Indonesia’s Energy Transition
Opportunities for ASEAN’s 2023 Chair
Hakimul Batih assesses Indonesia’s important commitments and leadership roles in 2022, considers upcoming opportunities for Indonesia to continue these efforts in 2023 as ASEAN chair, and examines specific domestic policies that it is undertaking to achieve its goals in the energy transition.
This year will be crucial for Indonesia to increase its presence and leadership in the global community to help mitigate the impacts of climate change. Its role as chair of the Association of Southeast Asian Nations (ASEAN) in 2023 provides an opportunity for the country to build on the momentum of its presidency of the G-20 in 2022 and its participation at the 27th UN Conference of the Parties (COP27). As the fourth-largest country by population, the fourth-largest producer of coal, and Southeast Asia’s largest economy, Indonesia is well-positioned to set priorities for limiting global warming to 1.5°C. This commentary assesses its important commitments and leadership roles in 2022, considers upcoming opportunities for Indonesia to continue these efforts in 2023 as ASEAN chair, and examines specific domestic policies that it is undertaking to achieve its goals in the energy transition.
INITIATIVES FROM 2022
G-20 presidency. Indonesia’s G-20 presidency in 2022 took the theme “Recover Together, Recover Stronger” and included a focus on sustainable energy transitions. Acknowledging its leadership role among G-20 members, which represent the world’s largest group of energy consumers and producers, Indonesia is aware of the importance of simultaneous transitions within the broader energy space. Energy transitions should be clean, sustainable, just, affordable, and inclusive, but each transition must also accommodate the different situations of each member country.
On the energy track, represented by the Energy Transition Working Group, Indonesia’s presidency aimed to strengthen global sustainable energy systems and just transitions by (1) expanding energy access, with a focus on clean cooking, electrification, and small island countries, (2) escalating the implementation of clean technologies, and (3) intensifying energy transition financing. To do so, Indonesia implemented a three-pronged approach of (1) taking stock, (2) outlining principles, and (3) articulating a roadmap.
Stocktaking aims to deepen understanding of access, technologies, and financing and provide insights on gaps through a draft that results in clear pathways for accelerating research, development, and demonstration and technology commercialization. The findings of stocktaking will be used to outline and define the G-20 principles known as the Bali Compact.
The Bali Compact lays out a set of inclusive voluntary principles for G-20 members, as well as for countries outside the G-20, to ensure smooth and effective transitions under national circumstances and priorities. Some of the highlighted principles include enhancing energy security, market stability, and affordability; scaling up innovative, affordable, smart, low, and net-zero emissions technologies; and collaborating on mobilizing all sources of financing to help achieve the goals of the 2030 Agenda for Sustainable Development and the Paris Agreement.
Finally, the Bali Roadmap charts a path for the clean energy transition that reflects the differing national circumstances, needs, and priorities of G-20 members as they strive to lower net emissions to achieve carbon neutrality by or around midcentury. On the sidelines of the G-20 summit in November, Indonesia and the International Partners Group (IPG) launched the Just Energy Transition Partnership to mobilize $20 billion in funding to help Indonesia implement its decarbonization efforts. IPG member countries contributed $10 billion, while the rest will be mobilized through private funding by the Glasgow Financial Alliance for Net Zero.
COP27. Another strong signal of Indonesia’s leadership on climate change was its decision to revisit and strengthen its nationally determined contribution (NDC) target to align with the Paris Agreement temperature goal by the end of 2022. Indonesia submitted its enhanced NDC in September 2022, increasing its emission-reduction target from 29% to 31.89% unconditionally and from 41% to 43.2% conditionally. This enhanced NDC is an important step in the transition toward Indonesia’s second NDC, which will be aligned with the Long-Term Strategy for Low Carbon and Climate Resilience 2050 with a vision to achieve net-zero emissions by 2060 or sooner. In the energy sector, this reduction target could be attributed to the following measures:
- implementation of the Electricity Supply Business Plan (RUPTL) that prioritizes renewable energy development
- implementation of minimum energy performance standards for appliances
- a national mandatory biodiesel policy of B20, B30, and B40
- acceleration of the Battery Electric Vehicle Program for Road Transportation
The Sharm el-Sheikh Implementation Plan presented at COP27 states that all countries have recognized that to prevent the temperature rise from exceeding 1.5°C, it is necessary to reduce global greenhouse gas emissions by 43% by 2030, relative to the level of emissions in 2019. Indonesia has already implemented the Glasgow Climate Pact by increasing its target for reducing greenhouse gas emissions in the enhanced NDC. It has also demonstrated how to mainstream domestic policies to align with international commitments. The introduction of a carbon tax, early retirement of coal-fired power plants, and incentives for electric vehicles (EVs) are examples of such efforts.
LOOKING AHEAD: INDONESIA’S ROLE AS ASEAN CHAIR
As ASEAN chair in 2023, Indonesia will adopt the theme “ASEAN Matters: Epicentrum of Growth.” Similar to its approach during the G-20 presidency in 2022, Indonesia defines three “strategic thrusts”: (1) recovery/rebuilding, (2) digital economy, and (3) sustainability. Moreover, it will implement sixteen priorities for economic development, including eight in the energy sector:
- Strengthen the ASEAN Power Grid to support the energy transition and ensure energy security in the region.
- Develop the ASEAN Energy Security Roadmap.
- Stimulate sustainable energy financing and mobilization of energy investments to ensure energy security in the ASEAN region.
- Accelerate EV penetration in the region and assess its impacts on energy security.
- Explore the potential of emerging clean energy innovations to improve better energy access in islands and remote grids.
- Explore the potential of emissions trading schemes and carbon offset platforms in the ASEAN energy sector.
- Assess the bioenergy market potential.
- Promote smart and integrated digital energy management in the industrial, commercial, and building sectors.
DOMESTIC EFFORTS TO ADVANCE THE ENERGY TRANSITION
In addition to its role in international forums, Indonesia has taken significant steps domestically to accelerate a clean, sustainable, just, affordable, and inclusive energy transition at the national level. To this end, the government has focused on the following areas.
Financing and green taxonomy. At the beginning of 2022, Indonesia launched a green taxonomy document in the financial sector. Indonesia Green Taxonomy Edition 1.0 will serve as the basis for the development of incentive and disincentive policies of various ministries and institutions, including financial service authority. It also establishes guidelines for information disclosure, risk management, and development of innovative sustainable finance products or services for financial institutions. Furthermore, it is expected to lay the groundwork for scientifically classifying sectors and subsectors as green to avoid greenwashing practices.
Indonesia Green Taxonomy Edition 1.0 was published before the ASEAN taxonomy, which was designed to establish a common language for sustainable finance among member states. This shows that Indonesia is prepared to provide support for regional initiatives to stimulate sustainable energy financing and mobilization of investment to ensure energy security. As part of its efforts to accelerate investment to achieve sustainable development goals (SDGs)—including goal 7 of ensuring access to clean and affordable energy—the Indonesian government launched the Global Blended Finance Alliance in November 2022. This initiative was undertaken to build capacity across government, the private sector, and philanthropic organizations. The alliance will be based in Bali and will invite all parties to partner with the government of Indonesia.
Renewable electricity. President Joko Widodo, officially issued Presidential Regulation no. 112 of 2022 to increase investment in the renewable energy sector, accelerate progress toward achieving the renewable energy mix target, and reduce greenhouse gas emissions. In this regulation, renewable energy development is carried out based on the PLN’s RUPTL by considering the target of the renewable energy mix, supply-demand balance, and the economic value of power plants. Two price mechanisms are regulated: ceiling price and dealing price. The policy also regulates the escalation of the share of renewables based on the location of the local power grid.
A significant difference between the previous draft and the officially issued version is the inclusion of articles related to the prohibition of the construction of coal-fired steam power plants and, in particular, the construction of a new coal-fired power plants. Coal-fired steam power plants are prohibited except for those stipulated in the RUPTL (13.8 gigawatts of capacity from additional coal-fired power plants). Three other exceptions are made for power plants that (1) are integrated with an industry built to increase the added value of natural resources or are included in national strategic projects, such as smelter industries, (2) are committed to reducing greenhouse gas emissions by at least 35% within ten years of operation compared to the average emissions for coal-fired steam power plants in Indonesia in 2021, and (3) have lifespans extending only until 2050.
Electric vehicles. To accelerate EV penetration and increase energy security (by reducing dependence on oil imports), Indonesia will provide EV subsidies. Currently, the government is in the process of finalizing subsidy regulations for battery-based and hybrid cars and two-wheeled vehicles. This subsidy will increase people’s purchasing power, which will then become a driving force in the creation of an EV market to attract and mobilize investment.
Indonesia has taken significant steps internationally and regionally to accelerate a clean, sustainable, just, affordable, and inclusive energy transition. Yet the implementation of the three-pronged approach outlined during Indonesia’s presidency of the G-20, the enhanced NDC agreed to at COP27, and the strategic goals and priorities announced for Indonesia’s term as ASEAN chair in 2023 will not be easy.
To support these efforts in international forums, Indonesia needs to develop implementation strategies and regulations at the technical level. In particular, mobilizing investment from the private sector will be crucial. Minister of Finance Sri Mulyani Indrawati estimates that the total funding requirement for the energy transition is around $243 billion. Public financing alone will be insufficient as Indonesia also needs funding for infrastructure, education, and other priorities. Carbon pricing, green financing instruments, SDG bonds, and public-private partnerships are some of the innovative financing initiatives provided by Indonesia to attract investment from the private sector.
Hakimul Batih is an Executive Board Member of the Indonesian Institute for Energy Economics (IIEE).