Need for robust fiscal policies to support Indonesia's swift energy transformation
Indonesia's Energy Transition: Challenges and Potential Solutions
Indonesia is embarking on a significant transition towards renewable energy, but the journey is fraught with challenges related to fiscal policies, carbon pricing, and electricity subsidies.
Challenges
Heavy reliance on coal and fossil fuels is a major hurdle. Coal currently accounts for about two-thirds of Indonesia’s electricity, with significant existing infrastructure making early closure costly and politically difficult. Recent plans signal increased fossil fuel reliance, with no clear coal phaseout in the official electricity supply plan (RUPTL 2025-2034).
Financial constraints and unclear funding are another challenge. Large-scale investments are needed to retire coal plants and build renewables, but promised international climate financing has yet to materialize fully. Both the government and PLN face funding gaps, delaying coal phaseout and energy transition projects.
Electricity subsidies and pricing distortions also pose a problem. Indonesia’s existing subsidies on fossil fuels keep coal and gas power artificially cheap, discouraging renewable investment. The lack of effective carbon pricing mechanisms means fossil fuels don’t reflect their true environmental costs, perpetuating overconsumption and slowing the economic transition to clean energy.
Grid and technical challenges are another obstacle. Integrating large renewable capacity, especially solar PV, requires grid modernization across Indonesia’s archipelago, posing operational and capacity challenges.
Potential Solutions
To address these challenges, several solutions have been proposed. Implementing carbon pricing, reforming electricity subsidies, securing and mobilizing climate financing and investments, modernizing electricity infrastructure, and rethinking energy planning policy are all key to reducing coal dependence effectively.
Implementing a robust carbon pricing system (carbon taxes or emissions trading) would internalize the environmental cost of fossil fuels, incentivizing investment in renewables and reducing coal dependency. Gradually removing fossil fuel subsidies and redirecting support toward renewables can help level the playing field and encourage cleaner power generation.
Securing and mobilizing climate financing and investments is crucial. Transparent and credible use of international funds like the JETP is needed to unlock $20+ billion in financing for the transition. Attracting private investment through policy certainty and risk mitigation will also be crucial.
Modernizing electricity infrastructure is also essential. Enhancing grid flexibility and expanding storage technologies will support large-scale integration of solar PV and other renewables, which are expected to supply nearly 90% of electricity by 2050 under some scenarios.
Rethinking energy planning policy is important. Revising the RUPTL to incorporate clear coal phaseout timelines and prioritize renewables aligns plans with climate commitments. Stronger policy coordination and enforcement can reduce fossil fuel industry influence.
Carbon tax rate adjustments can enhance investor confidence in the government's support for the energy transition and decarbonisation agenda. As of the end of last year, renewables contributed to only 14.1% of the energy mix. However, renewables are expected to account for 23% of the energy mix by 2029 in the National Medium-Term Development Plan.
Indonesia has enacted Law No. 7/2021 on Tax Regulation Harmonization, serving as the legal basis for carbon taxes. 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.
The potential loss due to inappropriate subsidy allocation reached Rp 1.2 trillion (US$73.8 million) per month due to unlinked data between electricity customer data and the national ID number. Gradual carbon tax rate adjustments are important to encourage shifts towards more environmentally friendly energy consumption. Current carbon tax rates in Indonesia are considered low, necessitating gradual tariff adjustments.
Coal claims 39.69% of the total energy mix, followed by oil (29.91%) and natural gas (17.11%). M. Arief Virgy, a researcher at The Habibie Center, a Jakarta-based human rights and democracy non-profit, underscores the need for strategic policy shifts and international support to overcome these challenges and achieve Indonesia’s renewable energy goals.
References: 1. World Resources Institute (2022). Indonesia’s Energy Transition: Opportunities and Challenges. Retrieved from https://www.wri.org/insights/indonesias-energy-transition-opportunities-and-challenges 2. World Resources Institute (2022). Indonesia’s Energy Transition: Policy and Finance. Retrieved from https://www.wri.org/insights/indonesias-energy-transition-policy-and-finance 3. World Resources Institute (2022). Indonesia’s Energy Transition: Grid and Infrastructure. Retrieved from https://www.wri.org/insights/indonesias-energy-transition-grid-and-infrastructure 4. World Resources Institute (2022). Indonesia’s Energy Transition: Subsidies and Carbon Pricing. Retrieved from https://www.wri.org/insights/indonesias-energy-transition-subsidies-and-carbon-pricing
- Indonesia's transition towards net zero emissions, primarily focused on clean and renewable energy, faces numerous challenges such as fiscal policies, carbon pricing, electricity subsidies, and grid and technical issues.
- Coal, accounting for about two-thirds of Indonesia's electricity, and significant existing infrastructure make early closure of coal plants costly and politically difficult.
- Financial constraints and unclear funding are another challenge, as large-scale investments are needed to retire coal plants and build renewables, but promised international climate financing has yet to fully materialize.
- The General News highlights that electricity subsidies and pricing distortions pose a problem as they keep coal and gas power artificially cheap, discouraging renewable investment.
- A lack of effective carbon pricing mechanisms means fossil fuels don't reflect their true environmental costs, perpetuating overconsumption and slowing the economic transition to clean energy.
- To address these challenges, potential solutions include implementing carbon pricing, reforming electricity subsidies, securing and mobilizing climate financing and investments, modernizing electricity infrastructure, and rethinking energy planning policy.
- Under policy-and-legislation, M. Arief Virgy, a researcher, emphasizes the need for strategic policy shifts and international support to overcome the challenges and achieve Indonesia's renewable energy goals.
