Indonesia’s Energy Market: Potential Waiting to be Unleashed

“Indonesia isn’t the most beautiful country in the world. I don’t think so. Italy is much lovelier – and France too. It’s a very problematic country. And that’s why you have to stay here for the rest of your life. Indonesia is a process. It’s not a finished idea. It’s a practice, and a trial and error”

Goenawan Mohamad

From the mountains of Java, to the rainforests of Bali and into the depths of the vast swamps of Sumatra, Indonesia is a land blessed with natural resources. The equatorial sunlight, with it’s incredibly high global irradiance rate, provides the land with perhaps the greatest potential for Solar PV development in the world. The climate, expansive landscape and conditions also make it a suitable base for further development of geothermal, hydroelectric and to an albeit lesser extent, wind power generation.

aerial photography of rice terraces during daytime
Photo by Jason Cooper on Unsplash

Yet, a conundrum persists.

Despite possessing amongst the highest levels of renewable energy generation potential in the world, combined with a 264 million strong population, with rapid improvements in literacy, life expectancy and development year on year – the Indonesian economy remains heavily and disproportionately reliant on the production and export of energy from non-renewable resources – particularly oil, coal and gas.

At first glance, it’s easy to see how this came about.

Possessing a massive 22 billion barrels worth of conventional oil and gas reserves, of which approximately 4 billion are recoverable, the production, consumption and more importantly, exportation, of oil and gas has been a major part of Indonesia’s economy. Throughout the 1980s, Indonesia’s economic development was spearheaded through the export of oil and gas, with Indonesia being the only Asian member of OPEC until 2008. This trade attracted the attention of predominantly US based investors, with huge sums of foreign direct investments flowing into the country year on year. These FDI flows and increased foreign investments had ripple effects throughout the economy as a whole – leading to financial reforms in the 90s and heavy globalization of Indonesia’s banking, manufacturing and services sectors across the board.

Even more recently, as of June 2010, the Indonesian Stock Exchange attributed two-thirds of its total $269.9 billion market capitalization to foreign funds.

However, as oil and gas production grew, so too did domestic demand. With a slight relative decline in the production of oil and gas combined with a rapidly expanding domestic demand for energy, as of December 2018 – Indonesia is now net importer of oil and gas.

Supply has not kept up with demand as Indonesia struggles to meet its energy demands which catastrophically opens up its economy to a high degree of vulnerability to price based and supply side shocks in the future – not a useful ingredient for a rapidly industrializing nation.

In order to assess the future of Indonesia’s renewable energy industry, it’s perhaps useful to analyse two issues in turn – what benefits do renewables bring over traditional, non-renewable sources of energy, and the steps that are needed to be taken in order for Indonesia to fully harness it’s natural energy capacity.

The case for renewable energy

The transition to a greater reliance on renewable resources would be almost natural for a country like Indonesia – but by no means inevitable.

It also presents extra challenges to a developing nation.

If adopted, not only must Indonesia maintain a stable and substantial transition to cleaner, low carbon energy sources  but it must also meet the already outstretched energy demand of it’s hundreds of millions of inhabitants, some of whom still live below the relative poverty line, as well as contribute meaningfully to other societal, developmental and economic goals.

Perhaps the greatest argument for renewable energy sources is the benefit it brings to our planet.

Yet, provision of renewable energy sources – solar, hydroelectric and geothermal in particular, in the case of Indonesia – could help overcome one of the greatest impediments to equitable energy distribution: the difficulty of distributing energy to many of Indonesia’s most rural areas.

Here, off-grid renewable energy sources from the grassroots level not only mitigate the problems associated with air pollution and global warming, but also provide a sustainable and cost-effective method by which to provide rural, often impoverished areas with modern energy services.

Then there’s the example of other developing countries.

The view that renewable energy resources are an expensive alternative only affordable by richer nations is erroneous indeed. Developing nations across the world have made strides in implementing large scale renewable energy distribution and perhaps the most notable example of this would be Kenya – where solar energy systems provide over 30,000PVs worth of energy sold per year. If implemented, renewable technology is a far more cost effective, equitable and sustainable provider of energy to developing nations than fossil fuels.

Plus, with a population of 264 million strong, Indonesia is well-positioned to tackle the labour-intensive work involved with the large-scale production of renewable energy extractors. Not to reiterate the massive natural potential that the nation already possesses in the production of solar and hydroelectric power.

Having said that, it’s worth remembering the devastating effects that energy poverty has on the population and development of a nation like Indonesia, where an estimated 20% of the 264 million population don’t have access to electricity.

A lack of access to electricity has an absolutely devastating effect on the running of households, schools, hospitals, libraries and public facilities, which in turn, drastically inhibit social mobility and economic development in these, often rural, areas.

Thus, as has been stated, renewable energy – in particular, solar and hydroelectric – provides a cost-effective, sustainable and environmentally-friendly method for the alleviation of poverty, access of education and production of energy to meet the ever-burdgeoning energy demand of Indonesia.

This certainly raises the question though:

How will Indonesia get there and what are the obstacles?

Perhaps the greatest obstacle in the path to adopting large-scale renewable energy in Indonesia is the inefficiency of its energy industry to begin with. 

Massive subsidies designed to make energy cheaper for the consumer have meant that energy providers in the non-renewable sector are only able to pay for about two-thirds of their actual operations. At the same time, the price of energy has increased four-fold in the past fifteen years and set to rise further still, exacerbating the already existing discrepancy in profit.

Whilst government subsidies have been an arguably effective way to decrease price for often lower income consumers without deterring production too much in an already well-established industry, heavy reliance on subsidies in the renewables sector, the industrial and practical appeal of which stems from it’s supposed cost-effective nature, could inhibit the profit incentive for foreign and domestic investment in the first place.

With the scaling up of renewable energy already set to save Indonesia up to $51.7 billion per year, this would be an especially pertinent issue to consider.

As well as this, consideration is needed to implement a truly comprehensive transition to renewable energy across the board – from the grassroots level, to the industrial level.

As far as the former is concerned, local bank regulations combined with local governance in rural areas most in need of modern energy services make it hard for local, small-scale providers to gather the funds they need to manage off-grid production.

blue solar panel
Photo by Chelsea on Unsplash

At the same time, as far as the latter is concerned, whilst Indonesia has the working population to effectively and cheaply participate in the large-scale, labour-intensive production of renewable energy extractors, investment is needed to garner the skills, acumen and experience to implement these changes on a national level. The transition won’t be immediate, but in order for it to occur, an estimated $9.4billion must be invested till 2030 to allow for sufficient development in the human and technological resources required. On this aspect, Indonesia shows perhaps the greatest promise, as a pioneer of global energy throughout the modern era – first, with liquefied natural gas, and then with oil. 

Indonesia’s greatest renewable potential lies in both geothermal energy – with 40% of the world’s geothermal reserves, as well as solar power, particularly in its eastern islands. However, whilst the potential for wind power in Indonesia, with the relatively low wind speeds meaning that only small and medium generators are feasible, is often posited as low, it’s estimated that if only half of Indonesia’s potential wind energy were to be captured, it would be sufficient to meet all of its current energy demands.

The potential across the board can be immense but this brings its own problems – particularly when it comes to how these sources must be allocated.

To this end, harnessing wind power seems like an ideal solution to the energy problem in rural areas. Wind power is cheap to harness, low space, quick, relatively cost-effective and can be downsized to provide modern energy services to more remote, rural areas in the archipelago.

At the same time, geothermal energy is more difficult. It requires more complex technology, thus greater investment and works on a larger scale. Whilst Indonesia already maintains a significant presence in the geothermal industry – growth has been lower than expected due to primarily political and industrial obstacles. This comes despite the fact that Indonesia’s geothermal potential is more than fourteen times its current energy demand.

Nevertheless, Indonesia targets a 25% hydro and geothermal energy production capacity by 2025, equivalent to 5000Mw, but focus is needed on targeting this distribution to primarily urban areas, particularly on the island of Java, to make the large-scale venture economically viable.

Final notes

With the shift to renewables just over the horizon though, concerns may arise over the future of the oil and gas industry, already on its last legs. Whilst the oil and gas sector, a major employer in the domestic economy, made up 20% of the state revenue between 2004 and 2006, the contribution of oil and gas to state revenue fell to a mere 3% by 2016.

It’s worth noting, however, that much of this decline is as a result of the heavy depletion of existing resources – the glory days of Indonesian oil and gas are already over.

With this in mind, the transition to renewable energy sources is not only vital to mitigate the effects of air pollution and global warming, but to save a large chunk of the Indonesian economy itself.

Depletion is inevitable – but a nation’s preparedness is not.

With the oil and gas sector already on the decline, the role of renewables is more important than ever. Given the previous recommendations and the vast potential for renewable energy in Indonesia however, all hope is not lost.

Quite the opposite in fact.

Come what may, one can conclude that the next few years will be absolutely critical in determining the strength of not only Indonesia’s energy production capacity, but also the future of it’s economy itself, and it’s vulnerability to supply side and price based shocks.

If successful, Indonesia’s story could serve as a blueprint for the developing nation energy model for years to come.

This article was written by: Akshat Sinha, currently a student at the London School of Economics, pursuing BSc Government and Economics

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