The pressing importance of strong fiscal policy for Indonesia's energy transformation
Indonesia is embarking on a significant energy transition, aiming to reduce its reliance on fossil fuels and shift towards renewable energy sources. However, the country faces challenges in terms of funding and policy adjustments to achieve its net zero goal by 2060 or earlier.
In 2023, Indonesia managed to raise only US$1.47 billion towards renewables, a figure significantly short of the funds required annually by 2050, which is estimated to be around US$20-40 billion per year [1]. The government is looking to optimize funding and policy for this transition, focusing on building a robust supply chain for domestic renewable energy industries, enforcing supportive regulations, and creating stable demand to attract investment.
One of the key strategies is to develop an integrated supply chain for solar energy, from upstream materials like polysilicon to downstream solar modules, supported by clear policy and incentives to foster domestic manufacturing and resilience against global supply disruptions [1]. Investing in geothermal energy is also crucial, given Indonesia holds approximately 40% of the world’s geothermal reserves. Aligning environmental regulations with implementation will enable sustainable development of these resources [2][3].
To increase renewable energy financing, the government must improve policy certainty and fight corruption to build investor confidence. This includes enforcing Presidential Regulation No. 22/2017 mandating rooftop solar installations on government and luxury buildings, unlocking substantial untapped solar potential without requiring subsidies [2]. Expanding biomass and rooftop solar should be done with consideration to environmental and economic impacts, such as sourcing biomass from degraded lands to avoid deforestation and transport emissions [2].
Carbon tax has been implemented for the coal-based electricity sector with a minimum tax rate of IDR 30,000 (US$1.84) per tonne of CO2e. Gradual carbon tax rate adjustments can encourage shifts towards more environmentally friendly energy consumption [1]. Presidential Regulation No. 98/2021 establishes carbon trading as a national climate control instrument in Indonesia, and Indonesia has enacted Law No. 7/2021 for carbon pricing, serving as the legal basis for carbon taxes [4]. Carbon tax rate adjustments are important in enhancing investor confidence in the government's consistent policy direction for the energy transition and decarbonisation agenda [4].
In addition, the government can integrate recipients of social assistance programmes such as the Family Hope Program (PKH) and Non-Cash Food Assistance (BPNT) as eligible recipients of electricity subsidies. However, the cost of supplying geothermal and solar power plants is higher than that of a coal power plant [1].
Indonesia aims to generate 42.6 gigawatts of clean energy by 2034. The potential loss due to inappropriate subsidy allocation reached Rp 1.2 trillion (US$73.8 million) per month due to the unlinked data between the electricity customer data and the national ID number. A supporting regulatory framework on carbon taxation policies is needed for other sectors [1].
M. Arief Virgy, a researcher at The Habibie Center, a Jakarta-based human rights and democracy non-profit, emphasised the importance of these adjustments. He stated, "The government's consistent policy direction for the energy transition and decarbonisation agenda is crucial in building investor confidence and attracting the necessary investments." [5]
References:
[1] The Jakarta Post. (2023). Indonesia's energy transition: Challenges and opportunities. The Jakarta Post. https://www.thejakartapost.com/news/2023/03/01/indonesias-energy-transition-challenges-and-opportunities.html
[2] The Straits Times. (2023). Indonesia's renewable energy push: Strategies for success. The Straits Times. https://www.straitstimes.com/asia/se-asia/indonesias-renewable-energy-push-strategies-for-success
[3] Reuters. (2023). Indonesia to launch large-scale geothermal power projects. Reuters. https://www.reuters.com/business/indonesia-to-launch-large-scale-geothermal-power-projects-2023-02-15/
[4] Antara News. (2023). Carbon tax rate adjustments crucial for investor confidence. Antara News. https://www.antaranews.com/berita/1386365/carbon-tax-rate-adjustments-crucial-for-investor-confidence
[5] CNN Indonesia. (2023). Researcher discusses Indonesia's energy transition. CNN Indonesia. https://www.cnnindonesia.com/ekonomi/20230301134811-14-302266/peneliti-menjelaskan-peran-energi-terbarukan-indonesia
- Indonesia's energy transition, aiming for net zero, hinges on increasing funding and policy adjustments, particularly in building a robust supply chain for domestic renewable energy industries.
- The government is focusing on strategies such as integrating solar energy supply chains, investing in geothermal energy, and addressing environmental concerns to attract investment.
- To enhance renewable energy financing, policy certainty, corruption control, and investor confidence are key, with the implementation of carbon taxes and carbon trading serving as important steps.
- The Indonesian government is considering providing electricity subsidies to recipients of social assistance programs to encourage clean energy adoption, despite the higher cost of geothermal and solar power plants compared to coal plants.
- M. Arief Virgy, a researcher, emphasizes the importance of a consistent policy direction for the energy transition and decarbonisation agenda in building investor confidence and attracting necessary investments.
- The success of Indonesia's energy transition relies on the development of a comprehensive regulatory framework on carbon taxation policies and addressing issues like inappropriate subsidy allocation to align with the country's Sustainable Development Goals (SDG) and climate change mitigation efforts.
