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Energetic Leapfrog into the Future –

“Not trailing the past”
Indonesia is currently building the energy infrastructure that will
take it through the next thirty to fifty years. South-East Asia’s
largest economy has a lot to catch up on in terms of power
generation. The current work program includes a 35 GW
expansion in generating capacity, some 10,000 transformer
stations and a similar expansion of the country’s electrical grid
network. While this represents a tremendous challenge, given
the many obstacles that will be encountered along the way, it also
represents a huge opportunity, not only for businesses and the
people involved but also for the nation as a whole. Indonesia now
has the opportunity to learn from the experiences of others and to
leapfrog over other struggling nations avoiding later upgrades
for billions of dollars. The ultimate goal is to secure a flexible and
decentralized national power infrastructure with a greater share
of renewable energy and greater independence from rapidly
depleting and polluting fossil fuels and their accompanying
volatile markets.

The Eurocham Energy Working Group has decided to focus

its 2018 Position Paper on this golden opportunity.

Foreign-Investment Regime

Coal demand is declining not only in Europe, Canada and the • China’s emissions standards for conventional air
United States but also in China, a country which is by far the pollutants from coal-fired power plants are stricter
world’s largest consumer of coal.1 than comparable U.S. standards
• Demand for coal-fired power is falling so quickly in
Indeed, Chinese coal demand declined in 2016, just as it had in China that the nation cannot support its existing coal
2014 and 2015. And while coal is still widely used in China, the infrastructure.
country is toughening up its standards in a bid to improve its air
quality. Instead of continuing to hide air-quality information from In 2016, average annual final investment decisions (FIDs)
its citizens so as to offer polluters more leeway as the country for coal power fell to their lowest level in nearly 15 years.
continues to pursue breakneck growth, Beijing flipped the script The investment decisions which were taken in 2016,
by going public with the nation’s pollution data and using its which amounted to a mere 40 GW globally, signal a
citizens’ anger as leverage in order to force polluters to comply more dramatic slowdown ahead for investment in coal
with the nation’s environmental regulations.2 power, once the current wave of construction comes to
an end.
As part of that broader strategy, Beijing has rolled out a new
air-quality monitoring system that now provides real-time Accordingly, investment in supplies of fossil fuels is also
information on air quality across the nation.3 in decline. The global energy transition is occurring
The results are as follows:4 primarily in the electricity sector, which was responsible
for the largest share of global energy investment in 2016
• China’s new coal-fired power plants are cleaner than anything for the first time in history - with renewables claiming the
currently operating in the United States largest share.5

1
Coal 2017: Analysis and Forecast to 2022, International Energy Agency Market Report Series, 2017
2
China Daily, “Beijing no longer counting ‘blue sky days’,” June 6, 2012, available at http://usa.chinadaily.com.cn/china/2012-06/06/content_15476803.htm and Xinhua,
“China declares war against pollution,” March 5, 2014, available at http://news.xinhuanet.com/english/special/2014-03/05/c_133162607.htm
3
Zheng Jinran, “Monitoring network to be further expanded,” China Daily, April 7, 2017, available at http://www.chinadaily.com.cn/china/2017-04/07/content_28827498.htm
4
https://www.americanprogress.org/issues/green/reports/2017/05/15/432141/everything-think-know-coal-china-wrong/
5
IEA World Energy Investment 2017

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2000

1500

1000

500

Rising investment in network infrastructure in order to cope with the new requirements is also a reflection of this transition:

1000

750

500

250

It has now been a long time since Germany first launched its renewable-energy revolution. At the centre of the country’s
transformation has been a mechanism of renewable-energy subsidies that has dramatically scaled up once-niche solar and
wind technologies, slashing costs in the process and making these new technologies competitive with fossil fuels in some
cases. The entire world can benefit from Germany’s experience, including Indonesia.

EUROCHAM | EUROPEAN BUSINESS CHAMBER OF COMMERCE IN INDONESIA

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From a purely technological perspective, Germany’s energy

transition has already been a stunning success. Indeed,
enough renewable energy was produced in Germany in
2016 to meet 32% of the country’s electricity needs, which
is a staggeringly large proportion by global standards.

Economically speaking, the ENERGIEWENDE is paid for

by consumers, who are facing the same dilemma as most
decision makers: They want to utilize renewables but prefer
to pay less. However, this is becoming less and less of an
issue, as the costs of renewables are declining, while the
real costs of fossil-fuel energy are becoming increasingly
obvious.

Developments in Indonesia

Meanwhile, Indonesia is currently rolling out its energy

infrastructure expansion program. Significant progress
has been made with regards to the country’s ability to
implement a stable power supply, as well as its overall
electrification ratio, however, a lot more is planned.
And while not all of the projects which are currently
in the pipeline will be realized, a great number will be.
However, much of these plans are still dominated by
fossil fuels.

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Table1: Indonesia’s Electricity Generation Expansion Plan, 2017 - 2026

Type C Capacity (GW) S Share (%)

Coal-Fired Power Plants 31.9 41.0

Gas-Fired Power Plants (turbine/thermal) 18.8 24.1

Gas-Fired Power Plants (reciprocating) 5.6 7.2

Hydroelectric 14.0 18.0

Geothermal 6.3 8.1

Others (solar, wind, diesel waste, biomass) 1 1.2 1.6

Indonesia’s most highly developed grid system, the Java-Bali Grid, already has a comfortable reserve margin installed, especially
when new projects currently in advanced stages are taken into account. Therefore, plant expansion in order to add further capacity
seems unnecessary. Instead, now is the right time to think about the retirement or upgrading of existing plants, so that the country’s
electrical grid complies with higher environmental and efficiency standards.

60,000
Installed Capacity
Available Capacity
50,000
Actual Peak Load
Forecast
40,000

30,000

20,000

10,000

2015 2016 2017 2018 2019 2020 2021 2022

Peak-load growth

Energy efficiency is equally important in terms of power generation and is, in fact, often the cheapest way of improving the supply
of electricity. Indonesian regulators are aware of this fact and have issued a whole raft of applicable regulations. Still missing though
are a strict enforcement regime and sufficient incentives.

EUROCHAM | EUROPEAN BUSINESS CHAMBER OF COMMERCE IN INDONESIA

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We feel that Indonesia is not yet realizing its full potential

to forge ahead and even leapfrog other countries in this
vital process. Much of the current plan resembles the past
projects of other countries, projects that such countries are
now trying to upgrade at great expense. Indonesia has a
golden opportunity to avoid making the mistakes of other
countries and to instead build the system of the future right
now. The European energy businesses in Indonesia are
committed and ready to support Indonesia’s development
and to see that it heads off in the right direction, as well
as to share the experiences of Europe and to provide the
necessary expertise, capital and technology for successful
implementation.

Recommendations:
1. Implementation and enforcement of the latest international environmental standards
We note that banks, credit agencies and other parties are increasingly avoiding the coal sector. Moreover,
countries in Asia are also reducing or setting end dates for the use of fossil-fuel power plants. In Indonesia,
it is widely accepted that coal-fired power plants have a major part to play in the country’s energy mix. While the
use of coal is considered unavoidable, the highest international standards for efficiency, safety and environmental
protection should be applied so as to ensure that assets have a sustainable future and do not require costly
retrofits or even decommissioning in the near future. Current tenders often refer to Indonesian legal requirements;
however, these requirements do not yet fall into line with international standards. As a result, financing is proving
difficult for western investors and lenders. Ultimately, there is a concern that Indonesia will end up with outdated
technologies that have no market elsewhere.

2. Objective power pricing and decoupling from political decision making

A major focus in terms of capacity expansion and tariff policy relates to cost per kWh. We acknowledge that there
is significant political and economic pressure aimed at ensuring stable and affordable power pricing in Indonesia.
However, it would be advisable to decouple end-user power prices from political decision making. A good tool to
implement could be the existing price-adjustment regulations, which may need some strengthening and support
through the issuance of an actual law instead of just a ministerial decree. The purpose would be to relieve political
decision makers from end user price responsibility because of price fluctuations in the commodity markets they
cannot control. This would reduce the pressure to provide energy subsidies especially for fossil fuels.

3. Focus on the long-term costs of power generation

We recommend placing a greater emphasis on the total long-term economic costs of power generation. Current
tenders tend to focus on capital expenses and current fuel-price assumptions. Meanwhile, plant efficiency, lifecycle
costs, fuel-price fluctuations and adaptation in order to meet international environmental standards are often not
seriously taken into account.

Greater participation by IPP is a great tool that can be used in order to ensure full lifecycle costs and efficiency
considerations. Specifically, renewable energy IPPs can offer long-term predictability in terms of electricity costs.
The sentiment that contracting IPPs is costly due to take-or-pay clauses seems flawed. These clauses are designed
to cover capital cost where the offtake is below expectations. These expenses are lost either way, no matter
whether private investors or state owned companies are the plant owners and operators.

> Next Recommendations

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However, this will require a suitable regulatory framework that allows for fair comparisons to be made with volatile
fossil-fuel power generation costs. Current average generating costs are widely considered as in transparent and
not sufficiently projecting into the future with regards to expected fuel price developments. Moreover, bonuses
for domestic value creation and the strategic benefits that result from national fossil-fuel independence, as well as
environmental- and health-protection value are factors that PLN currently has no sufficient legal tools or incentives
to consider. But considerations of these important factors are a key requirement to create a level playing field for all
power generating technologies.

4. Appropriate PPA risk allocation

The latest regulations demonstrate that an effort is being made to remove much of the political and operational
risk to IPPs. This is understandable from the buyer`s perspective although the current PPA risk allocation tends to
be costly. We recommend taking the economic consequences of inappropriate risk allocation into account. Risk
should be borne by the party best suited to control it. Otherwise, the inevitable consequence will be higher costs
or lack of project bankability.

5. Low-interest environment a good opportunity

Nobody can tell how long the historically low global interest environment will last. In this context, we recommend
moving fast and seizing the opportunity of the currently healthy financing possibilities. In order to take full advantage
of the current climate, the bankability of power projects could be improved at a regulatory level. In a competitive,
predictable and investor-friendly environment, IPPs are well suited to sourcing the cheap equity which is currently
available throughout the world markets. Smaller projects in particular still require local majority control, and this is
making it much harder for developers to access cheap international capital and to achieve high project valuations.

6. Simplification of processes
Swift and efficient project development and implementation require predictable and efficient processes. More
specifically, renewable-energy regulations are dominated by limitations but offer little help in terms of efficiency.
Under current regulations, prices are determined based on the previous year’s average generating cost in that
region. These prices are bound to change by the time projects mature. Even then, the framework only provides
ceilings, while the actual prices themselves are still subject to negotiations or limited bidding procedures which
are not yet entirely clear and which even then are still ultimately dependent on ministerial approval being
granted. We recommend a system where prices can be locked in at a very early stage of project development
to avoid waste of time and development expense.

7. Efficient use of IPPs including transmission and distribution.

IPPs can be primary contributors in terms of efficient power generation. This concept can also be expanded to
include not only power generation (for all technologies) but also transmission and distribution. Moreover, such
expansion does not come at the risk of the government losing control. Control over generation implies that
renewable IPPs must be paid a capacity charge and leave the operations to the relevant regional grid operators.

8. Energy efficiency is the cheapest form of generation

Energy efficiency is still an untapped area and ultimately offers the best returns on investment. This is in line with
EUROCHAM’s call for the use of the “latest technology”. Efficient users, both large and small scale, can drastically
reduce overall energy consumption. However, returns are currently often small as a result of cross-subsidies for
power pricing. We recommend a mechanism whereby reduced cross-subsidies to cover power-generation costs
are shared with efficient users, such as through tax benefits. Moreover, an improved framework and access to
financing for Energy Saving Companies (ESCOs) would be helpful. Also the regulation in energy efficiency that
accompanied with high enforcement is a necessity.

EUROCHAM | EUROPEAN BUSINESS CHAMBER OF COMMERCE IN INDONESIA

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9. Switch to different units for energy consumption: forget kWh

The world still uses kWh/capita as a measure of the development status of a nation. However, this concept cannot
apply to Indonesia, as the country is characterized by disconnection between the traditional “elasticity of demand”
and the reality. In 2017, power consumption did not grow at 1.2 - 1.3 x GDP. The reasons for this have not been fully
explored, however in a world of increasingly efficient appliances; this may be the wrong model to apply. In other
words: replacing old street lights with new ones and increasing their total number will improve wellbeing – even
if power consumption goes down as a result. We, therefore, propose the introduction of a new planning concept
known as “application units” instead of renewing the measurement of the country’s consumption of electricity in
kWh per capita.

EuroCham Position Paper 2018: Energy Working Group

Disclaimer: “This publication has been produced with the assistance of the European Union (EU).
The contents of this publication are the sole responsibility of European Business Chamber of Commerce in Indonesia
(EuroCham) and can in no way be taken to reflect the views of the European Union”

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