Indonesia has set ambitious targets for renewable energy electricity generation, aiming for 42.6 gigawatts of clean energy by 2034, as stated in the Electricity Procurement Business Plan.
To continue reading, subscribe to Eco‑Business.
There's something for everyone. We offer a range of subscription plans.
- Access our stories and receive our Insights Weekly newsletter with the free EB Member plan.
- Unlock unlimited access to our content and archive with EB Circle.
- Publish your content with EB Premium.
The country is also aiming for renewables to claim 23 per cent of the energy mix by 2029 in the National Medium-Term Development Plan.
However, progress remains slow. Renewables contributed to only 14.1 per cent of the energy mix by the end of last year. Indonesia still has a high reliance on fossil fuels. Coal claims 39.69 per cent of the total energy mix, followed by oil (29.91 per cent) and natural gas (17.11 per cent).
The high cost of renewable energy production in Indonesia is one of several reasons for slow growth. The basic cost of supplying geothermal and solar power plants is higher than that of a coal power plant. Therefore the cost of financing renewable energy development is very high. Required renewables investment is around US$20-40 billion per year by 2050. But Indonesia only raised US$1.47 billion towards renewables in 2023, which is well short of the funds required to attain net zero by 2060 or earlier.
The affordability of coal-based energy is determined by a number of key policies. One of them is the domestic market obligation (DMO) policy, which requires coal producers to supply domestic power plants’ needs at a maximum price of US$70 per tonne. This policy effectively keeps the price of coal low compared to renewable energy.
Meanwhile, the subsidy policy for electricity does not appropriately translate for energy consumers. The Indonesian Corruption Eradication Commission (KPK) found that the potential loss due to inappropriate subsidy allocation reached Rp 1.2 trillion (US$73.8 million) per month due to the unlinked data between the electricity customer data and the national ID number. Therefore, it was difficult to match the data with the Integrated Social Welfare Data (DTKS) intended for lower income families.
How to fix Indonesia’s energy transition problem
Several steps to reform fiscal policy in support of the energy transition need to be taken. One of them is related to improving the allocation of electricity subsidies for those who really need it through the integration of DTKS data with the PLN’s consumer data.
This will ensure that when coal electricity subsidies are shifted to renewable energy development programmes, people with low disposable income are not significantly affected. The government can integrate recipients of social assistance programmes such as the Family Hope Program (PKH) and Non-Cash Food Assistance (BPNT) as eligible recipients of electricity subsidies. Savings from electricity subsidies through the allocation of appropriate subsidy beneficiaries can open up fiscal space for reorienting the budget allocation for renewable energy development. For example, price incentives could be provided for renewable energy, so that it is more competitive with fossil energy.
To fill the budget gap allocated for renewable energy development in Indonesia, a carbon pricing mechanism can also be used as an incentive instrument for renewable energy project developers and provide additional funding sources to support Indonesia’s energy transition programme. Indonesia’s significant carbon pricing potential is a potential source of funding for energy transition programmes, which can be utilised to finance energy transition programme needs. Carbon pricing can also serve as a disincentive for developers of dirty energy projects due to its principle of reinforcing the “polluters pay emissions” principle.
To optimise funding sources from carbon pricing, revenue must be allocated specifically for energy transition programmes and climate change control through an earmarking scheme covering early retirement of coal-fired power plants, energy efficiency, renewable energy power plant projects, and renewable energy incentives.
Regulation-wise, Indonesia has paved the way for carbon pricing through the enactment of Law No. 7/2021 on Tax Regulation Harmonization, which serves as the legal basis for carbon taxes. Additionally, through Presidential Regulation No. 98/2021 on Carbon Economic Value, Indonesia has established carbon trading as one of the national climate control instruments. Although the regulatory framework has been established, the implementation of one of the carbon pricing instruments such as carbon tax has only been implemented for the coal-based electricity sector with a tax rate of IDR 30,000 (US$1.84) per tonne of CO₂e (minimum tax rate) and is planned to be implemented gradually for other sectors. To support the imposition of carbon taxes in other sectors, a supporting regulatory framework on carbon taxation policies is needed.
The issuance of supporting regulatory frameworks across sectors needs to be supported by various sectors because the measurement and reporting mechanisms for calculating emissions vary by sector. There relevant ministries from sectors with the potential to generate greenhouse gas emissions need to formulate and approve supporting regulatory frameworks for carbon taxes in their respective sectors. For example, the Ministry of Energy and Mineral Resources has issued Ministerial Regulation No. 16/2022 on the Procedures for the Implementation of Carbon Economic Value as the regulatory basis for carbon taxes in the electricity sub-sector.
On the other hand, the carbon tax rates applied are also still considered low. Therefore, gradual tariff adjustments are necessary and should be based on socio-economic impact analysis to optimise the role of carbon taxes in the national energy transition and decarbonisation agenda.
These adjustments are important given that carbon tax rates influence consumer behaviour, encouraging shifts toward more environmentally friendly energy consumption. In the context of Indonesia’s energy transition, this tariff adjustment mechanism will also enhance investor confidence in the government’s consistent policy direction in supporting the energy transition and decarbonisation agenda. In other words, gradual carbon tax rate adjustments are not merely fiscal measures but also important instruments in driving systemic energy transformation and low-carbon development.
M. Arief Virgy is a researcher at The Habibie Center, a Jakarta-based human rights and democracy non-profit.
