Journal of Sustainable Finance & Investment
ISSN: 2043-0795 (Print) 2043-0809 (Online) Journal homepage: https://www.tandfonline.com/loi/tsfi20
The political and institutional constraints on green
finance in Indonesia
James Guild
To cite this article: James Guild (2020): The political and institutional constraints on green finance
in Indonesia, Journal of Sustainable Finance & Investment, DOI: 10.1080/20430795.2019.1706312
To link to this article: https://doi.org/10.1080/20430795.2019.1706312
Published online: 03 Jan 2020.
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JOURNAL OF SUSTAINABLE FINANCE & INVESTMENT
https://doi.org/10.1080/20430795.2019.1706312
The political and institutional constraints on green finance in
Indonesia
James Guild
Nanyang Technological University S Rajaratnam School of International Studies, Singapore, Singapore
ABSTRACT
ARTICLE HISTORY
The ADB estimates Asia’s infrastructure needs from 2016 to 2030 will
exceed US $26 trillion. This ballooning demand for infrastructure,
coupled with rising investor awareness of the importance of
sustainable development, is driving the nascent green finance
sector. In emerging markets, raising capital for green projects is
often the easy part; identifying and implementing suitable
projects and structuring the financing is more challenging. This
paper draws on the school of institutional economics to analyse
the potential of green finance in underwriting renewable energy
development in Indonesia. The paper argues that even if there is
strong demand on capital markets for green bonds backing clean
energy projects, the institutional design of the renewable energy
sector has created a misaligned incentive structure for Indonesia’s
political class. The paper concludes by discussing Ministerial
Regulation 50/2017 which has created a regulatory framework
that side-steps some of these constraints.
Received 31 August 2019
Accepted 16 December 2019
KEYWORDS
Indonesia; green finance;
renewable energy;
institutional economics;
political economy
1. Introduction
In the Asia-Pacific there are two principal factors driving the development of the green
finance sector. One is that major economies in the region like China, India, Indonesia
and Vietnam are growing rapidly and the demand for investment in infrastructure is
large. The Asian Development Bank estimates Asia’s infrastructure needs from 2016 to
2030 will exceed US $26 trillion, including $14.7 trillion in the energy sector and $8.4 trillion in the transportation sector (ADB 2017).
The second factor is growing concerns about the sustainability of such rapid economic
development, particularly as more authorities acknowledge the reality of climate change
and the long-run negative externalities imposed by environmental degradation. Green
finance – the use of financial instruments like bonds and equity investments specifically
earmarked for sustainable development – is an emerging concept in global capital
markets, and is a direct response to the puzzle of how to accommodate rapid economic
growth in a sustainable way.
As green finance is still a nascent concept, precise definitions on what it means are still
developing as well as best practices for managing the sector. According to Bloomberg, at
CONTACT James Guild
jamesjor001@ntu.edu.sg
Nanyang Technological University S Rajaratnam School of
International Studies, 50 Nanyang Ave, Block S4, Level B3, Singapore 639798, Singapore
© 2020 Informa UK Limited, trading as Taylor & Francis Group
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J. GUILD
the beginning of 2019 green funds had over US $30 trillion in assets under management,
with money ‘gushing into any kind of asset labelled green or sustainable’ (Landberg,
Massa, and Pogkas 2019). Yet what qualifies an asset as green is unclear. Moreover,
raising funds through capital markets to finance sustainable development is only one
half of the equation.
The second, and perhaps more critical, side of the puzzle is channelling those funds into
productive investments. This poses an enormous challenge as many emerging markets
with high demand for infrastructure also suffer from weak institutions and under-developed financial markets, low levels of human capital, and a lack of feasible green projects in
the development pipeline. As will be discussed below, successful implementation of green
finance hinges on these factors. There may be a healthy demand for bonds labelled as
green – but if there are few attractive projects ready to be financed, or if financial intermediaries in the recipient country are ill-equipped to analyse the project risk, then those
funds are unlikely to have the beneficial impact that capital markets envision.
This paper will analyse these challenges in the context of Indonesia, a rapidly growing
economy with a healthy demand for infrastructure. Indonesia is a useful case study as it
embodies many of the hurdles encountered by emerging markets in implementing
green projects effectively. Indonesia has an unreliable regulatory environment, a powerful
political class of entrenched fossil fuel interests, and relatively under-developed levels of
human capital. It is therefore analytically useful to engage with the practical challenges
of implementing green finance in such an environment in order to identify them and
propose policy reforms that can address them.
The paper will begin by discussing the emerging discourse on green finance. It will then
draw on the school of institutional economics to develop an analytical framework for evaluating the institutional and political constraints on the development of green finance in
emerging markets. This framework will be used to drill down into the challenges Indonesia
has encountered in developing its renewable energy sector. The health of the renewable
energy sector has considerable impact on the sustainability of Indonesia’s economic development, and the analysis will highlight how raising funds earmarked for sustainable development has only limited utility if the intuitional framework is not able to allocate them
efficiently and if the interests of the political class are not sufficiently aligned with this
goal. The paper will conclude by discussing a recent regulatory reform, Regulation 50/
2017, and the potential opportunities it has created for addressing these challenges.
2. Green finance – a nebulous concept
The concept of green finance is still relatively new, and thus the literature as well as basic
definitional issues are still developing. According to a report by the ADBI, green finance
can be broadly conceived as encompassing financial instruments and policies aimed at
underwriting sustainable development such as ‘green bonds, green banks, carbon
market instruments, fiscal policy, green central banking, financial technologies and community-based green funds’ (Sachs et al. 2019).
A report for the G20 settled on a similarly broad scope, defining it as the ‘financing of
investments that provide environmental benefits in the broader context of sustainable
development’ and that benefits could include ‘reductions in air, water and land pollution,
reductions in greenhouse gas emissions, improved energy efficiency while utilizing existing
JOURNAL OF SUSTAINABLE FINANCE & INVESTMENT
3
natural resources, as well as mitigation of and adaptation to climate change and their cobenefits’ (G20 2016).
In an effort to streamline these expansive definitions, the ASEAN Capital Markets
Forum (composed of financial market regulators from ASEAN countries) developed the
ASEAN Green Bonds Standards as a set of voluntary guidelines for the issuance of
green finance instruments in the region. The standards require that any project receiving
funding through green finance ‘must provide clear environmental benefits’ (ACMF 2018).
Eligible projects are those related to renewable energy, energy efficiency, pollution prevention and control, environmentally sustainable management of natural resources and land
use, biodiversity conservation, clean transportation, waste water management, climate
change adaptation and green buildings. The standards also contain disclosure requirements with regards to how bond proceeds will be used.
ASEAN countries wishing to issue bonds that comply with these voluntary guidelines
can therefore use a variety of financial instruments to finance a range of projects. There is
significant latitude for the issuer to define what constitutes ‘clear environmental benefits’
and the pool of eligible projects is wide and varied. Financial markets are being seen as an
increasingly important driver of these types of projects, as investors are beginning to internalize the negative externalities of environmental degradation and this is aligning investor
incentives with sustainability goals (Volz 2018). However it is also clear that raising
capital, even if it is earmarked for environmentally beneficial projects, will have limited
impact in the absence of a pipeline of bankable and high quality projects ready to be developed (Mehta et al. 2017).
The ADB has identified three major impediments to successful implementation of
green finance (Sachs et al. 2019):
(1) Identifying the right projects
(2) Developing complex plans that involve both the public and private sectors
(3) Structuring the financing
All of these components are important to the success of green finance initiatives, and all
of them require competent governance, reliable regulatory architecture and well developed
capital markets with experienced financial intermediaries capable of assessing the credit
risk associated with new financial instruments. These are also areas where emerging
markets tend to struggle, often suffering from eroded institutional capacity, regulatory
uncertainty and under-developed financial systems.
The green finance sector is still relatively under-developed with the majority of activity
taking place in markets with already surging renewable energy sectors like China. Even
countries with well-developed financial systems like Singapore have only begun to
tepidly test the waters, with the Monetary Authority of Singapore (MAS) moving to establish compliance requirements and a limited grant scheme for green projects. Two green
corporate bonds were issued in 2017, but their scope was limited to energy efficient retrofitting of commercial buildings and vaguely defined renewable energy investments (Chang
2019).
Indonesia is one country that has shown enthusiastic support for green finance. In 2014
the Financial Services Authority (OJK) issued a Roadmap for Sustainable Finance, which
included a plan for boosting sustainable development over the next five years (OJK 2017).
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J. GUILD
Four years later, the government issued US $1.25 billion in sukuk, or Islamic, green bonds
in 2018 which are believed to be the first of their kind. These funds have been earmarked
for projects that are environmentally sustainable and comply with Islamic financing laws.
But investors were not provided with a specific list of projects that would be funded by the
bond, and a government spokesman merely indicated the proceeds would be directed
toward renewable energy and green tourism without elaborating (Gokkon 2018). OCBC
Nisp, a subsidiary of Singaporean bank OCBC, also issued a US $150 million green
bond in late 2018 with the guidance of the IFC. The proceeds have been earmarked for
green building development and waste water management projects, possibly in Jakarta
(Tang 2018).
In May 2018, a consortium of eight domestic banks partnered with the World Wildlife Fund to launch the Indonesia Sustainable Finance Initiative, with the aim of improving ‘organizational capacity particularly environmental, social and governance risk
management’ (WWF 2018). While there is a clear need for capacity building, the
MOU the parties signed contained no firm financing commitments or even attempted
to deal with the practical challenges of project selection or how to structure publicprivate partnerships. Thus, while Indonesia has shown enthusiasm for the idea of
green finance, much of the actual work done in the sector has been more aspirational
than actionable.
This highlights both the promise and the peril of green finance. As a broad, loosely
defined concept it appeals to investors who have internalized the long-run risk of
climate change and environmental damage and want to align their investments with sustainability goals. The concept is increasingly being leveraged to raise capital with the goal
of appealing to those types of investors.
But the sector is still a nascent one, fairly niche and under-developed. The ASEAN
Green Bond Standards have established a set of guiding principles defining what types
of projects should be eligible for green financing, as well as laying out basic disclosure
requirements. However, these standards are voluntary and as the case of Indonesia’s
sukuk bond shows compliance can be weak or incomplete. Given the expansive definition
of green finance instruments, as well as the considerable latitude given to issuers in
defining a qualified project, there are likely to be a lot of green bonds and other instruments being issued in the coming years.
As capital inflows begin to accelerate in the green finance sector, the challenge of
finding high-quality, scalable projects that are ready for development in emerging
markets with weak institutions and under-developed financial intermediaries will
become more acute. This underscores the need for better understanding of the institutional and political constraints that might impede project viability in recipient countries.
The following section will propose a framework for analysing those impediments in the
case of Indonesia.
3. Institutional economics & analytical framework
The school of institutional economics, and its offshoot collective action theory, is most
often associated with Douglass North and Mancur Olson. Their work offers a useful foundation upon which to build an analytical framework for this paper, because it identifies
important conceptual puzzles and perspectives without confining the analysis to a
JOURNAL OF SUSTAINABLE FINANCE & INVESTMENT
5
particular theoretical strain. This provides a flexible framework for probing impediments
to green finance in Indonesia in a structured and empirically rich way, without requiring
testable deductive hypotheses. For the study of green finance, a still developing concept
with a paucity of empirical evidence, this kind of inductive approach informed by solid
conceptual principles seems useful.
In The Logic of Collective Action Mancur Olson identified the primary obstacle to the
provision of shared public goods – rational individuals have little natural incentive to
pool their resources and labour toward a shared common goal; they must in some
way be induced to do so, and often one group that stands to receive outsize benefits
from the good will take on the majority of the costs associated with its provision (Heckelman and Coates 2003). Key to his framing of collective action problems is that ‘selective incentives’ are required to overcome natural impediments to cooperation and that
creating such incentives, and enforcing them, frequently falls to the state (Dougherty
2003).
This framing can be applied to the challenge of leveraging green finance for investment
in renewable energy. While capital markets are providing sufficient incentive to investors
who have internalized the negative externalities of environmental degradation and want to
invest in sustainable green projects, the implementation side of the puzzle is more complicated. Particularly in countries with powerful fossil fuel industries, creating sufficiently
attractive selective incentives for renewable energy developers is more problematic, and in
emerging markets the responsibility for creating such incentives often falls on governments with eroded institutional capacity and weak regulatory architecture.
The policy question at the heart of this puzzle is ‘how to get the encompassing political
interests to require individuals to make decisions compatible with the collective good’
(Wallis 2003). Often this is not merely a function of market-based incentives or neoclassical equilibriums. It is a political question, and how a particular political economy is
structured, as well as the interests and incentives of the political class, determines the
answer. The challenge of overcoming collective action problems and sufficiently incentivizing renewable energy companies to develop high-quality projects is the primary impediment to robust renewable energy investment in Indonesia.
This impediment can be more fully understood by applying an institutional economic
framework to diagnose areas that are holding investment back and therefore identify
potential policy remedies and effective regulatory reforms. North proposed a flexible framework for approaching these empirical puzzles, one not bound by the straightjacket of
neoclassical theory. In his framework three inter-related components are paramount:
demographics (the quality and quantity of the work force); human capital (knowledge,
technology); and the institutional design which determines the incentive structure of a
society. Critically, this stresses the importance of the political process in determining
incentive structures. North was frank that this framework did ‘not add up to anything
as elegant as a theory … . What we have so far is a set of definitions and principles and
a structure that make up some of the essential scaffolding necessary’ for understanding
economic change and outcomes (North 1992).
This paper will apply an institutional economic framework in its analysis of collective
action problems and renewable energy development in Indonesia. As this is one of the
sectors where demand for green finance is both very high and where development can
have a significant impact on reducing carbon emissions and mitigating environmental
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J. GUILD
degradation, understanding the political and institutional constraints on growth in the
sector is important. The analysis will focus on two components of North’s framework –
deficiencies in human capital, as well as political factors that have created an institutional
environment that disincentivizes investment in renewable energy.
Renewable energy is the first category listed by the ASEAN Green Bond Standards
as being eligible for green finance. It is a sector where investments, if properly structured, can yield healthy returns while also greatly reducing carbon emissions and mitigating environmental degradation. In emerging markets with ballooning energy
demand, it is also a sector with high growth potential that can shape the sustainability
of energy markets for the long term. Green finance may be a broad and nebulous
concept, but renewable energy development clearly falls under its purview and it is
an attractive destination for capital. That makes it an analytically useful area of
inquiry for this paper.
Moreover, Indonesia has immense potential for renewable energy. The International
Energy Agency estimates the country has the potential to develop 75,000 megawatts of
hydropower, 4.80-kilowatt hours per square meter per day of solar, 32,654 megawatts
of biomass and holds 40 per cent of the world’s geothermal reserves at around 28,000
megawatts (IEA 2015). If incentives are properly structured, and the institutional environment is conducive, then Indonesia’s renewable energy sector would stand to benefit substantially from global demand for green financial instruments.
Yet growth over the last five years in the sector has been largely stagnant, which underscores the two-sided nature of green finance. Raising capital through green financial
instruments will have only limited utility if suitable projects are not ready to be funded
in recipient countries. The following sections will explore the political and institutional
constraints inhibiting growth in Indonesia’s renewable energy sector.
4. Indonesia’s struggle with renewable energy
Despite being endowed with a wealth of potential renewable energy sources, the sector has
seen slow growth in recent years, with very little momentum in new renewables like solar,
wind and biomass gasification. Fossil fuel, especially coal, has remained the dominant
force in the energy mix. As of 2018, nearly 85% of nation-wide installed capacity was generated by coal, gas, oil or diesel fuel (see Figure 1). Grid-connected wind, solar and biogas
contributed just over .5% of total installed capacity.
Recent historical data on electricity generation shows that the dominance of fossil fuels
is growing, and that private sector development is actually being directed toward fossil fuel
power plants rather than renewables (Figures 2 and 3).
This underwhelming performance in the renewable energy sector is not for lack of
trying. In addition to the financial services regulator OKJ issuing a roadmap for sustainable finance in 2014, the Ministry of Energy has been experimenting with various incentives for jump-starting growth in renewable energy since at least 2011. These efforts have
included feed-in-tariffs and government financial guarantees for qualified projects. But
despite years of tinkering these efforts have yielded almost no growth. For instance,
between 2013 and 2017 feed-in-tariffs produced almost no increase in solar, wind or
biomass energy due to poor policy design and regulatory architecture that changed constantly, which drove down investor confidence (Guild 2019b).
JOURNAL OF SUSTAINABLE FINANCE & INVESTMENT
7
Figure 1. Power generation by type of power, calculated based on nation-wide installed capacity (MW).
Source: Ministry of Energy 2018 Handbook of Energy and Economic Statistics.
A report by the Climate Policy Initiative found that between 2012 and 2016 the Indonesian government provided direct and indirect financial support for clean energy projects
totalling IDR 12.4 trillion, or roughly US $870 million. This resulted in the successful
Figure 2. Power generated by PLN owned and operated plants, by type of power, 2008–2018.
Measured in GWH.
Source: Ministry of Energy 2018 Handbook of Energy and Economic Statistics.
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J. GUILD
Figure 3. Power generated by privately owned and operated plants, by type of power, 2008–2018.
Measured in GWh.
Source: Ministry of Energy 2018 Handbook of Energy and Economic Statistics.
development of 2,140 MW of additional generating capacity. The study found that
financial guarantees offered by the Ministry of Finance had the most impact in incentivizing private investment in the renewable energy sector, while direct disbursements to villages and adjustments to regional budgets had almost no effect, though they may have
been channelled into small off-grid developments (Rakhmadi, Haesra, and Wijaya
2018). By comparison, 7 mega-power projects of 1,000 MW or larger including 6 coalfired and 1 natural gas-fired plant, have attracted in excess of US $17 billion in private
sector investment and will yield 11,000 MW of increased generating capacity over the
next 1–4 years (Guild 2019a).
This captures the importance of considering project feasibility in any analysis of green
finance. Investors may be eager to purchase bonds or other instruments labelled as green
with the understanding that they will be used to finance renewable energy projects in
Indonesia. But the sector is not prepared to receive these inflows and channel them
into productive projects. This is evidenced by several years of dedicated policy efforts
which have failed to accelerate sectoral growth while fossil fuel continues to expand its
dominance in the energy mix. Without better disclosure requirements holders of these
instruments might not even be aware of how the capital is being allocated, as in the
case of Indonesia’s US $1.25 billion sukuk green bond. The following section will look
at some of the specific areas that are constraining productive allocation of green
financing, especially human capital levels and institutional design.
5. Constraints on growth
The first constraint on green finance in Indonesia is low levels of human capital and a lack
of experience with novel financial instruments like green bonds. This lack of experience
JOURNAL OF SUSTAINABLE FINANCE & INVESTMENT
9
means financial intermediaries may be slow to realize the potential of green finance, and
from a more practical standpoint will also struggle to properly analyse and underwrite the
risk associated with these investments. This is likely to create mismatched investor incentives, skew risk-reward calculations and impose significant inefficiencies on the sector.
A survey of domestic and foreign banks in Indonesia seeking to gauge overall industry
perceptions of sustainable finance found that ‘due to limited knowledge and understanding of local banks relative to [foreign] banks, the implementation of sustainable finance is
still partial, sporadic, ad hoc, undocumented, and unpublished.’ This was primarily linked
to a lack of knowledge, training and experience with sustainable finance, and specifically
local banks’ ‘limited understanding of international best practice and international standards of sustainable finance’ (Halimatussadiah et al. 2018).
This conclusion was echoed in an analysis by the Resilience Development Initiative
which noted that inadequate capacity and experience in environmental risk analysis has
held back green finance because of ‘difficult investment conditions, inconsistent policies
and complex permission procedures’ and that ‘these obstacles are mostly experienced
by foreign investors with considerably ample liquidity who wish and show strong interest
to do business in Indonesia’ (Adhitya 2019). Therefore, even if capital market demand for
green bonds is high, lack of experience and knowledge of these instruments as well as cumbersome regulations in Indonesian financial intermediaries will impose significant transaction costs on the allocation of funds.
The second major impediment involves poor institutional design and misaligned incentives for Indonesia’s political class. The energy market in Indonesia is dominated by stateowned electricity utility PLN (Persusahaan Listrik Negara), which has a monopoly on
transmission and distribution of power. Since the 1990s the power generation market
has been opened to competition from independent power producers (IPPs), which typically
enter into power purchase agreements (PPAs) of 20–30 years with PLN where the utility
agrees to purchase power at a fixed price for the duration of the contract. PLN is the
only off-taker in Indonesia, giving it considerable leverage in negotiating these contracts.
Yet the utility also owns and operates the majority of power plants in the country, generating almost 174,000 GWh of electricity in 2018 compared to 61,450 GWh from private
companies (Ministry of Energy 2018). This means the institutional design of the energy
market in Indonesia creates a situation where the sole off-taker is tasked with entering
into purchase agreements with private companies against which it is also competing for
market share. Moreover, there is an influential lobby of economic nationalists with prominent positions in both public and private institutions who prefer that state-owned companies maintain a monopoly on the generation of power. PLN leadership would prefer, in
most cases, to develop all projects itself as it would mean greater market share and larger
injections of state capital.1 These institutional constraints actively work against private
sector involvement in Indonesia’s energy market.
The incentives for private developers in the renewable sector are even more misaligned
due to the influence of the powerful extractive industries lobby. Even though the institutional design of the energy market provides limited incentive for PLN to be an honest
negotiating partner, large privately built coal-fired plants worth billions of dollars have
still reached financial closing regularly during President Joko ‘Jokowi’ Widodo’s first
term in office. Indonesia has large coal reserves, and many of the largest coal-mining companies have strong political connections. For instance, the former vice-governor of Jakarta
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J. GUILD
and former vice presidential candidate, Sandiaga Uno, is an investor in financial holding
company PT Saratoga Investama Sedaya. One of Saratoga’s subsidiaries is PT Adaro
Energy, Indonesia’s second largest coal mining company which is part of a consortium
currently building the 2,000 MW coal-fired Batang Power Plant in Central Java valued
at over $4 billion (Bosnia 2018).
There is no evidence of any illegal activity on Sandiaga’s part, but there is clear crosspollination between fossil fuel interests and politics in Indonesia. This again creates an
institutional environment that fails to provide incentives for renewable power development. If solar, wind and biomass gasification were to see rapid growth they would pose
a direct threat to the commercial interests of Indonesia’s political class, and the powerful
extractive industry lobby which holds a dominant position in Indonesia’s political
economy.
These political and institutional constraints mean that green finance will struggle to
find feasible renewable energy projects in Indonesia. Financial intermediaries in the
country currently lack adequate capacity and experience to properly analyse and underwrite environmental risks and investments. The institutional design of the energy
market itself also works to discourage private developers, and especially private developers
of renewable power that might threaten the dominance of the politically powerful extractive industries lobby. However, a recently passed Ministerial Regulation does open the
possibility of effective, targeted project development in more remote parts of Indonesia
and it is these areas which may stand to benefit the most from green finance.
6. Regulation 50/2017
At the end of 2017, the Ministry of Energy passed Ministerial Regulation 50/2017. This
benchmarks the price that PLN can pay to off-take power from IPPs to its local and
national costs of production (known as Biaya Pokok Penyediaan or BPP in Indonesia).
In other words, PLN will not pay more to IPPs to purchase power than it costs for the
utility to generate electricity from its own plants.
In Java and Sumatra, which have large grids powered mainly by cheap coal-fired
plants, this means more expensive renewable energies like solar or wind will struggle to
be competitive. In 2016, for instance, PLN’s cost of production on Java was just over 6
cents per kWh (Wulandari 2017). Under the old regulatory framework, the feed-intariff for solar was between USD 25 and 30 cents per kWh, and even at this above
market rate it failed to induce investment at scale. Now that PLN is more constrained
in what it can pay, solar is less likely to be financial competitive on Java where demand
is highest. The implications of this regulation are explored in more detail in the following
table (Table 1).
The first three columns in the table show the electrification ratio, kWh sold per capita
(which serves as a proxy for demand) and PLN’s local cost of production (BPP) in each
province and region denominated in USD as of 2018. The remaining five columns
show installed capacity in MW according to power source as of 2017.
The BPP in Java and Bali, areas with high per capita demand and close to 100% electrification, does not exceed 7 cents per kWh. If that is the maximum that PLN can pay to
off-take power from IPPs, solar and wind will struggle to be competitive against lower-cost
coal. The table also indicates that with over 32,000 MW of installed capacity generated by
JOURNAL OF SUSTAINABLE FINANCE & INVESTMENT
11
Table 1. This table summarizes, according to province, 2018 electrification ratios, 2018 kWh sold per
capita, PLN’s local cost of production in USD (BPP) as of 2018, and 2017 installed capacity in MW of
coal/gas/oil, diesel, hydro, geothermal and new renewables which include solar, wind and biomass.
2018
Elec %
2018
kWh/cap
2017 Installed Capacity (MW)
2018
BPP USD
Coal/Gas/
Oil
Diesel
Hydro
Geothermal
New
Renewable
East Java
94.91
903.7
6.94
7,862.00
26.38
311.12
0.00
0.00
Central Java & DIY
99.77
689.7
6.91
6,723.90
0.00
312.75
60.00
0.00
West Java
100.00 1,011.5
6.91
4,134.80
0.00 2,013.56 1,114.80
9.00
Banten
93.60 1,835.0
6.91
7,443.40
0.50
0.00
0.00
0.00
Jakarta
100.00 3,132.0
6.91
6,079.74
16.08
0.00
0.00
0.00
Total Java
97.66 1,514.4
6.916
32,243.84
42.96 2,637.43 1,174.80
9.00
Bali
99.57 1,223.1
6.91
684.10
225.96
0.00
0.00
1.33
Aceh
99.83
490.1
11.74
25.00
187.65
11.62
0.00
0.00
North Sumatra
100.00
717.5
10.18
2,754.34
955.11 1,093.50
0.00
30.00
West Sumatra
97.45
642.0
7.43
0.00
50.26
8.58
0.00
0.19
Riau
89.07
646.0
11.61
14.00
334.96
0.00
0.00
4.80
Riau Islands
84.69
986.0
14.74
383.70
498.64
0.00
0.00
0.20
South Sumatra, Jambi
89.69
543.1
7.45
2,870.91
977.92
633.16
110.00
0.00
& Bengkulu
Bangka-Belitung
100.00
739.7
15.73
101.20
163.87
0.00
0.00
0.33
Lampung
92.65
505.7
7.29
10.00
4.38
0.00
110.00
0.00
Total Sumatra
94.17
658.8
10.77
6,159.15
3,172.79 1,746.86
220.00
35.52
West Kalimantan
86.98
473.1
10.70
168.00
422.59
4.22
0.00
8.68
South & Central
88.91
561.0
11.80
1,430.20
645.50
30.00
0.00
83.00
Kalimantan
East & North Kalimantan
97.02
848.7
10.58
966.71
534.40
0.26
0.00
10.18
Total Kalimantan
90.97
627.6
11.03
2,564.91
1,602.49
34.48
0.00
101.86
North, Central Sulawesi
89.75
490.8
15.88
201.00
401.65
323.98
80.00
121.59
& Gorontalo
South, Southeast &
94.30
526.7
14.58
1,139.13
411.55
199.10
0.00
0.88
West Sulawesi
Total Sulawesi
92.03
508.8
15.23
1,340.13
813.20
523.08
80.00
122.47
Malukus
86.37
334.5
19.84
14.00
371.26
0.00
0.00
2.49
Papua
55.99
347.5
17.86
100.20
400.99
29.59
0.00
1.00
West Nusa Tenggara
90.43
347.4
16.77
60.00
344.04
13.62
0.00
0.83
East Nusa Tenggara
56.34
171.8
19.46
23.50
244.37
5.18
27.99
1.65
Sources: BPS Electric Statistics 2012–2017; PLN 2018 Statistical Report; Ministry of Energy and Mineral Resources Decree 55/
K20/MEM/2018.
steam, gas and combined cycle power plants, fossil fuel is overwhelmingly dominant in the
energy mix of Java.
The average BPP for the island of Sumatra is moderately higher, at 10.77 cents per
kWh, and much higher in some regions, such as Bangka-Belitung where it reached
15.77 cents per kWh. In North and South Sumatra, however, fossil fuel still dominates
and a price of 10 cents per kWh may not be sufficiently high to attract investment in
renewables at scale. Similar conditions prevail on the island of Kalimantan, where the
BPP does not rise above 12 cents per kWh. Under the conditions created by Regulation
50/2017, some moderate gains in renewable energy on Java, Sumatra and Kalimantan
are possible but will likely benefit from being targeted at regions with a higher BPP.
On Sulawesi the BPP is higher, averaging above 15 cents per kWh and the island has
significant wind power potential as evidenced by 122.47 MW of installed capacity, the
largest amount of wind power in Indonesia. On the islands of Papua, East and West
Nusa Tenggara and the Malukus the potential for renewable energy development in the
short-term may be greatest. As indicated by the table, these four regions rely almost exclusively on diesel power (1,366 MW), much of which is imported. Coal is a relatively minor
12
J. GUILD
portion of the energy mix, and the BPP in those areas is high, between 16.77 and 19.84
cents per kWh. This means PLN can pay a competitive tariff to off-take renewable
energy from private developers, and is incentivized to do so in order to reduce its reliance
on imported diesel.
Because coal is not dominant in these areas of Indonesia, which also have relatively low
per capita demand, developing moderate renewable projects poses little threat to the
market dominance of coal or the political interests of the extractive industries lobby.
While Regulation 50/2017 means solar and wind will struggle to be competitive on Java
or Sumatra, it does create an institutional and regulatory framework that provides attractive
and practical incentives for private renewable developers in more remote parts of Indonesia
without infringing on the existing incentive structure of Indonesia’s political class.
Realistic, high-quality renewable energy projects in Indonesia would thus benefit from
development efforts channelled mainly toward Eastern Indonesia – Sulawesi, Papua, the
Malukus and East and West Nusa Tenggara. Coal companies and their political interests
have less incentive to undermine these investments as they pose little threat to their market
dominance, and PLN under the current regulatory framework can purchase power from
these projects at attractive rates. The incentives of investors, developers and the political
class are therefore aligned, and as there is significant demand in capital markets for
green investment vehicles this could help drive renewable development where it would
be needed most.
The ADB has already begun targeting significant investment at renewable energy development in Eastern Indonesia, and two wind farms totalling more than 150 MW were
recently completed in Sulawesi with financing from the bank, the first wind power of
any significant scale in Indonesia. The ADB plans to mobilize around US $3 billion for
financing of energy projects, mostly in Eastern Indonesia, which aligns with the strategic
imperative of directing capital for green projects to the areas in Indonesia where it will
have the most impact (ADB 2018). If green finance is to be applied effectively in Indonesia,
modest renewable energy projects in Eastern Indonesia are one of the most promising
fronts as the ADB is demonstrating.
7. Conclusion & policy implications
Green financial instruments like green bonds can be harnessed to fund a wide range of
environmentally beneficial projects, of which there are potentially many in Indonesia.
Using the ASEAN Green Bond Standard, projects eligible for green financing include retrofitting commercial buildings, mitigating climate change and engaging in more sustainable land use management, for instance in the country’s large palm oil industry. But
renewable energy may offer perhaps the most attractive destination for capital looking
to align with sustainability goals as Indonesia’s growth in electricity consumption
coupled with an energy mix heavily tilted toward fossil fuels means the sector offers the
possibility of strong financial returns while its growth would help displace the dominance
of coal in energy generation.
Yet the sector has struggled to execute projects at scale, despite years of policy and regulatory effort. Using an analytical framework drawn from institutional economics, this
paper argues the main impediments to growth can be traced back to low levels of
human capital (lack of capacity and experience in domestic financial intermediaries
JOURNAL OF SUSTAINABLE FINANCE & INVESTMENT
13
with novel instruments like green finance) and an institutional design that makes it hard
for private capital to compete against the dominance of state-owned companies in energy
markets, as well as the entrenched interests and political influence of the extractive industries lobby.
However, Regulation 50/2017 has recently created a more conducive regulatory
environment for green investments in more remote areas of Indonesia which often rely
mainly on expensive imported diesel for power. Small-scale wind and solar projects in
Sulawesi, the Malukus, Papua and East and West Nusa Tenggara would be eligible for
attractive rates from PLN and it side-steps the institutional and political constraints
that have held back renewable development in Java and Sumatra, as renewable projects
in remote parts of the archipelago pose no threat to the market dominance of coal.
These areas could potentially be high growth opportunities for the allocation of green
financial instruments under the current regulatory framework.
Note
1. Author interview with Mr. Purnomo Yusgiantoro, former Minister of Energy of Indonesia
2000–2009. Jakarta, February 11, 2019.
Disclosure statement
No potential conflict of interest was reported by the author.
ORCID
James Guild
http://orcid.org/0000-0002-1655-2315
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