Monday, February 11, 2019

Indonesia: Regulatory Uncertainty and Coordination Breakdowns Explains Lack of Growth in Geothermal Energy Sector - Opinion

Opinion: Indonesia’s struggle with renewable energy (East Asia Forum)

by James Guild, S. Rajaratnam School of International Studies (RSIS)

While the levelised cost of renewables has dropped dramatically in the last few years, inducing investment at scale in Indonesia is still a more expensive proposition than in places that have seen faster growth, such as China and India. This is because regulatory uncertainty and a cumbersome bureaucracy tend to inhibit investor interest unless PLN is willing to pay above market prices. This adds to the cost, even in an era of increasingly inexpensive renewables.

But PLN is not flush with cash. Indonesia has a constitutional mandate to provide affordable electricity to its people, putting the utility in a tough spot when it comes to developing a sustainable financial model. The Ministry of Energy, not PLN, sets the consumer price of electricity. These rates have been frozen through the build-up to the election. With its ability to raise revenue constrained, PLN must keep costs down in order to remain solvent. With access to cheap domestic coal and no political appetite for passing the high initial costs of renewable technologies onto the public, the most prudent way to keep costs in check is to lean into inexpensive fossil fuels.

For instance, the pricing mechanism for geothermal power was initially pegged to oil prices, which then changed to a ceiling price for all of Indonesia and finally ended up as a feed-in tariff that was rolled out by the Ministry of Energy without consulting the Ministry of Finance. The regulatory uncertainty and coordination breakdowns go a long way in explaining the lack of growth in the sector.

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