In Indonesia, regulatory gaps are holding back renewables

An international partnership to speed up the energy transition has been announced. Strong domestic regulations to support renewables are urgently needed.
<p>Solar panels on the roof of the Jakarta Cathedral, in Jakarta, Indonesia (Image: Willy Kurniawan / Alamy)</p>

Solar panels on the roof of the Jakarta Cathedral, in Jakarta, Indonesia (Image: Willy Kurniawan / Alamy)

Indonesia currently produces 71% of its energy from fossil fuels. The need and expectation for the energy mix to instead be dominated by renewables are continuing to rise, sharpened by the negative impacts of fossil fuels which can no longer be denied.

On 15 November, at the G20 summit in Bali, Indonesia co-launched the Just Energy Transition Partnership, which will help the country shut coal power plants and expand renewables.

But domestically the energy transition is being held back by a lack of firm regulation favouring renewables. In fact, recent regulations, including the Job Creation ‘Omnibus’ Law and the Mining Law Amendment, focus on providing support to fossil energy, especially coal.

This is the primary obstacle to a just energy transition in Indonesia.

How effective will the new regulation be?

In September, the government issued a presidential regulation (PR 112/2022) designed to accelerate renewable electricity generation. It does this, for example, by requesting that government ministries provide incentives for developing renewable energy projects. Interestingly, the regulation also mentions accelerating the phase-out of coal-fired power plants – the first time this has been mentioned in a regulation. The question is, can PR 112/2022 meet the challenge? The answer is uncertain. At least three problems may be identified.

First, the regulation states that coal power plants may still be constructed if they were registered in the Electricity Supply Business Plan before PR 112/2022 was enacted on 13 September. That means plants in the planning stage which have yet to reach financial closure may still get the green light. This condition contradicts the political statements of President Joko Widodo, who instructed in 2020 and 2021 that no new coal power projects should be built unless they have already reached financial closure or are in construction. It means several huge coal plants yet to reach financial closure are on course to be built. For example, Jambi-1, with its capacity of 600 megawatts (MW), Jambi-2 (600 MW) and Sumbagsel-1 (300 MW).

In addition, the regulation still allows licences to be issued for building “captive” coal power plants (which serve a factory or industrial park only, not the wider grid), and those listed as National Strategic Projects, as long as such projects commit to limiting their emissions and not operating past 2050. The UN Environment Programme has however advised governments to take “rapid and immediate steps” to phase out coal and avert the worst of the climate crisis.

Second, PR 112/2022 has yet to provide an answer to several underlying issues in the development of renewable energy. For instance, it tends to mimic previous regulations that prioritise using locally made products, failing to recognise that a domestic industry for making renewable technology components has yet to be developed and most components are still imported. In other countries, regulation on locally sourced products is not overly strict during the early development of renewables, giving the local industry time and space to grow. Although PR 112/2022 mandates the Ministry of Industrial Affairs to provide support to enterprises so they can prioritise the use of local products, such support still requires an implementing framework.

Third, the regulation mandates various ministries to provide incentives for renewable energy development. This provision may be appreciated but is very broad and general. For instance, the Ministry of Energy and Mineral Resources is asked to formulate a power generation development plan that utilises renewable energy. This support should have been classified as an obligation.

The deployment of renewable energy requires state intervention to create a level playing field

Furthermore, the Ministry of Finance is asked to provide fiscal incentives, such as income tax, import duty exemption, and land and building tax relief. But these provisions have been mandated in several regulations already and no further explanation is given on guaranteeing them or the mechanisms to deliver them.

Take licensing and land procurement as an example. Several ministries can grant licences, but they need not do so according to the type or size of projects. This is highly important because certain kinds of large-scale renewable energy project, such as geothermal and hydropower, require special treatment – namely firm environmental and human rights safeguards – so that their development can be just.

Urgent need for regulatory reform that supports a just transition

PR 112/2022 is a long-awaited breakthrough, but it has failed to meet expectations.

The successful guidance of Indonesia’s energy transition relies on other legal frameworks, too, including the draft Bill on New and Renewable Energy that is being deliberated in the senate. This draft bill, published in August 2022, includes a provision stating that coal-fired power plants which endeavour to reduce emissions will receive incentives, either fiscal or non-fiscal, such as land procurement and licensing relaxation. Considering this and PR 112/2022, it seems that for years to come incentives and supports will not only go to renewables but also to fossil energy, especially coal. This is unfortunate, since the deployment of renewable energy requires state intervention to create a level playing field.

Other regulations, such as the Job Creation Law and the Mining Law Amendment, provide huge incentive in the form of 0% royalty for coal-mining businesses that increase added value, including by developing mine-mouth power plants and coal gasification facilities. These regulations are obviously not in line with global advice to phase out coal power stations and mining, and transition completely to renewable energy.

We must be aware that the climate crisis is here. Reliable and just renewable energy is the future that must be strived for immediately. Thus, Indonesia needs a long-term, ambitious and systematic regulatory framework that favours entirely the development of renewables. It is crucial that there be political willingness and strong leadership to provide a level playing field for renewables. The first step is to review all regulations that hinder the just development of renewables, with involvement from all stakeholders, including civil society, and then to perform a comprehensive regulatory reform that favours that development.