A net energy exporter, the energy sector in Indonesia – and the economy overall – has been built on the exploitation of the country’s natural resources, particularly coal, natural gas, metals, and other mining and agricultural products. Coal is currently Indonesia’s main export commodity, accounting for around 11% of the total energy export value, followed by palm oil at 8.76%, as of 2020. Other mineral fuel, including oil, make up over 15% of the country’s total exports – topping the list among its other export categories.
According to data from the Asian Development Bank (ADB), as of 2019, Indonesia has 149 billion tons of proven coal reserves with 37.6 billon tons of potential reserves; 2.48 billion barrels proven reserves of oil, within an additional 1.29 billion barrels potential; and 49.74 billion barrels proven reserves and 27.55 billion barrels potential of natural gas.
In terms of renewables, the government estimates that the archipelago has the largest global potential for geothermal energy at 23.9 gigawatts (GW) and potential for hydropower of more than 94 GW. Additionally, the country also has a biomass potential of more than 32.6 GW and a biogas potential of 200,000 barrels per day. Projections for other renewable energies are estimated at 60.6 GW for wind energy, 208 GW for solar energy, and 17.9 GW for ocean and tidal energy. As renewable energy technology rapidly advances, these potentials could grow substantially larger.
The government’s overall strategy for the energy sector is called the National Energy Policy (KEN). Issued in 2014, KEN targets a primary energy mix of 23% new and renewable energy, 22% gas, 55% coal, and 0.4% oil by 2025. As of 2019, Indonesia’s primary energy supply mix consist of oil 35%, coal 37.3%, gas 18.5%, hydropower 2.5%, geothermal 1.7%, biofuel 3%, and biogas, solar, wind, and other renewables at nearly 2%.
Currently, the transportation sector makes up the highest demand for energy at 44%, followed by industry at 37%, households at 14%, and 4.5% by the commercial sector. On the other hand, primary energy demand has increased by 3% per year since 2010 due to the country’s rising middle class and its wealth of young and productive population segment.
As for electricity, the islands of Bali, Java, and Madura together had the highest estimated demand (181 terawatthours (TWh) in 2019 according to data from the ADB, followed by Sumatra, which forecast 38 TWh of electricity demand). Electricity demand is expected to increase among the industrial and household sectors, with the Indonesian government estimating annual demand to increase by 6.4% through 2019–2028.
Overall, the energy sector is a crucial and strategic element of Indonesia’s economy. Any significant advancement in the energy sector could result in a dramatic improvement in the productivity, competitiveness, and quality of the Indonesian economy in general.
Primary Energy Supply
As of 2019, Indonesia’s primary energy supply mix consist of oil 35%, coal 37.3%, gas 18.5%, hydropower 2.5%, geothermal 1.7%, biofuel 3%, and biogas, solar, wind, and other renewables at nearly 2%.
Source: Government of Indonesia, Ministry of Energy and Mineral Resources, 2020. Handbook of Energy and Economic Statistics of Indonesia. Jakarta.
One of the largest geothermal opportunities globally
Among the top 8 countries for geothermal potential, Indonesia’s has one of the best geothermal opportunities globally as it is one of the countries on the “ring of fire” on the Pacific tectonic plate. Currently, it has 1925 MW of geothermal installed making it the second largest after the USA for geothermal plant.
Unexploited potential across a range of renewable energy technologies
Indonesia’s strategy traditionally focuses on building low-cost production facilities. Currently, coal-fired plants supply 60% of the country’s energy, while natural-gas plants supply 22%. A wealth of renewable energy sources remains untapped in the country.
Source: Indonesia’s Electricity Procurement Plan (RUPTL) 2019-2028; Renstra EBTKE 2015-2019; McKinsey Analysis
Despite being a critical element to its economic development, Indonesia’s energy sector continues to be hampered by unreliable data, conflicting national policies, and prevailing organizational structures. The most recent example occurred in early 2022 when the Indonesian government imposed an export ban on coal after the country’s state power company PLN reported critically low coal stock and said that Indonesia was on the brink of widespread power outages. Authorities blamed its coal supply crisis on miners failing to meet domestic market obligations, under which miners are required to sell 25% of their output to local buyers with a price cap of US$70 per ton for power plants. This move invited the ire of Indonesia’s largest customers, including Japan and South Korea. At the time of writing, the issue remains ongoing with the country reportedly allowing some freights to resume shipping, but not others.
Meanwhile, many electricity sectors are still waiting for implementing rules and regulations to be aligned with non-energy regulations. The country’s long-term Electricity Procurement Plan (RUPTL) and even its National Energy Plan (RUEN) rely on unrealistic data and provide conflicting and unachievable target. Current policies such as price caps on coal, growth key performance indicators, unrealistic reserve margins, and other domestic obligations have resulted in fossil fuels to be artificially more financially attractive than lower-emission options. Furthermore, rapid urbanization in regions with inefficient public transport has increased reliance for fossil fuel. In metropolitan regions, the increased use of these fuels, combined with proximity to coal-fired generation, has resulted in worsening air quality that threatens health and the environment.
At the same time, Indonesia has an abundance of renewable energy resources. The challenge here is the prevailing institutional frameworks. Renewable energy projects are hampered by high financing cost due to uncertain and unbalanced contract risk allocation. The country is known to renegotiate contracts and power purchase agreements and impose stringent local content requirement. This hurts both private companies and state-owned enterprises, who are financially strained as tariffs do not reflect true energy prices. At the same time, energy efficiency measures remain vastly underused in Indonesia due to low energy pricing, poor enforcement of existing regulations, lack of financing and insufficient energy conservation guidelines.
Last but not least is the COVID-19 pandemic, which posed a major shock to the sector. A combination of a significant decrease in electricity demand, the depreciation of the Indonesian rupiah and the government’s expansion of electricity subsidies to protect the poorest Indonesian household has led to huge losses for PLN, and further delays infrastructure investment for future power generation.
How Indonesia implements its reforms for the energy sector following the COVID-19 pandemic will be key to its economic recovery. By addressing regulatory bottlenecks, cumbersome licensing and permitting processes, as well as consistently applying national regulations, Indonesia can improve productivity, competitiveness and resiliency.
The long-term goals for the energy sector as outlined in the 2014 KEN emphasizes resource diversification, environmental sustainability, and maximized use of domestic resources. However, considering the challenges, the government strategy from 2020 to 2024 will likely be a continuation of support for the growth of domestic industries, specifically the electric vehicle industry, and energy sources derived from coal, geothermal, and hydropower. The coal industry will likely remain the main contributor to its energy supply past 2028.
In meeting its energy mix target, the Indonesian Energy and Mineral Resources Minister has already announced plans to replace retiring coal plants with new and renewable energy. While regulatory support can seem stunted, recent and planned regulations and decrees have continually been aimed at providing clear guidelines and reduce red tape around private sector involvement and land-use for all large-scale renewable energy projects, including geothermal development, rooftop solar, floating solar, and commercial and legal implications for utility-scale solar.
For the economy, equitable development of the energy sector is important to providing opportunities and improve health and access to education for all Indonesians. Indonesia has made impressive progress in increasing the share of the population with access to electricity from 91.2% in 2016 to over 99% in 2021. Nevertheless, many of these regions, especially in Eastern Indonesia, are still experiencing extended blackouts; nor do they have access to other modern sources of energy. An estimated 14.9 million households, many in eastern provinces, still use biomass such as firewood. These traditional sources contribute to health and environmental problems, such as premature death and deforestation. Fiscal and implementation policies are lacking to promote clean fuels, including the expansion of city gas to households and industrial and commercial customers.
Even before the COVID-19 pandemic, Indonesia’s energy sector had had an uphill battle, what with having to supply and sustain energy supply to the world’s fourth largest population spread about an archipelagic terrain. The economic slowdown caused by the pandemic has undermined the sector even further. There is no denying that Indonesia is resource rich, with a stable economy and a large and young population to boot. However, the success and sustainability of the sector depends highly on how the sector reimagines itself, as well as how public and private leaders address the fundamental long-term challenges facing it.