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A chance for lift off: Indonesia’s solar sector

16 July 2019

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Paul Burke is a Professor in the Arndt-Corden Department of Economics, Crawford School of Public Policy. His research interests include energy economics, environmental economics, and Asia-Pacific economies. His courses include IDEC8029 Issues in Applied Microeconomics.

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Indonesia is behind the pack in terms of the adoption of solar power. The world’s fourth most populous country was outside the top 70 countries in terms of total generation of electricity from solar photovoltaics in 2016.

With substantial solar resources, Indonesia has the potential to benefit much more than it does now from the sizeable reductions in solar costs experienced globally over recent years. Solar could play a major role in achieving Indonesia’s energy mix and emissions reduction targets.

One way forward is to look to India, which has had much greater success. India generated more than 700 times more solar power than Indonesia in 2017, thanks, in part, to a more investment-friendly and goals-oriented policy approach.

A team of colleagues and me from the Australian National University’s Grand Challenge project Zero-Carbon Energy for the Asia-Pacific have recently published a paper in Energy Policy on insights for Indonesia from India’s relative success. We conclude that there are a number of ways for Indonesia to break the cycle of low investment in renewables.

The most important driver is having the political will. India’s solar generation industry has benefitted from clear policy direction under schemes like the Jawaharlal Nehru National Solar Mission. Indonesia, on the other hand, has seen underwhelming interest from political leaders and key players such as the state electricity utility, Perusahaan Listrik Negara (PLN).

The use of market mechanisms is also central. India has put reverse auctions to good use, unleashing competitive forces that help drive prices down. A key requirement for reducing solar prices is a low-risk investment environment. India has sought to foster this via approaches such as the establishment of solar parks for investors to locate their projects and a plug and play model for these projects.

India has also used Renewable portfolio obligations. A green certificate scheme in Indonesia – whereby PLN could be required to purchase certificates representing domestic renewable electricity generation – would have the potential to create a much closer link between renewables adoption targets and actual adoption levels than has existed to date.

Moreover, factors affecting the price of coal are relevant as well. India has a coal levy, aimed in part at promoting the use of clean energy. In contrast, a domestic market obligation has served to suppress coal prices in Indonesia, making it difficult for renewables to compete.

The removal of these obligations and the introduction of a levy that reflects the costs of using coal for the environment and the economy would have the potential to create a much more even playing field.

A key priority is maximising access to high-quality, low-cost solar panels. Currently, Indonesia’s local content requirements and solar panel import tariff serve to inflate project costs. Reforms in this area could help lower energy prices for households and commercial consumers alike.

Under current arrangements in Indonesia, any large new solar projects feeding into the grid must be handed over to state control at the end of their contract period. This acts as a disincentive to invest, particularly for projects that are closely embedded with other assets such as malls, plantations, or industrial estates. Investor interest could spike if these types of requirements were relaxed.

Managing intermittent solar flows on the grid is a major challenge in both Indonesia and India. Substantial investment in the grid and in its management capacities will be needed over the coming years. This will be expensive, but a coal-dominated expansion path would also involve substantial outlays.

Our paper outlines other potential reforms for Indonesia, such as strengthening the institutional framework for renewables and continued progress in phasing out fuel and electricity subsidies.

The future for solar power is bright, but not all countries will participate equally. Governments can do a lot to help by removing regulatory and other impediments, as well as creating a more investor-friendly environment. India serves as a useful example of how to jump into the fast lane.

An open-access version of the research paper is available here. Information about the Zero-Carbon Energy for the Asia-Pacific ANU Grand Challenge is available here. A presentation of the research is available here.

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