Indonesia's equatorial location an asset for solar energy projects

Although the focal point of renewable energy development in Indonesia has been geothermal resources, of which the country holds over a third of the global total, in recent years solar power has gained new attention as a viable source. As an equatorial country, Indonesia is well-placed to reap the benefits of new solar options, with off-grid projects offering new ways to connect rural residents. Meanwhile, the government’s move to cut billions in annual fuel subsidies bodes well for broader development of renewables. Stakeholders now project that as the cost of solar materials continues to drop, solar will become a key driver of renewables growth over the medium term, supported by the government’s feed-in tariff (FIT) programme and plans to ramp up public funding.

Oil Dependence

Indonesia has yet to fully exploit its sizeable renewable energy resources, with oil and coal generating some 65% of the nation’s electricity supply in 2014, according to the Asian Development Bank (ADB). Demand for power has risen steadily in recent years, and until recently, state subsidies kept electricity tariffs low, hobbling state-owned provider Perusahaan Listrik Negara, which holds a monopoly on power distribution, as it sought to invest in expansion and maintenance. According to a March 2014 report by the Ministry of Energy and Mineral Resources (MEMR), electricity consumption is rising by an average of 7% a year, while generation is expected to increase by 6.5% a year through to 2022.

Although falling oil prices have reduced the most pressing near-term cost burden on Indonesia’s energy sector, renewables development is rising to prominence and should be further bolstered by the government’s move to eliminate costly fuel and electricity subsidies in early 2015. Although consumers have yet to experience any major price shocks from depressed oil prices, the impetus to develop renewable power projects will intensify if oil prices rebound.

Early Stages

At present, renewable energy accounts for between 5% and 6% of total on-grid electricity capacity in Indonesia, concentrated in large-scale hydro and geothermal power plants. Off-grid, the bulk of capacity comes from small-scale hydro, geothermal and solar power plants. In 2014 total solar-power capacity stood at 42.77 MW, with the number of new state-funded photovoltaic (PV) projects reaching 123 in 2012, 121 in 2013 and 154 in 2014, according to the MEMR.

In 2008, the government’s renewable energy targets included raising this level to 17% of total supply by 2025, as well as boosting the capacity of microhydro plants to 2846 MW by 2025, biomass to 180 MW by 2020, wind power to nearly 1 GW by 2025 and solar to 0.87 GW by 2024. To meet these goals, the investment required was estimated at $13bn. Targets have since been adjusted, with the MEMR announcing in June 2015 that it hopes to raise renewables’ share of the energy mix to 19% by 2019 as part of its Energy Vision 25/25 plan aimed at generating 25% of total power supply through renewables by 2025.

To this end, a number of investor incentives are in place, including an exemption on import duties for goods used in geothermal business activities, similar exemptions for capital goods used in independent power projects and a value-added tax exemption for geothermal developers. The Indonesia Investment Coordinating Board (BKPM) hopes to attract $56bn in green investment from foreign firms and Rp448trn ($37bn) from local firms by 2019, according to a May 2015 report in The Jakarta Post. With Indonesia holding nearly 40% of the world’s geothermal resources according to the ADB, new geothermal projects have, until recently, received the bulk of investor attention. However, a new push to develop solar power could see solar rise to become a major source of renewable generation capacity over the next decade.

Feed-In Tariff

Solar power has received significant government support in recent years, most notably through the FIT programme, which guarantees purchase prices for renewables developers selling to the national grid across a range of segments, from geothermal to solar and hydro.

The MEMR launched its solar FIT programme in 2013, under which government rates for solar projects can reach up to $.30 per KWh, including the cost of delivering all power from the plant to the national grid. This figure can be misleading, however, as public selection committees generally choose bidders offering the lowest tariffs, while the country’s 2013/14 solar FIT quota was set at 140 MW and 80 individual plants, according to a 2014 report by PT Kaltimex Energy. According to the MEMR, five developers, representing 12 MW of capacity, appointed investors for the 2013/14 bidding process, while six developers bid directly. The winning bidders are expected to reach financial close within three months of signing a power purchase agreement, and to start construction within three months of that, followed by commercial operations 18 months later. Although the MEMR can grant a 12-month extension in certain cases, this results in fines of 3-8% of total purchase prices.

Officials have made notable progress in expanding the FIT programme since its launch in 2012. Most recently, new regulations issued by the MEMR in May 2014 allow mini-hydro projects with up to 10-MW of capacity to receive guaranteed prices for power sold back to the national grid. In August 2014, the government expanded this to cover hydro projects using multi-purpose dams and irrigation channels.

Solar Solution

In a January 2015 report, PV Magazine identified solar as a high-potential renewable energy source in Indonesia, noting the country’s equatorial geography and falling PV technology prices. According to the magazine, Indonesia’s solar radiation stands at 4.8 KWh per sq metre per day, with offgrid solar PV projects the most viable option for development on account of Indonesia’s disparate geography and large rural population. PwC reports that in 2012 the country’s electrification ratio stood at just 74.4%, one of the lowest in the region.

Perhaps most significantly for solar development, the government plans to raise its budget for renewable energy fivefold in 2016 to reach Rp11trn ($909m), up from Rp2.2trn ($182m) in 2015, as the MEMR’s director for energy conservation, Maritje Hutapea, told the press in June 2015. According to Hutapea, solar projects will be a top priority in the new renewables budget, and the MEMR is already eyeing office buildings, airports and state-owned properties as potential sites for rooftop PV projects. A pilot project is planned for government buildings, including the State Palace in Bogor, the Office of the Coordinating Economic Minister building in Jakarta, and administrative office buildings in East Java, Aceh and Bali. The ministry is also looking into installing PV systems at airports in the East Nusa Tenggara province, including in Tambolaka, Maumere, Labuan Bajo and on the island of Sumba. Once feasibility studies finish in July 2015, new tenders will be launched for state-funded rooftop solar projects by the end of the year, Hutapea said.

The effects of this new push for solar are already being felt. In May 2015, BKPM announced that UKbased investors plan to make major investments in new solar and tidal projects, each offering over 10 MW of capacity, with over $4bn to be invested, although further details have not yet been unveiled. The growing emphasis on solar projects will also benefit local industry and solar manufacturers: the MEMR says its solar strategy includes incentives for local solar PV production, including mandatory use of locally made PV equipment for any state-funded solar power project.