The energy transition era in Indonesia began more than a decade ago, when the Directorate General of New and Renewable Energy and Energy Conservation (EBTKE) was established in 2010 as the official government institution dedicated to energy transformation. However, the development of renewable energy is still far from achieving the national ambitious goals. Indonesia aims to electrify the country with clean energy sources up to 23% by 2025, according to PP 79/2014. Yet, the reality is that the country’s renewable energy share is reached 13% in 2024, which is only half of its target over a decade (MEMR, 2024). Scaling up the rest of the target number within a year, as the timeline set for 2025, seems overly ambitious. In fact, the target is planned to be revised and lowered to around 17-18% in the new national energy policy (KEN) bill in 2024, rather than ramping up clean energy development (METI, 2024). Consequently, this raises the question: what has impeded the target from being met in the first place?

Among the possible reasons, President Joko Widodo highlighted that financing and investment in renewable energy development are among the main hurdles in Indonesia (The Ministry of State Secretariat, 2022), given that the primary source of financing for renewables within the nation is coming from public funds. The massive financing needs for energy transition are no longer a new finding, and relying on limited public investment to finance the transition is not a viable solution for a developing country like Indonesia. Currently, Indonesia needs approximately USD 30-40 billion to achieve energy transition by 2050 (IETO, 2023), but less than USD 2 billion has been allocated annually for clean energy development within the country over the last five years (MEMR 2024). Thus, paving the way for private financing as an alternative source of funds is highly needed to meet the national energy transition target.

Private financing plays a key role as a potential source of capital to finance the energy transition needs (GFANZ, 2023). However, despite the potential, private financing for renewable energy remains low in Indonesia. Data from the top 10 banks in Indonesia over the last six years reveals that only USD 584 thousand, or 5% of their total energy sector investment, was mobilized for clean energy development, while the rest went to fossil fuel-powered energy (Katadata, 2023). This indicates that investment in the clean energy sector in Indonesia remains unattractive for private investors compared to the high-emitting energy sector.

This situation is understandable, considering the high barriers to entry for private investors due to regulatory risks (IETO, 2023). Inconsistent regulations and policies are perceived as higher risks, which impede private investors from engaging in clean energy investment in Indonesia (EY, 2023). Therefore, reducing these barriers would improve the business environment of the renewables industry and boost its attractiveness for private investors. So, what should be done to attract private finance to engage in financing energy transition in Indonesia?

First, it is crucial to provide a clear and consistent regulatory framework for renewable energy development to ensure regulatory certainty. This is important as it offers guidance and guarantees for private investors in the form of legality in directing their investment in the renewables sector (MEMR, 2021). Investment in this sector is classified as long-term, as renewable project development takes years to deploy. Therefore, regular changes in industry provisions lead to high investment risks.

Second, unlocking private finance for more private financing flow through blended finance is essential. Blended finance is the strategic use of development finance provided by international sources, such as multilateral development banks, to attract private investors, as it can act as a de-risking mechanism for renewables project investment (Grantham Research Institute, 2022). In practice, blending public and private capital can lower the investment risk for private investors and make it more attractive to get involved.

Thus, creating a conducive business environment through proper regulation enactment and blended finance mobilization is crucial to attracting private investment into the renewable energy sector, so Indonesia can meet its clean energy targets in 2025.