Case study on decarbonising the Indonesian electricity sector

Indonesia faces enormous challenges in achieving decarbonisation. In an environment of rapid economic expansion, population growth and soaring demand for energy, it must find ways to embrace clean power sources, boost energy efficiency and encourage electricity use. To do this, it must internalise climate change into the national agenda, attract finance for significant infrastructure and technology investment, facilitate technology transfer, and adopt the right energy-pricing policy for renewable sources. 

This study envisages that despite these challenges, decarbonisation holds economic opportunities for Indonesia, and therefore goes hand-in-hand with the country’s development objectives. Developing renewable energy sources and low-emissions technologies could stimulate economic development and create jobs. Energy-efficiency measures could improve productivity. A deep decarbonisation scenario also assumes a shift towards a more service-oriented economy that is less dependent on unstable revenues from fossil fuel exports. Deep decarbonisation holds two additional benefits. The first is reduced pollution from transport, industry, power plants, and residential energy; the second is improved energy security from developing domestic renewables. 

In 2009, the Indonesian government made a non-binding commitment to reduce 26 per cent of CO2 emissions by 2020, compared to a business-as-usual (BAU) path. In 2016, it committed to an emissions reduction of 29 per cent below BAU in 2030. However, climate concern has not been fully internalised into the Indonesian development agenda. To embrace deep decarbonisation, the government has to make climate change integral to that agenda. 

As a developing country, Indonesia’s economy and population are expected to grow. By 2050, energy demand under a decarbonisation scenario is estimated to be 300 per cent higher than in 2010. This would be an average annual growth rate of 2.8 per cent, much lower than economic growth, which is in the range of 5.4-5.8 per cent. The difference is attributed to energy efficiency measures. Important changes expected by 2050 include a significant increase in industry’s share of energy consumption (from 49 per cent to 74 per cent) and a significant increase in electricity, gas and biofuels, and decrease of oil fuels. The decarbonisation scenario has 20 per cent lower energy demand in 2050, compared to BAU. 

Under decarbonisation strategies, Indonesia’s CO2 emissions will at first increase due to economic development before declining as a result of decarbonisation measures. A decarbonisation scenario results in much lower emission intensity in 2050 – around 50 per cent of BAU. Emissions from the industrial sector will increase from 152 megatonnes in 2010 to 241 megatonnes in 2050. Emissions from electricity generation will also increase to 184 megatonnes in 2050. Decarbonisation will occur in the transportation sector, from 111 megatonnes in 2010 to 88 megatonnes in 2050, due to a shift to public transport, electrification of transport and fuel substitution. 

Indonesian decarbonisation has three pillars: energy efficiency, electrification of end-use and decarbonisation of the power sector. 

Efficiency improvements will come from building design, better appliances and lifestyle changes. Efficient transportation is expected to be achieved through transport-energy-conscious urban design and development of mass transport systems. The electricity generation system will become more efficient through better power plants and improved electricity transmission and distribution systems. Efficient industrial equipment and development of less energy-intensive industry will combine with structural changes in the country’s economy (i.e. decreased role of industry through service sector substitution) to significantly decrease overall energy input per dollar of GDP. 

Decarbonisation of the power sector will come from deployment of renewables (geothermal, hydropower, biomass and solar), natural gas and, possibly, nuclear power. Decarbonisation is projected to cut emissions intensity of power generation from 871 gCO2/kWh to 133 gCO2/kWh. 

Replacing combustion energy systems with electrically operated devices (end-use electrification) will increase the share of electricity in energy demand and, combined with a decarbonised generation system, result in an overall decarbonised energy system. End-use electrification is projected in all sectors: fossil-fueled heating systems (stoves/heaters/boilers) will be replaced by electric, and electric vehicles will replace internal combustion engines. The share of electricity in final energy demand is expected to triple, from 12 per cent in 2010 to 35 per cent in 2050.

New technologies are key to this process. Some of these are still in the demonstration phase, or require important progress if their cost is to decline. There are also some proven technologies, such as solar, biofuel, and geothermal, that are currently more expensive than competitors such as diesel and coal-fired generation. Deployment of renewables requires technical development to reduce costs, combined with the right energy-pricing policy. 

Deep decarbonisation also requires massive infrastructure development: in public transport, gas transmission, and subsea electrical transmission. One of the main challenges is financing that infrastructure, and, most notably, redirecting investment towards low-carbon options. Given its fast growth and size, Indonesia’s economy is expected to be able to absorb the investment needs of decarbonisation. The main challenge lies in the country’s capacity to reorient investment decisions towards low-carbon solutions, a drastic change from past and current decisions that largely target fossil energies. Deployment of nuclear power could play a role, but faces special challenges.

Indonesia’s decarbonisation scenarios are built on assumptions that the country maintains steady economic growth, provides electricity to almost all households, and reduces poverty. Decarbonisation is therefore compatible with the country’s socioeconomic development objectives. The scenario used in this study will also see Indonesia significantly contribute to global efforts to prevent 2°C temperature increases in 2050.