Clean Energy Finance and Investment Policy Review of Indonesia

Executive Summary

The Clean Energy Finance and Investment Policy Review of Indonesia supports Indonesia’s efforts to realise a clean energy transition. It provides a comprehensive overview of the current policy environment, highlighting progress and identifying opportunities for strengthening policy interventions that can help to scale up clean energy finance and investment. The following is a summary of the assessment and key recommendations from six policy areas that form the framework for the review and that are elaborated in chapters 2 through 7.

Assessment

The Government of Indonesia is to be commended for signalling from the highest political offices that clean energy is an important part of the country’s future. Development of Indonesia’s abundant renewable energy and energy efficiency potential are critical to meet the country’s sustainable development goals and climate commitments. As other countries and corporates pledge more stringent climate actions, Indonesia will also need to accelerate its clean energy transition if it is to remain an attractive investment destination.

Planning and public governance

The adoption of the low-carbon development initiative (LCDI) as part of the 2020-24 Medium-term National Development Planning (RPJMN) reinforces Indonesia’s commitment to achieve clean energy and climate change targets and could help accelerate clean energy investment. Co-ordination amongst government institutions and other key stakeholders on clean energy finance and investment still is a challenge. Streamlining the regulatory environment while improving national and regional governments’ capacity and resources would improve the delivery of Indonesia’s clean energy targets. The global economic slowdown resulting from the COVID-19 pandemic, which has substantially affected the outlook of the energy sector, also will require an update of Indonesia’s energy plan, the RUEN. The revision represents an opportunity to support clean energy development as part of the country’s recovery programme. This would support efforts to improve energy access and energy security as well as objectives to build back better.

Regulatory framework

The government has put forward a number of important energy efficiency and renewable energy regulations, including measures such as the country’s first energy performance standards and the forthcoming presidential regulation on renewable energy. Reforms such as the Omnibus Law on Job Creation help to provide a clearer policy framework that should improve the business environment for renewable electricity, which to date could be difficult to navigate. Corporate sourcing is an important opportunity to accelerate renewables development, but it is hindered by a number of barriers such as lack of clear regulation on power wheeling. There remain other important gaps in energy efficiency policies, including low coverage of energy performance requirements. Work on standards for 10 new appliance categories is very encouraging, and effort should focus on strengthening existing regulations to reflect market realities.

Investment and competition policy

The passing of the Omnibus Law is an important step to improve the ease of doing business. It intends to repeal a number of overlapping regulations and is already easing some restrictions on foreign direct investment (FDI) as well as streamlining business licensing. The long-term impact on the business environment will depend on implementing regulations in other areas, but this should not come at the expense of environment and sustainability goals. While Indonesia’s job creation and industry development goals are commendable, the level of local content requirements also tend to stifle solar and wind markets, as local manufacturers often produce at higher costs than international competitors. This affects the profitability of projects and hinders overall investment.

Investment promotion and facilitation

Support for renewable energy investment (including a number of tax incentives) has improved in recent years, with encouraging signs that the forthcoming Presidential Regulation on renewables will facilitate market growth. To continue momentum in promoting investment in renewable energy, perceived risks such as lack of transparency in power purchase agreement (PPA) pricing and uncertainties around force majeure should also be addressed. Government support and incentives equally do not sufficiently target energy efficiency development. Low capacity in the market to propose bankable projects creates a critical barrier to finance and investment, and more targeted support to stakeholders involved in preparing energy efficiency projects is required.

Financial market policy

The recently released, Phase II (2020-24) of Indonesia’s Sustainable Finance Roadmap is a key step in resetting the country’s finance ecosystem, strengthening the implementation of environmental, social and governance (ESG) considerations and supporting innovation as well as development of financial services and products. Indonesia’s financial institutions face a number of challenges to expanding their sustainable finance portfolios, particularly as this pertains to financing renewable energy and energy efficiency projects. Issues include a lack of familiarity with clean energy projects; insufficient information; high-perceived risks; and lack of suitable financing instruments and funds. The creation of a dedicated green finance facility could help to overcome a number of these barriers, helping to improve access to long-term debt, reduce high transaction costs and lower high interest rates.

Crosscutting issues

The government has promoted clean energy Research & Development (R&D) and innovation, but funding is still below commitment levels, and overall energy R&D activities remain focused on fossil fuel technologies, highlighting a major challenge in breaking dependence on hydrocarbons. Indonesia has also made great strides in skill and capacity development for clean energy technologies, as well as sustainable finance. Yet, these efforts have tilted towards technical and operational aspects, and there remains considerable need to develop financing capacity among project developers while equally improving capacity on structuring and due diligence for clean energy projects.

Table 1. Actions for Indonesia to improve its clean energy finance and investment framework

KEY ACTIONS
Near-term
Undertake an update of RUEN to reflect the impacts of the COVID-19 pandemic on energy demand and take this opportunity to strengthen renewable energy and energy efficiency targets in the country’s recovery programme, implementing actions to build back better. Take steps to ensure more streamlined policies and regulations under the expected presidential regulation on renewable energy, including streamlining PPAs and addressing regulatory gaps for net-metering and power wheeling arrangements. Also, increase efforts to facilitate land acquisition (e.g. drawing from Indonesia’s toll road and India’s Solar Parks experiences) as land access remains one of the longest lead items for renewable energy projects. Consider expanding use of financing products like the Kredit Usaha Rakyat, which provides a guarantee scheme and subsidised interest rates for small businesses to help overcome barriers such as high collateral requirements. These types of products can make it easier for businesses to establish or expand their clean energy offerings. Undertake a detailed market assessment of financing needs and challenges as well as opportunities to identify and scale up suitable financing instruments that meet the needs of the market. Also, consider the use of the SDG Indonesia One Fund to support guarantee schemes aimed at de-risking projects to help project developers overcome collateral requirements while building experience and confidence among financial institutions with clean energy projects. Expand training programmes to integrate aspects of financial and business development for clean energy projects, including the design of bankable and internationally recognised PPAs as well as development and implementation of public-private partnership models to encourage market growth.
Medium-to-long term
Develop clear implementing regulations and guidelines for PLN to guarantee a well-functioning procurement process and fair competition in the market. Plan a transparent shift in coming years to public, competitive tenders to procure renewables, creating predictable and fair processes that attract investors. These have proven particularly successful globally to bringing down the cost of renewable energy. Develop clear regulatory frameworks and market signals to enable innovative finance and market‑based mechanisms such as energy savings performance contracting, open and tradeable energy attribution certificates, and energy-as-a-service models. Improve clean energy finance and investment data availability to increase transparency and build investor confidence in the market. This can be achieved by setting up monitoring and reporting protocols as well as supporting capacity building among financial institutions. Establish project finance structures for clean energy projects through collaborations between OJK and commercial banks, standardising contract terms that can be widely replicated.

Table 2. Opportunities to enhance development assistance

KEY ACTIONS

Assistance from the international community can play a key role in supporting Indonesia to accelerate its clean energy transition and achieving sustainable development goals. The development community is already very active in providing technical assistance and in financing clean energy projects; however support in areas that can have a large multiplier effect will enable more clean energy entrepreneurs and mobilise private capital. Consultations with project developers, financial institutions and other stakeholders identified strengthening regulatory frameworks as a priority to unleash Indonesia’s renewable energy and energy efficiency potential. Development co-operation should enhance efforts to support policy makers in designing and implementing policies to facilitate land access, streamline power purchase agreements, design renewable energy auctions and expand energy efficiency regulation. Training and capacity development was also highlighted as another priority area and development assistance could allocate additional resources for technical assistance to expand both past programmes such as supporting certification of investment grade energy auditors and develop new programmes aimed at improving financial learning within the energy efficiency and renewable energy sectors, as well as clean energy knowledge within financial institutions. Such training and capacity building efforts should also include developing solutions that can be easily replicated or standardised to facilitate project preparation and due diligence by investors as well as knowledge transfer programmes through partnerships with development partners and foreign investors. Development funds could also be targeted to support blended finance mechanisms (such as the SDG Indonesia One Fund) that can mobilise private capital from both domestic and international institutional investors as well as commercial lending for clean energy projects. This will need to address not only de-risking of projects to mobilise direct investments but also providing technical assistance to support project preparation as well as setting up suitable investment vehicles that can allow a larger number of investors to deploy capital (e.g. through aggregation and securitisation of projects to meet scale requirements particularly for larger international investors). Finally, assistance can be targeted at supporting Indonesia to improve clean energy finance and investment data availability and to develop monitoring and evaluation tools. Significant gaps remain in the availability of consistent and reliable renewable energy project performance and detailed resource data that financial institutions require for project due diligence and risk assessment. Tools to help monitor and evaluate energy savings are also needed to support development of the energy efficiency market.