Indonesia: Indonesia Energy Profile

Indonesia, officially the Republic of Indonesia, is a country in Southeast Asia and Oceania. Indonesia is an archipelago comprising approximately 17,508 islands. It has 34 provinces with over 238 million people, and is the world's fourth most populous country. Indonesia is a republic, with an elected legislature and president. The nation's capital city is Jakarta.

The country shares land borders with Papua New Guinea, East Timor, and Malaysia. Other neighboring countries include Singapore, Philippines, Australia, Palau, and the Indian territory of the Andaman and Nicobar Islands. Indonesia is a founding member of ASEAN and a member of the G-20 major economies.

The Indonesian economy is the world's sixteenth largest by nominal GDP and fifteenth largest by purchasing power parity. The Indonesian archipelago has been an important trade region since at least the 7th century, when Srivijaya and then later Majapahit traded with China and India. Local rulers gradually absorbed foreign cultural, religious and political models from the early centuries CE, and Hindu and Buddhist kingdoms flourished. Indonesian history has been influenced by foreign powers drawn to its natural resources. Muslim traders brought Islam, and European powers brought Christianity and fought one another to monopolize trade in the Spice Islands of Maluku during the Age of Discovery. Following three and a half centuries of Dutch colonialism, Indonesia secured its independence after World War II. Indonesia's history has since been turbulent, with challenges posed by natural disasters, corruption, separatism, a democratization process, and periods of rapid economic change. Across its many islands, Indonesia consists of hundreds of distinct native ethnic and linguistic groups.

The largest—and politically dominant—ethnic group are the Javanese. A shared identity has developed, defined by a national language, ethnic diversity, religious pluralism within a majority Muslim population, and a history of colonialism and rebellion against it. Indonesia's national motto, "Bhinneka Tunggal Ika" ("Unity in Diversity" literally, "many, yet one"), articulates the diversity that shapes the country. Despite its large population and densely populated regions, Indonesia has vast areas of wilderness that support the world's second highest level of biodiversity. The country has abundant natural resources, yet poverty remains widespread.

Energy sources

Total installed electricity capacity (2009): 31.4 GW
Thermal sources: 86%
(Coal – 41.8%, Gas – 23.6%, Oil – 21.3%)
Renewable sources: 13.3%

Total primary energy supply (2009): 1,247,623 thousand BOE
Oil and Products: 40.27%
Biomass: 19.20%
Coal: 19.04%
Natural gas: 17.95%
Hydropower: 2.33%
Geothermal: 1.22%

The electricity generation by fuel source type in 2010 was as follows:
Oil: 44.4%
Natural Gas: 24.0%
Coal: 25.7%
Geothermal, Hydro-electric, Other Renewable Energies: 5.2%
Indonesia’s total electricity generation to the grid was 142,439 GWh in 2007, of which 21.9% was supplied by IPPs and captive power.

Indonesia is a significant consumer of traditional biomass in its residential sector, particularly in the more remote areas that lack connection to Indonesia’s energy transmission networks.

Reliance

Prior to 2002, Indonesia had been a net energy exporter of oil, gas and coal. Due to increased demand, depleted reserves and failure to develop new, comparable resources, Indonesia has commenced the import of crude oil and refinery products and has been a net importer of oil since 2004. It was a member of the Organization for Petroleum Exporting Countries (OPEC) from 1962 to 2009, but suspended its OPEC membership in January 2009.

Indonesia continues to import fossil fuels to cover production deficiencies instead of fully utilizing its already installed renewable energy capacity. Indonesia imported 18 284 ktoe of crude oil and 18 856 ktoe of petroleum products in 2009, up 11.0% from a total of 33 457 ktoe in 2008. Notably, oil production has declined significantly over the past decade (in 1997, Indonesia produced 72 474 ktoe of crude oil and condensates)..  Oil production has declined over the past decade; and Indonesia produced 49,234 ktoe of crude oil in 2008). 

However, despite this, Indonesia is still a net exporter of energy, and exported 128,642 ktoe of coal and peat, 32,351 ktoe of gas, 13,957 ktoe of crude oil, 6,796 ktoe of oil products and 169 ktoe of combustible renewable and waste in 2008. It is the sixth largest net exporter of natural gas and the second largest net exporter of coal in the world.

Extend network

The Indonesian interconnected system integrates the systems in the islands of Java, Bali and Madura; in addition, there are several isolated and partially-interconnected power systems in the other islands. These systems have been developed around major load centres, but electricity is often delivered through 20 kV rural electrification systems.

In 2006, the state-owned electricity company (PLN) served 54% of Indonesia’s households. PLN expects that 93% of households will be connected to grid electricity by 2020. The Ministry of Energy and Mineral Resources reported that Indonesia’s electrification ratio had increased to 65% in 2009.

Transmission is via a 500 kV network, with distribution voltages of 150 kV and 20 kV. The islands of Java and Sumatra are linked by a 39 km submarine cable to cover Sumatra’s shortages in electricity supply.  

The electricity sector is expected to expand coal-fired generation, and to eliminate most use of oil. The share of electricity generated by oil will reduce from 31% in 2005 to 4% in 2015, and to 1% by 2030. Electricity generated by coal-fired power plants is expected to increase to 64% of all electricity generated in 2015; the final figure for 2030 is 67%.
 

Indonesia’s gas distribution utility Perusahaan Gas Negara (PGN) currently operates more than 3,500 miles of natural gas transmission and distribution pipelines. However, domestic distribution infrastructure is almost non-existent outside of PGN’s Java and North Sumatra strategic business units. According to PGN, in 2009 there was over 400 Bcf of unmet demand for gas among domestic industrial and electric power customers. 

Capacity concerns

Prior to the Asian financial crisis, Indonesia had plans for a rapid expansion of power generation, based mainly on the opening of Indonesia’s power market to Independent Power Producers (IPPs). The crisis led to severe financial constraints on the state-owned power utility Perusahaan Listrik Negara (PLN). Although the generation capacity has increased by more than a quarter in the decade leading up to 2009, capacity growth has lagged behind the pace of electricity demand growth. Indonesia is now facing an electricity supply crisis even in grid-connected areas, and may be unable to take on any new customers. Intermittent blackouts are an issue across Java. Demand for electrical power is expected to grow by approximately 7% per year for the next ten years.

The power supply will mainly rely on reserves and additional capacity from IPPs. Consequently, there is a foreseen uncertainty in the ability of supply capacity to match demand. The Java-Bali system anticipates medium-term uncertainty in meeting the projected electricity demand. Worse conditions could be expected from the outer islands, where twenty-four areas are already struggling with power deficits. Electricity service quality may decline unavoidably in the years to come.

Indonesia has a refinery capacity of just over one million bbl/d, spread across eight refineries, owned by Pertamina. Refinery output goes primarily to the domestic market, but meets only about 70% of domestic consumption. Pertamina plans to eliminate the need for product imports by 2017, and in the last few years has announced several refinery upgrade, expansion and greenfield projects in support of this goal. However, most of these projects have been delayed, as low refining margins and lack of government financial incentives have deterred investment from international partners.

Gas production was initially geared towards exports, but the country’s declining oil production has driven an effort to shift increasing volumes toward domestic consumption. In 2009, the country consumed 1.3 Tcf of natural gas, or about half of its total dry gas production. Although the industrial sector accounts for the largest portion of domestic consumption, the power sector is expected to be the most significant driver for future consumption growth. LNG exports therefore have been a politically charged topic, due to the perception of LNG exports removing much-needed gas from the domestic market. The expected growth in gas demand, in addition to the currently unmet demand, has led the government to pursue policies for securing domestic supplies for the local market.

Coal production has quadrupled between 2000 and 2009, while the consumption of coal has tripled, largely owing to the consumption in the power sector. Electricity sector demand for coal is expected to more than double by 2014 as a result of coal-fired generation capacity additions. As the majority of additional production has gone towards exports, the government is encouraging an increased use of coal in the power sector due to its abundant domestic supply and in order to reduce the use of expensive diesel and fuel oil, and has set a domestic market obligation of 24% for producers, in order to guarantee sufficient domestic supply.

Consumption of biomass in the residential sector is estimated at 43.6 Mtoe in 2006. Households are increasingly relying on commercial energy, primarily kerosene and LPG. In 2006, residential consumption of kerosene was 7.9 Mtoe, while the consumption of LPG was 0.89 Mtoe.

Renewable energy

In Indonesia, renewables output from hydro remained fairly stable. Geothermal grew by 5.8% per annum since 2000 and now contributes roughly one‐third to renewables. The rest of renewables is hydro power. Thanks to the increase in geothermal generation, the share of renewables went down only mildly from 15.9% in 2000 to 13.3% in 2009, although the total electricity generation grew at a fast rate.

Biomass energy / Biofuels
Indonesia has a large potential for biomass energy. Rice residues, sugar, rubber and palm oil all provide biomass electricity, but the most promising commercial application for biomass is likely to be cogeneration in agribusiness. The current installed capacity is 445MW, whilst the whole potential of biomass from forestry, agriculture and estates is equivalent to 50,000MW.

Palm oil is the main biodiesel feedstock in Indonesia. In 2008, the economy produced 20 Mt, making Indonesia a leading producer and the second-largest exporter of palm oil. It was the world’s 11th largest producer of biofuels (fuel ethanol and biodiesel) in 2010. Palm oil, however, is rarely used in local biofuel development. The international price for palm oil and the higher value placed on food has meant that most palm oil is expected or used in food production. Additional restrictions to development include a lack of incentives and subsidies for fossil fuels; incomplete data on land ownership; and a lack of biofuel processing ability. As a result, biofuel development in Indonesia remains sluggish compared to that of other countries in the region. But several companies have begun using fast-growing crops, such as cassava, jatropha, or sweet sorghum, for biofuel production. The Ministry of Agriculture is preparing additional land for growing these high-yield feedstocks to meet the country’s biofuel production goals of 5.57 million kiloliters of biodiesel and 3.77 million kiloliters of bioethanol. The introduction of these crops will likely to accelerate the production of biofuels. New areas planted with Jatropha are expected to total 1.69 million hectares in 2010. Indonesia’s biodiesel blend production capacity in 2009 was 2,865 million litres (ML) and was estimated to be 4,680 ML in 2010, far exceeding the volumes needed to fulfil the mandates in those years.

Solar energy
Current installed capacity of solar PV is estimated to be about 12.1 MW, which is mostly from roof-mounted solar PV cells, in urban areas. Average daily insolation ranges from 4.5 to 5.1 kWh/m2 across the country, with a monthly deviation of 9%, indicating a good potential for the widespread use of solar energy. Indonesia is utilizing PV systems to increase its electrification ratio target, which was 66.2% in 2009. During the same year, the government allocated about USD 65 million to
provide new and renewable energy–based power generation for Indonesia’s distributed power systems. The program provided electricity to around 94,000 households, particularly households in 18 of the outermost islands of Indonesia.

Wind energy
The potential for wind energy is limited because of the lack of wind along the equator. Average wind speeds across the country range from 3-6 m/s, indicating the potential capacity for wind energy of 9,190 MW mainly from the higher wind-speed regions. However, the windiest regions tend to be the less populated, eastern islands, which lack a transmission infrastructure capable of sustaining large wind farms. Wind power opportunities are thus limited to small or medium-sized projects requiring lower wind speeds. Government plans therefore include the development of small- and medium-scale wind energy systems, with a view to having a total installed wind capacity of 970 MW by 2025. To date, only a few small-scale wind farms have been attempted, and they account for only 1.1 MW of installed capacity. In the future, offshore wind is more likely to provide investment opportunities due to the lengthy coastlines and consistent ocean breezes.

Hydropower
In 2008, Indonesia had an estimated hydropower potential of 75,670 MW. However, roughly 35,000 MW of Indonesia’s hydropower potential is located in the province of Papua, which is located far from demand centres. The country has not built a large hydropower facility; and the current installed capacity is 4,264.0 MW, with an additional 500 MW of mini-hydro potential having been identified. Currently, only 6% of Indonesian hydropower potential has been utilised, indicating the possibility for considerable development in the sector for the future.

Geothermal energy
Indonesia is home to 40% of the world’s known geothermal resource, which is the largest geothermal potential in the world. 2010 estimates report that the total geothermal potential of the country is roughly 28,100 MW. Current installed geothermal capacity is roughly 1,189 MW. As of end-2010, Indonesia was the third largest geothermal generator in the world, producing 1.2 GW. The further development of the country's substantial geothermal capacity has slowed since 2000, and currently, only 4.2% of the country's total geothermal potential is being exploited. Government plans for the development of the energy sector include expanding the installed geothermal capacity of the country to 5,000 MW by 2014, rising to 9,500 MW (5% of the national electricity) by 2025, according to the 2005-2025 National Energy Blueprint. The second phase of the Fast Track Programme includes additional geothermal capacity of nearly 4 GW by 2014, most of which will be operated by independent power producers.

Ocean energy
With thousands of miles of coastline, the potential for ocean energy is significant at an estimated 10-35 MW per kilometre of coastline. The potential capacity is estimated to be 35 MW, while the current installed capacity stands at 0.0 MW. Presently, only one demonstration project has been developed – an ocean current system in the Lombok Strait. But future growth in the industry is also likely as technologies become further commercialised, and some ocean energy projects are underway.

Energy efficiency

Consumption of refined products grew at a fairly steady 4.7% average annual growth of rate between 1995 and 2005, but declined by about 2% in both 2006 and 2007, largely as a result of the 126% increase in the price of subsidised fuel implemented in 2005. The 2005 price increase and the removal of fuel subsidies for large industrial consumers were part of President Yudhoyono’s early attempts to gradually eliminate fuel subsidies. Consumption increased in both 2008 and 2009, exceeding 1.3 million bbl/d in 2009.

Indonesia’s total primary energy consumption grew by nearly 30% between 1999 and 2008. Total final energy consumption (TFEC) was 948,112.455 thousand BOE in 2009. Oil continues to account for the most significant share of Indonesia’s energy mix, at 51.9%, followed by natural gas at 18.4%, coal at 12.9%, electricity at 12.8% and LPG at 3.9%. The share of TFEC by sector in 2009 was 40.86% for industry, 36.8% for transport, 13.26% for households, 4.73% for commercial and 4.28% for other sectors.  There is a need for improved energy efficiency in industry, and limiting petroleum consumption in the transport sector.

There is significant potential for energy savings. A move away from general subsidies on fuel, whilst continuing to assist those who would otherwise face energy poverty, could help promote more efficient use of energy, especially oil. Indonesia has a range of options for reducing the carbon content of its energy supply. These include increased development of its hydro-electric, geothermal and wind resources, and more efficient thermal electricity generating plants.

The efficiency of the power sector tends to fluctuate and has decreased slightly since 1990. It stood at 38% in 2009, compared with 40% in 1990. The reduction of the share of hydroelectricity and the development of coal power plants explain the deterioration of the ratio. In 2009, thermal power plants had an efficiency rate of 35%; that rate has remained relatively stable since 1990. The limited development of more efficient technologies, such as gas combined cycles and cogeneration, did not permit an increase in the ratio for thermal power generation. The rate for T&D losses in the Indonesian grid is above 10% of the distributed volumes, which is above the world average of 9%. Those losses tend to fluctuate significantly and have decreased since 2005.

Industrial energy consumption has soared by 6%/year since 1990, which is faster than the economic growth rate of 4.5%/year.  Industrial energy intensity increased by 0.7%/year between 1990 and 2009. Since 2000, it has increased at the even faster pace of 1.2%/year.

The National Energy Conservation Master Plan (RIKEN) in 2005 identified the following sectoral energy saving potentials: 15-30% in industry; 25% in commercial buildings for electricity; and 10-30% in the households sector.

Industry

• Energy Intensity reduction: 1%/yr until 2025, through fiscal incentives, educational programmes and audits.
• Partnership Program on Energy Conservation – Government support in return for efficiency commitments from companies, 20% efficiency improvement targets.

Utilities

• Energy Conservation Regulations – reductions in technical losses in T&D.
• Government initiatives to increase geothermal capacity to 5,000 MW (48%), with annual reductions in CO2e of 82 Mt.
• 12% new hydro capacity development. (2009-2014)

Transport

• Mandatory 10% biodiesel content in road fuels as of 2009.
• Clean and Lean Transportation Initiative, promoting efficiency in vehicle fleets.

Residential

• National efficiency standards established for new buildings, and software tool provision for designers.
• Penduli program – rebates on CFL purchasing for households.

Public

• Public-private partnerships with PLN, to stimulate the energy efficiency market.
• Sustainable tourism initiatives, in partnership with the UNWTO.
• Efficient street lighting refits.

Ownership

Electricity market
The initial steps in restructuring the Indonesian electricity industry took place in 1994, when PT Perusahaan Listrik Negara (PLN, www.pln.co.id) was converted from a state enterprise to a government-owned limited liability company.

Restructuring efforts continued in 1995 with the unbundling of PLN’s Java, Bali and Madura generation, distribution and transmission assets. Generation assets were unbundled into two wholly owned subsidiaries of PLN: PJB (Pembangkit Jawa-Bali, www.ptpjb.com) and Indonesia Power (IP, www.indonesiapower.co.id). The distribution unit was separated into four distribution entities (East, West and Central Java, and Jakarta). Each distribution unit operates semi-autonomously, with an allocated budget to cover operational expenses in meeting the performance targets set out in its contract with PLN. The Java–Bali transmission business was transferred to the Java–Bali Electricity Transmission Unit and Load Dispatch Centre.

Apart from sharing the generation business with the IPPs and cooperatives, PLN is the sole buyer and seller of electricity in the power market, currently purchasing approximately 80% of the power produced by the IPPs. Outside Java, Bali and Madura, restructuring is taking place through the decentralisation of PLN’s assets.

Oil and gas market
The liberalisation of Indonesia's downstream oil and gas sector has been under discussion for several years. In October 2001, the Indonesian legislature passed the much-anticipated Oil and Gas Law 22/2001 which limited Pertamina's (www.pertamina.com) monopoly on upstream oil development (which requires it to be included in all Production Sharing Contracts (PSCs)) by the end of 2003. Also, Pertamina's regulatory and administrative functions were transferred to other entities, while its regulatory role was spun off to new state-owned legal bodiesy, BP Migas (www.bpmigas.com) as upstream regulator and BPH Migas as downstream regulator. The Ministry of Energy and Mineral Resources is responsible for entering into PSCs, while BP Migas serves as the upstream regulator that manages and implements these agreements. Legal changes adopted in 2005 have allowed for the extension of contracts beyond the previous 20-year limit, which helped to facilitate the deal with ExxonMobil for the development of the Cepu fields.

In addition to its upstream activities, Pertamina operates nearly all of Indonesia’s refinery capacity, procures crude and products imports, and supplies products to the domestic market. While Pertamina’s monopoly in the retail market ended in 2004, the company continued to be the sole distributor for subsidized fuels until early 2010. With the December 2010 decision to gradually remove fuel subsidies for private vehicles, Pertamina now competes more directly with product retailers.

The upstream oil sector is dominated by several international oil companies, in particular Chevron, Total, Conoco Phillips, Exxon and BP. Chevron is the largest single oil producer in Indonesia, accounting for more than 40% of the country’s total crude production, followed by Pertamina, accounted for approximately 15% of 2009 crude and condensate production.

The upstream gas sector is dominated by international oil companies such as Total, Conoco Phillips, and ExxonMobil as well as Pertamina, which accounts for about 15% of natural gas production. However, natural gas transmission and distribution activities are carried out by a state-owned utility, Perusahaan Gas Negara (PGN).

Competition

In September 2009, Electricity Law No. 30/2009 replaced Law No. 15/1985. A notable difference is the absence of the Holder of Electricity Business Authority (PKUK, Pemegang Kuasa Usaha Ketenagalistrikan). Under Law No. 15/1985, the government assigned the state-owned electricity company (PLN) as the sole PKUK. As the PKUK, PLN, on behalf of the government, was responsible for providing electricity across the whole of Indonesia, and for developing the electricity sector. Under the new electricity law, PLN will no longer have a monopoly on supplying and distributing to end customers. Instead, a licence to provide electricity for public use (IUPTL) may be granted to (among others) private business entities, subject to a 'right of first priority' provided to state-owned companies (i.e. PLN).

Under the provisions of the Oil and Gas Law No. 22 of 2001, Pertamina was transformed into a public liability company, with responsibilities including liberalisation of the upstream and downstream oil sectors. Senior Pertaminal officials have indicated plans to divest two of its subsidiaries by about 20% in an initial public offering, but details and timing have not been confirmed.

Energy framework

Until the time the National Energy Council (DEN) establishes a new National Energy Policy (KEN), the National Energy Policy of 2006 applies. The aim of this policy is to:

• Achieve energy elasticity to GDP of less than one by year 2025
• Realize an optimum primary energy consumption mix in 2025, with shares as follows:
•    oil - to become less than 20%
•    natural gas - to become more than 30%
•    coal - to become more than 33%
•    biofuels - to become more than 5%
•    renewable energy and other energy including nuclear - to become more than 10%
•    liquefied coal - to become more than 2%.

The details of the energy programs and targets of the National Energy Policy are elaborated in the Blue Print - National Energy Management 2005 to 2025. Indonesia’s 2006 Energy Policy expects the combined share of renewable energy and nuclear in the overall energy mix in 2025 to have exceeded 17%. The policy has special emphasis on enhancing the share of biofuels. Renewable energy and other energy including nuclear (as in the list above) is expected to be made up of at least a 5% geothermal share and a combined share of biomass, hydropower, solar, wind and nuclear power to make up the remainder to 10% by 2025.

National Energy Conservation Master Plan (RIKEN) (2005) aims to achieve Indonesia’s energy saving potential through energy efficiency and conservation (EE&C) measures, and so avoid wasteful energy use in the country. It also aims to reduce energy intensity by around 1%/year, on average, until 2025. Fiscal incentives (tax reductions and soft loans) together with other instruments such as training and educational programmes as well as energy audits are used to implement the plan.

National Biofuel Roadmap (Presidential Decree 10/2006) for 2006-2025, following the 2005 National Energy Blueprint, is to accelerate the use of biofuel as a replacement fossil-based fuel. It sets specific targets for production as well as utilization between 2006 and 2025, gradually increasing the utilization of biofuel from 2% to 5% of energy mix.  

Government’s ‘25/25 Vision’ plans to have renewable energies fulfil 25% of the country’s energy needs by 2025.

On 10 August 2007, Indonesia enacted the Energy Law (Law No. 30/2007). The Law elucidates principles for the utilisation of energy resources and final energy use, security of supply, energy conservation and protection of the environment with regard to energy use, pricing of energy, and international cooperation. The Energy Law sets out the content of the National Energy Policy (KEN, Kebijakan Energi Nasional) (2006); the roles and responsibilities of the central government and regional governments in planning, policy and regulation; development priorities for energy research and development, and the role of enterprises.

The Energy Law mandates the creation of a National Energy Council (DEN, Dewan Energi Nasional), the tasks of which are:

• draft the National Energy Policy, to be endorsed and promulgated by the government, with due consent of parliament (the DPR),
• draft the National Energy Master Plan (RUEN, Rencana Umum Energi Nasional),
• declare measures to resolve the conditions of energy crisis and energy emergency,
• provide guidance and management on the implementation of cross-sectoral policies on energy.

It is a national, independent, and permanent body and its members include 7 government officials and 8 stakeholders.

Under the Energy Law, the 2006 National Energy Policy will address the availability of energy, energy development, the utilization of domestic energy resources, and energy supply reserves. It states that Indonesia’s goal is to achieve energy elasticity (the ratio of change of total primary energy supply over the rate of change of GDP) of less than 1 in 2025.

Until the new National Energy Policy is enacted, the Presidential Regulation No. 5/2006 on the National Energy Policy regulates the development of renewable energy. It mandates an increase in renewable energy production from 7% to 15% of generating capacity by 2025. It states that the contribution of new and renewable energy in the 2025 national primary energy mix is estimated at 17%, consisting of 5% biofuel, 5% geothermal power, biomass, nuclear, hydro and wind, and also liquefied coal at 2%. The government will take measures to add the capacity of micro hydro power plants to 2,846 MW by 2025, biomass of 180 MW by 2020, wind power of 0.97 GW by 2025, solar of 0.87 GW by 2024, and nuclear power of 4.2 GW by 2024. The total investment needed for this development of new and renewable energy sources up to the year 2025 is projected at $13,197 million.

The Green Energy Policy (2004): includes guidelines for the development of renewable energy, including regulatory instruments.

Biofuel Decree (Ministry of Energy and Mineral Resources Regulation No. 32/2008) settles a mandatory utilization framework in the transportation, industrial, commercial and power generation sectors for biodiesel, bioethanol and bio-oil from 2009 to 2025.

Biofuels subsidy: In February 2009, the Indonesian government announced that it would establish a biofuels subsidy to encourage investment in, and use of, biofuels made from palm oil and other feedstocks. The subsidy would only be paid if biofuel prices are higher than crude oil-based fuels.

The Geothermal Law (No. 27/2003): gives powers to regional governments to develop geothermal energy, in particular in respect of licensing, allowing investors to deal directly with regional governments and requiring projects to be competitively tendered. It also provides incentives for investment by establishing long-term licenses for land use (more than 30 years) and a regulated price for geothermal energy.

Tax incentives for geothermal exploration (Regulation 22/PMK011/2011).

Ministerial Regulation No.002/2006: on the commercialisation of middle scale renewable energy power plants.

Law No. 25/2007: concerning investment. Since 2008, the government has offered tax incentives for foreign investment including investors in renewable energy. Incentives include a 30% net income tax reduction for 6 years, free repatriation of investments and profits, and dispute settlement.

The Electricity Law (Law No. 30/2009): secures sustainable energy supplies, promotes conservation and use of renewable energy resources. The regulation was issued by the Ministry of Energy and Mineral Resources (ESDM) and referred to as "Purchasing Price by PT PLN (Persero) of Generated Electricity from Small and Medium Scale Renewable Energy Power Plant or Excess Power”. The aim of this ministerial regulation is to enhance the electricity generated by small and medium scale of renewable energy power plant or excess power to be purchased by state owned company, regional owned company, cooperatives. The law does not make provisions for a feed-in tariff, but does provide for differing tariffs in different regions, more accurately reflecting the cost of supply. For rural development, the government set a bold electrification target of 90% by 2020.

Purchase of electricity from geothermal plants (Regulation 02/2011) of the Ministry of Energy and Mineral Resources regulates the power purchase tariff of electricity from geothermal sources. It assigns the PLN to purchase electricity from geothermal plants inside at a maximum price of 0.97/kWh.

Clean Technology Fund (CTF), a multilateral fund, aims to accelerate the country’s initiatives to promote energy efficiency and renewable energy, and to help achieve the objective of increasing the electrification rate from 65% to 90% in 2020 as well as the long-term goal of reducing greenhouse gas emission by 26% by 2020. Under a new $400 million climate investment plan, endorsed by the CTF, Indonesia’s geothermal power capacity is set to nearly double. The plan will use co-financing from the CTF to expand large-scale geothermal power plants and to facilitate energy efficiency and renewable energy by creating risk-sharing facilities and addressing financing barriers to small- and medium-scale investments. The CTF is slated to mobilise an additional $2.7 billion from a range of other sources.  

Indonesia ratified the UN Framework Convention on Climate Change (UNFCCC) on 23 August 1994 and the Kyoto Protocol on 3 December 2004. As a non-Annex 1 party in the Kyoto Protocol, Indonesia has no obligation to reduce GHG emissions. However, the government is committed to participating in, and cooperating with, the global effort to combat climate change as Indonesia is the third largest emitter of greenhouse gases, mostly because of deforestation. It is also vulnerable to climate change as an island nation whose capital city, Jakarta, sits below sea level. This position was expressed by the Indonesian President in the G20 Finance Ministers and Central Bank Governors Summit held in September 2009 in the United States. The government has pledged to reduce GHG emissions from forestry and the energy sector by 26% through domestic effort by 2030, and by up to 41% through cooperation with other economies. To meet the goal, Indonesia will heavily invest in renewable energy and recommit to stopping deforestation. 

Energy debates

It is expected that the draft of the National Energy Policy as defined in the Energy Law will be finalised in 2010, for approval by parliament, and enactment by the government. It is expected that the policy will be integrated into the Mid-Term Development Plan 2010–2014 (RPJM, Rencana Pembangunan Jangka Menengah) in 2010.

The Indonesian government has set out a roadmap to integrate climate change issues into development planning. The roadmap will integrate mitigation and adaptation into policy instruments, regulations, programs, projects, funding schemes and capacity building in all development sectors. Two initial phases are the integration of climate change into the Mid-Term Development Plan (RPJM), and the launching of the Indonesia Climate Change Trust Fund (ICCTF) in September 2009.

The government has maintained high-energy subsidies for the country’s energy consumers to appease local energy consumers. Whilst the subsidies stimulated economic growth with low, stable energy prices when supply was high, they became a burden on the nation’s fiscal budget and a deterrent to investments in cleaner, renewable sources as demand began to outpace supply. The fuel subsidies have the negative consequence of making growth itself an unaffordable expense to the government. In response to the fiscal challenges imposed by the energy subsidies, and in order to increase investment in the electricity sector and meet increasing power requirements, the Indonesian government introduced the two-stage “Fast Track” Programme to be developed by PLN in 2006.

The first Fast Track Programme focused on fossil fuels, and aimed to see 35 coal-fired and natural gas-fired power plants projects totalling 10,000 MW of new capacity installed by 2013.

In a departure from Indonesia’s historical reliance on coal, the second Fast Track Programme, scheduled to be commenced in the period from 2009 to 2014, will include an increase of 50% in new capacity from renewable energy resources. A key departure for the second phase is private sector participation. Unfortunately, without changes to policy and regulation, it is unlikely that the second phase will garner a significant influx of foreign investment.

After the Fast Track Programme, the government expects a 56% increase in overall energy investment by 2014. Investments will likely leverage private investment with public money to focus on increasing energy reliability and to meet the government’s 90% electrification target by 2020. To further international investment in the renewable energy sector, the government recently announced a $0.097 per kWh feed-in tariff for geothermal energy and the creation of a new $400 million fund to help with the development of the country’s geothermal resources.

In total there are plans for 10,147 MW of new capacity comprised of 3,977 MW of geothermal, 3,312 coal-fired, 1,660 gas-fired and 1,198 hydropower projects.

The subsidies issues have been politically contentious in Indonesia. It is not only because the fuel subsidies accounted for nearly 10 billion dollars in 2010, or about 10% of the government’s tax revenues, but also they do not facilitate the efforts for energy efficiency and 70% of which are captured by the wealthiest 40% of households. In December 2010, the parliament approved a measure to remove fuel subsidies for all vehicles excluding motorcycles and public transportation vehicles. Cash transfers will be used to ease the impact on the economically disadvantaged. The policy was initially slated for April 2011 implementation in the greater Jakarta area, and nationwide by 2013. However, implementation was indefinitely delayed in March 2011 due to concerns over the effect on the rate of inflation.

Energy studies

A World Bank-sponsored study, by PT Pelangi Energi Abadi Citra Enviro (PEACE), an Indonesian consulting group, and others in 2007, claimed that Indonesia’s greenhouse gas (GHG) emissions from energy use accounted for 9% of the economy’s overall GHG emissions. The largest source of GHGs was forestry (largely due to deforestation), which accounted for 85%. The study considered Indonesia to be the world’s third-largest emitter of GHGs. However, a formal government report, submitted to the UNFCCC in November 2009 (Indonesia’s Second National Communication) found that, under the same time frame (2000 to 2005), Indonesia’s average yearly greenhouse gas emissions were around 1,416 million tonnes of CO2 equivalent, far lower than the 3,014 million tonnes that the World Bank study claimed. The report did not provide its own world ranking.

A new World Bank study on sustainable energy in East Asia, “Windows of Change: East Asia’s Sustainable Energy Future”, supported by the Australian government thorough AusAID, suggests that a greater use of natural gas can help the Indonesian government reach its target of reducing greenhouse gas emissions by 26% by 2020. It also suggests that a shift in emphasis from coal to renewable energy would help quicken the pace of Indonesia’s move to a more environmentally sustainable energy path. Energy use is Indonesia’s second largest source of emissions, and one of the fastest growing. On a business-as-usual path, Indonesia’s energy-related emissions will dominate by 2030.

Indonesia is a member of the Association of South-East Asian Nations (ASEAN), a regional organisation for integration between member states. ASEAN has a Centre for Energy, which promotes the development of energy in a sustainable fashion, and integrating the energy production and power generation capacities of all members.

Role of government

The Ministry of Energy and Mineral Resources (MEMR, www.esdm.go.id) provides the energy sector with a streamlined governance structure and has effectively become the responsible agency for formulating and implementing policies in all energy related sectors, including oil, gas, coal, and electric power. 

Directorate General of New Renewable Energy and Energy Conservation was renamed from Directorate of New Renewable Energy and Energy Conservation in August 2010. It is a new unit of the Energy and Mineral Resources Ministry (ESDM) to formulate and implement policies and technical aspects of the new and renewable energy as well as energy conservation.

Directorate General of Electricity is under and responsible to the MEMR. It is tasked to formulate and implement policies and technical standardization in the field of electricity.

Due to the powerful position of the PLN, the electricity sector is also dependent on the administrative decisions by the Ministry of State-Owned Enterprises (MSOE, www.bumn-ri.com), the Ministry of Finance (MOF, www.depkeu.go.id) and the National Development Board (BAPPENAS, www.bappenas.go.id). The MSOE oversees the shareholder interest of the state in the PLN, while the MOF is responsible for allocating government subsidies and loans to the electricity sector including the PLN. Furthermore, BAPPENAS is responsible for the development planning of the energy sector, and also possesses some jurisdiction over economic issues, natural resources and regional development.

Government agencies

Energy efficiency and Conservation Clearing House Indonesia (EECCHI) (www.energyefficiencyindonesia.info/) is a service facility under the Directorate General of New Renewable Energy and Energy Conservation of the Ministry of Energy and Mineral Resources, which aims to promote energy saving and energy efficiency in Indonesia. 

Research in Indonesia is coordinated by the National Research Council (DRN, Dewan Riset Nasional), which is chaired by the state Minister of Research and Technology. Institutions conducting research on energy include the Agency for the Assessment and Application of Technology (BPPT, Badan Pengkajian dan Penerapan Teknology); research institutions under the Ministry of Energy and Mineral Resources working on oil and gas, coal, geothermal, and renewable energy; and research centres in universities and technical institutions.

Indonesia has a broad range of R&D into new and renewable energy technology (such as solar, small-scale wind power and hydropower) and technologies that use biomass and plant-based oils as fuels. Research in this area is directed in many cases at applications in rural development. 

Energy procedure

Energy security has been central to Indonesia’s energy policy since its first General Policy on Energy (KUBE, Kebijakan Umum Bidang Energi) in the early 1980s, and thereafter in the Energy Policy of 2006. Basic policy principles include diversification from oil through the development of natural gas, coal and renewable energy resources; energy conservation in all economic sectors; and an intensified search for new energy resources to increase Indonesia’s energy reserve base.

Indonesia recently took significant diversification measures. Rapid increases in geothermal power will begin in the next five years, including new capacity additions of 1,685 MW under the Accelerated Development of Power Generation program, Phase II. Indonesia has set a goal to have an installed geothermal capacity of 6,000 MW in 2020. The power development plan foreshadows the addition of at least 34,300 MW of non-oil power generation capacity from 2006 to 2015. By Ministerial Regulation No. 32/2008, the government has set out plans for a greater role for biodiesel and ethanol-blend fuel in transport.

The Upper Cisokan Pumped Storage Hydroelectric power plant (4 x 260 MW) project in West Java received a government loan from the World Bank/IBRD in late 2011. The project is expected to be completed in 2016. This plant will be the first of its kind in Indonesia. PLN has also secured financing for construction of the Jati Gede hydroelectric power plant (2 x 55 MW) in West Java, and the Merangin hydroelectric power plant (2 x 90 MW) in the province of Bengkulu, Sumatra.

PLN’s 2009 Electricity Power Supply Business Plan (RUPTL) also expects the addition of 4740 MW to Indonesia’s hydropower capacity during 2010–18; of this capacity, 3835 MW would be developed by PLN and 905 MW by IPPs. The hydropower capacity addition includes three pump-storage power plants in Java – specifically Upper Cisokan (1000 MW) in West Java, Matenggeng (885 MW) at the border of West and Central Java, and Grindulu (1000 MW) in East Java. These pump-storage plants are considered important for stabilising system frequency, to provide spinning reserves and system stability.

Under the 10 000 MW Accelerated Development of Electricity Generation – Phase II program for 2011–15, Indonesia is committed to building two hydropower plants – specifically Asahan III (174 MW) in north Sumatra, and Bakaru II (126 MW) in west Sulawesi. These hydropower plants would increase Indonesia’s total large hydropower capacity to 3804 MW, or 5% of Indonesia’s total hydropower potential of about 75 000 MW. It is worth noting that Indonesia’s large hydropower potential is located in the eastern part of Indonesia, far from large demand centres.

To remove barriers to energy standards and labelling, Indonesia is currently participating in the UNDP/GEF-funded Barrier Removal to the Cost Effective Development and Implementation of Energy Efficiency Standards and Labelling Project (BRESL), which involves six developing Asian economies. BRESL has five major programs promoting energy standards and labelling: policy making; capacity building; manufacture support; regional cooperation; and pilot projects.

Since 2002, Indonesia has implemented a government-funded public–private partnership program in energy auditing for industry and commercial buildings. The program requires participating companies to implement measures identified in energy audits. Some 292 industries and commercial buildings have participated so far. Indonesia is an active participant in the ASEAN Energy Awards program (including the Best Practice for Energy Efficient Buildings and the Best Practice for Energy Management in Buildings and Industries).

The Indonesian Climate Change Trust Fund (ICCTF) is a financing mechanism for climate change mitigation and adaptation within Indonesia’s policy framework. The ICCTF’s two key objectives:

• achieving Indonesia’s goal of a low-carbon economy and a greater resilience to climate change through the facilitation and acceleration of investment in RE and EE, sustainable forest management and conservation; and reducing vulnerability in key sectors, such as coastal zones, agriculture and water resources;
• enabling the government to increase the effectiveness and impact of its leadership and management in addressing climate change, by bridging the financial gap ;and increasing the effectiveness and impact of external finance for climate change work in Indonesia.

Indonesia is utilising solar PV systems to achieve its electrification target, which was 66% in 2009. Also in 2009, the government allocated IDR658.7 billion (about US$65 million) to provide new and renewable energy–based power generation for distributed power systems. The program provided electricity to around 94,000 households, particularly in 18 of the outermost islands, and in remote areas along the Indonesian border. In addition, the government allocated IDR841.3 billion for the extension of PLN’s 20 kV rural electrification network and generation capacity.

In the 2010 budget, the government expects to allocate IDR561.5 billion for the electrification of 81000 households in very remote areas (based on new and renewable energy), and to allocate IDR591.5 billion to further extend PLN’s rural electrification network.

Demand Side Management and Labelling: DSM focuses on clipping the peak load which is contributed primarily to by household lighting, street lighting, and household electric appliances. The idea is that the effective implementation of DSM and labelling costs less than building and operating new power plants to meet peaks in electricity demand.
Although the importance of DSM and labelling have been realised, current programmes have not yet been fully implemented due to financial constraints.

The Directorate General of Electricity and Energy Utilisation (DGEEU) is now planning/implementing the following three programmes:

• the TERANG programme, aiming to reduce electricity demand by installing compact fluorescent lamps (CFLs) in households;
• the PJU programme, aiming to reduce electricity demand by installing efficient lamps in street lighting;
• the Socialisation programme, an awareness programme specifically for DSM.

Energy regulator

Through the Directorate General of Electricity and Energy Utilisation (DGEEU, www.esdm.go.id/directorate-general-of-electricity-and-energy-utilization), the DEMR acts as the chief regulator of the sector, being responsible for the drafting of legislation, it's implementation, co-ordination, enforcement and compliance.

Degree of independence

The DGEEU is a direct subsidiary of the DEMR, and is therefore a wholly governmental body. The DGEEU is headed by a Director General, and the board consists of a permanent Secretary and four Directors. As a division of the DEMR, the DGEEU is funded directly from the national budget.

Regulatory framework

On 16 November 2009, the Governmental Regulation (PP, Peraturan Pemerintah) No. 70/2009 on Energy Conservation, as called for by Law No. 30/2007 (the Energy Law) was issued. Regulatory measures included:

• the formulation of a National Energy Conservation Master Plan (RIKEN, Rencana Induk Konservasi Energi Nasional), to be updated every five years or annually, as required;
• the mandatory assignment of an energy manager, energy auditing, and an energy conservation program for users of final energy of 6000 toe (tonnes of oil equivalent) per year or more;
• mandatory energy-efficiency standards and energy labelling;
• government incentives, including tax exemptions and fiscal incentives for imports of energy-saving equipment and appliances, and special low interest rates for investments in energy conservation;
• government disincentives, including written notices to comply, public announcements of non-compliance, monetary fines, and reductions in energy supply for non-compliance with the terms of the law.

In 2008, the Ministerial Regulation No. 32/2008 that was to make biofuel consumption mandatory, commencing in 2009, was passed. 

Regulatory roles

The DGEEU has the following responsibilities, set out in the establishing law:

• To prepare and formulate policy for the DEMR in the fields of electricity and energy utilisation,
• The implementation of said policy,
• The preparation of standards, guidelines, criteria, and procedures for the fields of electricity and energy utilisation, and
• To provide technical assistance and evaluation services in the fields for any who may require it.
   

Energy regulation role

The central government, with approval from the parliament, will stipulate the tariff for electricity that is sold to end customers by the holder of a license to provide electricity for public use (IUPTL), whilst having regard as to national and regional interests, as well as to the end consumers' and power producer's interests. Meanwhile, for 'regional scope', the provincial government (Pemda), with approval from the regional parliament, will stipulate the tariff in accordance with tariff guidelines provided by the central government. The precise meaning of 'regional scope' in this context is not clear, and will hopefully be elaborated in the implementing regulations.
The government may stipulate different tariffs in each region within a business area. The holder of an IUPTL is prohibited from stipulating a tariff to end customers without approval from the central government or the Pemda. Failure to comply with this may result in an administrative sanction.

The central government and the Pemda, must also approve the sale price of electricity from the holder of an IUPTL (i.e. from the power producer to the holder of an integrated IUPTL) and the fee for use of a transmission line.

Regulatory barriers

Energy consumers’ level: The barriers to energy conservation include, the inadequacy of knowledge, lack of information, and high investment costs.
Other concerns are: lack of in-depth management skills; the concentration of decision making at the top level; and lack of expertise in proposal preparation.

Coordination (government) level: The government is constrained in implementing various EE&C programmes and activities due to limited budget. The absence of coordinating mechanisms among key government actors, decision making, and overlapping/unclear division of responsibilities among the institutions remain as barriers; and the situation has been further complicated by the decentralisation of some administration. There is a dearth of information on current and future trends in energy technology, cost and usage.

A significant portion of the country’s geothermal resources are located in conservation forests. Indonesian law distinguishes between protected forests and conservation forests. Although some power plants and other projects are allowed in protective forests since February 2010, the only human intervention allowed in conservation forests is for education or research. The government has proposed that geothermal wells could be drilled in conservation forests, but geothermal power plants would have to be built outside of these areas. Further regulation is awaited.

The establishment of an independent regulatory agency could improve the confidence of private firms in the electricity sector in Indonesia.

While Indonesia needs to attract foreign investments to accelerate its effort in expanding renewable energy and has been attempted to create incentives for foreign investment in renewable energy (e.g. Geothermal Law 25/2007), it struggles to attract foreign investments due to some issues. The key issues include the difficulty of obtaining land-use permissions, subsidized tariffs and uncertain regulatory environment. PLN’s status as the sole legal provider of electricity through Indonesia’s power grid complicates the incentives for foreign developers and often limits the profitability of projects.

There are some perceived barriers to renewable energy development. The price regime has forestalled the development of cleaner energy infrastructure as there is a lack of financial incentives, combined with heavy subsidies for energy consumption. The country currently restricts foreign investment in power plants producing less than 10 MW, and therefore is unlikely to meet its targets for economic growth and renewable energy development without allowing participation by foreign companies, which often have the technical know-how and capital. It also needs to incentivise domestic finance for the renewable power sector s by providing a sovereign debt guarantee. There is also a lack of an after-sales service infrastructure and a strong transmission infrastructure for grid-connected renewable energy projects. While local governments have been given the authority to administer tenders for projects in an effort to implement policy initiatives efficiently, they often lack the capacity to manage tendering processes transparently. Furthermore, Indonesia lacks quality data; and there is a need to verify through third-party valuation.