Key Considerations for Indonesia’s Energy Transition

As countries around the world increasingly value the importance of sustainable development and carbon reduction, Indonesia is actively exploring and implementing various plans for energy transition, providing unique opportunities for investors.

Layout of energy transition

Indonesia, which is rich in mineral resources, has long relied on exporting raw ore for profit. It has enormous potential for renewable energy development, including hydropower, solar energy, biomass energy, and geothermal energy. Its changes in the mineral export pattern have attracted high attention from the global energy market in recent years.

In 2014, Indonesia first implemented restrictions on bauxite exports, which were later lifted in 2017. From 2020 to 2023, Indonesia successively banned the export of unprocessed nickel ore, coal, and aluminum ore. By doing so, Indonesia hopes to shift its focus from exporting raw materials to developing downstream industries and plans to achieve net zero emissions by 2060, reducing reliance on fossil fuels through energy diversification. 

Since the promulgation of Indonesia’s Law on Energy in 2007, the Indonesian government has been seeking opportunities to expand the proportion of renewable energy in its energy structure and incorporate renewable energy into the national energy plan. According to Indonesia’s energy policy, the proportion of renewable energy generation in the country will increase from 14% in 2021 to 23% in 2025 and 31% in 2050. 

According to data from Indonesia’s Energy Council in 2023, however, Indonesia’s current energy structure is still dominated by coal (40.46%), oil (30.18%), and natural gas (16.28%), with clean energy accounting for only 13.09%. The proportion of renewable energy generation, such as wind power and photovoltaic power, is still relatively low.

To realize the goal of energy transition, so as to reduce carbon emissions in the power industry, Indonesia issued a new regulation in September 2023, announcing that it would no longer build new coal-fired power plants and required Perusahaan Listrik Negara (PLN) to accelerate the shutdown of its coal-fired power plants. CNBC Indonesia reported that PLN has canceled a coal-fired power plant construction plan with a capacity of 13 gigawatts (GW). According to the newly revised Rencana Usaha Penyediaan Tenaga Listrik (RUPTL) 2021-2030, Indonesia’s electricity generation will be at least 80 GW by 2040, of which 75% will come from new and renewable energy generation and 25% from gas power generation.

Furthermore, the Indonesian government plans to develop five specific measures to accelerate energy transition. Firstly, building a large number of new transmission lines to transmit renewable energy electricity, and building a national level “green-oriented super grid” to achieve interconnection and interoperability of the originally dispersed power system. Secondly, building more renewable energy power plants to support the development of the renewable energy industry. Thirdly, steadily developing the electric vehicle industry. Fourthly, attracting more and more battery industry enterprises to invest in Indonesia. Fifthly, developing green hydrogen and green ammonia, with green hydrogen being a key focus to accelerate energy transformation.

Dreams come true

Nickel is the main component in manufacturing stainless steel and electric vehicle power batteries. Since Indonesia banned nickel ore exports in 2020, Indonesia has signed more than 10 agreements on the production of battery material and electric vehicles with global manufacturers such as LG in South Korea, Foxconn, Hyundai, and Wuling in just three years. In 2022, Indonesian then President Joko expressed his hope that Tesla from the United States could invest in Indonesia and further enhance Indonesia’s position in the electric vehicle supply chain. In 2023, Joko met with Wang Chuanfu, the founder of Chinese electric vehicle manufacturer BYD. The momentum for BYD to land in Indonesia has become stronger. Meanwhile, nickel companies have started listing in Indonesia, with a record number set in 2023. 

Thanks to earlier projects, Chinese enterprises have already gained a foothold in Indonesia’s nickel resource industry. According to Reference News, companies represented by Tsinghan Holding Group Co., Ltd. and Jiangsu Delong Nickel Industry Co., Ltd. have established relatively mature industrial parks in Indonesia. With this, they occupy a considerable share in the global stainless steel market. Further, Chinese enterprises such as Huayou Cobalt and Greenway that have settled in the park have applied world-leading hydrometallurgy to industrial production, effectively extracting nickel, cobalt, and manganese from low-grade ores, and then processing them into precursor materials for ternary batteries. 

As a key raw material for ternary batteries in the power battery category of new energy vehicles, nickel has become an increasingly sought-after resource in the international market. Besides European mining and chemical companies that have been operating in Indonesia for many years expand their business in the power battery raw material sector, leading companies in the power battery industry have also launched new investment projects in Indonesia.

Indonesia has also made progress in clean energy. In 2023, the Zhilata Floating Photovoltaic Project, jointly developed by PLN and Abu Dhabi Future Energy Company of the United Arab Emirates, achieved full-capacity grid-connected power generation. Joko stated at the ceremony that Indonesia’s dream of owning a large-scale new energy power generation project has finally been realized, making it the largest floating photovoltaic project in Southeast Asia. 

In March 2024, CHN Energy Investment Group Co. LTD won the bid for the 100 MW floating photovoltaic power plant project. As the largest Chinese enterprise investing in Indonesia’s electricity sector, it has expanded its investment from traditional coal to renewable energy, not only expanding its overseas investment business but also opening the door for Chinese enterprises to win centralized photovoltaic projects in Indonesia.

Opportunities and challenges coexist

Although the prospects are promising, companies investing in Indonesia still face many challenges.

First of all, there is competition from international peers, such as companies from Singapore, the largest source of foreign investment in Indonesia. According to Gu Xincen, Director of Greenpeace Climate & Energy Project, since Indonesia and Singapore signed a memorandum of understanding on renewable energy cooperation in 2023, more and more Singaporean companies have increased investment and cooperation in Indonesia’s renewable energy field. Among them, Singapore’s Sunseap Group plans to build the world’s largest floating photovoltaic power station in Indonesia, with a peak capacity of 2.2 GW. It will export 300 megawatts (MW) of electricity to Singapore and other Southeast Asian countries through a 400 KV underwater transmission network. 

Currently, Indonesia’s renewable energy mainly consists of hydropower and biomass, with wind and solar power accounting for a negligible proportion. PLN pointed out that wind and solar resources will not be automatically converted into investments and projects, and policy incentives and promotion are needed. However, there is almost no transparency in bidding for Indonesia’s renewable energy projects at present. Although RUPTL formulated by PLN includes the renewable energy part, there is no clear timetable for implementing renewable energy projects, and investors have not received corresponding policy guidance on how to develop renewable energy projects in Indonesia. 

Financing is another prominent issue. In an article titledAccelerating Indonesia’s Green Energy Transformation, the Chinese media Economic Daily mentioned that Indonesia released the world’s largest energy transformation financing plan in 2022. In the next 3 to 5 years, it will raise $20 billion through the international financing mechanism Just Energy Transition Partnership to develop clean energy, including supporting the early shutdown of coal-fired power plants. The International Partnerships led by the United States and Japan have promised to help Indonesia break free from dependence on coal power generation and achieve the goal of carbon neutrality by 2050, but substantial progress has not been made yet. Private companies even lack interest in supporting Indonesia’s early shutdown of coal-fired power plants. 

For international investors, Indonesia has an enormous development potential for renewable energy, which is also followed by certain risks and challenges. Under the wave of energy transition, Indonesia’s investment demand for renewable energy is showing an unstoppable upward trend, which requires potential investors to explore the truth.

来源：《中国东盟商界》杂志

文：黄利霞 

翻译：刘丽娟​        

审定：林  涵