World Renewable Energy Regional Congress and Exhibition, Jakarta 17-21 April 2005

FINANCING RENEWABLE ENERGY

UTILIZATION IN INDONESIA: NOTES
Hanan Nugroho
National Development Planning Agency (BAPPENAS)
Taman Suropati 2, Jakarta 10310, INDONESIA
Tel/Fax. (62-21) 391-2422. email:nugrohohn@bappenas.go.id

ABSTRACT: Renewable energy is a promising energy for Indonesia, an archipelago of

more than 60,000 rural villages and thousands of small/remote islands. While there is
growing environmental concern that favor to renewable energy than fossil fuels, the
Electricity Law No. 20 Year 2002 has put the use of renewable energy a high priority.

There are financial schemes have been implemented in financing renewable energy
projects in Indonesia. The first source is the (central) government development budget,
allocated through government agencies such as BPPT, Min. of Energy, Min. of
Cooperatives, etc. Other source is grant/technical assistance from bilateral and
multilateral agencies. To wide-spread the use of photovoltaic, the Government of
Indonesia has even taken loans from multilateral funding agencies. The GOI has also
developed schemes so that local government might propose for overseas loans directly,
including for renewable energy development. Indonesia’s absorption of the growing pro
poor, green and carbon funds is low.

This paper describes Indonesia’s experiences in financing renewable energy projects. It

discusses the current financing practices, and proposes the development of financing
scheme that include collaboration among Local Government, the State-owned company,
Dealers/Supplier and Users, and the establishment of Designated National Authority &
Renewable Energy Office.

Keywords: finance, renewable energy, Indonesia.

I. INTRODUCTION

Renewable is a promising energy for Indonesia, a country rich in fossil fuel resources but also
blessed with renewable potentials. Indonesia can no longer depend heavily on fossil fuels,
particularly oil, which is being used lavishly but depleting fast in the country. There is growing
environmental concern that favor to renewable energy than fossil fuels. The archipelago consists
of more than 60,000 rural villages and thousands of small/remote islands, where access to modern
electricity grid and fuels is constrained. Electricity Law No. 20 Year 2002 and the Rural

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Electrification program being implemented in the country have put the use of renewable energy a
high priority.

The potential of Indonesia’s renewable energy is shown in Table 1 [7]. Surveys have identified
217 geothermal prospects, 70 of them may provide energy of about 27 GW. So far, the installed
geothermal plant is only 800 MW. The Government has enacted the Geothermal Law No. 27
Year 2003 to promote the development of geothermal. The potential of hydropower (large, mini
and micro) is theoretically about 75 GW, spread-out in more than 1,300 locations. The utilization
of large-scale hydro power is 4.3 GW (just about 5.6 percent of the country’s potential), while
utilization of mini-micro-hydro is about 84 MW (out of 500 MW potentials). The Ministry of
Energy & Mineral Resources has established a Mini-Micro Hydro Clearing House to provide
information and networking on mini-micro power development.

As a tropical country, Indonesia has great potential to utilize solar energy. The use of thermal
solar for cooking and drying of agricultural products is still limited, while as water heater it has
reached a commercial phase. The use of SHS (solar home system) has for some periods been
promoted by the Government, and is now reached a semi-commercial phase. The use of wind
energy in Indonesia is very small (about 0.6 MW installed capacity in the Eastern Region), due
mostly to the wind velocity which is quite low. Being an agriculture and rural country,
Indonesia’s use of biomass as a traditional fuel (firewood, etc.) is quite large, predicted to be
around 1/3 of the total energy consumed in Indonesia. However, the use of biomass as a modern
fuel has not been developed well yet.

Table 1. Indonesia’s potential of renewable energy

Type Potential Installed Capacity
Hydro Power 75.67 GW 4,200 MW
Geothermal 27 GW 807 MW
Mini/micro-hydro 500 MW 84 MW
Biomass 49.81 GW 445 MW
2
Solar Energy 4.8 kWh/m -day 8 MW
Wind Energy 3-6 m/sec 0.6 MW
Source: Directorate of Electricity & Energy Utilization, 2004.

Several financial schemes have been applied in financing renewable energy utilization in
Indonesia. This paper looks at the current practices of financing renewable projects in Indonesia,
discussion and lesson learned, and proposed ideas. The samples taken are mostly from
photovoltaic and micro-hydro projects.

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II. FINANCING RENEWABLE ENERGY UTILIZATION: THE CURRENT

PRACTICES

The first and main source of renewable energy finance is the (central) government “DIP”
(development budget). The budget is allocated to government agencies such as Ministry of
Energy & Mineral Resources, The Agency of Technology Assessment & Application (BPPT),
Ministry of Cooperatives, Ministry of Health, etc. to finance their renewable energy projects.
The projects by these government agencies, although carried out in several remote areas far from
the capital city Jakarta, are considered as the (central) Government’s projects and so far directed
mainly by these (central) government offices.

The mechanism for using (central) government budget is quite simple: the respected government
agencies propose the program for renewable utilization (projects that need renewable energy
application) and their budgets to Ministry of Finance/National Development Planning Agency
(BAPPENAS). After evaluating them, as long as the fund available, the BAPPENAS / Min. of
Finance (People Assembly for some large projects currently) will agree to allocate the amount of
the proposed budget to those respected agencies for carrying out their projects.

The second financial source for renewable energy projects (mostly to the government agencies) is
grants/technical assistances and soft loans from bilateral and multilateral agencies. Respected
ministries/government agencies submit their project proposals to BAPPENAS, including
grants/loans needed. Some proposal might be sent directly to the donor agencies. It is then
BAPPENAS task’s to evaluate whether the proposal is fundable, and search for donor agencies
that might have interest to finance the proposed projects. In addition, BAPPENAS provides local
funding/portion to finance the proposed projects that include not only the physical projects but
also their feasibility study, etc.

The third source of finance related to the issue of regional autonomy being promoted recently in
Indonesia. With the issuances of Law No. 22 Year 1999 on Regional Government and Law No.
25 Year 1999 on Central and Regional Government Finance, a larger amount of budget became
available to Regional Government, especially where considerable natural resources available in
their regions. The Regional Governments’ budget to finance their projects is becoming larger,
including for renewable energy projects. The GOI has even developed schemes so that local
government might propose for overseas loans directly (Min. of Finance Decision No. 35 Year
2001). This type of loan can be used for non-renewable energy development purpose. However,
so far, there has been no overseas loan proposed by local government for the purpose of
renewable energy projects. The number of renewable energy projects initiated and financed
solely by Regional Governments is quite rare.

The government is still the largest actor and fund provider of renewable energy projects in
Indonesia. The government –through those government agencies-- usually makes energy
available to the villagers /remote areas using solar thermal, PV, micro-hydro, etc. It is currently
not only the Central Government and its line ministries/agencies that provide fund for the

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utilization of renewable energy, but also the Local (Provincial) Government. Even, there are
“kabupaten” (district) governments that provide funding for renewable energy (PV, micro-hydro)
development in their respected regions.

During REPELITA (Five Year Development Plan) VI (1994-1999), there was Sub Directorate for
Rural Electrification established in BAPPENAS, devoted to boost rural electrification
development in Indonesia. The Sub-Directorate led the preparation for national rural
electrification master plan (including share allocated for non-grid electricity), finance the rural
electrification program and monitor the progress of the program. The utilization of renewable
energy (PV, micro-hydro, etc.) was part of the rural electrification strategy. The target was that
by the end of the REPELITA VII, Indonesia’s rural electrification ratio had achieved 79 percent.
The 50 MWp program, the program to electrify 1 million rural houses in 9 provinces using 50 W
photovoltaic each was established during the period.

Before the REPELITA VI however, efforts have been done by agencies such as BPPT and
Directorate of Electricity & New Energy Development to plan and finance renewable energy
projects, for instance by using the BANPRESS (Presidential Aid) scheme. The development of
micro-hydro in particular, has been supported by international financial/technical agencies, such
as GTZ, JICA and European Union.

While the financing schemes using entirely the Government of Indonesia’s budget (pure Rupiah)
has increased during the last decade, the combination of local funding and foreign sources (mixed
financing) has also been growing recently. To wide-spread the use of photovoltaic system, the
Government of Indonesia had even taken loans from multilateral funding agencies, begun in
RELITA VI period, particularly to support the 50 MWp project. The implementation of this quite
“ambiguous” program has increased the proportion of overseas loans/grants in solar/renewable
projects finance. However, the pure Rupiah is still made up the largest part of the allocated fund
for solar utilization in Indonesia so far. Table 2 presents basic features of the 50 MWp projects,
which is maintained primarily by BPPT. The program is not quite success, mainly due to the
Indonesian financial/economics crises in 1997/98 that decrease significantly the villagers’ ability
to repay project costs.

Table 2. Part of the 50 MWp SHS project

Projects Phase # of SHS Units # of PV Hybrid System Join finance with
I 36,400 14 AUSAID, Australia
II 1,000 1 E7
III 200,000 World Bank
IV 1,300 1 France
V 2,750 2, + 3 pumping system
Source: [9]

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The fourth source of renewable project finance comes from the rising global concern on
environmental problems/renewable energy and the concern to reduce the world’s poverty. The
global environmental concerns, particularly mitigation of climate change issues have provided
developing countries with several financing options to apply more environment-friendly energy
technology. As well, the concern to reduce poverty (i.e., as stated by the UN Millennium
Development Goals) and help the poor to get access to modern energy has increased the available
fund for utilizing renewable energy in developing country, provided by several international
agencies and foreign governments.

The World Bank Group includes GEF, ASTAE, ESMAP, IFC, the Asian Development Bank, and
the overseas development agencies such as JICA, DANIDA, CIDA, SDR, NEDO among others,
provide financial/funding services that might reduce transaction costs and risks in renewable
energy technology and its market development. It also possible to build services networks and
develops skills to manage credit mechanisms and local business using the fund they provide.

There are other promising carbon fund financing offered by new “carbon finance agency”, those
multilateral institutions and developed country governments.

The world acceptance of the Kyoto Protocol recently would generate more funds available to
implement renewable energy, through the Kyoto’s Clean Development Mechanism (CDM)
scheme. However, it must be said that so far Indonesia’s preparation and absorption of these
financing facilities is still very low/late.

The other source of funding is the local business entrepreneurs, who see business prospects from
renewable energy development projects. The number of these entrepreneurs is still very limited,
as well as the projects they involve (usually limited to only PV projects). In addition, the
local/rural banks that finance renewable energy projects, generally work only as a channeling to
the other larger financial institutions.

As for geothermal projects, which need larger amount of funding than the other ordinary
PV/micro-hydro ones, the financial scheme is similar to that used for the other electricity plants.
Since the government funding capacity is limited for this type of projects, other sources of
finance is usually searched from multilateral/bilateral funding agencies. The CDM scheme, that
in a certain amount may provide “finance” for geothermal projects, is being studied and adopted
recently (for example in Lahendong geothermal project, North Sulawesi).

III. DISCUSSION AND LESSON LEARNED

Renewable energy is appropriate option for some places and usages in Indonesia. There are
many areas in the archipelago far from the services of electricity grid and other marketed fuels.
The micro hydro is alternative electricity generation in rural areas, while SHS (Solar Home
System) would be the largest application for lighting in rural/remote areas. The other segments

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of PV market in rural areas are the thousands of village clinics, schools, remote offices and water
pumping applications. There are large un-explored potentials of using biomass (rice husk,
baggage, coconut palm, etc) energy, as electricity and fuel.

With the current national electrification ratio of about 55 percent (82 percent of villages
electrified) and the slow progress of other rural infrastructure development (such as rural road in
particular) means that the rural villages to be electrified are getting more remote and scattered. It
also means that the potential for using energy sources which are locally available (micro hydro,
for instance) and the ones that are easily movable (PV/SHS) are getting bigger.

The cost competitiveness of renewable is still low compared to many other energy systems.
However, since renewable technology has its own application competitiveness, it is not always
necessary to compare their use based on costs, either in large scale or small scale use. More over,
there is a promise that the costs for using renewable energy technology becoming cheaper. The
support of government (and other stakeholders) is still important. A simple rule can be applied
that today in Indonesia renewable energy is becoming more competitive especially when the
current low oil prices in domestic market is gradually increased by the government.

Nevertheless, since the largest part of the costs for PV/SHS and micro-hydro system is up-front
cost, efforts have to be made to reduce this up-front cost so that the system would be more
accessible / payable by rural consumers. Government help in reducing this up-front cost is
essential, which can be done by giving direct subsidy to the project development, assisting in
reducing interest rate, etc. The government has to develop renewable energy, since electricity in
some degree can be considered as infrastructure which has to be provided by the government as
its PSO (public service obligation). Renewable energy projects, carried out in rural areas, can be
considered as a way of alleviating poverty.

However, project sustainability is still a critical issue to be considered in developing renewable

energy project in Indonesia. The projects should involve, as large as possible, local people of the
projects site/nearby, who then will be responsible for maintaining (including fee collecting) after
the projects is constructed. The necessary skills, including projects financing and management
should be transferred to local/regional people and government, rather than be carried out by
(central) government agencies.

Cooperation between agencies in central government/research centers which have already had
expertise with agencies in the regional government must be carried out with a purpose to increase
the regional government capacity, and in turn, to transfer these related works to regional/local
governments and the villagers.

It is necessary to review the master plan for rural electricity development first developed during
REPELITA VI (1994-1999) and put clearly new targets for each region and how they will be
financed, define their (new) stakeholders, and who do what job. The share/contribution of
renewable energy application (particularly SHS and micro-hydro) in achieving new target for

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rural electrification should be redefined. Incorporating this renewable energy application into the
RUKD (General Plan for Regional Electricity) is essential, which –under the new Electricity Law
No. 20/2002- must be prepared by the local/regional government.

Private sector participation in renewable energy utilization in Indonesia so far is limited as

contractors, consultants of the projects, which are owned by government agencies, or as
dealers/vendors. There is involvement of government agencies in technical matters, such as done
by BPPT, but in general their involvements are very limited.

Private to private schemes in renewable energy financing –which is very rare so far- should be
developed, but it needs that those renewable energy projects are more commercially viable.

Developing domestic capacities in renewable energy projects development, such as by increasing

local contents in its manufacturing process would –in the middle to long term- reduce investment
costs of those renewable energy projects. The increase of domestic capacities could be possible if
strong coordination among implementing agencies in renewable energy projects is enforced. For
instance, by forcing the government agencies working in renewable energy projects to order their
supply of renewable energy system to a domestic industry dedicated to develop the system.

To encourage the use of renewable energy as well as to promote private sector participations in
renewable energy development in Indonesia, financial incentives should be applied, with a
purpose that the tariff for renewable energy can be lowered so that it close to tariff of alternative
energy (electricity) being implemented in the region. Fiscal incentives, such as lowering import
tax that have been applied in some degree, should be developed further, both in the upstream and
downstream of the business.

However, it is still very important to note that, for the non-commercial use of renewable energy,
especially in rural areas and remote islands where other alternative energies are not available, it is
the obligation of government to provide direct subsidy, including for these renewable energy
applications.

It is also very important for the Government of Indonesia to re-assess its energy pricing policy,
particularly subsidies given to oil based fuels and electricity, which has been proved that it is not
an economic sound policy. The subsidies being given to those fuel and electricity clearly have
reduced the potential of renewable energy to increase its share in domestic energy market.

It is also important to Government to reassess and make clear its policy in renewable energy
financing. Is the purpose of financing renewable energy projects: to help the poor with access to
modern energy, to “fill the difference”, to provide “revolving fund” or to assist in searching
grants/ low interest loans? Can these renewable energy finance (and promotion) be done
effectively by an office that also works for many other sectors? Is it necessary for the
Government to develop a new financing agency dedicated to promote renewable energy, such as

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IREDA of India or an Infrastructure Fund being proposed currently to speed-up the development
of infrastructures?

The Indonesian very low absorption of pro poor, green and carbon funds provided world-wide
must be improved by increasing the knowledge of government (and non government) agencies
dealing with the renewable energy development. In the future, the amount of these funds will be
increasing, and Indonesia should take advantage of that development. It is necessary to
disseminate the information on those financing options to local/regional governments in
particular so that, in the near future, those types of green and carbon funds can be absorbed more
for developing renewable energy in Indonesia. Activities such as training and workshop on
financing renewable energy projects, particularly solar energy and micro-mini-hydro, must be
carried out more intensively throughout Indonesia.

IV. PROPOSED IDEAS

With the believe that renewable energy is energy of the future, and that the Government role in
supporting the development of renewable energy is still very important in the medium term to
come, two options for financing scheme for renewable energy are proposed here:

4.1 Collaboration of Local Government, the State-owned company, Dealers/Supplier and Users.

Up to now, the Central Government agencies are still playing dominant role in developing
renewable energy application in Indonesia, including projects that take place in remote areas far
from the Central Government offices. This is not efficient in term of projects costs and projects
sustainability. The role of government in promoting renewable energy has to be shifted from the
central to the regional/local Government.

The state owned company (including the Local-State company/BUMD) needs to be invited to
participate in financing renewable energy projects in their particular regions. So far, there is
obligation for the state-owned companies to spend a certain amount of their profit to finance the
local/small-scale business. This needs to be enlarged to finance local renewable energy projects.

The role of those stakeholders (Local Government, the State-owned company, Dealers/Supplier
and Users) in the collaboration to finance/develop local renewable energy projects can be defined
as follow [8]:

• The Local Government:

- Provide accurate information on the potential and population group requiring
renewable energy system (PV, micro hydro, bio gas, etc.).
- Determine the number/scale of renewable energy system required.
- Provide a part of the projects budget.

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• The State-owned Company:

- Provide the funding required.
- Determine the credit conditions and set up the administration of the credits together
with the local government and local financial institution assigned by the government.
- Provide the credit directly to the users/through local financial institution.
• The Dealers/Suppliers:
- Provide quality renewable energy system demanded by the selected markets.
- Provide technical supports, maintenance and effective distribution system.
• The Users:
- Purchase the system by credit offered. Payback the credit on time.
- Ask for system warranty and after sales services fro the dealers.
- Maintain the system according to dealer’s instruction.

This scheme can be extended to incorporate manufacturer of renewable energy system, etc.

4.2 DNA and Renewable Energy Office

The CDM (Clean Development Mechanism) of the Kyoto Protocol can be considered as an
option to finance renewable energy projects by a developing country. However, to be accepted
for a formal CDM project, the developing country involves in “carbon trade” has to establish its
Designated National Authority first.

Indonesia’s potential to gain benefit from CDM projects, particularly the projects from energy
sector is quite great [6].. In response to the world’s acceptance of the Kyoto Protocol to enter into
force, Indonesia is currently speeding-up its establishment of its Designated National Authority.

We propose that the office is dedicated not only to promote/administer the CDM in Indonesia, but
also to promote the use of renewable energy and to search for their finance. So far, the so called
pro poor, green and carbon funds available is offered by several foreign agencies that apply
different administration procedures, financial requirements and policies. In the other side, the
demand for renewable energy application comes from, mostly, rural villagers and local
government. The absorption of those funds is very low.

The new “DNA cum Renewable” office needs to mobilize the potential funds available world
wide and to bridge the “information/knowledge gap” between the fund providers and the
demander for renewable energy applications in Indonesia. The office to be established should
also incorporate the work like IREDA in India in promoting and financing renewable energy
development.

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V. SUMMARY AND CONCLUSION

The potential for using renewable energy in Indonesia is quite great. The application of solar
energy and micro-hydro is in the progress of semi-commercialization, even though it is still in
small scale.

The current practice of financing renewable energy projects is through government budget as the
dominant source (subsidy, fill the gap, revolving fund) and foreign grant/loans as complementary.
Although reducing costs of the renewable energy application is important, it is not always
necessary to compare the cots of renewable energy use to that of other energy delivery options.

Financing renewable energy projects is an issue open to improve. The government needs to
develop clear-cut policy on the use of renewable energy (reshape the current policy), including to
incorporate them into RUKD. Financing schemes for renewable energy development also need
to be reassessed, that may include the creation of a financing agency dedicated to support
renewable energy development. It is necessary to reassess projects sustainability and to increase
local/regional government’s capacity in absorbing the world-wide green and carbon funds.

To further disseminating the application of renewable energy in Indonesia, two options of

financial schemes are proposed: (1) Collaboration of Local Government, the State-owned
company, Dealers/Supplier and Users, and (2) the establishment of DNA & Renewable Energy
office.

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[1] Harjakoesoema, G. & Hanan Nugroho. 2004. Investment and financial scheme for solar
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Jakarta, January 17-20, 2005.
[3] Nugroho, Hanan, et. al. 2004. Gas energy pricing in Indonesia for promoting the
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Energy Economics Conference, Taipei, June, 2005.
[6] Ministry of Environment, Republic of Indonesia. 2001. National Strategy Study on
Clean Development Mechanism in Indonesia.

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[7] Pratomo, Yogo (Director General of Electricity & Energy Utilization). 2004. Energy
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[8] Respati, Soedjono. 2004. Financing PV applications in Indonesia. Proceeding, The 1st
International Workshop on Solar Energy Utilization. Jakarta, October 6-7, 2004.
[9] Sudradjat, A. & Syafri Syarief. 2004. Photo-voltaic in Indonesia: technical experiences
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