Indonesia's Coal Price Cap: A barrier to renewable energy deployment

Indonesia's coal price cap encourages the consumption of coal while slowing the integration of renewable energy into the country's power grid.

Key Messages

• A price cap on mandatory sales of Indonesian coal to Perusahaan Listrik Negara (PLN), the state-owned electricity company, distorts the market and locks in coal consumption
• There are five other viable strategies to shore up PLN's finances without harming the integration of renewable energy into Indonesia's power supply
• While subsidy reforms may affect consumer power prices, there are additional strategies to offset these impacts

Indonesia requires coal mining companies to supply part of their coal production to the domestic market, with much of this coal eventually delivered to coal-fired power plants.

The domestic market obligation, introduced in 2018, includes a cap on the prices coal suppliers can charge, reducing the cost of coal for coal-fired power stations. This regulation functions as a consumption fossil fuel subsidy, designed to keep electricity prices stable as well as protect the finances of government-owned electricity distribution company Perusahaan Listrik Negar (PLN) from sudden hikes in coal prices.

This policy brief finds that this glut of cheap coal-powered electricity effectively locks out renewable energy projects in Indonesia. The authors review the impacts of the coal price cap on renewable energy deployment and discuss five alternative strategies to sustain PLN’s finances without harming the integration of renewables into the power system.