Indonesia's Power Sector Investments: Supply–demand insights (Part I)

2023 was the 50th anniversary of ASEAN-Japan friendship and cooperation, and the anniversary serves as an opportunity to further deepen collaboration and accelerate efforts contributing to both economic growth and decarbonization.

Indonesia holds a critical role in the decarbonization efforts of the ASEAN region. The energy sector, heavily dependent on coal-fired power generation, urgently requires a shift towards decarbonization. Analysis of Indonesia’s current electricity supply and demand highlights the necessity for a strategic transition plan that considers both the short-term surplus and the projected increase in long-term demand. We are also examining the specific circumstances of various regions and outlining the necessary steps both Indonesia and Japan must undertake in the future.

We analyzed the current electricity supply and demand scenario in Indonesia, including both peak demand and total installed generation capacity (Figure 1). Demand across the country totals to 40 gigawatts (GW), with the Java–Bali area* contributing to 80% of this figure and highlighting significant regional variations in demand. On the supply front, the total stands at approximately 70 GW. Of this, coal-fired power makes up about 50%, while gas, oil, and other forms of non-coal-fired generation represent 40%. Renewable energy sources, primarily geothermal and hydropower, account for the remaining 10% and offer stable power generation. The supply capacity in Indonesia^† exceeds demand by about 180%, indicating a substantial surplus.

In this supply-demand scenario, the utilization rates for coal-fired and geothermal power generation facilities stand at approximately 70%, whereas those for non-coal-fired power generation are notably lower, hovering around 20–30%. At times, maintaining facilities with low utilization is necessary to guarantee a specific level of supply capacity within the power system. Nonetheless, given the low average utilization rate of power sources—constituting 40% of Indonesia's total installed capacity—there exists an opportunity to use thermal power generation to address the immediate electricity demand.

The existing surplus in thermal power generation might pose a challenge to decarbonization efforts. Although investing in new, decarbonized power sources is crucial for achieving emission reduction goals, the demand for such investment may not appear urgent from a broader standpoint. To effectively advance decarbonization in Indonesia, it will be essential to devise strategies that are informed by an understanding of this specific supply–demand dynamic.

In long-term forecasts, the national power company PLN expects Indonesia to experience a notable increase in demand due to population and economic growth. In 2021, PLN unveiled its national electricity supply plan (RUPTL) for 2030, projecting that electricity demand will rise to about 60 GW by 2030. However, the supply capacity surplus is expected to decrease from current levels (Figure 3). Notably, the capacity for hydroelectric and geothermal power generation, both considered decarbonized energy sources, is expected to grow. It will be intriguing to see if their consistent deployment can be achieved despite the developmental risks associated with each.

If demand continues to grow at the same rate from 2030 to 2040, it is expected to reach about 80 GW*, approximately equal to the supply capacity outlined in the RUPTL for 2030. Consequently, Indonesia needs to initiate comprehensive planning for the power supply from 2030 onwards, focusing on facilitating a seamless transition to decarbonization.

While analysis of demand tends to take a macro-level approach, Indonesia is an archipelago made up of many islands, and forecasts must consider the characteristics of regions differing significantly from one another. Plans too must accurately reflect the unique conditions of each, and key factors to consider include the supply–demand gap in each region, the reliance on coal-fired power, and the uneven distribution of renewable energy potential.

The first point to consider is the supply–demand gap in each region. Figure 4 illustrates a forecast for electricity demand and the supply capacity in 2030 across four major regions. Like the country as a whole, many regions will see demand nearing the supply capacity projected for 2030 by around 2040. However, in the Kalimantan region, demand is expected to surpass supply capacity as early as 2030. Additionally, a significant recent development in this area is the government's plan to relocate the capital from Jakarta*. Reports of large-scale hydroelectric power projects^† are also emerging, which will likely influence future variations in the supply-demand dynamics.

The second point concerns the country’s reliance on coal-fired power. In 2030, PLN expects that coal-fired power will continue to constitute a significant portion of the power generation mix in each region (Figure 5). In areas like Java–Bali and Sumatra, where the demand is especially high, its share will surpass 50%.

Nonetheless, the transition away from coal-fired power generation has been at the forefront of recent discourse. Coming off the heels of the latest RUPTL, published in 2021, it is important to explore alternative power sources and the potential for co-firing power generation as the world moves towards reducing reliance on coal.

The third point concerns the uneven distribution of renewable energy potential. In the Sulawesi region, where demand is relatively low, renewable energy is expected to comprise about 50% of the total by 2030, and in the Sumatra region, about 40%. Indonesia is notable for its significant potential in stable renewable energy sources, such as geothermal and hydroelectric power. However, there are instances where the demand does not align well with the locations suitable for development. To effectively leverage this potential, it is crucial to consider not only the sources of power but also the infrastructure for connectivity, such as interconnection lines, and the production of decarbonized fuels.

Additionally, investment strategies for decarbonized power sources might impact more than just the power sector; they could also affect industrial competitiveness. Specifically, the accessibility of renewable energy will be a crucial consideration for companies as they evaluate locations to decarbonize their supply chains. This aspect is equally significant for Indonesia, as it seeks to expand its economy through foreign investments.

In the second article of this series, we will delve deeper into the characteristics of each region and discuss the government and corporate initiatives that will be necessary moving forward. Additionally, we will explore how the two countries can collaborate to leverage Japan's strengths.