Navigating policy and power – Indonesia and Australia’s energy transition

Sep 19, 2023
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Indonesia and Australia have more to gain from energy transition – and more to lose from inaction – than any two countries in the world. But the Indonesian government must navigate significant policy challenges to attract the capital it needs for a swift, just and orderly transition.

When Indonesian President Joko Widodo visited Australia recently he came with a vision for long-term cooperation in the renewable energy sector. This vision is shared by Australian Prime Minister Anthony Albanese, who while in Jakarta for the ASEAN and East Asia summits, voiced similar sentiments. Albanese used the occasion to launch Australia’s renewed Southeast Asia economic strategy, which highlighted the renewable energy industry as a core focus for investment and collaboration.

Both countries have made clear their ambitions to rapidly decarbonise and shift away from fossil fuels. It seems we stand on the brink of a green industry revolution in Southeast Asia.

But Indonesia’s ambitious plans face significant hurdles. Modernising Indonesia’s energy system poses technical challenges, and securing an estimated US$1 trillion to transition by 2060 will mean building confidence among investors, not just in the technical feasibility of the enormous project, but in its enduring social licence and the policy settings that surround it.

To understand the challenges Indonesia faces requires some context. Indonesia’s energy policy has two core goals that, at times, have been in conflict.

The government aspires to reach 100% electrification nationwide. Despite their progress to date, about 8% of the population are still without access to electricity. This translates to roughly 7.8 million households in the dark, primarily due to lacking local transmission networks. Bridging this gap requires investment in both generation capacity and transmission infrastructure.

On the other hand, the country is planning for a swift transition to renewables under mounting domestic and global pressure. The intermittent nature of renewable energy sources also demands transmission upgrades to integrate dynamic flows from renewable sources, as well as investment in battery storage to stabilise the grid and enhance the overall reliability of the energy infrastructure.

While significant progress has been made in expanding renewable energy infrastructure, coal remains a dominant player, with a planned 20 GW of new capacity set to come from coal-fired plants. Plans for an early retirement of certain coal facilities are plagued by the uncertain financial framework of the massive US$20 billion Just Energy Transition Partnership (JETP).

Adding to these factors is Indonesia’s reliance on subsidised coal power. In 2022 alone, nearly 20% of the national budget was dedicated to fossil fuel subsidies. This hefty support makes renewable energy solutions less competitive and hinders the shift from fossil fuels to greener alternatives. Oversupply in certain areas, such as the Java-Bali grid, keeps wholesale energy prices suppressed. While the government is open to introducing more renewable energy, they can’t afford the political backlash that may come from cost increases, especially in an election year.

So where to from here? How can Indonesia overcome these challenges to both rapidly decarbonise and build itself up as a green industry superpower?

Firstly, Indonesia needs to level the playing field so that renewable energy is able to compete in a market dominated by coal-fired power. While sources like solar and geothermal could be cost-competitive, fossil fuel subsidies keep coal as the cheaper energy choice, stifling renewable investments.

Secondly, the challenges in drawing capital and securing financing largely stem from uncertain political regulations concerning renewable energy support. Since large-scale renewable projects and transmission infrastructure builds represent long-term investments, it’s crucial for investors to trust that the market conditions and regulatory environment will remain consistent.

Lastly, informing the public about the negative impacts of coal on the environment and health can decrease its social acceptance. By boosting support for renewable energy, this education can make the switch to cleaner energy more politically favourable, even if costs rise. This is particularly pertinent in light of recent issues around worsening air quality in Jakarta.

Taking these steps to address the policy and regulatory difficulties will be vital if Indonesia hopes to attract the investment needed to reach its emission reduction and energy transition goals, but doing so can open up a world of opportunities.

Indonesia has the track record to pull off large scale projects, such as the $7 billion post-Tsunami Aceh and Nias reconstruction which built 150,000 homes, roads, ports, and airports in five years. This success was based on strong regulation, decisive leadership, and bureaucratic innovation. Given a longer timeline for the Net Zero Emissions goal by 2060, Indonesia can utilise these past insights to enhance the energy transition.

As Indonesia addresses the policy obstacles, the technical challenges and the quest for investment present an ideal opportunity for collaboration with Australia. Notably, Australian fund managers have shown interest in Indonesia and could provide the essential investment to fuel the energy shift.

Beyond finance, Australia stands as a valuable partner for knowledge sharing. With its substantial expertise in developing and managing renewable energy infrastructure, Australia can impart crucial insights and best practices to Indonesia.

Australia and Indonesia, both global coal giants, have the potential to become world leaders in decarbonisation and green industry through their joint efforts, but it will require ongoing collaboration and engagement to ensure that any hurdles are overcome. Platforms such as the Australia-Indonesia Energy Transition Policy Dialogue are vital to bring together senior officials, regulators, business and non-government experts from Australia, Indonesia and the region to come up with solutions to these challenges and continue to momentum.

While the global renewable tide is in their favour, navigating the inherent complexities of Indonesia’s energy landscape will require political will, and, more importantly, an unwavering commitment to a sustainable future.

Ruddy Gobel is a Senior Policy Adviser at the Centre for Policy Development and Co-chair of the Energy Transition Policy Development Forum in Indonesia.

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