Using Public Funding to Attract Private Investment in Renewable Energy in Indonesia

Achieving a Fossil-Free Recovery in Indonesia | Brief 3

Indonesia is holding the G20 Presidency in 2022, and sustainable recovery and clean energy transitions will be part of the agenda. Indonesia has an opportunity to accelerate its energy transition by supporting renewable energy development in the country. The private sector will be critical to this transition. However, the right mechanisms and policies have to be put in place to incentivize private actors to invest in the sector.

This brief analyzes how public funding can be used to leverage much-needed private funding in renewable energy development in Indonesia.

By Murtiani Hendriwardani, Anna Geddes, Theresia Betty Sumarno, Laura Hohenberger on February 23, 2022

As the next G20 Presidency, Indonesia has an important role to play in ensuring that the objectives of a sustainable recovery and clean energy transition are achieved. The country can use this opportunity to showcase its efforts to transition away from fossil fuels to renewable energy. In 2020, Indonesia spent IDR 20 trillion (USD 1.4 billion) on its renewable energy sector, representing 7.8% of its total investment in the energy sector. The rest of its investment (IDR 237 trillion, or USD 16.5 billion) went to fossil fuels.

Indonesia can accelerate its energy transition by supporting renewable energy development in the country. The current realization of renewable energy investment is far below the amount required to achieve the nationally determined contribution (NDC) target of 23% share of new and renewable energy in the national energy mix by 2025. Private investment will be needed to meet this target. There are different mechanisms the GoI can put in place to accelerate private funding of renewables. Public financial institutions (PFIs) can help Indonesia to achieve this target. The government can leverage these PFIs to incentivize private investment in renewable energy. By leveraging public funding in the form of fiscal incentives, budget transfers, and capital injections to attract private investment in new and renewable energy, Indonesia can also send positive signals to the international community and showcase its efforts in the G20 Presidency.

In addition to this, Indonesia can increase the clarity and traceability of the financial flows directed to specific projects to increase the trust of international funders as well as to unlock the potential to further increase private investment and boost investor confidence. The GoI can also mandate PT PLN, PT Pertamina, and other energy SOEs to adapt their strategies to align with the established NDC targets more closely. In terms of renewable energy projects in the country, the GoI should also increase investment targets for solar photovoltaic and wind power in addition to its current investment in geothermal energy and increase policy stability to boost investors’ confidence.

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