Bulletin of Indonesian Economic Studies

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Prospects of Energy Transition in Indonesia

Budy P. Resosudarmo, Jahen F. Rezki & Yuventus Effendi

To cite this article: Budy P. Resosudarmo, Jahen F. Rezki & Yuventus Effendi (2023) Prospects
of Energy Transition in Indonesia, Bulletin of Indonesian Economic Studies, 59:2, 149-177, DOI:
10.1080/00074918.2023.2238336

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 Bulletin of Indonesian Economic Studies, Vol. 59, No. 2, 2023: 149–177

Survey of Recent Developments

PROSPECTS OF ENERGY TRANSITION IN INDONESIA

Budy P. Resosudarmo* Jahen F. Rezki

Australian National University Universitas Indonesia

Yuventus Effendi
Indonesian Ministry of Finance

The Indonesian government has submitted its plan for nationally determined con-
tributions (NDCs) to the United Nations and has committed to achieving net-zero
emissions (NZEs) by 2060. While looking to reduce emissions from forestry, the
government has prioritised a transition to renewable energy in the energy sector.
However, Indonesia faces challenges owing to its lower-middle-income status, lim-
ited budgets and constraints in attracting international finance. This paper aims to
assess Indonesia’s potential for realising its energy transition goals. It evaluates the
country’s economic strength, past experiences in energy transition and the current
status of ongoing initiatives. It concludes that significant progress is possible, but
achieving NZEs by 2060 remains a major challenge.

Keywords: climate change policy, energy transition, climate finance, carbon market,
Indonesian economy
JEL classifications: Q54, Q58, Q42, Q48

INTRODUCTION
Since the 15th session of the Conference of the Parties (COP15) to the United Nations
Framework Convention on Climate Change (UNFCCC) in 2009, the Indonesian
government has been committed to reducing its greenhouse gas (GHG) emissions
and meeting the targets set as part of its intended nationally determined contribu-
tions (NDCs). Set under the UNFCCC, these targets have been repeatedly revised,
reflecting the country’s evolving circumstances. Before COP27 in 2022, the govern-
ment announced its enhanced NDCs. As part of these, it committed to reducing the
country’s annual emissions by 31.9% by 2030 compared with the business-as-usual
(BAU) projections, which were based on national economic growth before the
mid-2010s. The government hopes to achieve these reductions mainly by reduc-
ing deforestation, forest degradation and emissions from the energy sector. With

* Corresponding author ([email protected]).

The views and opinions expressed in this article are those of the authors only.
ISSN 0007-4918 print/ISSN 1472-7234 online/18/000149-77
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© 2023 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group
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150 Budy P. Resosudarmo, Jahen F. Rezki and Yuventus Effendi

TABLE 1 Indonesia’s Nationally Determined Contributions (MTCO2e and %)

First NDC (2010­­–30) Updated Enhanced

2016 2021 2022

GHG emission reduction from

GHG the BAU level by 2030
emissions in
2030 (BAU) CM1 CM2 CM2 CM1 CM2

Energy 1,669 314 398 446 358 446

10.90% 13.90% 15.50% 12.50% 15.50%
Waste 296 11 26 40 40 43.5
0.40% 0.90% 1.40% 1.40% 1.50%
Industry processes 70 3 3.25 3.25 7 9
and product uses 0.10% 0.10% 0.10% 0.20% 0.30%
Agriculture 120 9 4 4 10 12
0.30% 0.10% 0.10% 0.30% 0.40%
Forestry and other 714 497 650 692 500 729
land uses 17.30% 22.70% 24.10% 17.40% 25.40%
Total 2,869 834 1,081 1,185 915 1,240
29% 38% 41% 31.90% 43.20%

Source: unfccc.int (2010, 2016, 2021, 2022).

Note: MTCO2e = metric tonnes of carbon dioxide equivalent. CM1 = counter measure 1 (without inter-
national support). CM2 = counter measure 2 (with international support).

international support, however, Indonesia has the potential to achieve emissions

reductions of up to 43.2%.1
Table 1 details the government’s NDC targets, highlighting the specific emission
reductions planned for each sector. Comparing the targets shows that the govern-
ment is determined to accelerate its emission reductions in the energy sector to
surpass the BAU levels.
We must, however, acknowledge that changes in the actual economic growth
compared with the BAU projections would affect the emission reductions needed
to achieve the NDC goals (Pramita 2022; Basri and Riefky 2023). In the case of
Indonesia, its economic growth since the mid-2010s has been lower than first pre-
dicted under the BAU scenario, mainly owing to the commodity bust and the
effects of the Covid-19 pandemic. Consequently, this lower economic growth tra-
jectory suggests that a smaller emission reduction is needed to meet the targets of
the NDCs. This could be a factor behind the government’s decision to elevate its
targets in the enhanced NDCs.

1. This generally necessitates significant international funding.

Prospects of Energy Transition in Indonesia 151

The government, however, has also made a commitment independent of any

projected BAU scenarios. During COP26 in 2021, Indonesia’s leaders, alongside
those from other nations, pledged to achieve net-zero emissions (NZEs) by 2060
or earlier, aiming to limit the rise in global temperatures to 1.5 degrees Celsius
above pre-industrial levels. Irrespective of Indonesia’s future economic growth,
the government appears determined to significantly reduce carbon emissions.
Achieving NZEs by 2060 presents significant challenges for Indonesia, given its
budget constraints and aspirations to become a high-income country by the early
2040s (Bappenas 2019). As of 2018, Indonesia was among the top 10 carbon emitters
in the world, with net emissions of almost 2,000 metric tonnes per year, account-
ing for about 4% globally. The energy sector alone contributed about 650 metric
tonnes, or 1.7% of global emissions from the energy sector (Friedrich, Pickens and
Vigna 2023).
While the difficulties of reducing emissions from deforestation and forest deg-
radation have been discussed extensively (Sunderlin et al. 2018; Dwisatrio et al.
2021; Resosudarmo, Tacconi and Waluyo 2023), few studies explore the energy
transition required, particularly for achieving NZE in the power sector by 2060.
This is a crucial issue because Indonesia must have affordable energy to improve
its welfare and achieve the economic growth needed to reach high-income status.
Indonesia will need large financial resources to achieve NZEs by 2060, or ear-
lier, through the energy transition. To secure the necessary funding, Indonesia
must develop robust financial systems combining domestic resources, international
loans and carbon market mechanisms. Whether Indonesia will successfully secure
the required funding for the energy transition remains uncertain. However, the
government appears optimistic that its commitments to the energy transition will
attract investment in the country (Kompas 2023).
This paper explores the potential for Indonesia to achieve NZEs by 2060, with
a focus on funding needs and the shift to renewable energy sources. The analysis
begins by evaluating the economic strength of Indonesia, considering its capacity
to mobilise domestic resources and secure international loans to finance the energy
transition. It then outlines Indonesia’s energy transition goals and assesses the
historical progress made in adopting renewable and low-carbon energy sources,
particularly within the power plant sector. Additionally, it examines the ongoing
development of financial mechanisms such as the Energy Transition Mechanism
(ETM) Country Platform, the Indonesian Just Energy Transition Partnership (JETP-
Indonesia) between Indonesia and other economies, and programs related to the
carbon market and pricing, which are crucial for generating funds to support the
energy transition targets.

ECONOMIC ENVIRONMENT
Since the outbreak of Covid-19 in 2020, the Indonesian economy has shown signs
of improvement, with economic growth returning to or exceeding the levels typi-
cally seen before the pandemic. After falling to about -2.0% in 2020, the economic
growth rate bounced back to above 7% in the first quarter of 2021. The economy
then grew by more than 5% in each quarter of 2022. Through the first quarter of
2023, the growth rate remained robust, at more than 5% (BPS 2023a)—similar to
the levels seen before the pandemic (Burke and Siyaranamual 2019). A report by
152 Budy P. Resosudarmo, Jahen F. Rezki and Yuventus Effendi

the World Bank (2022) suggests that commodity windfalls and the reopening of
the economy have aided this recovery.
Despite the robust economic recovery in Indonesia, concerns have arisen regard-
ing whether the recent performance of the economy has been strong enough to
support an ambitious energy transition. To address this question, we examine
Indonesia’s economic performance before and after the pandemic. This involves
analysing the drivers of current economic growth trends, inflationary pressure,
trade balance improvement and government spending expansion.

Economic Growth
Let us start by examining Indonesia’s recovery from the Covid-19 economic shock.
Table 2 shows the year-on-year quarterly growth rates of GDP in the past year in
comparison with the average during the pre-pandemic period of 2017–19. This
shows that the GDP growth rate began to rebound in the second quarter of 2021
and had nearly returned to the pre-pandemic trends by the fourth quarter of 2021.
Consumption and investment were the main drivers of the Indonesian economy,
with their shares in GDP remaining stable at about 60% and 30%, respectively.
However, the growth rates of these drivers have fluctuated post-pandemic, show-
ing a declining trend. During 2017–19, the average year-on-year quarterly growth
rate of consumption was about 4.9%, which is considerably higher than the average
in 2022. Although the rate in the first quarter of 2023 reached 4.5%, it still fell short
of the pre-pandemic level.
The slowdown in consumption in 2022 was likely due to the large contraction
in government spending since the first quarter of 2022. This contraction aligns
with the government’s pursuit of fiscal consolidation to maintain a budget deficit
of below 3% of GDP in 2023. Another possible factor, as highlighted by Al Izzati,
Yusrina and Suryahadi (2023), is the increase in energy prices due to the reduction
in fuel subsidies in September 2022. This led to a price increase of more than 30%
for Pertalite fuel and about 16% for Pertamax, resulting in decreased fuel consump-
tion. Nonetheless, in the first quarter of 2023, overall consumption accelerated as
government spending recovered.
Investment, represented by gross fixed capital formation (GFCF) in table 2, has
also underperformed since 2022. During 2017–19, the average year-on-year quar-
terly growth rate for GFCF was 5.8%. Growth has failed to reach that level since
the first quarter of 2022 and reached only 2.1% in the first quarter of 2023. However,
since the second quarter of 2022, there has been relatively high year-on-year growth
in vehicle-related investment, which peaked at 24.1% in the first quarter of 2023.
Nevertheless, this increased investment in the vehicle sector could not compen-
sate for the investment contraction in buildings and structures, as well as in other
equipment since 2022. In the first quarter of 2023, the growth rate of investment in
buildings and structures was 0.3%, while the rate for other equipment was negative.
Looking at the sectoral components of GDP, we see that the average year-on-
year quarterly growth rate of tradable goods and services in 2022 was slightly
higher than the average in 2017–19 (table 2). However, the growth rate declined
to 3.3% in the first quarter of 2023. The positive growth in the tradable sectors
can be attributed mainly to the resurgence of the mining and quarrying sectors,
driven by high demand and prices for commodities, particularly coal. Notably,
the International Energy Agency (IEA 2022a) reported an increasing trend in coal
demand, driven by rising needs from Europe, India, and China.
Prospects of Energy Transition in Indonesia 153

TABLE 2 Components of GDP Growth (2010 prices, % year-on-year)

Average 2021 2022 2023

2017–19 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

GDP 5.1 -0.7 7.1 3.5 5.0 5.0 5.5 5.7 5.0 5.0
By expenditure
Consumption 4.9 -1.8 6.2 1.0 3.8 3.3 4.2 4.3 3.0 4.5
Private 5.0 -2.2 6.0 1.0 3.6 4.3 5.5 5.4 4.5 4.5
Government consumption 3.5 2.6 8.2 0.6 5.3 -6.6 -4.6 -2.6 -4.8 4.0
Gross fixed capital formation 5.8 -0.2 7.5 3.8 4.5 4.1 3.1 5.0 3.3 2.1
Building and structures 5.7 -0.7 4.4 3.4 2.5 2.6 0.9 0.1 0.1 0.1
Machine and equipment 11.5 3.5 19.0 11.5 13.5 19.2 16.3 36.5 18.4 4.6
Vehicles 4.8 2.1 42.4 9.0 3.6 0.3 7.0 17.1 17.1 24.1
Other equipment 5.0 -4.9 36.7 10.0 3.4 6.0 -4.3 0.1 -2.7 -5.3
Others 1.5 -0.5 2.1 -4.9 12.2 0.4 5.0 3.1 3.5 3.8
Export 5.0 2.2 28.4 20.7 22.2 14.2 16.4 19.4 14.9 11.7
Import 4.4 5.2 33.2 31.1 32.6 16.0 12.7 25.4 6.3 2.8
By sector
Tradable 3.5 -0.1 4.3 3.6 4.2 3.6 3.2 3.6 5.5 3.3
Agriculture 3.8 3.5 0.6 1.4 2.3 1.2 1.7 2.0 4.5 0.3
Mining and quarrying 1.4 -2.0 5.2 7.8 5.2 3.8 4.0 3.2 6.5 4.9
Manufacturing 4.1 -1.4 6.6 3.7 4.9 5.1 4.0 4.8 5.6 4.4
Non-tradable 6.0 -1.6 9.2 2.5 4.1 5.3 5.0 6.5 5.9 5.0
Electricity, water and gas 9.3 -13.3 -4.5 -3.3 5.9 12.4 13.7 8.1 3.6 -0.1
Construction 6.2 -0.8 4.4 3.8 3.9 4.8 1.0 0.6 1.6 0.3
Trade, hotel and restaurant 4.9 -2.4 11.5 4.2 5.4 5.9 5.4 7.4 7.9 6.1
Transport and communication 8.1 -0.4 12.9 3.2 6.9 10.3 12.9 13.7 11.9 10.5
Finance, real estate 5.8 -2.4 6.7 3.0 0.2 3.2 3.0 2.7 4.0 3.5
and company
Services 6.0 -1.9 9.2 -2.9 2.9 1.3 1.7 6.9 3.1 3.5

Source: BPS through CEIC (https://www.ceicdata.com/en).

In Europe, the conflict between Russia and Ukraine resulted in a reduction

in natural gas sales to Europe, prompting the region to substitute gas with coal
for electricity generation. This contributed to an increase in the demand for coal.
Additionally, in India and China, the demand for coal grew significantly owing
to the countries’ ongoing economic growth (IEA 2022a). IEA (2023) predicts that
renewable electrical capacity in the member states of the European Union will
double during 2022–27 owing to energy security concerns.
The non-tradable goods and services sector exhibited slightly lower average
growth rates in 2022 compared with the rates seen during 2017–19. Furthermore,
this growth waned to reach only 5.0% in 2023. Among the subsectors, the trade,
hotel and restaurant sector has recovered strongly from the initial pandemic shock,
as has the transport and communication sector, particularly from the fourth quarter
of 2021 onwards. Conversely, the performance of sectors such as utilities; construc-
tion; finance, real estate and company; and services indicates that the economy has
154 Budy P. Resosudarmo, Jahen F. Rezki and Yuventus Effendi

FIGURE 1 Prices of Coal and Palm Oil, and Tax Revenue from Mining Income
500 Mining income tax excluding oil and gas
Coal prices*
400 Palm oil prices**

300

200

100

0
Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 Dec-22

Source: World Bank and BPS (https://www.bps.go.id).

Note: Levels in 2019 are indexed to 100. The tax revenue excludes oil and gas income tax revenue.
* Free-on-board coal prices at Newcastle, Australia. ** Free-on-board palm oil prices, Malaysia.

not fully rebounded. These sectors, in general, have been growing more slowly
than before the pandemic. The varying growth across non-tradable sectors suggests
a complex recovery process with sector-specific challenges. While some sectors
have shown resilience and regained momentum, others continue to face hurdles
in achieving pre-pandemic growth levels.
A promising development has been the performance of net exports. The year-
on-year quarterly growth rates of exports have been in double digits since the
second quarter of 2021, although showing a declining trend. In the third quarter
of 2023, the growth rate reached 11.7%, much higher than the rate of imports
(2.8%). According to the World Bank (2023a), the strong results in Indonesian
trade since the second quarter of 2021 can be attributed to surging commodity
prices, particularly for coal and palm oil (figure 1). The World Bank recorded
that the global coal price almost quadrupled from January 2019 to December
2022, rising from about $99 per metric tonne to about $379 per metric tonne. Coal
prices had begun to rise in 2021 following the Russian invasion of Ukraine (World
Bank 2023b). Similarly, the price of palm oil in December 2022 had risen by 60%
compared with January 2019. The price rise began with an increase of more than
30% in January 2020 compared with January 2019. By the end of 2021, the price
had doubled, before it then declined in 2022. A study by Halimatussadiah et
al. (2022) asserts that the palm oil price had a significant impact on the agricul-
tural sector in Indonesia, resulting in increased output and export values, and
an improved trade balance.
Regional growth patterns show that Sumatra, Kalimantan and Eastern Indonesia,
encompassing Nusa Tenggara, Maluku Islands and Papua, have benefited from the
commodity boom, which has contributed to their recovery (table 3). Their growth
rates in 2022 have been higher than during 2017–19. Java, with a contribution of
almost 60% of national GDP, has largely sustained the country’s growth momen-
tum and is heading towards pre-pandemic levels of growth. In the fourth quarter
of 2022 and the first of 2023, Java produced year-on-year quarterly growth rates of
Prospects of Energy Transition in Indonesia 155

TABLE 3 Growth in Gross Regional Domestic Product (2010 prices, % year-on-year)

Average 2021 2022 2023

2017–19 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

Sumatra 4.5 -0.8 5.3 3.8 4.6 4.1 5.0 4.7 5.0 4.8
Java 5.6 -1.1 7.8 3.0 4.7 5.0 5.6 5.8 4.8 5.0
Kalimantan 4.4 -2.3 6.3 4.7 4.5 3.5 4.5 5.7 6.0 5.8
Sulawesi 7.6 1.4 8.8 4.8 7.7 5.5 6.5 8.2 7.8 7.0
Eastern Indonesia 1.7 5.4 7.3 6.8 9.1 8.5 9.9 6.8 4.7 2.6

Source: BPS through CEIC (https://www.ceicdata.com/en)

4.8% and 5%, respectively. Before the pandemic, the average year-on-year quarterly
growth rate on the island was about 5.6%.
Meanwhile, the economic growth of Sulawesi has fluctuated significantly. In
this region, the economic recovery of Gorontalo and North Sulawesi has faced
challenges, while the economy of Central Sulawesi has grown strongly, at a rate
of about 15.2% in 2022. Remarkably, even during the pandemic, in 2020 and 2021,
Central Sulawesi’s economy grew by 4.9% and 11.7%, respectively, owing to the
development of the smelting industry, particularly in the Morowali kabupaten
(district).
Overall, we can confirm that the Indonesian economy has been showing signs of
recovery. The main driver behind this has been the growth in commodity exports.
However, as of the first quarter of 2023, economic growth had not yet fully returned
to the levels seen before the pandemic, particularly in the non-tradable goods sec-
tors and in Java. This raises concerns, as both private consumption and investment,
which are the two largest components of GDP expenditure, have tended to decline.

External Factors
In 2023, Indonesia faces a possible trade slowdown owing to declining commodity
prices, geoeconomic fragmentation and a weakened global trade outlook. Export
growth decreased by three percentage points in the first quarter of 2023 compared
with the fourth quarter of 2022. This decline can be attributed to a 4.8% reduction
in the nominal term of oil and gas exports in March 2023 compared with March
2022. Furthermore, non-oil and gas exports declined by 11.7% nominally in the
same period (BPS 2023b). These reductions indicate a potential trade slowdown
for Indonesia, driven by decreasing commodity prices, particularly for coal and
palm oil, which are projected to fall by 42% and 23%, respectively, in 2023 (World
Bank 2023a).
The rivalry between the United States and China has presented additional chal-
lenges. The contention has led to trade and investment restrictions, which appear to
have caused geoeconomic fragmentation and varying degrees of global economic
loss. In scenarios where the fragmentation is limited and adjustment costs are low,
the loss could amount to 0.2% of global GDP. However, in cases of severe fragmen-
tation, with high-cost adjustment, the loss could be as much as 7% of global GDP
(Aiyar et al. 2023). Similarly, Bolhuis, Chen and Kett (2023) argue that geoeconomic
fragmentation could reduce real GDP by 4.2% for advanced economies and by
156 Budy P. Resosudarmo, Jahen F. Rezki and Yuventus Effendi

FIGURE 2 Direct Investment and Portfolio Investment

$ billion
15 Direct investment
Portfolio investment
10

-5

-10
Q1 Q1 Q1 Q1 Q1 Q1 Q1* Q4*
2016 2017 2018 2019 2020 2021 2022 2022
Source: Bank Indonesia (https://www.bi.go.id/id/statistik/default.aspx).
Note: * Provisional.

5.2% for emerging economies. In contrast, low-income countries may experience

a GDP contraction of 10.8%. Notably, Indonesia is not immune to the effects of
geoeconomic fragmentation.
In addition to these concerns, a report by the World Trade Organization (WTO
2023) highlights a below-par global trade outlook. The projected trade growth for
the year is estimated to slow down to 1.7%. The fourth quarter of 2022 already
produced a slump influenced by factors such as the ongoing war in Ukraine, high
inflation rates, tighter monetary policies and financial uncertainty.
These factors pose risks to Indonesia’s trade performance and contribute to the
weakened global trade outlook. The reduction in exports, particularly in the oil
and gas and non-oil and gas sectors, combined with the challenging global trade
environment, indicates a potential trade slowdown for Indonesia in 2023.
Regarding investment and capital movement, recent years have shown rela-
tively stable levels of direct investment, while portfolio investment has fluctuated
significantly, especially after the onset of the pandemic (figure 2). In 2023, capital
outflow from Indonesia is projected to continue owing to relatively high interest
rates in the United States and Europe. The IMF (2023a) expects the policy rate to
reach slightly more than 5%, according to the median projection of participants
in the Federal Open Market Committee. Moreover, Europe may experience high
interest rates owing to the risk of higher and persistent inflationary pressures
resulting from increases in energy prices in 2023 (IMF 2023b).
It has been argued that Indonesia can mitigate the potential trade and investment
slowdown by actively participating in the global value chain through negotiating
limited free trade agreements (FTAs) that focus on critical minerals for the country
and developing the value chain for electric vehicles and batteries (Aswicahyono
2023). It is worth noting that these trade agreements and down-stream supply chain
strategies may have unintended costs in certain sectors.
Prospects of Energy Transition in Indonesia 157

FIGURE 3 Inflation (year-on-year) and the Interest Rate (% per year)

%
7

4 Seven-day reverse repo rate

2 Inflation

0
Jan-19 July-19 Jan-20 July-20 Jan-21 July-21 Jan-22 Apr-22

Source: Bank Indonesia (https://www.bi.go.id/id/statistik/default.aspx) and BPS through CEIC (https://

www.ceicdata.com/en).

Internal Factors
Inflation and Interest Rates
Relatively low inflation in 2021 and mid-2022 allowed Bank Indonesia, the coun-
try’s central bank, to keep its policy interest rate low (Suroyo and Christina 2021).
This reduced borrowing costs for both Indonesian businesses and individuals,
ultimately supporting economic growth in the country. Furthermore, the bench-
mark interest rate in Indonesia, known as the seven-day reverse repo rate, was
reduced to 3.50% in March 2021. Remarkably, this rate remained unchanged until
August 2022. However, from August 2022, the rate was adjusted to respond to
inflationary pressures. By the end of 2022, the interest rate had been raised to
5.5% (figure 3).
Looking ahead to 2023, Bank Indonesia has set a target inflation rate of 3%,
plus or minus 1% of deviation. This means that the central bank aims to maintain
inflation within the range of 2%–4%. Furthermore, there are forecasts indicating
that the interest rate will be adjusted upwards. This suggests that Bank Indonesia
may increase the policy rate in response to evolving economic conditions and
inflationary pressures.

Fiscal Policy
In general, despite the pandemic in the past three years, the government’s budget
position has been robust with a manageable deficit (figure 4). In 2020, there was
a significant fall in government revenue. Conversely, the government spent more
during the early stages of the pandemic than in previous fiscal years. As a result,
in 2020, the budget deficit reached around 6% of GDP. Nonetheless, the govern-
ment managed to increase revenue and narrow the budget deficit to 4.5% of GDP
in 2021 and 2.2% of GDP in 2022.
158 Budy P. Resosudarmo, Jahen F. Rezki and Yuventus Effendi

FIGURE 4 Government Budget

Rp trillion %
3,500 Revenue (lhs) -7

Expenditure (lhs) -6
3,000
Deficit (rhs)
2,500 -5

2,000 -4

1,500 -3

1,000 -2

500 -1

0 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Source: BPS through CEIC (https://www.ceicdata.com/en).

The improvement in revenue in late 2021 and mid-2022 can be attributed to the
reopening of the economy and to the commodity boom. The reopening was evident
through strong private consumption, particularly in the trade, hotel and restau-
rant sector, and the transport and communication sector (table 2). Additionally, a
report by the Asian Development Bank (ADB 2023) states that robust consumer
spending has accelerated economic growth in Indonesia. Revenue collection also
benefited from the commodity boom, particularly in palm oil and coal, which
began in 2020 and 2021. As a result, in the first quarter of 2022, income tax revenue
from non-oil and gas mining had more than tripled compared with the revenue
in 2019 (figure 1). Similarly, non-tax revenue from this sector surged in 2021 and
2022. Consequently, the commodity boom bolstered the collection of both tax and
non-tax revenue by the government. However, such dependency on the current
geoeconomic fragmentation could pose risks. A slowdown in the commodity boom,
for example, could threaten national revenue.
Regarding expenditure, the government plans to increase spending by 12.7%
in nominal terms in 2023. However, it will cut spending in two main accounts:
health by 30% and social protection by 4.2%. These reductions are mainly due
to the high base values in 2021 and 2022. For example, in 2022, the government
allocated more than 7% of its expenditure to the health sector and more than 13%
to social protection. The reductions in these accounts also reflect the easing of the
pandemic’s impact on the economy (Ministry of Finance 2022b).
In 2023, the Indonesian government’s focus is to achieve fiscal consolidation and
produce a budget deficit below 3% of GDP, as mandated under Law 17/2003. The
budget deficit is expected to be about 2.6%–2.9% of GDP, as revenue is projected to
range between Rp 2,267 trillion and Rp 2,399 trillion, while expenditure is estimated
Prospects of Energy Transition in Indonesia 159

to be between about Rp 2,796 trillion and Rp 2,993 trillion (Ministry of Finance

2022b). Nevertheless, despite efforts to reduce the deficit, the budget will continue
to prioritise human resource development through investments in education.

DEVELOPMENT OF RENEWABLE ENERGY

Targets of Energy Transition
After announcing its intended NDCs in 2009,2 the government set targets for the
country’s energy transition under Government Regulation 79/2014 on National
Energy Policy. The targets include:
• increasing the contribution of renewable energy to the mix of total energy con-
sumption to 23% by 2025 and at least 31% by 2050
• reducing the contribution of oil to the mix to less than 25% by 2025 and less
than 20% by 2050
• controlling the use of coal to contribute a minimum of 30% to the mix by 2050
and a minimum of 25% by 2050
• controlling the use of gas to contribute a minimum of 22% to mix by 2050 and
a minimum of 24% by 2050.
At the time of writing, Regulation 79/2014 remains in effect as the highest regula-
tion outlining the government’s energy transition target. This document outlines
three main strategies to achieve the targets: constructing additional power plants
for renewable energy, reducing dependence on non-renewable energy sources,
and enhancing energy efficiency by improving energy intensity. However, the
implementation of any of these strategies is likely to face significant challenges,
and immediate results should not be expected (Wahyuni and Ardiansyah 2022).
After the government committed in 2021 to achieving NZE by 2060, it was urged
to develop a comprehensive roadmap for the energy transition that extends beyond
the targets specified in Regulation 79/2014. Various ministries and agencies have
been involved in producing roadmaps, although their plans are not uniform and
continue to undergo revisions. While most roadmaps outline a possible pathway
towards NZE by 2060, none of them yet claim to be the definitive strategy (IEA
2022c). Notably, the National Energy Council (DEN) released its roadmap for the
energy transition in January 2023, which provides insights into the envisioned
trajectory (table 4).
The DEN roadmap emphasises the intended steps towards energy transition on
both the supply side and demand side. The first priority is to increase the share of
renewable energy sources and develop nuclear power plants for the supply side.
Then, addressing demand, the roadmap highlights steps in the energy transition
for transport and for household cooking sectors. For Indonesia to meet these ambi-
tious supply and demand targets, a robust economy is vital, especially considering
the currently low contribution of renewables to the energy supply and the almost
complete lack of infrastructure for electric and hydrogen vehicles. Moreover, the

2. For more, see https://www4.unfccc.int/sites/submissions/INDC/Published%20Documents/

Indonesia/1/INDC_REPUBLIC%20OF%20INDONESIA.pdf.
 TABLE 4 DEN Roadmap for Energy Transition (presented January 2023)

2025 2030 2035

Supply side Supply side Supply side

Renewable energy is 23% of the total energy Renewable energy is 25% of the total energy Renewable energy is 30%–31% of the total
mix mix energy mix
Gas and renewable energy replaces 50% of Diesel power plants are abolished
diesel power plants
Retirement of coal power plants enters
phase one
Nuclear power plants generating up to 2
gigawatts are in use

Demand side Demand side Demand side

Gas is piped to 5 million households Gas is piped to 5.8 million households Gas is piped to 10.8 million households
Induction cookers are used in 2 million Induction cookers are used in 5 million Induction cookers are used in 10 million
households households households
Dimethyl ether is used in households
Electric cars total 1 million Electric cars total 5.5 million Electric cars total 6.7­­­million to 7.3 million
Electric motorcycles total 6 million Electric motorcycles total 8.5 million Electric motorcycles total 28.5­million to
30.2 million
Electric buses total 219,000
Electric trucks total 595,000
Gas fuel powers 200,000 cars and 100 ships Gas fuel powers 440,000 cars and 257 ships Gas fuel powers 500,000 cars and 300 ships
Fuel must be B30 blend Hydrogen trucks total 245,000
 2040 2050 2060

Supply side Supply side Supply side

Renewable energy is 36%­–38% of total Renewable energy is 53%–54% of total Renewable energy is 62%–63% of total
energy mix energy mix energy mix
Carbon capture, utilisation and storage
technology is installed at non-renewable
power plants
Retirement of coal power plants enters
phase two
Nuclear power plants generating up to 8 More nuclear power plants are in use
gigawatts are in use

Demand side Demand side Demand side

Gas is piped to 15.5 million households Gas is piped to 20.5 million households Gas is piped to 23 million households
Induction cookers are used in 15 million Induction cookers are used in 46.6 million Induction cookers are used in 52 million
households households households

Electric cars total 12 million to 13 million Electric cars total 25 million to 27.7 million Electric cars total 44 million to 47 million
Electric motorcycles total 48.5 million to 52 Electric motorcycles total 88.5 million to 95 Electric motorcycles total 128.4 million to
million million 138 million
Electric buses total 388,000 Electric buses total 777,000 Electric buses total 1.3 million
Electric trucks total 1.3 million Electric trucks total 2.7 million Electric trucks total 4.1 million
Gas fuel powers 550,000 cars and 310 ships Gas fuel powers 600,000 cars and 320 ships Gas fuel powers 650,000 cars and 330 ships
Hydrogen trucks total 558,000 Hydrogen trucks total 1.1 million Hydrogen trucks total 1.7 million

Source: DEN presentation in Jakarta on 6 January 2023.

162 Budy P. Resosudarmo, Jahen F. Rezki and Yuventus Effendi

country’s capacity to develop and safely manage nuclear power plants is uncertain
and remains a topic for discussion.
To support the targets outlined in Regulation 79/2014, President Joko Widodo
issued Presidential Regulation 112/2022 in September 2022. This regulation aims to
incentivise the state electricity company, Perusahaan Listrik Negara (PLN), to pri-
oritise the development of renewable power plants while halting the construction
of new coal plants. According to the government, the regulation aims to address
four key points to facilitate this transition (Ministry of Finance 2022a).
First, it details plans for PLN to work with the Ministry of Energy and Mineral
Resources to close coal-fired power plants (CFPPs) early, underscoring the urgent
need for an energy transition. Second, the regulation proposes a more feasible
price-ceiling regime for buying electricity from renewable energy projects, instead
of benchmarking renewable energy against subsidised coal. Third, it outlines the
tender procedures for PLN’s project procurement, encouraging transparency and
fairness in the selection of renewable energy projects. Fourth, the regulation pro-
vides general incentives to support the development of renewable energy projects,
which promotes a favourable environment for their implementation.
However, Presidential Regulation 112/2022 does not address certain challenges
of the energy transition. For instance, it does not specify the funding source for the
early closure of CFPPs. It also does not allow PLN the flexibility needed to increase
electricity prices, which would enable it to purchase electricity from renewable
power plants at a higher rate. Furthermore, the incentives outlined for the develop-
ment of renewable energy projects lack detail, often referring to existing regulations
that are not tailored for renewable power plant development.
Several estimates have been made regarding the funding needed to meet
Indonesia’s energy transition targets by 2060. The Ministry of Finance estimates
that the transition will cost Rp 3,500 trillion ($0.23 trillion) (Bisnis.com 2022), while
BloombergNEF predicts $3.5 trillion (Rp 52,500 trillion) (BloombergNEF 2022). These
estimates underscore the significant amount of funding needed to support the
energy transition.

Past Experiences and Lessons

In recent decades, the prices of renewable technologies have been rapidly declining.
The cost of solar photovoltaic (PV) panels was about $32 per watt in 1980. By 2000,
this price had plummeted to $5.7 per watt. Another notable price drop occurred
while oil prices were high between 2008 and 2013. In this period, the cost of solar PV
panels plummeted from $4.15 per watt to $0.73 per watt. In 2021, the cost of solar
PV panels reached a remarkable low of $0.26 per watt (Our World in Data 2023).
These reduced prices for renewable energy conversion have not only encouraged
countries to commit to carbon emission control but also allowed them to transition
their energy resources to renewable alternatives (IRENA 2022).
Notably, China and India witnessed substantial growth in their renewable elec-
tricity production, including solar power, wind energy and hydroelectric power
sources. China’s renewable electricity generation surged from 223 terawatt hours
in 2000 to an impressive 2,283 terawatt hours in 2021. Similarly, India experienced
a significant increase from 79 terawatt hours in 2000 to 297 terawatt hours in 2021.
Figure 5 illustrates the pace of the energy transition in China, India, Vietnam and
Indonesia since 2000. It shows that Indonesia has fallen behind the three other
countries in adopting renewable power generation.
Prospects of Energy Transition in Indonesia 163

FIGURE 5 Rate of Energy Transition (indexed) in Selected Asian Countries

1,400

1,200

1,000

800
Vietnam
600

400 China India

200
Indonesia
0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

Source: EMBER (https://ember-climate.org/data/data-tools/data-explorer/. Accessed 10 June 2023.

Note: The amount of renewable power generation in all countries was set to 100 in 2000.

According to Burke et al. (2019), there are at least three main reasons for this
slow transition in Indonesia. First, the market position of fossil fuel energy holds
significance in the Indonesian economy. Fossil fuel mining has been a crucial source
of income for the Indonesian government. As a result, the country has been reliant
on fossil fuels, hindering the widespread adoption of renewable energy.
Second, the persistent resistance from the utility sector has made it challenging
for private entities to embrace renewable power generation. The electricity sector
in Indonesia, in particular, has been dominated by the state-owned enterprise
PLN. Over the past decade, PLN has been committed to expanding the electricity
supply in the country, mainly driven by optimistic projections of the country’s
growth. This has led to the construction of CFPPs and the signing of power pur-
chase agreements with private corporations operating coal power plants. The
optimistic predictions of electricity demand, coupled with the government’s pro-
gram, outlined in Presidential Decree 5/2006, to increase the proportion of coal in
the country’s energy sources,3 from 26% of total energy consumption in 2008 to
33% by 2025, has resulted in the development of mainly coal-based power plants
during the past decade (Resosudarmo, Alisjahbana and Nurdianto 2012).
Third, energy (fuel and electricity) subsidies have been prevalent in Indonesia
for some time. The government has exercised control over fuel and electricity
prices, resulting in fluctuating energy subsidies. In 2022, the energy subsidy was
about Rp 134 trillion ($9 billion), which made up about 7% of the government’s
total expenditure or 0.7% of the country’s GDP. To grasp the extent of the energy
subsidy, consider that the price of 92-octane petrol (Pertamax) was Rp 13,300 per
litre in May 2023. In comparison, in May 2023, the prices of 91-octane petrol in
Melbourne, Australia, and 92-octane petrol in Singapore were about A$1.7 (Rp
17,000) and S$2.67 (Rp 26,700) per litre, respectively. Owing to the relatively low

3. All sources of energy including biomass sources such as wood.

164 Budy P. Resosudarmo, Jahen F. Rezki and Yuventus Effendi

FIGURE 6 Composition of Total Energy Consumption in Indonesia

%
100
90
80
70
60
50
40
30
20
10
0
2000 2005 2010 2015 2020
Coal Oil Gas Geothermal Hydro, solar and wind
Biofuel and biogas Biomass and others

Source: Handbook of Energy and Economic Statistics of Indonesia, Ministry of Energy and Mineral Resources
(https://www.esdm.go.id/en/publication/handbook-of-energy-economic-statistics-of-indonesia-heesi).

domestic prices of fuel, Indonesians have been less motivated to consume non-
renewable energy more efficiently or to adopt renewable alternatives.
In the case of electricity, the government allocates the electricity subsidy to
PLN based on the expected deficit of the company each year. This deficit arises
owing to the government’s control over the price of electricity sold by PLN, which
is typically lower than global electricity prices. To minimise the magnitude of the
subsidy, both the government and PLN are strongly motivated to seek the most
cost-effective energy sources for their power plants. In the past two decades, coal
has been the preferred choice for the country, as it has been the cheapest energy
source available.
Therefore, it is not surprising that fossil fuels have dominated Indonesia’s
energy consumption for a considerable period. Figure 6 breaks down Indonesia’s
total energy consumption. Note the significant growth of non-renewable resources,
particularly coal, between the early 2000s and mid-2010s. As of 2020, renewa-
bles—including geothermal energy, biofuel, solar power, wind energy and
hydroelectricity—made up less than 10% of the total energy consumption, with
solar power and wind energy contributing less than 1% each. The heavy reliance
on coal raises concerns about its environmental impact. Over the past two decades,
coal has increasingly replaced oil and gas as the primary energy source in the
country. Unfortunately, coal power plants emit more carbon per unit of energy
produced than oil and gas power plants.
Indonesia will likely need to cease its use of coal, seen mostly in electricity
power plants, to meet the NZE targets. CFPPs have had an extensive effect on
Indonesia’s electricity sector. As of 2021, about 61% of Indonesia’s electricity (190
terawatt hours) came from CFPPs. In fact, the percentage generated from coal was
ranked the seventh highest in any country. In contrast, the combined contribution
Prospects of Energy Transition in Indonesia 165

of hydroelectricity, wind energy and solar power made up less than 9%, while geo-
thermal energy and bioenergy sources made up about 10% (Basri and Riefky 2023).
Currently, Indonesia has 86 operational CFPPs with a combined capacity of 40.2
gigawatts. The country is also set to generate about 10 gigawatts of capacity from
CFPPs under construction. Most of the operational CFPPs are in the Java–Bali and
Sumatra regions. As a result, there is a substantial surplus of electrical capacity,
surpassing historical levels. Projections indicate that surplus capacity will continue
until about 2029–30 (Ministry of Finance 2022a; Basri and Riefky 2023).
Moreover, Indonesia’s heavy reliance on coal is closely tied to its economic
sector. State revenue in 2022 increased by almost 103% (year-on-year) compared
with 2021, mainly owing to tax revenue from coal commodities (Basri and Riefky
2023). This dependency on coal poses challenges for Indonesia’s NZE aspirations.
Coal power generation is Indonesia’s second-largest source of emissions, after
deforestation, contributing about 35% of the country’s total emissions of 1,262
gigatonnes of carbon dioxide equivalent in 2020 (Nangoy and Suroyo 2021).
In Indonesia, coal has been an economic pillar as well as a primary energy
source. The many complexities of an energy transition include the capital needed
to transition to renewables, the costs of prematurely closing coal power plants, the
loss of jobs and income, the costs of required institutional changes, the possibly
increased cost of electricity from renewable energy plants, the risk of stranded
assets, and a decrease in tax revenue.
Successful environmental policies have been rare in Indonesia. Among those
perceived as successes were the ‘clean river’ Prokasih program and the Integrated
Pest Management program, as highlighted by Resosudarmo and Irhamni (2008)
and Resosudarmo (2012). These initiatives were implemented in the early 1990s,
before the 1997–98 Asian financial crisis. Despite their initial success, the programs
remained localised and could not be easily scaled up to the national level. The effec-
tiveness of the programs soon waned and they faced further setbacks during the
financial crisis. Perhaps the most significant climate change policy in the country’s
history was seen in 2015, when the government reduced energy subsidies from
about Rp 276 trillion to Rp 65 trillion (Resosudarmo and Kosadi 2018). Since then,
however, the subsidy has gradually increased again.
Resosudarmo (2012) argues that three important lessons arise from past
environmental policies in Indonesia. First, the successful implementation of envi-
ronmentally friendly policies in Indonesia requires unwavering political support
from the highest authority; namely, the president and presidential office. Without
such support, the influence of conflicting interests within the country can hinder
the implementation. Second, a strong knowledge base and strong connections to
international research communities are typically necessary to ensure successful
implementation. The unique structure and diversity of Indonesia’s society and
environment demand specific knowledge to make such policies work. Third, when
the economy is struggling, environmental concerns tend to take a backseat. In other
words, for the implementation of these policies to be successful, the country’s
economy needs relatively high and stable growth.4

4. This contradicts what is known in Indonesia as the Sadli law: ‘good times make for bad
policy, and bad times make for good policy’ (Patunru and Rahardja 2015).
166 Budy P. Resosudarmo, Jahen F. Rezki and Yuventus Effendi

ENERGY TRANSITION INITIATIVES

Currently, the government is preparing to introduce or promote several initia-
tives, including the ETM Country Platform, the JETP-Indonesia, carbon-pricing
and market mechanisms, and electric vehicle development. This section aims to
provide a comprehensive review of these four initiatives.

Energy Transition Mechanism Country Platform

The ETM Country Platform is a partnership program aimed at improving energy
infrastructure and accelerating the transition towards NZEs by 2060 or earlier. The
government launched the ETM Country Platform during COP26 in 2021. As part of
the ETM Country Platform, two key mechanisms will be used: the early retirement
of CFPPs and the facilitation of investment in renewable power plants (IEA 2022c).5
The ETM Country Platform is also expected to establish a steering committee, with
ministry representatives and the country platform manager. This committee will
be responsible for setting objectives, establishing targets and approving financial
instruments at the project level.
To implement the platform, as outlined in Ministry of Finance Decree 275/
KMK.010/2022, PT Sarana Multi Infrastruktur (PT SMI) will develop and manage
a blended finance fund, which includes funds from the state budget and other
non-public sources, such as donors, philanthropies, bilateral and multilateral
institutions, and private investors. PT SMI will also provide financial de-risking
instruments for CFPP early retirement projects. PT SMI will then connect this
blended finance fund with PLN and independent power producers to accelerate the
retirement of their CFPPs. Additionally, as mandated under the decree, PT SMI will
conduct a study on the funding support needed for the platform and will develop
the blended finance concept to attract more non-public funds (PT SMI 2022).
Since February 2023, PT SMI has approached many possible partners for the
ETM Country Platform in Indonesia (PT SMI 2023). In response, the ADB—in
collaboration with the Indonesian government, Islamic Development Bank and
the World Bank Group—has launched financial facilities in the form of soft loans
(Uly 2022). This partnership is significant as it has produced $500 million, with
the potential to attract up to $4 billion in soft loans. These funds are intended to
accelerate the early retirement and transformation of CFPPs. Additionally, the col-
laboration is preparing financial facilities to support the upgrade of power plants
and electricity networks as a key part of the ETM initiatives (Mawangi 2022).
As per the DEN roadmap for the energy transition, the first CFPP earmarked
for early retirement is Cirebon 1. Run by PT Cirebon Electric Power in West Java,
this power plant has a capacity of 660 megawatts and began commercial operation
in 2012. If agreed upon, Cirebon 1 would be retired by 2042, the end of its power
purchase agreement (PPA) with PLN. This would effectively shorten its life by
10–15 years (Lawder 2022). The cost to retire Cirebon 1 early is estimated to be
between $250 million and $300 million (Nurbaiti 2023). Why the plant cannot retire
much earlier than 2042, the year its PPA ends, remains unclear. By that time, the
output of Cirebon 1 might already struggle to compete with electricity generated
by new renewable power plants. Consequently, PLN would have good reason to
stop buying electricity from Cirebon 1. Note that, at the time of writing, no formal

5. See https://fiskal.kemenkeu.go.id/fiskalpedia/2022/11/10/21-energy-transition-mechanism.
Prospects of Energy Transition in Indonesia 167

agreement had been signed between PT Cirebon Electric Power and PLN regard-
ing the retirement of Cirebon 1.
The ETM Country Platform faces several challenges. Chief among them is a
lack of grant funding from donors or philanthropists for the program. Investors in
particular are generally more interested in the development of renewable power
plants, which offer promising future returns. According to the Institute for Essential
Services Reform (IESR 2022), investment in renewables in Indonesia has increased
significantly compared with other sectors in recent years. From the first quarter
of 2022 to the third quarter of 2022, the total investment in renewables was about
$1.35 billion (or about 14% of the total investment during this period).
Conversely, investing in the early retirement of CFPPs does not offer promis-
ing returns. Parties involved in CFPP operations are reluctant to give up their
expected profits. CFPP operators would be more inclined to participate in early
retirement initiatives if they received compensation for the profits they would have
earned from operating their CFPPs. Blended finance entities could provide this
compensation for the forgone expected profits but would also expect a commercial
return on their investment. While some entities, such as multinational development
institutions, might be open to offering softer loans with slightly lower returns, it
is important to note that this may not be sufficient.
Achieving returns on investment from retiring CFPPs will be challenging for
the blended finance institutions unless affirmative policies are implemented, such
as tax exemption schemes, policies to lower the cost of capital (Crystallin and
Ishikawa 2023) or other government subsidies. Additionally, PLN’s electricity
prices are regulated. Higher returns could be achieved by letting PLN sell its elec-
tricity at the prices set by the global market, which would increase the price of
electricity in Indonesia. Any increase in electricity prices, however, could have
political implications.
Another challenge for the government is coordinating the efforts of multiple
agencies to secure the blended funds and to facilitate the early retirement of
CFPPs—a significant and intricate undertaking (Basri and Riefky 2023). Relying
solely on PT SMI to manage these complex tasks may not work. The right
approach to coordinating private agencies and government entities remains
unclear. However, the government may need to establish an institution within
the presidential office.
Last, the early retirement initiative for CFPPs has not yet generated any
income through the international carbon market. This is mainly because the
UNFCCC has set no approved method to verify the scale of emission reductions
for this case. Nevertheless, the Indonesian government has been advocating for
a carbon verification method for this initiative. In a significant step forward, the
government successfully included the sale of carbon credits resulting from CFPP
retirement in the revised version of the ASEAN Taxonomy for Sustainable Finance,
released in March 2023 (Crystallin and Ishikawa 2023). This publication plays a
crucial role as a shared foundation that facilitates a smooth transition and encour-
ages the adoption of sustainable finance practices among member states of the
ASEAN region. The final decision on this matter rests with the United Nations.

Just Energy Transition Partnership

At the Group of Twenty (G20) Leaders’ Summit in Bali in late 2022, the Indonesian
government and the International Partners Group (IPG) entered a partnership
168 Budy P. Resosudarmo, Jahen F. Rezki and Yuventus Effendi

supporting ambitious new targets for Indonesia’s energy transition. Specifically,

the JETP-Indonesia aims to achieve an NZE power sector in Indonesia by 2050
and a 34% renewable energy share in the sector by 2030. To achieve this, the
JETP-Indonesia prioritises activities like those of the ETM Country Platform. The
partnership advocates for a freeze on plans for on-grid CFPPs, as outlined in the
national Electricity Supply Business Plan (RUPTL) for 2021–30, and a moratorium
on new on-grid coal power generation as per Presidential Regulation 112/2022. It
facilitates the growth of a robust and competitive manufacturing sector for domestic
renewable energy. It acknowledges the significance of identifying and supporting
vulnerable segments of the population, especially workers in the coal industry
and related occupations, with a specific focus on women, youth and other groups
disproportionately affected by the transition. Finally, the JETP-Indonesia aims to
collaborate with financial institutions to unlock substantial investment opportu-
nities for achieving an NZE economy in Indonesia (European Commission 2022).
To achieve these targets, the JETP-Indonesia secretariat will coordinate the
mobilisation and deployment of an initial $20 billion in public and private financ-
ing over three to five years. From this $20 billion, the IPG members aim to mobilise
at least $10 billion in private funding by working with the Indonesian government
and as part of the Glasgow Financial Alliance for Net Zero. This will include fund-
ing from the Bank of America, Citi, Deutsche Bank, HSBC, Macquarie, MUFG and
Standard Chartered, through commercial loans. The availability of private sector
funds will depend on the presence of catalytic public finance and collective ambi-
tion from all parties involved, including increased engagement from multilateral
development banks. It is expected that the remaining $10 billion, provided by
public sector finance, could attract a significantly larger amount of private finance.
In February 2023, the Indonesian government, along with the co-leads of the
IPG, established the secretariat for the JETP-Indonesia. The secretariat, within
the Ministry of Energy and Mineral Resources and supported by the ADB, will
coordinate the internal and external stakeholders involved in the JETP, includ-
ing communication, collaboration and activities (US Embassy and Consulates in
Indonesia 2023).
However, the strategy for implementing the JETP-Indonesia remains uncer-
tain. Besides facing challenges like those faced by the ETM Country Platform, the
JETP-Indonesia has not benefited from clear announcements about the financial
contributions of the other IPG members, except for the United Kingdom’s $1 bil-
lion through the World Bank’s loan programs (GOV.UK. 2022). It is crucial to
have transparent and explicit commitments in terms of public funding as it plays
a critical role in enabling the refinancing of essential programs, such as the early
retirement of CFPPs. Proper sequencing of activities is vital for the effectiveness of
JETP-Indonesia. Without initiating the retirement of CFPPs as a first step, it will be
challenging for Indonesia to achieve its goal of a NZE power sector by 2050. Public
funding also acts as a catalyst for attracting private finance, making it imperative
for successful implementation.
Furthermore, the government must overcome the persistent challenge of regu-
lation uncertainty and low institutional quality, which continue to hinder foreign
investment in the country. Doing so will trigger greater investment in sectors
related to the energy transition and allow the government to implement the JETP-
Indonesia programs effectively. At the same time, the government needs to reform
key regulations and policies. This should include a revision of the local content
Prospects of Energy Transition in Indonesia 169

requirement for investment projects in the country, a reduction or elimination

of fossil fuel subsidies, and the creation of a competitive market in the electricity
sector to enhance its efficiency. The reforms should also include addressing the
existing monopoly held by PLN in electricity distribution and the government’s
control over electricity prices. However, the likelihood and timeline of these essen-
tial reforms in the near future remain uncertain. Thus, Indonesia might not receive
the necessary investment to achieve its target.
The experience of JETP-South Africa highlights the difficulties that may be
encountered by Indonesia during the implementation of JETP-Indonesia. In South
Africa, poor transparency and public participation led to tension between civil soci-
ety and the government (IESR 2022). The likelihood of success for JETP-Indonesia
is uncertain without strong partnerships between the government, private sectors
and civil society. Note that the energy transition may result in job losses in non-
renewable sectors, but it can create new employment opportunities in renewable
sectors. This transition could lead to winners and losers, underscoring the signifi-
cance of collaboration to ensure the program’s effective execution.

Carbon Market and Pricing

Indonesia has taken significant steps towards establishing an emissions-
trading system (ETS). The process began with the enactment of Law 32/2009
on Environmental Protection and Management. Subsequently, Government
Regulation 46/2017 on Environmental Economic Instruments was introduced,
which mandates that any party or activities causing pollution or environmental
damage must contribute to environmental guarantee funds. These funds are then
used by the government to restore the quality of the damaged or polluted environ-
ment. Building upon these regulatory foundations, Presidential Regulation 98/2021
on Carbon Economic Value was enacted in 2021. This regulation establishes a
national framework for carbon-pricing instruments, including the implementation
of an ETS in Indonesia.6
The key approach employed within the ETS to reduce emissions is as follows.
The government, first, establishes a predetermined level of permissible carbon
dioxide emissions for a certain entity, referred to as the baseline. Entities that emit
below the baseline are permitted to sell their surplus emission allowances to enti-
ties that exceed the baseline. This system is known as a baseline-and-credit ETS.
To promote these carbon-trading activities, entities whose emissions surpass the
current baseline will be subject to a carbon tax. This carbon tax is regulated under
Law 7/2021 on the Harmonisation of Tax Regulations and must be set higher than
the highest price of carbon in the ETS. It is imposed on emissions that exceed the
established baseline. Therefore, the overall strategy of the ETS can be summarised
as ‘baseline, trade and tax’. It is important to note that this tax serves as an incen-
tive to enhance energy efficiency.
The government has implemented a step-by-step approach to the ETS and tax
system strategy. In 2021, from March until August, a voluntary intensity-based

6. The Minister of Environment and Forestry issued Ministerial Regulation 21/2022 on the
Guidelines of Carbon and Economic Value Implementation, which provides specific guide-
lines for achieving a net emissions reduction in the forestry sector. However, this paper does
not cover the developments in the forestry sector.
170 Budy P. Resosudarmo, Jahen F. Rezki and Yuventus Effendi

pilot program was done in the power generation sector. This pilot involved 32
facilities, representing more than 75% of emissions from the power sector, with an
average carbon price of $2 per tonne of carbon dioxide. The objective of the pilot
was to familiarise stakeholders with ETS compliance and offset mechanisms, and
it provided valuable insights for the development of the mandatory national ETS.
During this pilot project, 18 CFPPs participated as sellers, while the remaining 14
CFPPs took on the role of buyers in the emission-trading process (Andriansyah
and Hong 2022).
Building on the lessons learned from the pilot project, the Ministry of Energy
and Mineral Resources issued Ministerial Regulation 16/2022, which outlines the
procedures for setting the economic value of carbon in the power generation sub-
sector. Subsequently, in February 2023, the ministry launched the first phase of
the ETS in the Indonesian energy sector, which is a mandatory intensity-based
emissions-trading system for CFPPs with a capacity of more than 100 megawatts.
This initial phase of the ETS covers 99 CFPPs, which generate more than 81% of
the country’s national power (ICAP 2023). Out of these facilities, 55 belong to the
state-owned utility PLN, while the rest are owned by independent power produc-
ers. The emissions cap for CFPPs at mining sites is expected to be 1.089 tonnes
of carbon dioxide equivalent per megawatt hour. For CFPPs producing between
100 megawatts and 400 megawatts that are not situated at mining sites, the cap
is expected to be 1.011 tonnes of carbon dioxide equivalent per megawatt hour.
CFPPs with a capacity higher than 400 megawatts are expected to have a cap of
0.911 tonne of carbon dioxide equivalent per megawatt hour (CNBC Indonesia 2023).
The second phase is scheduled for launch in 2025, and the third in 2028. These
phases aim to incorporate oil and gas-fired power plants, as well as CFPPs not con-
nected to PLN’s grid, into the domestic carbon market. Additionally, in January
2023, Law 4/2023 on Financial Sector Development and Strengthening was enacted.
This law gives Indonesia’s Financial Services Authority (OJK) the responsibility of
managing and supervising carbon market trades in Indonesia. The OJK has been
tasked with developing regulations to ensure adherence to international carbon-
trading practices, which include carbon certification procedures.7
If these trades are limited to domestic entities, Indonesia can easily assess
its success in reducing emissions and meeting its NDC targets. This reduction,
coupled with the subsequent implementation of a carbon tax, will contribute to
Indonesia’s progress towards achieving NZEs by 2060. However, domestic carbon
trades alone might not generate sufficient funding for Indonesia’s energy transition.
International funding will most likely be needed. Currently, much of the fund-
ing associated with the ETM Country Profile and JETP-Indonesia, when received,
comes in the form of loans. When the Indonesian carbon market becomes inter-
connected with the international carbon market, funds could come from the latter.
However, selling emission rights abroad might not count towards Indonesia’s
NDC achievements.
Besides the complexity of determining whether carbon trading can effectively
fulfil our commitments for NZE by 2060 and attract foreign capital to fund the
energy transition, there are several fundamental challenges in implementing a

7. While this paper was being written, OJK was still preparing the regulation for the carbon
market in Indonesia.
Prospects of Energy Transition in Indonesia 171

carbon market and tax in the country. First, the OJK has not yet developed the
necessary regulations to initiate the carbon market in Indonesia. It remains to be
seen whether these regulations will effectively facilitate carbon trading and prevent
trade manipulation, such as carbon washing or false claims of conducting offset
services that appear ecologically friendly but are not truly so.
Second, determining the appropriate size of the carbon baseline per entity for
the carbon market and carbon tax has traditionally posed challenges. If the base-
line is set too high or too low, CFPP operators may not respond as expected, and
the same applies to carbon tax rates. Understanding the true transaction costs for
CFPP operators participating in carbon trades is crucial for setting appropriate
levels of the carbon baseline and carbon tax. Another important consideration is
establishing clear procedures and mechanisms for regularly adjusting the levels
of the carbon baseline and carbon tax.
Third, the issue of carbon washing must be effectively addressed. It is imper-
ative to establish stringent regulations that enhance the competence of carbon
assessors, enabling them to prevent and detect carbon-washing activities. In a
country where monitoring and evaluation processes are not robust, the occurrence
of carbon-washing activities could have significant implications. Thus, prioritising
the development of strong regulations and robust monitoring systems is essential
to ensure the integrity and credibility of the carbon market.

Electrical Vehicles
On the demand side of energy, the Indonesian government is taking steps to estab-
lish a comprehensive program for domestic electric vehicles. The program aspires
to have 2 million electric cars and 13 million electric motorbikes on the roads by
2030. Meanwhile, PLN aims to establish 7,146 plug-in charging stations and 15,625
battery-swapping stations by 2030 (IESR 2022). By early 2023, about 50,000 electric
vehicles were estimated to be in the country. Meanwhile, as of 2022, Indonesia had
439 plug-in charging stations and about 961 battery-swapping stations. About 52%
of the charging stations were owned by PLN. These numbers fall well short of the
government’s targets (Setiawan 2023).
To further stimulate demand for electric vehicles, the government introduced
two key policies in 2022. First, Presidential Instruction 7/2022 was issued, aiming
to promote the use of electric vehicles for official government vehicles. Second,
Ministerial Regulation 15/2022 was enacted, expanding the scope for vehicle con-
version into electric vehicles beyond just two-wheelers.
To produce high multiplier effects in the country, the government aims to
develop a robust supply chain for electric vehicles, covering various aspects, from
mining and processing battery metals to manufacturing electric vehicles and
recycling batteries (IEA 2022c).8 This target is a key component of the National

8. Regarding electric vehicle batteries, the government has set an ambitious target to pro-
duce batteries with an annual capacity of 140 gigawatt hours by 2030. One-third of this
capacity will be allocated for export, while the remaining two-thirds will cater to the grow-
ing domestic demand. To achieve this goal, the government has established the Indonesia
Battery Corporation, which is a joint venture involving four state-owned enterprises:
Pertamina, PLN, Mind ID and Antam. Each of these enterprises holds a 25% stake in the
corporation, ensuring their active involvement in the battery production sector (IEA 2022b).
Recognising Indonesia’s position as the largest global producer of nickel, the government
172 Budy P. Resosudarmo, Jahen F. Rezki and Yuventus Effendi

Grand Energy Strategy, which was unveiled during the G20 summit in Bali in
2022. To support this initiative, the government has taken several measures. First,
it implemented Presidential Regulation 55/2019, which focuses on battery electric
vehicles. This regulation, along with a government roadmap for battery electric
vehicles, outlines specific targets for the local production of low-carbon vehicles,
including battery electric vehicles, plug-in hybrid vehicles, flex-fuel engines and
low-cost green cars. To further incentivise the local production of electric vehicles,
the Ministry of Finance introduced Ministerial Regulation 38/2023. From 1 April
2023, this regulation will ensure a reduction of 1%–11% in the value-added tax
for sales of electric vehicles made from at least 40% local materials (Rayanti 2023).
Crucially, these regulations to help develop the domestic supply chain for
electric vehicles must not discourage local industries from becoming globally com-
petitive. For example, because of the current export ban on nickel, Indonesia could
miss an opportunity to increase foreign income, and instead develop uncompetitive
nickel-processing industries.9

CONCLUSIONS
Among the world’s top 10 carbon emitters, Indonesia has a responsibility to help
reduce global emissions and limit the increase in the global temperature to a maxi-
mum of 1.5 degrees Celsius above pre-industrial levels. To do this, the government
has submitted its NDCs to the United Nations, committing to achieve NZEs by 2060.
However, as a lower-middle-income country with limited government budgets and
ambitious plans to attain high-income status by the early 2040s, Indonesia faces
significant challenges in meeting these goals. This paper analyses the prospects and
feasibility of the government fulfilling its commitments, considering the complex
economic and developmental context of the country. This paper focuses solely on
analysing Indonesia’s commitment to the energy sector.
The Indonesian economy has shown strong signs of recovery from the shock
of the Covid-19 pandemic. Such a recovery would provide a favourable environ-
ment for the capital-intensive reform required for an energy transition. There are,
however, still threats and challenges that need to be addressed. Geoeconomic frag-
mentation, if not properly managed, could negatively affect global trade volume
and, consequently, the Indonesian economy. An end to the commodity boom could
slow the country’s GDP growth and reduce fiscal revenue.
Historically, Indonesia has not placed a high priority on developing its renew-
able energy sector or increasing the share of renewable energy in its total energy
supply. Instead, the country has heavily relied on its oil, gas and coal resources to
meet its energy needs. As a result, the contribution of renewables to Indonesia’s
energy supply has remained below 10%. Transitioning to a greener energy system
poses significant challenges for Indonesia, owing particularly to its well-established,
non-renewable energy industries. Other challenges include the need for substantial

aims to capitalise on the abundance of the resource. The objective is to attract foreign invest-
ment in nickel processing, which adds value to the mined nickel ore—a vital component in
the majority of electric vehicle batteries today, along with cobalt.
9. For example, see the impact of a log export ban for the development of the plywood
industry, in research by Resosudarmo and Yusuf (2006).
Prospects of Energy Transition in Indonesia 173

capital investment in renewable energy infrastructure, the costs associated with

prematurely closing coal power plants, the potential job and income losses, the
potential increases in the cost of electricity generated from renewable energy plants,
the expenses related to necessary institutional changes, the risk of stranded assets,
and the possible decrease in tax revenue.
To address these challenges, the government has implemented several ini-
tiatives. On the energy supply side, the government, in collaboration with the
international community, has launched Indonesia’s ETM Country Platform and
the JETP-Indonesia. These initiatives aim to mobilise financial resources to sup-
port the phase-out of CFPPs and accelerate the development of renewable energy
projects. However, most of these international financial resources come in the
form of loans, which require positive returns on investment. The heavily regulated
electricity sector, characterised by a monopoly in power distribution, presents chal-
lenges in finding additional returns on investments. Moreover, weak institutional
quality and regulatory uncertainty in the country may discourage international
finance institutions from investing their resources. The availability of sufficient
international funds through these initiatives remains uncertain and will depend
on various factors.
An ETS, combined with a carbon tax, is another way to gather the interna-
tional finance needed to transition the county’s energy supply. The strategy can
be summarised as ‘baseline, trade and tax’. Although promising, Indonesia has no
experience in organising this activity. Strong regulations and robust monitoring
systems are essential to ensure the integrity and credibility of the carbon market.
On the demand side, the Indonesian government has implemented programs
to promote electric vehicles. Measures such as the reduction of the value-added
tax on electric vehicles made from at least 40% local content have been introduced,
along with the development of electric vehicle infrastructure. However, the lack of
sufficient infrastructure remains a significant challenge in achieving the country’s
targets for electric vehicle adoption.
Despite these challenges, the government’s determination to launch various
energy transition initiatives, and the relative stability of the economy present
opportunities for progress. However, meeting ambitious energy transition targets
will require addressing long-standing challenges, such as the lack of capital and
knowledge, low institutional quality, rigidity in conducting policy reforms and
regulatory uncertainty. It is likely that Indonesia could make significant progress
in its energy transition, but the probability of achieving the NZE by 2060, at the
moment, seems rather low. Maintaining program consistency and monitoring
progress, while considering flexibility in target implementation, may be crucial.

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