The Government Needs to Provide a Level of Playing Field for Renewable Energy Development

Jakarta, 24 March 2023 – Achieving Indonesia Net Zero Emission (NZE) target in 2060 or sooner needs to be escorted by a shift from fossil energy to renewable energy. Unfortunately, renewable energy development in Indonesia is still hindered by uneven competition with subsidized fossil energy. Meanwhile, in various countries, the decline in the price of renewable energy generation has encouraged significant renewable energy adoption.

The Institute for Essential Services Reform (IESR) launched a report entitled Making Energy Transition Succeed: A 2023’s Update on The Levelized Cost of Electricity and Levelized Cost of Storage in Indonesia and a web-based simulation tool accessible to the public to estimate energy generation costs for any energy generation and storage technology. This levelized cost of electricity (LCOE) and levelized cost of storage (LCOS) calculation can help policymakers, renewable energy developers, investors, and the general public in planning for renewable energy development and determining energy technology options that are cheaper, with low GHG emissions.

In Indonesia, the development of renewable energy capacity in the last five years has been below the planned target. Between 2015 and 2021, renewable energy capacity increased by an average of 400 MW or less than one-fifth of the growth required to achieve the target of 23 % of the renewable energy mix in 2025. In 2022, renewable energy generating capacity will increase by 1 GW, yet still, be far from the expected growth.

“The development of renewable energy is less significant because there is no level of playing field. So far, renewable energy development has been neglected by coal-fired power plants. There is a wrong view that coal is the cheapest energy source. What is happening is that coal-fired power plant (CFPP) electricity is cheap because it is supported by the Domestic Market Obligation (DMO) policy and other subsidies starting in 2018. Meanwhile, renewable energy does not receive support,  instead, the price is always demanded to compete with electricity from CFPP and gas power plant electricity which receive state subsidies, “said the Executive Director of IESR, Fabby Tumiwa.

IESR analysis shows the LCOE of renewable energy is decreasing and competitive. Medium-scale hydropower plants have the lowest average  LCOE which is 4.1 cents/kWh. In the second and third lowest positions respectively were mini/micro hydropower plants and solar power plants worth 4.9 cents/kWh and 5.8 cents/kWh. However, this generation cost calculation does not include land use costs and project preparation costs, so there will be a possibility of an increase in LCOE of at least 6% for medium-scale hydropower plants, and 18% for utility-scale solar power plants.

“Currently, the investment climate for renewable energy development is not yet conducive. One reason is caused by some regulations that increase high costs. For example, for the development of utility-scale solar PV, there is local content requirement regulation requiring the domestic components whose product prices are still more expensive, and inferior in terms of quality to imported components. The price of more expensive components causes the required investment costs to increase. Meanwhile, the lack of quality assurance and compliance with standards also makes project funding more expensive, especially from abroad, becoming difficult,” said His Muhammad Bintang, IESR Researcher who is also the main author of this report.

Nonetheless, the downward trend in technology prices is expected to make renewable energy generation more competitive. Solar PV, for example, the projected LCOE of new utility-scale solar PV in 2050 will reach 3 cents/kWh or lower, much cheaper than the operating costs of existing CFPPs. In the 2030s, the combination of Solar PV and BESS will be more affordable and competitive compared to electricity from CFPP. Moreover, the government has started implementing emission reduction regulations, for example through carbon pricing mechanisms and limiting exhaust gases which can increase the LCOE of PLTU.

“The competitive price of energy storage systems certainly helps the development of renewable energy. One of the challenges for renewable energy generators such as solar PV and wind turbine is the interval that requires an integrator to maintain the stability of the existing system. This energy storage system is the most popular integrator because of its varied functions,” explained Bintang.

Examining the carbon capture storage (CCS) in coal-fired power plants to reduce GHG emissions, Deon Arinaldo, Energy Transformation Manager, IESR, stated that this would increase the LCOE of coal-fired power plants.

“The initiative to use CCS in coal-fired power plants should no longer be an option for two reasons. First, there has been no implementation of CCS in a coal-fired power plant that has successfully achieved its emission reduction target. Second, the LCOE of coal-fired power plants with CCS will increase to at least double or be greater than 10 cents per kWh. This is equivalent to imposing a carbon tax of around 50 dollars per tonne of CO2e on all coal-fired power plant emissions. All renewable energies are far more competitive and proven to produce electricity without GHG emissions,” explained Deon Arinaldo.

For renewable energy to compete fairly with CFPP, IESR recommends the government and utility companies such as PLN accelerate the coal-fired power plants phase out, as well as, provide incentives for renewable energy and energy storage technologies and gradually abolish the coal DMO provision in 2025. The development of renewable energy will create various economic opportunities that have the potential to increase economic growth in Indonesia.

“Renewable energy manufacturing industries such as solar and battery have the opportunity to create a new economic base, create green jobs, and drive LCOE and LCOS of renewable energy and Energy Storage Systems (ESS) even cheaper in Indonesia for the long run. Therefore, there is a need for an integration strategy for renewable energy and ESS electricity development with the development of the local manufacturing industry. For example, for solar energy, it is necessary to allocate a large renewable energy market in Indonesia to help the growth of the local industry and also to incentivize the local industry to build a complete supply chain and produce tier 1 modules of export quality,” continued Deon.

Furthermore, IESR encourages PLN as the electricity system operator to actively implement solutions to overcome renewable energy interruptions, for instance, by adjusting its operating system and increasing system flexibility. In addition, the utilization of energy storage systems needs to be prepared when the massive penetration of renewable energy in the energy system in Indonesia.

“PLN as the main operator of the electricity system in Indonesia, needs to initiate several pilot projects of energy storage systems with various types of technology to find good practices in technology selection and operating procedures. However, the implementation of energy storage systems is still limited to off-grid systems, even though energy storage can have many functions in large-scale systems, apart from the integration of renewable energy generators. With so many project initiatives and clear regulations, investors, technology producers and developers can increase their confidence to develop supply chains for energy storage systems in Indonesia that will further reduce costs,” concluded Bintang. ***