IEEFA Report: Renewables key to financial stability and climate goals in Indonesia’s power sector

Indonesia is at a pivotal juncture, with less than seven years to meet its Paris Agreement goals, emphasizing the urgency for sustainable energy practices. PT Perusahaan Listrik Negara (PLN), the national electricity utility, is poised to lead this transformation by transitioning from coal to renewable energy sources, according to a new report authored by Mutya Yustika, an Energy Finance Specialist at the Institute for Energy Economics and Financial Analysis (IEEFA).

Yustika states, “Our new report illustrates the financial case to gradually retire coal-fired power plants and scale up the development of more financially sustainable renewable energy, especially solar and wind power plants.”

PLN has been grappling with financial difficulties, heavily relying on government subsidies and compensations to cover operational costs.

In 2022, the utility received about 123 trillion Indonesian Rupiah (approximately US$8 billion) from the government.

Yustika comments on the situation, saying, “Subsidies and compensation for PLN have become a significant burden on the government’s budget and will remain so for the foreseeable future.”

She also highlights the economic advantages of moving away from coal, “The gradual retirement of these coal-fired power plants offers benefits such as decreasing exposure to coal price volatility and reducing the significant maintenance costs.”

Despite the goal to improve PLN’s financial performance, previous government programs aimed at expanding coal power significantly increased PLN’s financial burden due to high operating and maintenance costs. The disparity between the average basic cost of generating electricity (BPP) and the electricity tariff is a core factor in determining the subsidy level, which has been a contentious issue due to the potential public backlash against tariff adjustments.

Furthermore, Yustika found an inconsistency in PLN’s coal purchasing costs and actual electricity generation, suggesting inefficiencies. She explains, “PLN’s revenue from coal purchasing and purchased electricity has not translated to greater coal-fired electricity generation, indicating potential energy production inefficiency.”

As of December 2023, PLN has around 20.4 gigawatts (GW) of coal-fired power plants, 23% of which have been operating for more than 20 years. Yustika notes, “The gradual retirement of old coal-fired power plants would reduce the significant maintenance costs as the economic benefits of old plants decrease with age.”

Looking towards the future, Indonesia’s renewable energy target of 23% by 2025 appears challenging, with renewables only contributing 13.1% to the energy mix in 2023.

Indonesia announced earlier in January this year its plans to reduce the targeted share of renewables in the national energy mix.

The revised target, proposed by the National Energy Council (DEN), is set to range between 17 and 19 percent by 2025, a significant decrease from the previous goal of 23 percent for the same period.

Arifin Tasrif, the Minister of Energy and Mineral Resources, acknowledged to local media the slow pace of renewable energy development, attributing it largely to the predominance of coal-fired power plants.

Yustika criticizes the existing perceptions within PLN, stating, “Indonesia is set to miss its renewable energy target because of PLN’s mistaken notion that large-scale development of renewable energy is costly.”

She counters this by highlighting the reduced costs and improved efficiency of renewable technologies, “As renewables become much cheaper than coal, reducing Indonesia’s coal dependence and accelerating renewable energy deployment will help fulfill the country’s Paris Agreement commitments and its financial goals.”

This report not only calls for a strategic overhaul within PLN but also aligns with global economic and environmental trends favouring renewables over traditional coal power.