Energy Transition Policy Direction Not Enough to Reassure Investors

One of the factors contributing to this uncertainty is influenced by the Indonesian Government's policy that still grants permits for the construction of steam power plants (PLTUs) in industrial areas through Presidential Regulation (Perpres) Number 112 of 2022. However, without building new PLTUs, the excess electricity from current PLTUs can be channeled to industrial areas.

During the period of 2018-2023, the average annual investment value for the renewable energy sector in Indonesia reaches 1.62 billion US dollars per year.

"At the very least, coal-fired power plants that have already been built in industrial areas can reduce their capacity and be replaced with renewable energy. This makes those who want to fund early retirement for PLN's coal-fired power plants hesitant," he said.

Currently, the Indonesian Secretariat of the Just Energy Transition Partnership (JETP) is collecting data on industrial-owned PLTU. JETP is a funding program provided by developed countries to support the energy transition of developing countries.

Bhima urges the acceleration of data gathering as the basis for issuing new regulations to stop the issuance of permits for new power plants in industrial areas. If there is no new regulation that pushes for a reduction in power plant capacity, Bhima believes that Indonesia will have difficulty achieving its target of net-zero carbon emissions by 2060.

Bhima's assessment shows that the government's policies have yet to convince investors or international institutions to channel their investment funds into the domestic renewable energy sector, in line with McKinsey & Company's report published in late 2024 titled "Indonesia Green Powerhouse Promise: Ten Bold Moves".

Written in the report is that in the period of 2018-2023, the average annual investment value for renewable energy sectors in Indonesia reaches 1.62 billion US dollars per year. The value only meets 20.2 percent of the annual expenditure required by Indonesia to meet the target of new and renewable energy mix (EBT) of 17 percent-19 percent by 2025.

In addition to government policies that seem contradictory to the acceleration program for energy transition, there are also a number of issues that cause investment funds to flow slowly into the renewable energy sector. These problems include high rates for renewable energy, competition with subsidized fossil fuels, high initial capital requirements, as well as a lack of clarity and traceability in financial flows and public funding allocations for renewable energy projects.

Also Read: One Year Passes the Promise of IDR 300 Trillion JETP Program

These challenges can also erode investor confidence in investing in the renewable energy sector in Indonesia. However, private funding sources are crucial in filling the funding gap, complementing public funding allocations for renewable energy projects," wrote the report prepared by Senior Partner and Managing Partner of McKinsey Indonesia Khoon Tee Tan, Senior Partner of McKinsey Singapore Vishal Agarwal, Leader of McKinsey Sustainability in South East Asia Ashwin Balasubramanian, and Renewable Energy Market Specialist McKinsey Fadhila El Discha.

To further address the investment deficit in the green finance sector, McKinsey advises governments to develop innovative new financing mechanisms, including exploring new ways to raise capital for green projects. The government can also expand the use of financial instruments with higher leverage ratios, for example insurance, guarantees, pooled financing structures and currency hedging schemes.

In addition, the government also feels the need to promote public-private partnerships to attract more international capital, which can potentially be done through a national investment platform. The government and the private sector can work together to develop and implement sustainable financing solutions, which potentially include a national investment platform that allows for procurement and financing of large-scale projects.

"This can encompass increased capital allocation from existing initiatives and institutions and new international climate concessional funds as part of COP, G20, and United Nations processes, such as the proposed combined financing fund related to COP28, loss and damage fund, and new global climate tax or levy," the report stated.

Also read: Renewable Energy Investment Deficit Preserves Global Warming

Meanwhile, in the draft document of the Comprehensive Investment and Policy Plan (CIPP) which contains the implementation plan for the JETP project in Indonesia, the JETP Secretariat projected that during the period of 2022-2030, Indonesia's coal-fired power plant capacity will continue to increase, reaching a total of 40.6 gigawatts by 2030.

Then, in 2035, its capacity is projected to start decreasing to 39.4 GW and continue to shrink until reaching 0 GW in 2050. The retirement of coal-fired power plants is planned to be accelerated after 2040.

The JETP Secretariat estimates that in order to prepare for early retirement and gradual cessation of coal-fired power plants, Indonesia requires an investment of up to 1.3 billion US dollars until 2030. However, all plans contained in this CIPP are still in draft status and do not have legally binding force.