Although Indonesia has abundant resources, it still struggles to push the development of renewable energies such as wind and solar. Despite the official political goal of supplying 23 percent of energy from renewable sources by 2025, the actual expansion of the grid of renewables is progressing rapidly and accounts for only a small fraction of total electricity generation.
As I mentioned in a recent article in The Diplomat, there are many reasons for this, but perhaps the most important is that Indonesia's political economy is heavily dependent on fossil fuels. Not only is coal a major export with strong political and commercial clout, but the state-owned energy company PLN also owns and operates a large number of fossil fuel power plants, which account for around 70 percent of Indonesia's installed capacity. This poses a significant barrier to renewable energy adoption, especially if developed by a private company, as adding more solar power will lose PLN's market share.
In the textbook example of a fully liberalized energy market, the generation and transmission functions would be separated and managed by different entities. In theory, this eliminates the unequal incentives that can develop in vertically integrated structures like PLN, where grid operators also generate most of the electricity. When these functions are separated, grid operators have an easier mandate to invest in grid infrastructure and source the cheapest, most reliable power from a competing group of power generation companies.
But the split will not work in Indonesia because PLN is too strong and too integrated into the market structure. Because of this, schemes centered around private renewable energy developers selling their electricity to PLN have not been very successful. Left alone, this market mechanism has struggled to be effective given the political economy of Indonesia's energy sector.
All of this begs the question, did something work? A large solar farm currently under construction, the first of its kind in Indonesia, may provide some answers.
The Cirata solar field in West Java is scheduled for completion in 2022, according to the Institute of Energy Economics and Financial Analysis (IEEFA). The 1.8 trillion rupiah (about US$126 million at current exchange rates) factory is due to be completed. It will eventually have a capacity of 145 MW, making it the largest utility-scale and grid-scale solar project in Indonesia to date. PLN agreed to buy the electricity produced by the plant at 5.8 cents per kilowatt-hour, which is within the range paid by coal-fired power plants. In other words, buying electricity from a coal-fired power plant at PLN is just as expensive as that power plant, negating one of coal's supposed advantages, namely its low cost. If things could be priced by supply and demand, here we would see a clear path for solar power to replace coal, because as it gets cheaper, PLN will buy more to reduce operational costs.
But that's not what we're seeing, and things will get really interesting when we see who's going to lead the project. PT PJB Masdar Solar Energi, the developer, is a joint venture between an Abu Dhabi company and a subsidiary of PLN. As a grid operator, PLN has signed a contract to purchase solar energy produced by a company that is also a shareholder. You probably won't find that in a book on efficient market design, but given the incentive structures that actually exist in the Indonesian energy market, this is arguably the most realistic path for solar energy in the short term.
Either PLN participates as an equity partner in the production of renewable energy, or Indonesia's solar and wind energy will continue to weaken. And it seems that's a reality that some big companies are beginning to accept. Sembcorp Industries Singapore recently announced plans to build a solar farm near Batam, from which Singapore will import electricity. The projects will be developed in cooperation with PLN's Batam branch, replicating the structure of the Cirata Agreement and making the state-owned energy company an active partner in the company.
Free market purists won't like it, but I think if Indonesia is serious about solar and other renewable energies, more deals should follow a similar model and give PLN some financial incentives to get involved in the project. Fertility. Alternatively, the country's renewable energy ambitions could stall for some time.
