Asia-Pacific’s (APAC) renewable energy capacity will grow substantially over the next decade, projected to expand 7 percent annually, adding 2 terawatts of capacity by 2030. This growth will be driven by rising populations, strong economic prospects and lucrative potential in a market with relatively low renewable penetration. Southeast Asia will itself be a vital part of this growth journey, with electricity demand expected to grow at twice the global average over the coming years.
The region’s overall electricity demand is expected to double by 2040. As Southeast Asia’s largest economy and most populous nation, Indonesia will be pivotal in dictating the direction of that growth. Total installed renewable capacity in Indonesia is expected to triple from 8 gigawatts (GW) to 24 GW by 2030, revealing the potential for green energy to drive electricity supply opportunities. In Boston Consulting Group’s (BCG) recent report, Riding the Renewables Wave in Asia-Pacific, it sets out the substantial potential for renewable energy investors and operators in this rapidly expanding market. This is an environment with an expected US$3.7 trillion of investment under current stated policies, more than the combined renewable investment commitments of North America and Europe.
Green post-pandemic recovery commitments are likely to deepen this shift, expanding government revenues by up to 30 percent as a result of coal subsidy elimination, and offering a valuable investment landscape for new and existing market players.
Southeast Asia’s shifting landscape The renewable energy expansion in APAC will benefit from significant falls in generation cost for renewable energies, alongside growing support for technologies such as utility-scale batteries and green hydrogen. The levelized cost of energy (LCOE) for solar power has fallen at an annual rate of 19 percent over the last decade. Offshore wind costs are also falling, supported by technology transfer from mature European markets.
Solar and wind technologies will drive regional renewables growth, with APAC emerging as the second-biggest offshore wind market by 2030, with expected annual growth of 24 percent. This growth is supported by geographical advantages in a region with significant wind potential, alongside strong early phase development returns. While Indonesia certainly boasts the potential, market support will need to evolve in order to leverage this growth.
Renewables in Indonesia currently account for 12 percent of the power mix, predicted to rise to 21 percent by 2030. Hydropower accounts for three-quarters of current installed renewable capacity, followed by geothermal power. Solar and wind have been the fastest growing technologies over the last decade, with 33 percent and 72 percent growth respectively, although this does reflect a low starting base. These latter two technologies will be essential in steering an affordable path to achieving Indonesia’s stated goal of 16.7 GW of installed renewable capacity by 2028.
Huge untapped renewable energy potential Indonesia is a country blessed with substantial renewable energy potential. It not only boasts favorable conditions for wind and solar power, alongside suitable topography for hydropower, it is also home to the world’s largest geothermal reserves. Yet the report makes clear that leveraging that significant potential does come with notable challenges for operators and green energy investors.
The combined potential of key renewable technologies in Indonesia stands at a remarkable 400 GW. Solar power represents the greatest share of this opportunity, with a maximum viable installed base of 200 GW, up from less than 0.2 GW today. Wind could provide up to 61 GW of potential installed capacity, up from 0.1 GW today. Yet hurdles around feed-in-tariff price caps, alongside challenges from subsidized coal power alternatives, create barriers to growth.
Additionally, it is possible for Indonesia to initially develop an accessible 7 GW of distributed solar power, primarily driven by rooftop solar installations, with relatively positive implementation pathways. This could offer valuable potential in rural areas, where solar power offers an attractive alternative to the high generation costs of local diesel-based power generation. Such efforts would go a long way to aligning with the government’s own rural electrification goals.
Despite these opportunities, promoting these potential projects to investors remains a challenge in the current landscape. Incumbent operators tend to operate small-scale projects, with Indonesia’s biggest independent power provider (IPP) for solar boasting just 30 MW of installed capacity.
Indonesia’s renewable energy journey The LCOE of solar power improved 13 percent year-on-year between 2014 and 2019, and with the right incentives could fall below average national generation costs by 2025, but may require more robust regulatory support and efforts to lower costs across the ecosystem. Supporting policies will be required to incentivize investors, with new financing encouraging growth, spurring development of utility-scale solar.
There are currently four business models that offer potential for large-scale solar players in the existing landscape. They primarily focus on the early stages of the value chain (e.g. in manufacturing or solar panel assembly), project development, project executions as integrated developers, and lastly as owners and operators. Project development offers the most lucrative area of returns for investors. Incentivizing later stages of the ecosystem will be invaluable in spurring wider solar growth.
Hydropower represents perhaps Indonesia’s most developed renewable resource today, but greater potential remains to be tapped. Indonesia has an installed capacity of 5.6 GW, with an additional ~70 GW of potential resources to develop. Plans to build the nation’s largest hydropower dam in North Kalimantan offer a vision of what that development might look like. Yet the industry remains a challenging investment environment due to burdens around permit approval, community engagement, environmental concerns and transmission infrastructure investment needs.
Geothermal is another area of significant renewable potential in Indonesia but is dominated by the efforts of state-owned enterprises. The reality is this remains a difficult arena for operators and investors alike, with significant capital needs in the exploratory phases, and long lead times. Further development of the geothermal sector will depend on government support through preferential tariffs.
Indonesia’s huge renewable potential is a valuable natural resource for the nation. Developing that resource will require deepening investment, and a more supportive regulatory environment. Addressing local content requirements which present barriers for foreign investors should also be considered, offering a chance to leverage foreign investment to further accelerate this national opportunity. Investors and operators should look for ways to maximize their existing business strategy in Indonesia, while expanding their value pool. Exploring new frontiers will also offer valuable areas to win, particularly in the more promising areas of solar power development.
Indonesia’s current goal is to achieve a 23 percent share of renewables in the total primary energy supply and power capacity by 2025. With the right enabling regulation, and a supportive investment framework, we have the opportunity to far exceed that target.
