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• Indonesia: PLN's New 2021 - 2030 Business Plan - High hopes and 'greener' projects

Indonesia: PLN's New 2021 - 2030 Business Plan - High hopes and 'greener' projects

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The Minister of Energy and Mineral Resources has finally approved PLN's 2021-2030 Electricity Supply Business Plan ( RUPTL ). A copy of the RUPTL can be downloaded from PLN's website here .

This long-anticipated RUPTL marks a pivotal milestone for PLN. For the first time, the majority of power generation projects to be developed are renewable energy projects, accounting for 51.6% of 40,575 MW of power generation projects. The RUPTL also allocates a bigger share to Independent Power Producers ( IPP ) in developing power generation projects.

The new RUPTL also lays down, among other things, PLN's strategies to reduce the effects of greenhouse gases, and its target to achieve net zero emission by 2060, which is the policy adopted by the current administration in line with the UNFCCC's Paris Agreement.

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Indonesia’s green powerhouse promise: Ten bold moves

The world stands at a pivotal point in the journey toward decarbonization—emissions need to reduce by half by 2030 and reduce steeply thereafter. 1 NGFS climate scenarios , Network for Greening the Financial System, June 2021; “REMIND-MAgPIE model,” Potsdam Institute for Climate Impact Research, November 2023. This presents both immense challenges and significant opportunities.

Challenges include fostering global cooperation; strengthening climate policies; navigating technological transitions (including negative emissions technologies); overcoming infrastructure limitations; and securing substantial investments. In addition, a just transition is needed, one that includes reskilling workers and addressing socioeconomic disparities.

On the other hand, the transition to sustainability and clean energy presents a tremendous market opportunity, requiring unprecedented global investments of $8 trillion to $11 trillion annually to 2050 (Exhibit 1). 2 “ The net-zero transition: What it would cost, what it would bring ,” McKinsey Global Institute, January 2022. Power generation, transportation, as well as land use, land-use change, and forestry (LULUCF) are three sectors at the forefront of this required transformation.

Global efforts are already underway. These include China having scaled up solar photovoltaic (PV) capacity to approximately 500 gigawatts (GW), Norway having successfully shifted to more than 80 percent of new car sales being electric vehicles (EVs), and Canada having the world’s largest carbon capture and storage (CCS) facility at 14.6 million metric tons per year (Mtpa). 3 Yicong Zhu, “China’s solar capacity surges; expected to top 1 TW by 2026,” Rystad Energy, September 12, 2023; Artem Abramov and Eliot Busby, “Mystery solved: Norway’s persistent road fuel demand won’t last amid rapid EV adoption,” Rystad Energy, August 24, 2023; “ Capacity of operational large-scale carbon capture and storage facilities worldwide as of 2023”, Statista, November 2023. Developments such as these not only address urgent decarbonization needs, but also open new avenues for economic growth and innovation.

Indonesia’s strategic response to decarbonization

As the eighth-largest contributor to global greenhouse gas (GHG) emissions, Indonesia’s role in global decarbonization is increasingly critical. With historical trends indicating a potential doubling of its emissions by 2060 (versus a 2019 baseline), Indonesia’s commitment to reversing this trend is crucial (Exhibit 2). 4 Indonesia third biennial update report , United Nations Framework Convention on Climate Change (UNFCCC), 2021; “Decarbonization scenario explorer model—Indonesia,” McKinsey, 2019.

The country has prioritized green growth, and its decarbonization efforts are starting to gain momentum. Expected to become the fourth-largest economy in the world by 2045, and boldly aiming to become a high-income economy within a similar time frame, Indonesia shows strong economic fundamentals with a 5 percent annual growth rate, stable inflation, and stable exchange rates. 5 “Indonesia will be world’s 4th largest economy by 2045, President Jokowi says,” Cabinet Secretariat of the Republic of Indonesia, March 27, 2017; Fransiska Nangoy, Stefanno Sulaiman, and Gayatri Suroyo, “Indonesia c.bank to stabilise exchange rate to cushion price pressures,” Reuters, November 3, 2023. The government has also implemented various regulatory and fiscal incentives to encourage green growth, focusing on electric mobility, carbon markets, and renewable energy. In September 2022, Indonesia increased its Nationally Determined Contribution (NDC) targets, now aiming for a 31.9 percent unconditional emissions reduction (up from 29.0 percent) and a 43.2 percent reduction with international support (up from 41.0 percent) below a business-as-usual scenario by 2030. These targets include emissions reductions from LULUCF. 6 A nationally defined contribution (NDC) is a climate action plan to cut emissions and adapt to climate impacts; each party to the Paris Agreement of 2015 is required to establish an NDC and update it every five years; Enhanced nationally determined contribution , Republic of Indonesia, 2022.

Notably, the Just Energy Transition Partnership (JETP), established during the G20 Leaders’ Summit in 2022, further signifies Indonesia’s commitment to delivering a just transition for the power sector. 7 “Indonesia’s Just Energy Transition Partnership,” UNDP, December 5, 2023. Under JETP, Indonesia aims to cut carbon emissions to 250 million metric tons per year for its on-grid power sector by 2030, while simultaneously increasing its share of renewable energy generation to 44 percent. 8 Just Energy Transition Partnership Indonesia: Comprehensive investment and policy plan 2023 , JETP Indonesia, November 21, 2023.

Finally, Indonesia’s endowment of critical minerals such as nickel—vital for electric vehicle (EV) batteries—along with its potential for carbon storage and nature-based solutions (NBS) positions it as a key supply side player in the decarbonization market. 9 “Mining,” Business Indonesia , December 5, 2023; Vivek Lath and Deepak S. Moorthy, “Indonesia can lead the world in nature-based solutions for climate change,“ Jakarta Post , July 14, 2023; “Indonesia to be the pioneer of CCS in the region: Collaboration in maintaining growth towards low-emission future,” PR Newswire, September 5, 2023. These natural resources and an enabling ecosystem could help to create substantial opportunities for businesses in renewable energy, EV production, and sustainable practices.

Ten bold moves to becoming a global beacon for decarbonization

In this article, we offer ten strategic initiatives that could help to speed up green growth in Indonesia, each of which could realize significant emissions reductions while maximizing economic value, job creation, and environmental protection. These encompass a wide range of activities and investments, from accelerating renewable energy adoption to developing innovative technologies in CCS. Together, they have the potential to position Indonesia at the forefront of the global fight against climate change.

Bold move 1: Greening the power sector

Indonesia’s energy sector, including end use electricity and the industry’s thermal energy consumption, transport, and buildings, accounts for around a third of national emissions, with remaining emissions primarily coming from land use change (such as deforestation and peatland degradation), forestry, agriculture, and waste. 10 An energy sector roadmap to net-zero emissions in Indonesia , International Energy Agency, September 2022. The power sector, mainly fueled by coal, is responsible for around 40 percent of these energy sector emissions. With the country’s power demand expected to increase by 50 percent by 2030 and quintuple by 2060, the challenge is to manage this growth without a corresponding growth in emissions.

The Indonesian government aims for net-zero emissions by 2060, while maintaining energy security and affordability. 11 Enhanced nationally determined contributions: Republic of Indonesia , United Nations Framework Convention on Climate Change, September 23, 2022. This goal will entail expanding power generation capacity to over 400 gigawatts GW by 2060, with around 75 percent of total capacity sourced from renewables by 2060. 12 McKinsey analysis using McKinsey power model. Indonesia possesses immense renewable resources, including over 550 GW in solar power, 450 GW in wind power, 100 GW in hydropower, 10 GW in geothermal power (the world’s largest source), and 20 GW in biomass. These resources mean that a net-zero power sector in Indonesia is theoretically possible, with more than 1.1 terawatts (TW) of total renewable energy potential. This presents a huge opportunity for Indonesia (Exhibit 3).

Realizing the power sector opportunity

The Indonesian government has laid out targets for renewable energy. The current goal is between a 17 and 19 percent renewable share in the energy mix by 2025, potentially rising above 30 percent by 2050. 13 Renewable energy prospects: Indonesia , International Renewable Energy Agency (IRENA), March 2017; “Indonesia to abandon 23% renewable energy target by 2025,” The Jakarta Post , January 16, 2024. In line with this, the country’s latest power sector plan (RUPTL 2021–30) earmarks over 50 percent of new capacity for renewable energy, with 65 percent slated for development by independent power producers (IPPs). 14 Electricity supply business plan (Rencana Umum Penyediaan Tenaga Listrik—“RUPTL”) 2021–2030 , PT PLN Persero, 2021. Recent momentum has been spurred by a memorandum of understanding (MoU) with Singapore for renewable electricity exports, as well as various initiatives by companies in domestic solar PV and battery energy storage systems (BESS) manufacturing.

Fossil fuels currently account for around 95 percent of the energy mix (85 to 90 percent of electricity generation). However, Indonesia also has an established base of hydropower and geothermal energy. 15 Global Energy Perspective 2022 , McKinsey, April 26, 2022; James Guild, “Indonesia’s coming geothermal boom,” The Diplomat, November 21, 2023. Further, since 2020, it has started to transition to biomass cofiring in coal-fired power plants and, given its equatorial location, is increasingly focusing on solar PV. 16 Putra Adhiguna, “Indonesia’s biomass cofiring bet,” Institute for Energy Economics and Financial Analysis, February 2021; Willy Kurniawan et al., “Indonesia president inaugurates $108 million floating solar plant,” Reuters, November 9, 2023. Renewable energy projects are primarily being developed by Perusahaan Listrik Negara (PLN, the state-owned electric utility), Pertamina (the state-owned oil and gas company that has primarily focused on geothermal), IPPs, and smaller-scale solar PV developers—although grid stability remains a significant constraint to large-scale intermittent renewables. 17 Indonesia—Renewable energy , International Trade Administration, December 2023; “Having slow solar PV development in 2022, Indonesia needs to push the implementation of supporting policies,” Institute for Essential Services Reform, October 27, 2022.

The government has implemented specific local content requirements for renewable energy projects. 18 “Ministerial regulation No. 05/M-IND/PER/2/2017,” Tingkat Komponen Dalam Negeri, Ministry of Industry, 2017. These stipulate that projects must utilize a minimum percentage of domestic materials and labor, particularly for solar PV and BESS projects.

Future strategies

To effectively scale up its renewable energy sector and meet its ambitious goals, Indonesia’s decision makers could look to develop a multifaceted strategy encompassing policy incentives, investment, technology transfer, and international collaboration. 19 Indonesia energy transition outlook 2022 , Institute for Essential Services Reform, December 2021. Possible priority actions could include:

• Renewable energy: Renewable portfolio standards; capacity payments; bundled at-scale procurement (ideally at multi-GW scale using competitive process); net metering; simplified approvals; agreements with neighboring countries to export clean power (replicating the recent MoU with Singapore); partnerships with global leaders in renewable technology to facilitate the transfer of cutting-edge technologies to Indonesia; awareness campaigns to educate the public about the benefits of renewable energy and ways to participate (such as rooftop solar installations); and capability building programs to create a skilled workforce.
• Transitioning from coal: Decision makers might consider low-emissions standards; a full transition to biomass firing in suitable coal plants; carbon pricing; mandatory CCS; tax incentives for plants that install clean technologies; and the selective phaseout of the oldest and most polluting plants.
• Incentivizing the scale-up of local production of renewable energy equipment, including equipment such as solar panels, wind turbines, and batteries, which could reduce costs and increase accessibility. Joint ventures are already emerging within the solar PV industry—a positive indicator of the sector’s growth.
• Improving Indonesia’s overall investment environment, by decision makers reviewing policy frameworks; tax incentives; streamlined regulatory processes; concessional finance; and risk-mitigation mechanisms. A national investment platform could be considered, where international investors use the platform to invest in specific special purpose vehicles (SPVs) or funds (see “Bold move 9: Funding the energy transition”).

In addition, the national grid will need to be adapted to handle the variability and decentralization of renewable energy sources, including developing and integrating energy storage technologies, as well as minimizing transmission and distribution losses.

Bold move 2: Delivering clean energy by strengthening and expanding the grid

The global transmission market, poised to reach $250 billion to $300 billion by 2030, is expanding rapidly, driven by factors that include rising energy demand, renewable energy integration, electrification of transport, and concerns over energy security. 20 “Singapore and Indonesia sign memorandum of understanding to strengthen cross-border electricity trade,” Ministry of Trade and Industry Singapore, September 8, 2023. Within this dynamic environment, Indonesia could benefit from urgently enhancing its power grid, including by expanding interconnection and intra-island grids, thus linking clean energy resources with major demand centers such as Java and Bali.

Optimizing the clean energy opportunity

To expand and modernize its grid, Indonesia has been adding thousands of kilometers of transmission lines and new transformer capacity. It has also been developing interconnections between different islands to improve energy distribution and reliability and to alleviate strain on existing island power systems. This grid expansion and strengthening are necessary both to enable renewables at scale and to support captive power intended for mineral processing in the clean technology value chain, such as for EV batteries. Projects, such as the Java–Sumatra 3 GW interconnection project (planned for inclusion in Indonesia’s 2024–34 long term electricity plan, RUPTL) and the establishment of a power cable plant by LS Cable & System and Artha Graha Network, highlight ongoing efforts. 21 Indonesia’s power sector plans: Focus on renewables to reach NZE goals , Southeast Asia Infrastructure, June 16, 2023; Hong Yoo, “LS cable & system completes new cable plant in Indonesia,” Korea Herald, January 26, 2022.

Indonesia is also encouraging associated private investment in the electricity sector, with more than 60 percent of new capacity under RUPTL allocated to IPPs. The Indonesian government is working on improving the regulatory framework to facilitate these investments in the sector. 22 Indonesia—country commercial guide , International Trade Administration, December 5, 2023.

In addition, the government has initiated programs to extend electricity access to rural and remote areas. These efforts often involve small scale, off-grid solutions such as solar panels and microhydro plants, alongside the extension of the traditional grid network. 23 Indah Soesanti and Ramadoni Syahputra, “Renewable energy systems based on microhydro and solar photovoltaic for rural areas: A case study in Yogyakarta, Indonesia,” Science Direct, November 2021.

For Indonesia to accelerate strengthening and expanding its power grid, priority actions could include:

• Upgrading transmission and distribution infrastructure, including replacing aging equipment and installing new, more efficient transmission lines. Current technologies limit the integration of intermittent power sources, potentially prolonging reliance on coal power.
• Rolling out smart grid technology to enhance the integration of renewables, including solar power. Smart grid technology encompasses designing grids for bidirectional energy flow, essential for incorporating residential solar PV systems and preventing grid instability.
• Developing the upstream transmission value chain —a vital action, as raw material prices are rising significantly (for example, copper by 32 percent and aluminum by 40 percent). 24 Global Energy Perspective 2022 , April 26, 2022. Securing such materials is important to control project costs.
• Developing low-carbon captive power plants, particularly necessary for energy-intensive industries such as mining and manufacturing to ensure a reliable power supply and reduce the burden on the public grid.
• Collaborating with international organizations and countries to receive technical and financial assistance, including for technology transfer, capacity building, and funding for infrastructure projects.

Bold move 3: Accelerating electric mobility

The transportation sector in Indonesia currently accounts for approximately 10 percent of total anthropogenic emissions. Under a business-as-usual scenario, these emissions are projected to more than double, rising from around 150 MtCO 2 in 2020 to approximately 350 MtCO 2 per year by 2050. 25 “Decarbonization scenario explorer (DSE) model: Indonesia,” McKinsey, 2019. This surge will be fueled by population growth, economic growth, urbanization, and increasing preference for four-wheel vehicles (4Ws) to 2050. Delivering Indonesia’s net-zero aspiration is likely to be achieved mainly through the electrification of vehicles, the corresponding decarbonization of the power sector, and the adoption of hydrogen as a fuel alternative.

Benefiting from the electric mobility opportunity

Despite EVs currently holding less than 1 percent of total penetration across 4Ws and two-wheel vehicles (2Ws) in Indonesia, the foundation for a substantial shift is being laid. 26 “Decarbonization scenario explorer (DSE) model: Indonesia,” McKinsey, 2019; Global Energy Perspective 2019 , McKinsey, January 2019. The Indonesian government has banned the sale of fossil fuel motorcycles by 2040 and cars by 2050, offered incentives for upfront purchase prices and non-monetary benefits such as exemptions from the odd-even traffic rule for EVs. 27 Rod Farmer, Rahul Gupta, Vivek Lath, and Nimal Manuel, “ Capturing growth in Asia’s emerging EV ecosystem ,” McKinsey, June 30, 2022; “Transportation minister promotes EV benefits at electric vehicle funday,” Jakarta Post , November 21, 2022.

In a net-zero scenario, total EV sales penetration is forecasted to reach approximately 26 percent for electric two-wheelers (E2Ws) and 27 percent for electric four-wheelers (E4Ws) by 2030, and 100 percent for E2Ws and 86 percent for E4Ws by 2040. 28 Penetration = EV/(total EV + total internal combustion engine [ICE]). This translates to EV parc (the total stock of vehicles in use) penetration reaching 8 percent for E2Ws and 4 percent for E4Ws by 2030, and 68 percent for E2Ws and 26 percent for E4Ws by 2040. 29 Global Energy Perspective 2024, Achieved Commitment scenario. As a result, annual emissions from the transport sector are projected to reduce by approximately 2 MtCO 2 in 2030 and 37 MtCO 2 in 2040 compared to a fading momentum scenario (Exhibit 4). 30 Global Energy Perspective 2024, Achieved Commitment scenario and Fading Momentum scenario. Private corporations are already participating in this shift: Gojek aims to completely transition its fleet to EVs by 2030 and Grab is set to deploy 26,000 EVs in Indonesia by 2025. 31 “Gojek and TBS Energi Utama form a joint venture to accelerate the development of Indonesia’s two-wheel electric vehicle ecosystem,” Gojek, November 18, 2021; Fanny Potkin and Fathin Ungku, “Ride-hailing giant Gojek to shift to electric vehicles by 2030,” Reuters, April 30, 2021. E2W sales momentum in Indonesia has started to pick up with sales in 2023 nearly tripling, bringing the number of E2W to 62,000 units compared to 17,000 units in 2022. 32 “Indonesia's two-wheeled EV sales surge 262 percent in 2023,” Antara , March 1, 2024. CAGR in E2W sales is poised to increase by more than 50 percent between 2023 and 2030 with expected sales of two million units by the end of this period. 33 McKinsey Centre for Future of Mobility 2024. Electric trucks and electric light commercial vehicles are also high-potential future markets.

Total EV penetration is forecast to reach 6 percent for electric two wheelers (E2Ws) and 2 percent for electric four wheelers (E4Ws) by 2030, and 40 percent for E2Ws and 20 percent for E4Ws by 2040. 34 Penetration = EV/(total EV + total internal combustion engine [ICE]). This corresponds with a 3 MtCO 2 per year emissions reduction versus business-as-usual by 2030, and 33 MtCO 2 per year emissions reduction versus business-as-usual by 2040 (Exhibit 4). 35 Global Energy Perspective 2024, Achieved Commitment scenario and Fading Momentum scenario. Private corporations are already participating in this shift: Gojek aims for a complete transition of its fleet to EVs by 2030 and Grab is set to deploy 26,000 EVs in Indonesia by 2025. 36 “Gojek and TBS Energi Utama form a joint venture to accelerate the development of Indonesia’s two-wheel electric vehicle ecosystem,” Gojek, November 18, 2021; Fanny Potkin and Fathin Ungku, “Ride-hailing giant Gojek to shift to electric vehicles by 2030,” Reuters, April 30, 2021. Further, Indonesia is set to become a leader in E2W rollout, with the market already growing at an annual rate of more than 50 percent. 37 McKinsey analysis. Electric trucks and electric light commercial vehicles are also high-potential future markets.

For Indonesia to realize the full potential of electric mobility, priority actions could include:

• Adopting more targets in line with COP28’s agreement to accelerate emissions reductions in this decade, which could see reducing internal combustion engine (ICE) vehicles and significantly scaling electric vehicle charging infrastructure (EVCI), including public charging stations and battery swap stations. This would signal a rapid EV transition to both manufacturers (OEMs) and consumers.
• Addressing critical associated infrastructure barriers, in particular, new infrastructure that would require addressing high capital expenditure (capex) requirements through low-cost financing solutions; forming partnerships with real estate entities; optimizing station placement through geospatial analysis; upgrading grid infrastructure as needed; and harmonizing technical standards.
• Establishing a comprehensive ecosystem for EVs, including third-party service and maintenance, a secondary market for EVs, and battery recycling—all of which could enhance the affordability and appeal of EVs compared to ICE vehicles. This may require adopting innovative business models to make EVs more affordable, such as separate financing for vehicles and batteries, offering “battery as a service,” and developing financing options for second-hand vehicles.

Bold move 4: Building the battery value chain

The role of batteries, especially lithium-ion (Li-ion) batteries, which often contain high nickel content within their cathodes, is increasingly becoming pivotal to the decarbonization of transportation and power sectors globally. 38 “ Battery 2030: Resilient, sustainable and circular ,” McKinsey, January 16, 2023. Indonesia, with the world’s largest nickel reserves at about 21 million tons (approximately 20 percent of global reserves), is uniquely positioned in this evolving market. 39 Ayman Falak Medina, “Unleashing nickel’s potential: Indonesia’s journey to global prominence,” ASEAN Briefing, May 30, 2023. By 2030, global Li-ion battery demand in Indonesia is projected to soar from approximately 200 gigawatt hours (GWh) in 2020 to around 4,700 GWh, and from 0.2 to 13.0 GWh (Exhibit 5). 40 “Projected global battery demand from 2020 to 2030, by application,” Statista, December 5, 2023; “ Battery 2030: Resilient, sustainable and circular ,” January 16, 2023. Over 50 percent of this demand is expected to be fulfilled by batteries utilizing nickel cathodes. 41 “Battery Insights demand model,” McKinsey, June 2023. In the burgeoning global value chain, key segments such as cell manufacturing, active materials, raw material mining and refining, and battery pack assembly are anticipated to contribute significantly to the global revenue pool, estimated to be around $400 billion in 2030. Consequently, Indonesia has already significantly increased nickel production in recent years, building on an existing production base that was formerly primarily for the stainless steel sector. 42 “Dirty metals for clean cars: Indonesian nickel could be key to EV battery industry,” Asia Nikkei, October 19, 2022. This will require a significant shift into production of higher-purity “Class 1” nickel (purity of at least 99.8 percent) that is required for Li-ion batteries, rather than “Class 2” nickel, which is primarily used in production of stainless steel. 43 Ayman Falak Medina, “Unleashing nickel’s potential: Indonesia’s journey to global prominence,“ ASEAN Briefing, May 30, 2023.

The battery value chain opportunity

Indonesia’s nickel resources and an enabling ecosystem could help open up opportunities in the battery value chain. The government recently announced a possible additional investment of around $32 billion for its domestic battery supply chain by 2026. 44 Fransiska Nangoy, “Indonesia sees $32 bln investment in battery chain—government official,” Reuters, May 30, 2023. South Korean conglomerate Hyundai also established Indonesia’s first EV manufacturing facility in 2022. 45 “Hyundai launches plant to produce Indonesia’s first electric car,” Reuters, March 17, 2022. In August 2023, a consortium led by another South Korean electronics company, LG, joined forces with the Indonesian government and Indonesia Battery Corporation (IBC) to establish a factory to manufacture EV battery cells, as well as a smelter and supplementary infrastructure, entailing an investment of $9.8 billion. 46 Faisal Maliki Baskoro, “Indonesia working with LG consortium to construct EV battery plant with $9.8B investment,” Jakarta Globe , August 4, 2023.

For Indonesia to realize its potential as a global battery manufacturing hub, priority actions could include:

• Establishing batteries as a national strategic priority , delivered sustainably to help attract both global and local industry players and ensure transfer of technological know-how. This effort could include improving the ease of doing business; developing infrastructure that adheres to environmental, social, and governance (ESG) standards; and implementing targeted education programs. In particular, key considerations could include how to ensure that nickel can be produced sustainably, including by using renewable energy, engaging local communities, providing local jobs, setting appropriate strict environmental regulations, particularly at mine sites, as well as setting the right domestic use and export mix.
• Stimulating demand and manufacturing by possibly enhancing access to export markets through free trade agreements (FTAs) and offering manufacturing incentives to attract OEMs and battery cell producers. This approach could help trigger domestic demand as well as manufacturing sector demand.
• Building an integrated value chain from mining and refining to cathode, cell, and pack manufacturing. This could assist in reducing production costs, alleviating supply chain bottlenecks, and extending reach into other lucrative segments of the value chain. For example, to manufacture battery cells, Indonesia will need to produce or import the materials required for battery anodes (such as graphite, copper, or silicon); electrolytes (for instance, lithium salts or organic solvents); and cathodes (primarily nickel). Recycling facilities and circular economy practices would help with this, giving Indonesia the ability in the future to reclaim materials such as lithium and cobalt that are not as widely available locally.

Bold move 5: Creating a carbon market with Indonesia’s abundant nature-based solutions

High-quality carbon credits (or carbon offsets) are an increasingly important part of the net-zero toolkit for organizations, particularly within hard-to-abate, high-emitting sectors such as aviation, cement, steel, and oil and gas. 47 “ Putting carbon markets to work on the path to net zero ,” McKinsey, October 28, 2021.

Nature-based solutions (NBS) for carbon sequestration, including reforestation and mangrove and peat restoration, offer effective ways to sequester carbon from the atmosphere and generate carbon credits from real, on-the-ground projects. These solutions are frequently deployed in emerging markets where rich, diverse natural resources are often more available, cost effectiveness is higher, and social and environmental cobenefits are to be had. Indonesia has among the largest NBS potential of any country globally, translating to over 1.5 GtCO 2 in carbon credit potential (Exhibit 6). With an increasing number of corporations committing to emissions reductions, the demand for all types of carbon credits in Indonesia is projected to grow tenfold from 2022 to 2030, reflecting a global trend. 48 Christopher Blaufelder, Cindy Levy, Peter Mannion, and Dickson Pinner, ” A blueprint for scaling voluntary carbon markets to meet the climate challenge ,” McKinsey, January 29, 2021. Beyond climate mitigation and economic returns, carbon credits are often valued for their cobenefits, including local economic growth, local community development, soil health improvement, water quality improvement, and biodiversity protection. 49 Nicole Sullivan, “Permanence considerations when buying carbon credits,” Carbon Better, March 24, 2023.

However, ensuring the long-term viability of the market for nature-based carbon credits involves creating a robust, transparent, and effective system where carbon credits can be reliably quantified, verified, and traded. Accurate accounting, as well as verification of permanence and additionality, are essential to opening this market.

Shaping the carbon market opportunity

Momentum for NBS in Indonesia is accelerating, and various initiatives are underway:

• Emerging project developers are focusing on the development of new, high-quality emissions abatement projects. Projects under discussion, if implemented successfully, include swampland conservation, food security, biodiversity protection, and community income opportunities. 50 “REDD+ on the ground,” CIFOR, 2014; “Sumatra Merange peatland project,” Forest Carbon, December 7, 2023.
• The Ministry of Environment and Forestry (KLHK) has introduced a National Registration System (SRN), which is a compulsory standard for local projects. This system plays a crucial role in maintaining quality control by establishing guidelines and requirements for monitoring and reporting carbon emissions reduction, including validation and verification by independent third-party organizations. SRN aims to promote transparency and accountability by creating a registry that serves as a reliable and authoritative source of information. 51 “Indonesia National Climate Registry System ( Sistem Registri Nasional Perubahan Iklim ),” Republic of Indonesia, 2023.
• The Indonesia Stock Exchange (IDX) launched a trading platform for both carbon allowances (under cap-and-trade) and voluntary carbon credits in September 2023. 52 “Launching of Indonesia Carbon Exchange (IDXCarbon),” Indonesia Stock Exchange, September 26, 2023.
• Various ministries enacted key milestones for its sector carbon trading, including KLHK, which set up the regulatory framework for carbon trading in the forestry sector under the Ministerial Regulation 7/2023, and the Ministry of Energy and Mineral Resources (ESDM), which launched the emissions trading scheme for the power sector in February 2023 under Ministerial Regulation 16/2023. 53 “Indonesia releases carbon trading scheme for the forestry sector,” Tempo , November 10, 2023; “Indonesia launches emissions trading system for power generation sector,” International Carbon Action Partnership, February 27, 2023.

Ways that Indonesia could position itself as a leading NBS hub include:

• Finalizing a national decarbonization road map that is disaggregated by sector (including a carbon markets strategy) could give stakeholders interested in carbon markets clarity and confidence to invest in a voluntary carbon market, and the operationalization of Article 6 of the Paris Agreement. 54 Article 6 of the Paris Agreement allows countries to voluntarily cooperate with each other to achieve emissions reduction targets set out in their NDCs; “What you need to know about Article 6 of the Paris Agreement,” World Bank, May 17, 2022.
• Ensuring collaboration between the public and private sectors to accelerate the improvement of carbon credit quality (in line with international standards) and the development of a carbon market ecosystem in the country. This could include support and incentives for credits-linked emissions reduction projects; streamlined regulatory and approvals processes; targeted sustainable financing; and mandated annual emissions measuring, reporting, and verification (MRV).
• Connecting Indonesia’s carbon credit market to the world to attract foreign investment and facilitate price discovery, which would enable international buyers to access Indonesia’s market. This would be done by ensuring that domestic standards are of high integrity and compatible with international standards, and that projects are rigorously implemented and monitored over the long term, enabling domestic benefits.

Bold move 6: Developing green fuels for transportation

Low-carbon transportation cannot be delivered through electrification alone. Green fuels also have a significant role to play, and Indonesia is well-positioned to contribute to this shift. As the largest producer of biodiesel globally, and with significant potential for producing sustainable aviation fuel (SAF), Indonesia is poised to be a global biofuels player. This shift aligns with global trends and caters to growing demand, particularly from regions such as the European Union and North America.

Accelerating the biodiesel opportunity

Indonesia has taken several steps to increase its use of green fuels.

Bioethanol: E5 bioethanol-blended gasoline was piloted in 2023 in several gas stations. 55 “Indonesia: Pertamina rolls out E5 blending in June 2023,” United States Department of Agriculture, Foreign Agriculture Service, June 27, 2023. There is good potential for further bioethanol uptake, with the possibility to increase bioethanol-blended gasoline to 10 percent of total supply in the next 10 years. To ensure cost competitiveness, several ‘on-farm’ and ‘off-farm’ initiatives, such as mechanization in sugar cane plantations, as well as regulatory support like a waiver on excise tax, are needed for first-generation biofuel (1G). Second-generation biofuels (2G) currently are still substantially more expensive than 1G, and hence can be considered a mid to long term option. 56 Based on industry expert interviews. Key challenges for the sector include solving land availability challenges for 1G biofuels without compromising food security and making 2G biofuels available at scale, which factors like technological development and regulatory support could enable. Brazil, as an example, have succeeded in improving ethanol blending in gasoline, achieving a mandated blending rate of more than 70 percent, beyond the 27 percent mandated blending rate, enabled by establishing flex fuel vehicles that basically run on any mix of ethanol and gasoline, thereby opening the possibility of going beyond the typical blending limit of 10-20 percent recommended by automotive manufacturers for unmodified engine.

Biodiesel: The biodiesel blend mandate was increased to 35 percent nationwide in August 2023. 57 Indonesia fuel projection at 2030 based on Pertamina net-zero emissions roadmap; McKinsey analysis.

Sustainable aviation fuel (SAF): With around 50 percent of global palm oil mill effluent (POME) production, a key feedstock for SAF, Indonesia is exploring SAF as a major component in reducing aviation emissions. However, due to the high cost of production compared with other types of aviation fuel, financial support or incentives may be necessary to unlock the SAF market. In addition, the use of POME is subject to regulatory sensitivities around palm oil-based fuel, despite POME being a waste product. Therefore, it will be increasingly important to monitor the supply chain using accurate accounting and traceability approaches.

SAF from used cooking oil: Used cooking oil (UCO) is another feedstock for SAF production. It is one of the cheapest and most sustainable feedstocks available globally along with POME. Despite less than 25 percent of UCO being collected in Indonesia today, the country is already a top three UCO exporter globally, with the UCO market projected to grow to around $2.5 billion in Indonesia by 2030. 58 McKinsey analysis.

To successfully expand the use of green fuels, priority considerations for Indonesia include:

• Creating a regulatory environment that enables competitive green fuel pricing versus fossil fuels and addresses high production costs and regulatory challenges around SAF. For example, other markets have proposed or introduced carbon taxation or other means of financial support (or both).
• Scaling up bioethanol and biodiesel production and adoption, including through enhanced palm oil plantation efficiency, without compromising food security. The scale-up of bioethanol could focus on delivering sufficient feedstock and the development of production and blending facilities, while the scale-up of biodiesel (including better seeding and agrotechnology) could improve yields for biodiesel production.
• Exploring the potential of clean hydrogen as a future energy carrier and regional export commodity, especially to energy importing nations such as Japan and South Korea. This would require advancements in production technology and specific regulations for e-fuels.

Bold move 7: Converting mature oil and gas fields into carbon stores

The global importance of CCS as a tool to mitigate GHG emissions is growing. CCS involves capturing CO 2 emissions from industrial sources and storing them underground. CCS could contribute to a reduction of 2 to 6 Gt per annum of CO 2 globally by 2050, representing 6 to 14 percent of current total emissions. 59 McKinsey analysis. In Asia, there are 12 commercial CCS facilities in operation, eight under construction, and 17 being developed. This is in addition to at least 15 pilot CCS facilities (as of November 2023). 60 Global status of CCS 2023: Scaling up through 2030 , Global CCS Institute, January 2024. As one of Southeast Asia’s largest oil and gas producers, Indonesia’s potential to repurpose mature oil fields or saline aquifers for CO 2 storage or enhanced oil recovery (EOR) is significant.

Increasing the CCS opportunity

Indonesia has been actively pursuing CCS, with ongoing evaluations of potential carbon capture, utilization, and storage (CCUS) sites and legislative advancements. As of November 2023, ten CCUS clusters were being evaluated, four CCUS projects were in early development, and three were in an advanced stage of development. 61 Global status of CCS 2023: Scaling up through 2030 , Global CCS Institute, January 2024; McKinsey analysis. Additionally, a presidential regulation on CCS and CCUS was released in January 2024. 62 Takeo Kumagai, “Interview: Indonesia to finalize presidential CCS/CCUS by year-end,” S&P Global, October 2, 2023. Efforts are also underway to map the CO 2 storage capacity, and the Ministry of Energy and Mineral Resources is finalizing regulations specific to CCS for oil and gas areas. These developments demonstrate Indonesia’s commitment to integrating CCS as a part of its climate change mitigation strategy.

To inform effective CCUS implementation, Indonesia can draw lessons from international large-scale projects:

• Exploring the development of cluster-based CCS in industrial hubs, which would achieve economies of scale to accelerate CCS adoption, inspired by successful models such as Net Zero Teesside and Zero Carbon Humber. 63 For further information, see East Co 2 ast Cluster’s website, eastcoastcluster.co.uk. This may include gathering insights from at-scale international projects such as Gorgon LNG and Northern Lights, including managing technical complexities (for example, reservoir pressure) and understanding potential business models involving CO 2 taxation and service margins. 64 For further information, see Chevron’s website, chevron.com/projects/gorgon, and Northern Lights’ website, norlights.com.
• Developing international collaborations with countries, such as Japan, and frameworks such as those provided by the American Carbon Registry, to assist in establishing clear, credible guidelines for safe and effective CO 2 storage.
• Including blue hydrogen in CCS plans to create a new revenue stream, helping to offset costs and ensuring competitive pricing.

Bold move 8: Developing green industrial estates

Indonesia is aiming for between 17 and 19 percent renewable energy in its mix by 2025 and net-zero emissions by 2060. 65 Enhancing Indonesia’s power systems , IEA, August 2022; “Indonesia to abandon 23%,” January 16, 2024. Central to this transformation is the development of green industrial estates (or hubs). These hubs are envisioned to be future centers of green innovation, crucial to reducing Indonesia’s substantial industrial CO₂ emissions, which account for 23.0 percent and 15.6 percent of the country’s direct and indirect energy related emissions, respectively. 66 Climate transparency report 2022 , Climate Transparency, 2022.

Concentrations of sustainability innovation

The Indonesian government has already initiated efforts to foster green industrial hubs emphasizing low-carbon utility and circular economy principles. These hubs are intended to serve as collaborative platforms for local and international companies, offering:

• Economies of scale by facilitating cross-sector collaboration, with hubs enabling industries to share resources, reduce costs, and accelerate local industrial decarbonization. This includes developing shared infrastructure like clean power systems, smart grids, and CO 2 and hydrogen pipelines.
• Innovation and test beds, with hubs serving as living laboratories demonstrating the convergence of policy and technology for environmental impact.
• Local development, with green infrastructure designed not only to support the industrial parks but also to provide clean energy to surrounding districts.

The Kalimantan Industrial Park Indonesia (KIPI) in Bulungan, North Kalimantan, is a flagship green industrial hub project. Planned as the world’s largest green industrial park, KIPI will focus on sectors such as EV battery manufacturing and clean energy production, with tens of billions of dollars of investment from international partnerships. 67 “Indonesia launches major industrial estate on Borneo Island,” Reuters, December 21, 2021. Two other planned industrial parks are Arun Lhokseumawe and Sei Mangkei. 68 Government stipulates Arun Lhokseumawe special economic zone (SEZ) , Cabinet Secretariat of the Republic of Indonesia, February 27, 2017; “The Sei Mangkei special economic zone,” PT Kawasan Industri Nusantara, December 6, 2023.

To successfully establish and scale green industrial estates, priority actions for Indonesia could include:

• Identifying strategic locations. This might include proximity to urban and transportation hubs; access to renewable utilities; availability of land with lower ecological value, low flood and natural disaster risk; appropriate zoning; and access to necessary raw materials. For example, Kalimantan offers renewable energy potential, and Java has existing infrastructure and is close to major markets.
• Initiating pioneering projects and partnerships to create a foundation for a sustainable industrial ecosystem. For instance, public-private partnerships can help distribute risks between the public and private sectors, while partnerships with international technology providers can help bring in cutting-edge solutions for renewable energy, waste management, water conservation, and more.
• Encouraging sustainable investments with fiscal incentives such as tax holidays and import duty exemptions, which can be vital in attracting both domestic and international investors.

Bold move 9: Funding the energy transition with green capital

Indonesia has set an ambitious target to reduce its GHG emissions by 43.2 percent by 2030 (approximately 31.9 percent unconditional and additional 11.3 percent conditional on international support). 69 Indonesia country climate and development report , World Bank, April 28, 2023. The country has excellent potential for sustainable growth but achieving these green growth targets and GHG reductions requires substantial investment, estimated at around $150 billion to $200 billion per annum to 2030. 70 “Indonesia needs $200 bln annual investment in 2021 to 2030 to decarbonize—govt,” Reuters, October 13, 2021. Consequently, engaging a diverse range of financial players and offering a range of green financial instruments are crucial for Indonesia’s green transition.

Sustainable financing can take three main forms: traditional loans from banks, bonds to domestic and international markets, and “blended finance” from public and private sources. The loans and bonds can be either sustainability-linked, where the interest rate or coupon rates change when sustainability goals are met, or project-based where the projects must be eligible green projects.

In Asia, green bonds and sustainability-linked loans form the majority of sustainable financing issued. Green, social, and sustainability bonds, typically issued by governments, public sector entities, or supranational organizations, are the largest part of the market (more than 50 percent), with sustainability-linked loans taking up much of the rest of the market in 2022. 71 ASEAN sustainable finance state of the market 2022 , HSBC, May 15, 2023.

Blended finance brings a more unique value proposition as it is provided by a group of lenders between public and private sectors—development finance institutions (DFIs), multilateral development banks (MDBs), and investors. It can include many asset classes such as grants, equity, debt, concessions, tax exemptions, immunities to investors, insurance, and guarantees (Exhibit 7). For example, the JETP uses a blended-finance mechanism consisting of a mix of concessional loans, market-based loans, grants, guarantees, and other instruments. 72 Comprehensive investment and policy plan 2023 , JETP Indonesia, 2023.

Investing in the green capital opportunity

In Indonesia, significant strides have been made in sustainable financing, particularly after the introduction of a sustainable financial road map by the financial regulator, OJK. Key developments include:

• The launch of the Indonesia Sustainable Finance Initiative (ISFI) in 2018 by eight banks in Indonesia, promoting environment-friendly project funding. 73 “Indonesia sustainable finance initiative,” Green Finance Platform, 2018. By 2021, half of Indonesia’s banking sector had committed to increasing financing for sustainable projects.
• The Global Blended Finance Alliance, initiated during the Indonesian G20 Presidency in 2022, aims to bridge funding gaps for Sustainable Development Goals’ programs. 74 “Indonesia presidency launches Global Blended Finance Alliance,” Antara News , November 15, 2022.
• Broad industry adoption of diverse financial instruments, including traditional loans, sustainability-linked loans and bonds, and innovative blended finance combining public and private resources, similar to the JETP.
• OJK launch of Phase II of the Sustainable Finance Roadmap 2021–2025, aiming to further accelerate the sustainable transition of the finance sector. 75 “Sustainable finance roadmap phase II (2021–2025),” OJK, 2021.
• The publication of Indonesia’s Green Taxonomy 1.0 in 2022 (updated by OJK in 2024), which standardizes sustainable finance terminology to enable identification of projects eligible for sustainable finance and requiring financial institutions to align climate disclosures with this taxonomy. 76 Indonesia green taxonomy edition 1.0—2022 , Sustainable Finance Indonesia, January 20, 2022; Indonesia taxonomy for sustainable finance , Sustainable Finance Indonesia, February 20, 2024.

Indonesia has seen progress across key financing instruments and schemes, however, there is still more to do to meet its goals. For example, the annual average investment in renewables over the past five years has been $1.62 billion, which represents only 20.2 percent of the annual spend required for Indonesia to reach its 2025 goal. 77 Indonesia sustainable finance outlook (ISFO) 2023 , Institute for Essential Services Reform, October 17, 2022. The funding deficit impedes the energy transition and underscores the challenges, such as high renewable energy tariffs; competition with subsidized fossil fuels; high capex requirements; and a lack of clarity and traceability of financial flows and allocation of public financing for renewable energy projects.

These challenges may also erode investor confidence in renewable energy investment in Indonesia, but nonpublic financing sources are strongly needed to fill the funding gap, which will complement public funding allocation to renewable energy projects. To further catalyze sustainable financing into Indonesia’s growth and decarbonization agenda, priority actions include:

• Developing innovative, new financing mechanisms, while also strengthening capacity and expertise in sustainable finance. These include exploring new ways to raise capital for green projects such as expanding the use of finance instruments with higher leverage ratios (for example, insurance, guarantees, blended-finance structures, and currency hedging). It could also provide training and resources to financial institutions, investors, and other stakeholders on sustainable finance.
• Promoting public–private partnerships to bring in more international capital, potentially through a national level investment platform. The government and the private sector could work together to develop and implement sustainable financing solutions, potentially including a national level investment platform that enables at-scale project procurement and financing. This could include increasing capital deployment from existing initiatives and institutions (for instance, the Bridgetown Agenda or MDB reform) 78 “The Bridgetown Initiative,” PMO (Office website of the Prime Minister of Barbados), October 9, 2023; “Boosting MDB’s investing capacity,” Independent Review of Multilateral Development Banks’ Capital Adequacy Frameworks, 2022. and raising new international concessional climate finance as part of COP, G20, and the United Nations process, such as proposed COP28-linked blended finance funds, the loss and damage fund, and new global climate taxes or levies.

Bold move 10: Enabling a green economy

To become a green economy, the integration of policy, technology, and people (as well as finance) will be key to unlocking all sectors, with one crucial cross-cutting policy that could have a strong enabling effect on the carbon price (for example, via an Emissions Trading Scheme). 79 “ The net-zero transition: What it would cost, what it would bring ,” October 28, 2021. Regarding technology, while many low-carbon technologies are manufactured outside the country, Indonesia could leverage global trends to attract new foreign investment and expertise in low-carbon manufacturing. Indonesia has a demographic advantage with its young, educated, and growing population, which enhances its attractiveness as an investment destination. Opportunities to further entice foreign companies and skilled professionals include financial incentives, robust infrastructure, and favorable visa and tax policies—potentially positioning Indonesia as an appealing alternative to traditional expatriate hubs such as Dubai or Singapore. It will be equally essential to continue to foster domestic talent.

Growing a green economy to achieve a sustainable future

Indonesia has taken initial steps to lay the foundation for a green economy. Key initiatives include:

• Innovation: Indonesia established its first carbon exchange market in September 2023. This initial phase focuses on the voluntary carbon market, with plans to extend to the compliance market. 80 “Indonesia Carbon Exchange (IDXCarbon) was officially launched,” IDX, September 26, 2023.
• Technology: With natural resources such as nickel, copper, and cobalt, Indonesia is already attracting global renewables and battery manufacturers, including Hyundai and LG. 81 “Hyundai Motor Group and LG Energy Solutions sign MoU with Indonesian government to establish EV battery cell plant,” Hyundai, July 30, 2021.
• People: The launch of the Sustainability Academy and Sustainability Center by Pertamina in September 2023 is a good example of a local capacity building initiative. 82 “Pertamina launches the first sustainability academy and sustainability center in Asia,” Pertamina, September 8, 2023.

To enhance its green economic landscape, Indonesia could consider the following priority actions:

• Developing comprehensive green economy policies and regulations that help promote sustainable practices across all sectors, as well as incorporate sustainability into national and regional development plans. For example, a system that encourages corporates to disclose emissions, adopt net-zero goals and initiatives, and to influence lower-carbon consumer behavior and carbon pricing could help drive down emissions.
• Facilitating manufacturing and the adoption of sustainable technologies in industries and households through incentives, grants, and awareness campaigns.
• Enticing foreign companies and professionals while continuing to foster domestic talent, including through financial incentives, robust infrastructure, favorable visa and tax policies, university and employee programs, and countrywide, dedicated sustainability programs to meet these objectives.

Decarbonizing is considerably challenging for Indonesia, but the opportunities are equally significant. By utilizing its abundant resources relevant for the green transition and building on various strategic initiatives across industries and the public and private sectors, the country could position itself well in the global journey to net zero.

Vishal Agarwal is a senior partner in McKinsey’s Singapore office, where Ashwin Balasubramanian is a partner. Fadhila Discha is a specialist in Jakarta, where Khoon Tee Tan is a senior partner.

The authors wish to thank Rajat Agarwal, Yuqing Chen, Adilla Fatimah, Rahul Gupta, William Hudson, Yann Menager, Jusuf Merukh, Shubhraneel Mitra, Neil Nevgi, Martin Santoso, Surya Sharma, Jessica Song, and Zhou Yi for their contributions to this article.

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RUPTL 2021-30: PLN steps up ambitions to accelerate clean energy investments in Indonesia - Total capacity addition was revised down but the share of renewables increased

16 Nov 2021

FAROI Jeremy

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Ambiguities versus ambition: A review of Indonesia’s energy transition policy

Indonesia’s current power status shows that the country derives half of its electricity from coal-fired power plants (CFPP). The overwhelming additions of capital-intensive fossil fuels have contributed to poor financial returns and heavy debt burdens on the state electricity company, Perusahaan Listrik Negara (PLN). Oversupply is a significant issue that developed as a combination of overestimating future demand, over-constructing large fossil fuel-fired generators, and market barriers that prevent the full utilisation of this existing capacity. Key power sector policies and announcements reveal that exemptions and existing, planned projects may not set Indonesia on the most straightforward path to achieving an effective, efficient, and timely energy transition. The proposed capacity additions stated in PLN’s Electricity Supply Business Plan (RUPTL) 2021-2030 could either prolong the use of fossil fuels or potentially deviate essential resources towards unproven “new” technologies rather than renewable energy (RE). The Centre for Research on Energy and Clean Air (CREA) and Trend Asia have published a joint report examining the ambiguities in Indonesia’s energy transition policy, in particular in the power sector.

The report found an estimated 33% of the 58 GW of total installed fossil fuel capacity in Indonesia was more than what was needed to meet peak demand and maintain a 15% reserve margin in 2021. This oversupply exceeds the national electricity reserve margin standard of 30-35% and amounts to an estimated IDR 16 trillion (USD 1.2 billion) for fixed operating and maintenance costs to keep this excess capacity in working condition. Existing overcapacity on the grid should therefore encourage Indonesia to avoid new coal construction while devoting much-needed capital to grid improvements and zero-carbon technologies to preserve the security of supply.

The Energy Transition Mechanism (ETM) and Just Energy Transition Partnership (JETP) scheme currently being offered to Indonesia will be excellent opportunities to accelerate the transition, in particular to support the financing of the early retirement of CFPPs and to boost the development of RE-based power plants such as solar and wind.

Key findings

● Over 12 GW of fossil fuel power plants have been commissioned in the last five years, increasing Indonesia’s operating coal fleet by 30%. Meanwhile, only 1.6 GW of renewable energy capacity was added, mostly hydro and geothermal. ● In 2021, 33% of the 58 GW of total installed fossil fuel capacity in Indonesia was in excess of what was needed to meet peak demand and maintain a 15% reserve margin. This oversupply exceeds the national electricity reserve margin standard of 30-35% and is maintained by IDR 16 trillion (USD 1.2 billion) annually in FOM cost. ● An estimated 40.6 GW of capacity is planned for commercialization between 2021 and 2030; of which 34% (13.8 GW) will come from coal and 14% (5.8 GW) from gas and diesel. Such capacity additions are incompatible with an ambitious NZE and will likely worsen oversupply. ● At present, the determination of the NZE targets is not fully aligned across ministries and related entities. PLN and MEMR set 2060 as the official target, while MoEF set 2070 and Bappenas set 2045. ● Amid slower economic growth rates, electricity grid oversupply, and CPP’s funding uncertainty, nearly 6 GW of new CPPs are “shelved” in the 2021 2030 RUPTL in case they are needed for “adjusting system needs.” The most significant portion is found in Sumatra (2.59 GW) and Java (2.66 GW), even though these grids both faced oversupply concerns of over 50%. ● From 2021 2030 RUPTL, PLN plans to convert 1.2 GW of proposed coal projects to fossil gas. The existing coal overcapacity in Indonesia and the low penetration of renewables in the energy mix means that gas infrastructure will only lock in fossil fuels infrastructure. ● PLN’s strategy to reduce GHG emissions will not be met by increasing biomass co-firing at coal plants because the portion of biomass is only 1-5%, and the remaining 95% will still use coal. Co-firing runs the risk of derating the asset and also potentially provides a reason to extend the coal life and keep them operating. PLN plans to implement this technology in 144 CPP units with a total capacity target of 18.3 GW by 2025. ● The feasibility of ammonia co-firing remains untested outside of Japan. Factors such as the need to import the fuel and the retrofitting of existing plants will likely make this technology extremely costly in Indonesia and are of concern as it could extend the lifetime of CPPs and LNG power plants. PLN plans to implement this technology in 7 units of power plants with a total capacity target of 4 GW. ● CCUS technology remains largely unavailable commercially and remains extremely costly to implement for power projects, especially in the face of renewable energy alternatives. The implementation will reduce the plants’ generating capacity because the technology is energy-intensive. ● Clean Coal Technology (CCT) does not guarantee the reduction of GHG emissions and air pollution from CPP. CPPs with CCT still emit CO2 and toxic pollutants such as sulfur dioxide, nitrogen dioxide, and particulate matter.

Recommendations

CREA and Trend Asia recommend to:

• cancel all new fossil fuel power plants in the pipeline;
• reevaluate fossil fuel projects that are subject to PPA renewals;
• expedite timeline for phase out of coal power plants, while scaling up deployment for new solar and wind technologies;
• disclose long-term power purchase agreements (PPAs) and plant-level retirement plans to the public;
• reevaluate fossil fuel based capacity, and its share in the energy mix;
• completely avoid fossil gas and false solutions in power sector and energy transition initiatives;
• integrate sub-national electricity grids and improve grid management.

The report is available in English and Bahasa Indonesia .

28 March 2023

Andri Prasetiyo (Trend Asia), Isabella Suarez (CREA), Jobit Parapat (CREA), Zakki Amali (Trend Asia)

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RUPTL 2021-30: PLN steps up ambitions to accelerate clean energy investments in Indonesia - Case Study

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The Government of Indonesia and PLN (the national power utility) released last month the new Electricity Business Plan (RUPTL) 2021-30, which sets out Indonesia’s future power capacity and network development plans over the next 10 years. This new RUPTL (touted as the “greenest” RUPTL to date) marks a turning point in the country’s energy transition as, for the first time, renewable energy accounts for half (or 21 GW) of total power capacity addition. The plan comes in support of the Government’s objectives to achieve a 23% share of renewable energy in the energy mix by 2025 (as stated in the National Electricity General Plan or RUKN) as well as to reduce greenhouse gas emissions by 29-41% by 2030 and achieve Net-Zero emissions by 2060 in line with the county’s Nationally Determined Contributions.

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Electricity Supply Business Plan (RUPTL)

This policy sets out an electricity generation capacity addition target of 41GW for the period 2021-2030, of which 48% will come from renewable sources, while 52% will be provided by fossil fuels

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Indonesia’s greener electricity supply business plan—2021 RUPTL

Associate Director, Gas, Power and Climate Solutions, S&P Global Commodity Insights

After a delay of more than a year, the Ministry of Energy and Mineral Resources released the 2021 electricity supply business plan (2021 RUPTL) in October 2021. The previous RUPTL was issued back in 2019, before the COVID-19 pandemic hit the world. The 2021 RUPTL signals Indonesia's first-ever shift from relying mostly on fossil fuel generation toward renewables.

The lower power demand growth projection is more aligned with the historical pre-pandemic performance. Perusahaan Listrik Negara (PLN) has lowered its power demand forecast owing to a decline in GDP growth by 1.25%, accounting for the COVID-19 impact and recovery time. Over the coming decade, the 2021 electricity supply business plan (RUPTL) projects an average annual power demand growth rate of 4.9% compared with 6.4% in the 2019 RUPTL.

The plan is to shift reliance away from fossil fuels, with larger renewable capacity additions planned. The 2021 RUPTL targets an addition of 21 GW of renewables, a 25% increase from the 2019 RUPTL. In contrast, fossil fuel generation capacity additions decline 50% to just under 20 GW. As a result, the share of capacity additions from renewables in the latest plan has increased from 30% to 52%, clearly indicating the intention to gradually shift away from the reliance on fossil fuels.

The renewables target is unlikely to be met owing to the country's reliance on traditional renewable sources and its unrealistic development timeline. The latest RUPTL plans for a 40-fold increase in solar capacity from the current level but has reduced the planned wind capacity additions by 40%. In contrast, hydropower and geothermal, which have been facing development challenges and delays, have their planned capacity additions relatively unchanged at about 14 GW. A total of 11 GW of renewable capacity is planned to come online by 2025 to meet the renewable generation target. However, IHS Markit has tracked only about 2 GW of capacity under construction, mostly from hydropower and geothermal.

Posted 22 October 2021 by Joo Yeow Lee , Associate Director, Gas, Power and Climate Solutions, S&P Global Commodity Insights

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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U.S. Department of the Treasury

U.s. department of the treasury, irs release proposed guidance to continue investment boom in clean energy production.

Proposed Rules for “Technology-Neutral” Clean Electricity Incentives in the Inflation Reduction Act 

WASHINGTON – Today, the U.S. Department of the Treasury and Internal Revenue Service (IRS) released proposed guidance on the Clean Electricity Production Credit and Clean Electricity Investment Credit established by President Biden’s Inflation Reduction Act. By providing clarity to developers of clean electricity projects, today’s guidance will further President Biden’s Investing in America Agenda, support American jobs, and bolster energy production and energy security while reducing energy costs for American consumers.  

The Inflation Reduction Act sunsets the existing Production Tax Credit (section 45 of the tax code) and Investment Tax Credit (section 48 of the tax code) by limiting their availability to projects beginning construction before 2025 and transitioning to the Clean Electricity Production Credit (section 45Y of the tax code) and the Clean Electricity Investment Credit (section 48E of the tax code) for projects placed in service after December 31, 2024. These new Clean Electricity credits are one of the law’s most significant reforms, providing incentives for the first time to any clean energy facility that achieves net zero greenhouse gas emissions. These credits provide the ability for new zero greenhouse gas emissions technologies to develop over time, while also providing long-term clarity and certainty to investors and developers of clean energy projects.

After extensive consultation with interagency experts, today’s Notice of Proposed Rulemaking (NPRM) identifies specific technologies that meet the high environmental standards set out in President Biden’s Inflation Reduction Act and would categorically qualify as zero greenhouse gas emissions for the purposes of the Clean Electricity Production Credit and Clean Electricity Investment Credit. The technologies recognized in today’s NPRM include wind, solar, hydropower, marine and hydrokinetic, nuclear fission and fusion, geothermal, and certain types of waste energy recovery property (WERP). The proposed guidance also clarifies how energy storage technologies would qualify for the Clean Electricity Investment Credit. The statute requires that clean energy technologies that rely on combustion or gasification to produce electricity undergo a lifecycle greenhouse gas analysis to demonstrate net-zero emissions. The proposed rules released today seek comment on a range of important questions related to this required lifecycle analysis for combustion and gasification technologies. Treasury, in consultation with interagency experts, will carefully review comments received and continue to evaluate how additional clean energy technologies, including combustion and gasification technologies, will be able to qualify for the clean electricity credits. 

“President Biden’s Inflation Reduction Act has driven an investment boom that is adding historic levels of new clean power to the grid while keeping consumer energy costs in check, reducing greenhouse gas emissions, and bolstering energy security,” said  U.S. Secretary of the Treasury Janet L. Yellen . “The Clean Electricity Tax Credits created under the Inflation Reduction Act provide certainty to the market and are poised to drive substantial further growth and lower utility bills over the long-run.”

“The Inflation Reduction Act’s new technology-neutral Clean Electricity credits, which will come into effect in 2025, are one of the law’s most significant contributions to tackling the climate crisis,” said John Podesta, Senior Advisor to the President for International Climate Policy . “Today’s initial guidance from Treasury will help provide long-term certainty to investors and developers, support new zero-emission innovations, and accelerate our progress toward a 100 percent clean power sector.”

“With today’s guidance, energy companies have yet another tool to cut electricity costs for families and businesses and power President Biden’s American manufacturing renaissance,” said Assistant to the President and National Climate Advisor Ali Zaidi.  “Under the President’s leadership, the U.S. is projected to build more new electric generation capacity this year than we have in two decades – and 96 percent of that will be clean. Thanks to the Biden-Harris Administration’s efforts, American families are expected to save up to $38 billion on their electricity bills and American businesses are projected to spend 15% less on electricity by 2030. This is how we win the future, by harnessing American innovation and the best workers in the world to grow our economy, reduce energy costs, and save the planet for future generations.” 

These proposed rules generally follow rules from the existing Production and Investment Tax Credits, which should provide clarity and certainty to developers as they move forward with clean energy production projects. Treasury is committed to grounding these rules in the best available science and ensuring continued transparency and public accountability. That is why today’s guidance proposes that any future changes to the set of technologies that are designated as zero greenhouse gas emissions or the designation of lifecycle analysis models that may be used to determine greenhouse gas emissions rates must be accompanied by an analysis prepared by the U.S. Department of Energy (DOE)’s National Labs, in consultation with agency technical experts and other experts. The NPRM also proposes a process by which taxpayers can request a Provisional Emissions Rate, which DOE would administer in consultation with the National Labs and other experts as appropriate.

Additionally, the NPRM includes proposed rules that provide clarity on the inclusion of costs of interconnection-related property for lower-output clean energy facilities that take the Clean Electricity Investment Tax Credit. Eligible costs, which are a major barrier to faster clean energy deployment, include the costs of upgrades to local transmission and distribution networks that are necessary to connect facility to grid.  The proposed rules continue the approach taken in the proposed rules for the Section 48 Investment Tax Credit, which was modified by the IRA to cover qualified interconnection costs. 

Treasury encourages the public to submit written comments in response to the proposed rules. Comments will be accepted for 60 days following publication in the Federal Register, and a public hearing is scheduled on August 12 and 13. The NPRM seeks comment on a variety of issues, and Treasury and the IRS look forward to receiving further input and benefitting from additional stakeholder perspectives on those issues.  Treasury will carefully consider public comments before issuing final rules.

Outside studies have shown that the Clean Electricity Production and Investment Credits are key to accelerating U.S. emissions reductions and achieving President Biden’s climate and clean energy goals. A recent  Rhodium Group study found that by 2035, the credits will reduce power sector carbon emissions by 43-73% below 2022 levels, save American consumers up to $34 billion in annual electricity costs, and add nearly 650 gigawatts of clean electricity to the grid.   

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Reporting by Leticia Fucuchima in Sao Paulo and Rodrigo Viga Gaier in Rio de Janeiro; Writing by Andre Romani Editing by Jonathan Oatis, Kylie Madry and Matthew lewis

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