Indonesia's Power Sector Investments: Insights on sustainability from Japan (Part Ⅱ)

We have published on the crucial role that Indonesia plays in ASEAN's decarbonization efforts and the need for the country to develop a transition plan that accounts for long-term increases in demand. The Indonesian energy sector relies heavily on coal-fired power at present, pressing the need for heightened integration of renewable energy sources to drive decarbonization efforts. We have extensively examined the Indonesian renewable-energy landscape, highlighting nuances in electricity supply–demand dynamics across different regions while delineating actionable steps imperative for both Indonesia and Japan in the foreseeable future.

Indonesia boasts a wealth of stable renewable energy resources*, including geothermal, hydro, and biomass types (Figure 1). Notably, hydroelectric power potential comprises 40% of the total renewable energy capacity, serving as a catalyst for decarbonization efforts. Moreover, Indonesia has the second-largest amount of geothermal power resources in the world, following the United States. Considering the potential for utilizing its vast agricultural lands and forests, Indonesia leads the world when it comes to stable renewable-energy resources.

Figures for the potential of variable renewable energies, such as solar and wind power, vary significantly depending on the methods used to estimate them. Indonesia boasts vast landmasses; however, its geography come with challenges too, including reduced sunlight during the rainy season from December to February and limited areas with favorable wind conditions due to its equatorial location. Indonesia must strategically tap into stable renewables, alongside variable renewables, for a well-rounded approach.

Electricity demand and geography vary widely across the archipelago. This leads to disparities between demand and the potential for renewable energy (Figure 2).

The Java–Bali region, housing the nation’s capital Jakarta, features approximately 60% of the population and GDP concentrated on less than 10% of the country's land. It stands out as a major hub for electricity demand, accounting for 80% of the country's total alone. However, the renewable energy potential falls short of meeting this demand, and even with maximum development of renewable energy sources, demand is projected to remain at the same level in 2030. Even a full shift to stable renewable energy sources will only cover about 60% of the demand.

We foresee that the Java–Bali region will experience sustained increase in its demand for electricity due to population growth and economic expansion, despite a plan to relocate the nation’s capital to the Kalimantan region over a 20 year span, though effects of the move could vary greatly. Indonesia will need to realize a gradual transition from coal-fired power generation, the bulk of its current mix, to decarbonized power sources, including renewables and potentially nuclear power. The Java–Bali area houses a high concentration of domestic nuclear research facilities as well as an existing opposition to nuclear power plant construction. This makes careful consideration and discussion regarding the social acceptance of such plants imperative.

In Kalimantan, the hydropower development potential far exceeds the island's overall electricity demand. The media has reported on plans for construction of the Kayan hydroelectric power plant, which will have a capacity of nine gigawatts, more than twice the size of forecasts for Kalimantan’s 2030 demand. Electricity generated from these abundant renewable energy resources is expected to be used for powering factories, which have a strong demand for decarbonization, as well as for the production of hydrogen, ammonia, and other decarbonized fuels. Furthermore, the island's hydropower potential is expected to be further harnessed through an international interconnection line with neighboring Malaysia, established under the ASEAN Power Grid (APG) initiative. It will be essential for this project to align with the plans of neighboring countries.*

The Sumatra region boasts vast land area with a renewable energy potential far exceeding the estimated demand. However, the current power generation mix is dominated by coal-fired sources, which account for about half of the total. Promoting investment and development in renewable energy sources and establishing power interconnections with the neighboring Java–Bali area are expected to accelerate Indonesia's decarbonization efforts.

Similarly, the Sulawesi region possesses a renewable energy potential that surpasses the island's electricity demand. However, there is an issue of the power grid being divided between the northern and southern parts of the island. To address the scattered but modest demand, strengthening the power infrastructure while utilizing stable renewable energy sources and power generation technologies such as small modular reactors (SMRs), capable of providing consistent power supply, will be crucial.

The characteristics of each area and the potential for introducing power sources are summarized in Figure 3. In the Java–Bali area, which presents the highest level of difficulty in decarbonization, there is a need for a managed phaseout from coal-fired power generation. The focus should be on large power sources such as nuclear power and gas-fired power generation while promoting low-carbon and decarbonization efforts as well as addressing the supply–demand gap. In the other three areas, decarbonization should be advanced by efficiently utilizing nuclear power and the abundant renewable energy resources available. Particularly in the Kalimantan area, where hydropower and other forms of power generation are being developed ahead of other regions, it will be crucial to integrate these efforts with effective utilization of the generated power.

Indonesia must shift to a decarbonized society while mitigating higher energy costs to ensure it can maintain its economic growth. While the state-owned power company (PLN) plays a significant role in power development, there are elevated expectations for independent power producers (IPPs) to innovate new power sources. This anticipation stems from PLN's ongoing reliance on government subsidies to offset deficits in power revenues and its persistent financial challenges. PLN's 2030 electricity supply plan (RUPTL), unveiled in 2021, indicates that IPPs are projected to expand PLN's capacity twofold (Figure 4).

It will be crucial for Indonesia to bring in foreign investment moving forward. Foreign investment has the potential to stimulate economic growth not only through the advancement of decarbonized power sources but also by enticing factories that can capitalize on the abundant renewable energy resources.

While the Indonesian government is working to bring in foreign investment, certain restrictions persist, such as the requirement to meet the domestic production rate (TKDN: Tingkat Komponen Dalam Negeri). Japanese firms too are well positioned to partake, but they must keep an eye on the local situation. Specifically, Japanese companies should take note of the similarities between the challenges of decarbonization faced by both Japan and Indonesia. For instance, the countries share geographical distance between their potential renewable energy resources and their areas of demand. In Japan, a comprehensive plan for wide-area grid connection was formulated in March 2023, and a grid enhancement policy was established based on future cost-benefit analyses conducted through simulations. Effective utilization of renewable energy must be considered alongside grid reinforcement and other measures, potentially serving as a component contributing to the development of a roadmap in Indonesia.*

The production and development of decarbonized fuels to utilize surplus renewable energy represents another significant area of focus. For instance, Japanese companies have frequently engaged in geothermal power generation as independent power producers (IPPs), with notable examples including investments in and operations of the Sarulla geothermal power plant (330 MW) in Sumatra and the Wayang Windu geothermal power plant (227 MW) in Java^†. Recently, these companies have shifted towards commercializing hydrogen and ammonia production using excess electricity and waste heat from geothermal power generation, with plans for future implementation.

Moreover, when considering emission reductions in both countries, particularly with their significant manufacturing sectors, it is imperative to prioritize the most cost-effective measures. On-site solar power generation^‡ presents one way to achieve cost-effective decarbonization. Japanese companies are also advancing solar power leasing services in Indonesia. It will be crucial to accelerate initiatives led by the private sector that prioritize cost-effectiveness. In Japan, firms have actively developed technologies and businesses to expand renewable energy amid limited land availability and a deregulated electric power industry. They are well positioned to leverage this experience in Indonesia too.

Linking intergovernmental cooperation and private investment will require an organic approach. Japan has contributed to the decarbonization of Indonesia through the Joint Crediting Mechanism (JCM)^§ and should, moving forward, establish a mechanism to connect intergovernmental collaboration with private investment and the real-world implementation of solutions. This could potentially be achieved by utilizing the JCM through trilateral cooperation that includes the Gulf countries.^¶

Another similarity between Japan and Indonesia is their significant reliance on coal-fired power generation. The Energy Transition Mechanism (ETM), led by the Asian Development Bank (ADB), is one example of how to achieve a managed phaseout from current coal-fired power plants. Similar collaborations, those linking countries and their businesses with the international community, will be crucial for advancing a pragmatic transition towards decarbonization.

However, Japan is not the sole actor seeking to strengthen relations with Indonesia and other ASEAN nations. The similarities between the challenges faced by both countries merely serve as a starting point. Japan has a competitive edge over other nations, but Japanese companies and the government must effectively demonstrate this to become the favored partner of Indonesia's rapidly expanding market. Capitalizing on Japan’s pioneering initiatives and utilizing ASEAN-Japan friendship and cooperation as a platform to pledge more comprehensive policies, including financial support, will be crucial for both Indonesia and Japan to realize economic growth and decarbonization.