The Country of Perpetual Potential: Indonesia’s Barriers in Renewable Energy Transition

Indonesia, with a renewable energy potential of 3,692 GW, is among the most resource-rich countries in the world for sustainable energy development. However, between 2020 and 2023, renewable energy usage increased only from 2% to 3%. This accounted for approximately 14.5% of the nation’s electricity generation, which falls short of the 23% target set for 2025.^[1] This paradox of abundance and underutilization highlights systemic barriers that prevent investment and development in renewable energy.

Indonesia is under increasing pressure to fulfill its climate commitments under the Paris Agreement while navigating an international energy transition. With coal comprising 60% of its energy mix^[2], the nation stands at a critical crossroads where inaction could jeopardize both its environmental goals and economic competitiveness. A recent paper by Halimatussadiah et al. (2024) highlights how persistent subsidies and policy misalignments obstruct the transition to renewable energy. This research is timely, as it outlines the barriers to renewable energy procurement in Indonesia by examining challenges related to policy decisions, institutional frameworks, and economic dependencies. Furthermore, the study pinpoints these challenges and provides policymakers and renewable energy advocates with specific action items to tackle systemic barriers and accelerate progress toward renewable energy objectives.

This study uses a rigorous qualitative approach, combining grounded theory techniques with insights from 17 semi-structured interviews and a focus group discussion. The researchers engaged diverse stakeholders, including policymakers, financiers, developers, and energy sector experts, to comprehensively explore Indonesia’s renewable energy procurement challenges. Most interviews were conducted in Bahasa Indonesia, and the data was systematically coded and analyzed using NVivo software.

Halimatussadiah et al. (2024) developed their framework based on studies of the African energy sector that analyzed the barriers and enablers of renewable energy investments in different contexts across Africa. These studies focused on identifying systemic issues at the macro level (country), institutional inefficiencies at the program level, and risks such as financing and land acquisition challenges at the project level. By adapting this framework, the authors align Indonesia’s renewable energy landscape with established methodologies for diagnosing and addressing investment bottlenecks in developing countries.

Country-Level Barriers

The authors identify fossil lock-in as the main obstacle at the country level. Indonesia’s coal sector benefits from policies such as the Domestic Market Obligation, which requires that 25% of coal production be designated for domestic use, and the Domestic Price Obligation, which caps the price of coal for power generation at $70 per ton. ^[3] These policies, combined with the influence of extensive political networks, reduce the cost competitiveness of renewable energy. Regulatory uncertainty, resulting from frequent policy changes and misalignment between national energy policies (KEN) and electricity master plans (RUPTL), ^[4] further complicates long-term investment planning. The study also highlights a significant gap: while fossil fuel subsidies maintain coal dependence, no comprehensive mechanism has been established to redirect these subsidies toward renewable energy. This policy shift could transform the investment landscape.

Program-Level Barriers

At the program level, Perusahaan Listrik Negara (PLN), Indonesia’s state-owned electricity company, serves as both the exclusive off-taker of electricity and the primary entity responsible for electricity procurement, creating inherent conflicts of interest in its dual role as producer and regulator. Non-transparent bidding processes, post-award price renegotiations, and insufficient procurement volumes weaken investor confidence. ^[5] For instance, the procurement process lacks a standardized timeline, which creates uncertainty regarding project feasibility. The pricing mechanism, linked to PLN’s cost benchmarks derived from coal, further discourages renewable energy investment.

Project-Level Barriers

Challenges at the project level include unclear land acquisition and permitting processes, inadequate grid infrastructure to connect renewable energy projects to demand centers, and unbalanced risk-sharing in Power Purchase Agreements (PPAs). For instance, developers frequently encounter delays due to overlapping land rights and bureaucratic obstacles. Furthermore, PLN’s demand for equity shares in projects without taking on proportional risks, such as financial liabilities during cost overruns or operational issues, deters private investment.

Indonesia’s ambitious renewable energy targets, which aim for 23% capacity by 2025, are undermined by systemic barriers such as fossil fuel subsidies, PLN’s monopolistic structure, and inefficient procurement processes. These challenges not only hinder progress toward renewable energy goals but also jeopardize Indonesia’s global climate commitments and competitiveness. ^[6] Addressing these issues requires dismantling entrenched coal interests, breaking the fossil fuel lock-in, and reforming procurement and institutional frameworks.

Indonesia is at a pivotal point in its energy transition journey. Beyond to policy reforms and institutional restructuring, the nation must foster a culture of accountability and innovation within its energy sector. Policymakers should concentrate on removing obstacles and creating a collaborative ecosystem that encourages public-private partnerships and local community involvement.

As a nation abundant in renewable resources, Indonesia has the chance to emerge as a regional leader in clean energy by aligning its economic goals with sustainable development objectives. This necessitates bold leadership to redefine renewable energy as not merely a climate necessity but as an economic driver capable of generating jobs, enhancing energy security, and propelling long-term prosperity. By adopting this vision, Indonesia can move beyond its reliance on fossil fuels and unlock its potential as a renewable energy leader.

 

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^[1]Mutya Yustika, “The Dark Cloud Over Indonesia’s Pledge to Achieve Net-Zero Emissions by 2060,” Institute for Energy Economics and Financial Analysis, February 13, 2024, https://ieefa.org/resources/dark-cloud-over-indonesias-pledge-achieve-net-zero-emissions-2060.

^[2] Energy Observer, “Indonesia Energy Mix: Coal,” accessed January 18, 2025, https://www.energy-observer.org/resources/indonesia-energy-mix-coal.

^[3] Richard Bridle, Anissa Suharsono, and Mostafa Mostafa, Indonesia’s Coal Price Cap: A Barrier to Renewable Energy Deployment (Winnipeg: International Institute for Sustainable Development, May 2019), https://www.iisd.org/gsi/.

^[4] Kebijakan Energi Nasional (KEN) is the Indonesia’s national energy policy. Rencana Usaha Penyediaan Tenaga Listrik (RUPTL) is the new electricity procurement business plan made by the Ministry of Energy and Mineral Resources.

^[5] Natalie Heng, “Beyond Technical Fixes,” Inside Indonesia, October 2020, https://www.insideindonesia.org/editions/edition-142-oct-dec-2020/beyond-technical-fixes.

^[6] World Bank, Indonesia Country Climate and Development Report (Washington, DC: World Bank, 2023), https://www.worldbank.org/en/country/indonesia/publication/indonesia-country-climate-and-development-report.