Overcoming legal and governance barriers to clean energy in Indonesia and Australia

This project aimed to assist policy makers and legislators by identifying, investigating and elaborating upon barriers and blockages to investment in cleaner energy in Indonesia. 

Indonesia is one of the largest energy users and greenhouse gas emitters in Southeast Asia. A rapid acceleration of investment in renewable electricity generation is urgently required to avoid lock-in to a carbon intensive path of development. Through comparative research, the project aimed to identify barriers to clean energy investment in Indonesia and Australia. The ultimate objective was to help policy makers and legislators incentivise clean energy in both nations. 

The pace of investment in renewable electricity in Indonesia has been relatively slow compared to other Asian nations. Researchers examined laws and policies affecting renewable energy investment in Indonesia, particularly the 2017 feed-in tariff law, with a focus on utility scale projects. A case study of one of the most prima facie promising sectors for renewable energy in Indonesia – geothermal energy – was selected. The project aimed to document, via a mixture of desktop and field interview research, the barriers and drivers of geothermal development in Indonesia, with a specific focus on issues of law reform, institutions and improved implementation of environmental laws. 

Geothermal was chosen because although Indonesia has one of the world’s best geothermal energy resources, and international lenders have stressed the importance of developing the sector, progress in commissioning geothermal generation has been slow. The principal benefit of geothermal energy relative to other low-emissions sources is its ability to meet base load demand, due to its capacity to produce electricity regardless of weather conditions. 

Despite this, Indonesia utilises less than 5 per cent of its estimated geothermal potential. There are various challenges to developing geothermal projects in Indonesia that reflect both the unique nature of geothermal investment and Indonesian energy law and policy. Primary obstacles include:

• A lack of available and reliable data on geothermal resources.
• An electricity tariff that is not proportionate to the risk and high costs associated with geothermal exploration and exploitation.
• Long lead times and the commitment of developers who win tenders to carry out development within the specified time period.
• The need for stable, predictable and supportive law and policy frameworks, and certainty in licensing and land-acquisition processes. 

Although feed-in tariffs with defined geothermal pricing have been very successful in attracting commercial investment in some European countries, a key challenge in Indonesia has been the excessively low geothermal tariff offered by the state electricity network, PLN. The geothermal feed-in tariff is calculated as the avoided costs to PLN of power generation by default sources, mostly coal. However, the avoided cost of coal electricity generation – calculated as the financial investment required to build a coal plant – is generally insufficient to cover the costs of geothermal generation. Proving that geothermal energy is economically competitive with coal in Indonesia is difficult because many externalities associated with coal power generation are not considered in economic analyses. 

This project examined the role of law and governance in achieving a rapid transition to a clean energy future in Asia within the context of two urgent challenges – first, preventing dangerous climate change by reducing emissions and second, the need to address limited, insecure and unequal access to energy in the region.

Some have described an energy ‘trilemma’ in Indonesia, with three problematic aspects: energy security, climate change mitigation and energy poverty reduction. In Indonesia, there is a pressing need to address two particular issues: limited and unequal access to energy, with more than 60 million people without a grid connection, and the distorting effects of multi-trillion rupiah transport fuel and electricity subsidies. The governance aspects of these problems are crucial. The International Energy Agency’s 2008 mission identified improved governance as vital to driving renewable energy investment. This research is intended to fill a critical gap in the legal literature, with a comparative review of lessons for the making and reform of energy legislation and policy in Indonesia and Australia. 

In 2015, President Joko Widodo announced an ambitious plan for new power generation, with plans for 35,000 megawatts of new capacity. If this is exclusively in fossil fuel generation, Indonesia will lock in substantial carbon emissions for the next 40 years. Geothermal energy provides potential baseload generation capacity, but the challenges of developing it include carbon and nuclear lock-in amongst existing political and organisational decision makers. An additional challenge is the very low price for clean development mechanism units, which renders them ineffective as a project incentive. 

Substantial reform of the legal framework for geothermal energy occurred in 2014, and this seems to have restored some momentum to the sector, with 67MW of geothermal developments coming online in 2014. However, feed-in tariff laws have failed to follow overseas models. In particular, there is a lack of clarity about the obligation of distribution and transmission providers to purchase geothermal electricity. PLN has shown a reluctance to sign power-purchase agreements for some renewable sectors, despite tariff laws, and this uncertainty has raised the risk profile for foreign investment. 

The research enabled Australian energy researchers to form a deeper understanding of international energy dilemmas, as well as facilitating participation in the broader interdisciplinary network of researchers within the Energy Cluster of the Australia Indonesia Centre. This project also laid the groundwork for a second extended research project on the PV sector.