2030 Indonesia

Roadmap
Multiplying the Transition:
Market-based solutions for catalyzing clean
energy investment in emerging economies
Sandra Esser
Caroline Chua
Antoine Vagneur-Jones

October 2021
 About
BloombergNEF is working with the Climate Investment Funds to identify how financial intermediaries can mobilize clean energy investment in
emerging markets. In the context of post-pandemic sustainable recoveries and the need to meet international climate commitments such as the
Nationally Determined Contributions (NDCs), accelerating the global energy transition is now more pressing than ever. BNEF sees electrification
through clean power and transport as the basis of decarbonization, and therefore, as the backbone of the energy transition. With investors’
appetite for ESG products at an all-time high and capital needs for clean energy investment in many emerging markets often unmet, this project
looks at how to better match this supply and demand. This slide deck serves to support the dialog with stakeholders on this topic.

About Climate Investment Funds (CIF) About BloombergNEF (BNEF)

The Climate Investment Funds (CIF) is one of the world’s largest and BloombergNEF (BNEF) is a strategic research provider covering
most ambitious climate finance mechanisms. Founded in 2008, it global commodity markets and the disruptive technologies driving
represents one of the first global efforts to invest in a dedicated climate the transition to a low-carbon economy. Our expert coverage
finance vehicle. The CIF emerged from recognition by world leaders assesses pathways for the power, transport, industry, buildings
that climate change and development are inextricably intertwined. The and agriculture sectors to adapt to the energy transition. We help
CIF’s creation also recognized a need to fill a gap in the international commodity trading, corporate strategy, finance and policy
climate finance architecture—to deliver climate-smart investment at professionals navigate change and generate opportunities.
scale. The CIF supports developing and emerging economies in shifting
to low carbon and climate resilient development.

1
BNEF Take: Emerging markets and the
energy transition ●
Despite reaching a record-high in 2020, at $501 billion, global energy transition
Global energy transition investment investment has become even more concentrated in high income countries as a
result of the Covid-19 pandemic. Emerging markets are, however, key to
$ billion achieving the global energy transition, as they will produce the bulk of global
emissions until 2050. In the context of delivering sustainable post-pandemic
600 recoveries, accelerating economy-wide decarbonization is therefore more
501 important than ever to keep global temperatures well below 2°C to deliver on the
459 goals set under the Paris Agreement.
434 441
378 ● BNEF sees electrification through clean power as the basis of decarbonization,
400 330 159 and therefore, as the backbone of the energy transition. The power sector is a
290 297 180
263 240 major contributor to overall emissions, with coal still the largest source of
213 177
57 161 generation. Clean power generation technologies are the most readily available,
200 78 104 137 scalable decarbonization solutions. To enable zero-carbon electrification of
78
294 further sectors, renewable energy capacity needs to be expanded through utility-
213 168 212 238 scale projects and distributed assets.
143 164 164 181 185
0 ● At $307 billion in 2020, investment volumes in renewable energy and storage
are, however, far from the necessary levels to achieve this: BNEF estimates that
2011 2014 2017 2020
expanding and decarbonizing the power system to stay on track for warming of
High income Upper middle income as much as 1.75 degrees Celsius would require over $2 trillion globally in power
Lower middle income Low income generation assets and batteries per year until 2050. There is therefore an urgent
Other/undisclosed need to mobilize and accelerate clean power investment, particularly in
emerging markets.
Source: BloombergNEF. Note: Numbers include renewable energy, electrified transport, electrified heat, energy storage, carbon capture and storage and hydrogen.

2
Project overview
● Focus: Scaling up clean energy investment through financial intermediaries in emerging markets
– Global energy transition investment and sustainable debt issuance reached a record high in 2020, but flows continue to
be concentrated in the world’s wealthiest countries and a select group of trail-blazing emerging markets.
– The 2020s are the decade where lessons learned need to be replicated and scaled across emerging markets to ensure
that their economies can grow sustainably, and help meet the objectives of the Paris Agreement.
– Through fund-deployment and fund-raising activities, financial intermediation has an important role to play in activating
more players in the investment chain, mobilizing more capital and ensuring more liquidity for the energy transition.

● The “Roadmaps”: Exploring country-level clean energy finance to 2030

– Focus: The short- to mid-term opportunities for intermediation in mobilizing clean energy investment in emerging
markets in order to fulfil the commitments of the Paris Agreement.
– Countries: India, Indonesia, South Africa, Morocco and Brazil.

● Final report - structure:

– Part 1: “Looking back”: The evolution of financial intermediation in delivering clean energy investment.
– Part 2: “Present situation”: Current opportunities and constraints to mobilizing investment through intermediaries.
– Part 3: “Looking forward”: The further potential of leveraging intermediaries to accelerate clean energy investment.

3
Indonesia: Key references and
background reading
● Ministry of Energy and Mineral Resources (2021) Strategic Plan 2020-2024
● Ministry of Energy and Mineral Resources (2019) Indonesian Electricity Supply Business Plan 2019-2028
● Ministry of Energy and Mineral Resources (2014) National Energy Policy
● Ministry of Energy and Mineral Resources (2009) Electricity Law (No. 30/2009)

4
Indonesia contents

State of the energy transition 6

Financial ecosystem, capacity and financing needs 21
Leveraging intermediaries to accelerate clean power investment 30

5
State of the energy
transition
Indonesia

6
State of the energy transition

Indonesia is poised for continued

economic and demographic growth
GDP Population Comments
$ billion (2018 real) million ● Sixteenth-largest GDP in 2020, but
11th largest GDP by 2030.
2,500 400
● Fourth-largest population in 2020,
and remains so until 2030.
2,000
300 ● Eighteenth-largest power consumer
in 2020, 12th largest power
1,500 consumer by 2030.
200
1,000

100
500

0 0
2000 '05 '10 '15 '20 '25 2030 2000 '05 '10 '15 '20 '25 2030

Source: BloombergNEF, IMF, OECD. Source: World Bank. Source: BNEF New Energy Outlook 2020.

7
State of the energy transition

Indonesia has modest renewables

targets which feature fossil capacity
Renewable energy targets Installed clean power capacity outlook
Entity Target Comments GW

60
PLN‘s 2019 23% new and Of which oil <25%, coal 52
National renewable >30% and gas >22%. 50
Electricity capacity by Renewables focus mainly
Supply Plan 2025 on large hydro, 40
(RUPTL) (25GW geothermal, biomass and 29
30 25
renewables) biofuels.
20
Nationally See above See above 10
Determined 10
Contribution
0
BNEF Outlook 29GW of Least-cost outlook shows 2019 PLN 2025 NEO 2025 NEO 2030
renewables by capacity higher than PLN,
Large hydro Geothermal
2025 with particular emphasis
52GW by 2030 on the potential of PV. Small hydro PV
Biomass & waste, biofuels Onshore wind
Source: PLN, BloombergNEF. Note: PLN refers to Perusahaan Listrik Negara,
Indonesia‘s state-owned electricity company. Source: PLN, BloombergNEF. Note: BNEF‘s NEO 2019 assumes least-cost outlook.

8
State of the energy transition

Coal dominates Indonesia‘s power mix

Installed capacity Power generation mix Power demand trajectory

GW TWh MWp

75 300 75,000

60,000

50 200
45,000

30,000
25 100

15,000

0 0 0
2010 2013 2016 2019 2010 2013 2016 2019 2010 2015 2020 2025 2030

Coal Gas Oil Geothermal Hydro Solar Onshore wind Biomass & waste
Source: BloombergNEF. Source: BloombergNEF. Source: BloombergNEF.

9
State of the energy transition

...and is set to remain in the mix for the

foreseeable future
Current LCOE (2H2020) Forecast mid-range LCOE Comments
● Coal is still cheap compared to
$/MWh (nominal) $/MWh (2019 real)
renewables and will continue to be the
300 140 cheapest fossil fuel available until past
2030. Economics alone will therefore not
250 120
help to decommission coal assets.
192 100
200 165 ● While solar PV is the renewable
145 150
150 80 technology with the most potential in
87 95 60 economic terms, its cost is high
100
compared to other markets due to the
89 40
50 71 79 lack of a local value chain and steady
57 58 20
0 34 project pipeline as well as high financing
0 costs. Plus, logistical challenges such as
2020 '22 '24 '26 '28 2030 transporting equipment and a lack of
expertise arise in remote areas.
Fixed-axis PV Onshore wind ● While PV will become increasingly
CCGT Coal competitive, the cheap cost of coal
impacts project pipelines going forward,
Source: BloombergNEF. Note: PV = fixed-axis PV. Source: BloombergNEF. with wind only attractive as of the 2030s.

10
State of the energy transition

The Indonesian power sector is built

around a state-owned monopoly Generation
PLN controls most of the generation
assets. Independent Power
IPPs (Independent
Power Producers)
PLN
(Perusahaan
Listrik Negara)
Producers provide only a quarter of - (37%)
Power sector Status Comments - (63%)
the total capacity
fundamentals
System Operation
Utility unbundling
⚫ Single buyer market PLN is the only system operator

Regulator: MEMR (Ministry of Energy and Mineral Resources)

Private participation
⚫ Only generation is open through
tenders Transmission
PLN owns and operates all transmission

⚫
network
Bilateral contracts On-site only
PLN
(Perusahaan

⚫
Off-grid generation C&I, residential and minigrids Distribution Listrik Negara)
PLN owns and operate all
distribution network

Purchase obligation
⚫ No standardized rules
Sales/Retail

⚫
There are no private retailers.
Cost-reflective Determined by Energy Ministry PLN provide electricity retail
tariffs services to all grid-connected
consumers

Wholesale market
⚫ No wholesale market Consumption

Standardized PPAs
⚫ Signed in IDR (can be indexed to USD)
Residential Commercial Industrial

Majority Majority Mixed

publicly owned privately owned ownership Power Seller Power Buyer
Source: BloombergNEF. Note: Green = available, yellow = somewhat available, red = not available.

11
State of the energy transition

Current clean power incentives are very

modest in ambition
Clean power Status Start Technologies Impact to date Details
policy date
Clean power ⚫ In force 2014 All renewables (excl. large Weak Some 23% new and renewable power capacity by
target hydro), plus nuclear, 2025 (RUPTL 2019). The final version of RUPTL
hydrogen, coal bed methane, 2021 may include changes to this.
gasified and liquified coal

Feed-in tariff ⚫ Planned - Solar, wind, small hydro - However, there is a renewable energy purchase
price, which is pegged to the average regional and
national generation cost (BPP), with a price cap.
Net metering ⚫ In force 2013 Rooftop solar Weak Exported generation receives 65% of retail tariff.
Reportedly unevenly enforced.
Accelerated ⚫ In force 2015 All renewables Encourages -
depreciation companies to set
up renewable
projects
Tax ⚫ In force 2008 All renewables Weak Exemptions for power projects developed by or
exemptions which have PPAs with PLN.
Priority grid ⚫ In force 2017 All renewables Weak Renewable energy plants have “must-run” status
access (formerly only plants ≤10MW, since 2020 no limit).

12
State of the energy transition

Indonesia‘s clean power policies have

driven little activity so far
Looking back Looking forward
● Overall, the clean power policies introduced or adjusted ● Recent changes in Presidential Regulation 10/2021 may
in the past decade have had little success in incentivizing ease market access through relaxed foreign ownership
clean power investment. rules, with 100% ownership now possible for plants
above 1MW. Successful projects will likely still be joint
● The impact of Indonesia‘s renewable energy purchase
ventures including local partners.
price is somewhat limited. The purchase price is pegged
to the regional and national average generation cost ● A first draft of the RUPTL 2021 indicates a larger focus
(BPP) and includes a price cap. on solar PV. Depending on the final document, this may
offer up further investment opportunities.
● Since 2013, there is a net metering scheme for rooftop
solar, which was updated in 2018. It only covers 65% of ● Much of renewables investment and project development
the retail price and is notably poorly enforced. is on hold, awaiting the pending Presidential Regulation
on renewable energy toward late 2021.
● Indonesia introduced a priority grid access policy for
renewables plants ≤10MW in 2017. Due to the low – The regulation is likely to include the introduction of a
project threshold, the policy has had little impact on feed-in tariff for smaller renewables plants.
incentivizing new-build so far. However, this may change – While further favorable regulatory changes
in the future, as the threshold cap was lifted in 2020. surrounding renewables are expected, the overall
level of energy transition ambition remains uncertain.

13
State of the energy transition

...with many regulatory bottlenecks

hampering the market
Key bottlenecks
● The major bottleneck of the Indonesian power sector is
the lack of a clear procurement pipeline and current BNEF Take: Power market (over-)regulation
The lack of a clear project pipeline communicated
thermal overcapacity under PLN‘s highly regulated single
by the government and the current oversupply of
buyer market structure. A weak incentivizing framework fossil capacity in key load areas is hindering the
for clean power further hampers the development of the build-out of renewables projects. Together with
renewables market. While generation is open to IPPs, occasionally poor regulatory enforcement and a
tenders are limited, with invitations to pre-qualify only general high risk perception of the market, this
issued periodically. The tender processes can also lack makes the Indonesian power market difficult to
transparency, with the results often not published. access. A clear political commitment to
decarbonization, in addition to a transparent
● Licensing and permitting procedures for new projects project pipeline and attractive clean power
tend to be lengthy. incentives would help to create investment
● Renewables must directly compete with subsidized coal opportunities.
under the BPP.
● Foreign ownership is not allowed for plants <1MW, as
these are reserved for cooperatives and SMEs.

14
State of the energy transition

Existing policies have done little to

spur renewables new-build
Policy introductions and investment growth Comments
3 ● The Indonesian Energy Ministry procures new capacity
Average through tenders. More powerful clean power incentives,
emerging market such as auctions, are not on the horizon. The most
(auctions) powerful policy tool so far is a renewables purchase price
for projects, introduced in 2017.
2
● The policy pegs the purchasing price of renewable power
Indonesia to the regional and national average (BPP), capping it at
(renewables a certain price ceiling.
purchase price)
1 ● The introduction of the purchasing price has done little to
spur renewables investment in past years, with overall
volumes remaining patchy. This stands in contrast to
examples seen in other emerging markets which
0 implemented well-designed auctions. Following the
-3 -2 -1 Start +1 +2 +3 introduction of auctions, the energy transition investment
year in an average emerging market tends to increase, until
competition helps to lower costs.
Source: BloombergNEF, CFLI. Note: Baselined growth to 100. “Average” includes 31 emerging markets that introduced auctions between 2012 and 2018.

15
State of the energy transition

Full access to steady electricity supply

remains a challenge in remote areas
Access to electricity in Indonesia Comments
Electrification rate ● Being an archipelago, Indonesia faces high geographical
constraints in rolling out a national grid and secure,
100% affordable supply. Remote areas in Eastern Indonesia
are yet to achieve complete electrification despite strong
80% progess, with reliability of power supply a further issue.
● Diesel generators are the most commonly used solution,
60% yet involve high fuel costs and pollution.
● Off-grid solutions such as mini-grids or the hybridization
40%
of diesel generators with solar modules offer potential to
advance electrification and supply-reliability goals.
20%
● Given regulatory constraints under PLN‘s monopoly, the
0% mini-grid market has proved challenging to private sector
2010 2013 2016 2019 developers. The development of mini-grids has therefore
mainly been led by DFIs, with local governments, co-
National Rural Urban operatives, village-owned enterprises and communities
Source: BloombergNEF. responsible for their operation upon completion.

16
State of the energy transition

Spotlight: Supporting PLN is expensive

for the Indonesian government
Government expenditure as % of GDP Comments
% of GDP ● Electricity subsidies for state utility PLN have accounted
for as much as 1% of Indonesian GDP expenditure in the
4 past, but have decreased in recent years.
3.5 ● PLN‘s financial situation is shaky, with government funds
3 and debt issuance needed to recapitalize it frequently.
2.5 ● Exchange-rate volatility has negatively impacted PLN‘s
2 finances, as PPAs indexed to the U.S. dollar have
1.5 caused soaring costs, for instance during the Covid-19
global pandemic.
1
0.5 BNEF Take: Private sector participation
0 Allowing more private participation in the generation
2010 2013 2016 2019 segment through a competitive procurement pipeline
as well as economic dispatch and cost-reflective tariff
Health Education PLN setting would make the Indonesian power sector
more efficient and reduce government liabilities.
Source: Statista, World Bank.

17
State of the energy transition

Renewables investment is patchy and

dependent on singular deals
Renewable energy investment Characteristics
● Indonesia is not able to secure a steady pipeline of
$ million
renewables investment, experiencing large annual
2,000 fluctuations dependent on singular deals.
1,767
● Much of the investment from IPPs also involves companies
1,471
1,500 majority-owned by state utility PLN.
● The vast majority of renewables investment in the past
1,012
1,000 decade has targeted geothermal, at $4.9 billion between
761 2011 and 2020. This amounts to 70% of the decade‘s total.
545 517
464 ● Geothermal has been one of the key priorities for the
500
274 225 government and the technology for which most familiarity
31 exists in the market, yet interest in solar PV has recently
0 been increasing. Due to high resources, further geothermal
2011 2014 2017 2020 projects offer potential for baseload generation, but by
nature tend to involve greater complexity than other utility-
Geothermal Small hydro Biofuels scale renewables in terms of deal size, number of financing
Wind Solar Biomass & waste entities and development lead times. This has led to limited
Source: BloombergNEF. progress on planned projects so far.
18
State of the energy transition

Large international investors are active

in geothermal deals
Key renewables financial players, 2011-2020 Renewables investor characteristics
$ million ● The major financial players involved in renewables
investment in the past decade are Asian banks, and in
Sumitomo 7,411 particular Japanese ones.
JBIC 1,258 ● There is currently a lack of a deep local market for
Kansai Mirai 1,039 renewables investors. While liquidity is theoretically
Jardine Matheson
available, investors do not have an appetite for
1,039
renewables projects, hampered by the current regulatory
ADB 812 framework and lack of meaningful policy incentives.
Domestic
Mitsubishi 674
● In terms of foreign investment, the largest investors to
Medco Daya
International
599 date have been commercial banks and utilities.
Pertamina 575 Involvement tends to be attached to large, singular
deals, which are often supported by DFIs.
SDIC 500
Engie 498
● Successes in attracting foreign investment for
geothermal through DFI support can provide lessons for
Source: BloombergNEF. Note: JBIC = Japan Bank for International establishing other technologies in the market.
Cooperation, ADB = Asian Development Bank, SDIC = State Development &
Investment Corporation. Only includes disclosed activity.

19
State of the energy transition

Summary: Indonesia‘s energy

transition is suffering from a lack of enabling environment
Opportunities Challenges
Potential for rural electrification and archipelago supply Single buyer market lacking project pipeline
Around 1% of the Indonesian population has yet to obtain access, and reliability of supply A key barrier in the Indonesian power market is the current overcapacity and lack of project
is often still lacking. Given the geographical make-up of the country, diesel gensets are pipeline of PLN, with IPPs depending on PLN to sign PPAs. Plus, intransparent processes
still a widespread means of power generation. Both the hybridization of diesel plants and for the limited tenders which are floated do little to incentivize market entrance.
the archipelago nature of Indonesia offer potential for decentralized power.

Positive economic trajectory and ensuing power demand No clear policy support for major renewables technologies
Indonesia is a fast-growing economy, with the growth in population and urbanization Until recently, there was little support for established renewables technologies such as PV
increasing power demand. Yet, while the economy is growing, there is currently an and onshore wind, with policy instability regarding the introduction and subsequent
oversupply of installed capacity, particularly in load areas, so growth will do little to removal of a feed-in tariff. The government considers fossil fuels in its energy transition
incentivize renewables new-build alone. targets and prioritizes cheap, domestic coal. Despite low utilization rates, PPAs with
thermal plants include a fixed capacity payment, which supports their economic viability.

First examples of utility-scale renewables Intransparent regulatory environment for new projects
The market is seeing its first examples of utility-scale renewables from IPPs such as Much of the Indonesian power market is highly regulated, yet regulations can also be
Vena or AC Energy. While these were supported by a now-canceled feed-in tariff, further intransparent and poorly enforced. Permitting and licensing procedures for new projects
opportunities such as floating solar are also being explored by international developers can be slow. Moreover, the lack of a sufficient local supply chain makes complying with
such as Masdar, which announced a 145MW plant in late 2020. It seems likely the stringent local content rules arduous.
Energy Ministry will provide support for the establishment of solar parks, facilitating
current issues such as land acquisition or grid access.

First examples of C&I onsite generation Non-cost reflective power tariffs

Large international corporations have been key drivers in the Indonesian C&I market. Indonesian power prices are highly subsidized and set by the Energy Ministry.Tariffs well
Companies such as Nike, Danone or Coca-Cola are piloting renewables-based self- below cost recoup do not incentivize the build-out of self-generation facilities.
generation projects, which can serve as templates for further such projects.

20
Financial ecosystem,
capacity and financing
needs
Indonesia

21
Financial ecosystem, capacity and financing needs

Much of the investment chain in Indonesia

remains to be activated
Central banks & financial regulators
Note: Faded color indicates
Asset owners weak representation, with
Insurance Other Sovereign Pension
bold color showing strong
Pension Pensio
companies inst.investors wealth funds funds
funds nnds representation.

Delegate Asset managers

assets
Passive funds Direct ownership,
Active funds
(index tracking) ownership through shares
& lending through bonds

Credit rating agencies Sell shares & bonds

Banks

Co-lend Commercial Investment Exchanges & Index

banks banks trading providers
Development
platforms
finance
institutions Lend & Lend Underwrite shares
provide risk-sharing tools & bonds
Ownership
Corporations
Governments
Project Other Listed List
developers corporations corporations shares

Subsidies, Build, own & operate Public sector

incentives, policies 0.02
Private finance
influence investments 0
Private non-finance
1
Source: CFLI, BloombergNEF. Assets in the real economy

22
Financial ecosystem, capacity and financing needs

Active players are mainly international

banks
Investment chain representation ● The Indonesian financial sector is fairly shallow, in
particular with regard to clean power investment.
Entities National International
● The major active entities domestically so far are banks
Asset owners ⚫ Not active ⚫ Not active such as Bank Negara Indonesia or corporations such as
Medco Daya or Pertamina.
Asset managers ⚫ Not active ⚫ Not active ● High currency risk in the Indonesian rupiah has led
foreign renewables investors to source capital outside
Banks ⚫ Semi-active ⚫ Active the country so far.

Corporations ⚫ Semi-active ⚫ Active BNEF Take: Intermediation in focus

There are multiple reasons for the lack of local appetite
in clean power financing across the investment chain,
such as limited options to market entry, tight regulatory
environment and a perception of high risk surrounding
renewables projects. While liquidity is therefore
available, the reach of the only available DFI Sarana
Multi Infrastruktur (PT SMI) is not strong enough to
Source: BloombergNEF. crowd-in investment.

23
Financial ecosystem, capacity and financing needs

Key intermediation deals to date have

targeted geothermal
Examples of financial intermediation in clean power projects in Indonesia
Entity Sarulla Operations Ltd. Star Energy

Set-up International consortium: Domestic project developer

Medco Power Indonesia, Itochu, Ormat and Kyushu EPC.
Aim Development of 330MW geothermal plant (Re-)financing of development, construction and operation of
geothermal plants in Java.

Intermediation Fund-deployment Fund-raising

Instruments Equity stakes: Green bond:

project consortium Issuance of a $1.1 million senior secured green bond, which adheres to
ICMA and ASEAN Green Bond Standards.
Senior loans:
Asian Development Bank, Japan Bank for International Cooperation
(JBIC) and six commercial banks
Concessional mezzanine loan:
Clean Technology Fund, Canadian Climate Fund

Guarantee:
JBIC (20-year government offtake guarantee and political risk
guarantee for commercial banks)

Outcome This project shows the highest private sector involvement for a new The bond was 3.5 times oversubscribed, in addition to being the first
geothermal project in the Indonesian market to date. investment-grade green bond to enter the market.

24
Financial ecosystem, capacity and financing needs

The Indonesian financial market is fairly

shallow, especially for renewables
Financial sector maturity Key characteristics
Indicator Value Debt:
● The main debt instruments available in the Indonesian market
Domestic credit from financial sector 46.5% of GDP are loans. However, these are not tailored to renewable
project needs and are characterized by high interest rates and
Domestic credit to private sector by banks 32.5% of GDP short tenors. Long-term debt or non-recourse loans are only
available for projects with credible regional or international
Lending interest rate 10.4% sponsors.
● While in its early stages, there is activity in bond markets for
Stocks traded, total value 10.5% of GDP larger IPPs, such as Star Energy.
Equity:
Turnover ratio of domestic shares 22.5%
● There is a relative lack of different domestic entities offering
Depth of credit information index 8 equity, with low appetite for renewables projects.
(0=low, 8=high)
Strength of legal rights index 6
(0=weak, 12=strong)
Source: World Bank. Note: 2019 data.

25
Financial ecosystem, capacity and financing needs

Driven by green bonds, sustainable

finance activity is on the rise
Sustainable debt issuance Comments
● Indonesia is one of the most progressive emerging markets in
$ billion
terms of sustainable finance regulation. The Financial Services
3 Authority OJK is a member of the Sustainable Banking Network.
2.5 ● Key policies on sustainable finance include:
2.5 2.3
– Roadmap for Sustainable Finance in Indonesia 2015-2019
0.6
2 1.8 – Regulation Number 60/POJK.04/2017 on the Issuance and
0.5 the Terms of Green Bond
1.5 1.3 1.4
1.1 1.9 – PLN Statement of Intent on Sustainable Financing Framework
1.3 – Regulation Application of Sustainable Finance to Financial
1 0.8
0.6 0.5 Services Institution, Issuer, Publicly Listed Companies
0.4 1.3 1.4
0.5 1.1
0.6 0.1 0.5 0.6 0.7
0.4 0.4 BNEF Take: Green bonds
0
2011 2014 2017 2020 Green bonds are attractive instruments for IPPs to meet their
debt needs, particularly if local lending conditions do not match
Green loan Green bond
renewables project development conditions. Exploring green
Sustainability bond Sustainability-linked loan bonds can also prove interesting to international institutional
investors seeking to fulfil ESG mandates.
Source: BloombergNEF. Note: Data includes all sub-industries.

26
Financial ecosystem, capacity and financing needs

Sustainable finance offers refinancing

opportunities going forward
Clean energy sustainable debt volume Comments
compared to asset finance ● Similar to the trend seen in asset finance for new
$ billion renewables projects, sustainable debt issuance in the
2 power industry in Indonesia is volatile.
1.8
● However, power-related sustainable debt issuance has
1.5 exceeded asset finance levels on multiple occasions.
1.5
The proceeds are used to (re-)finance projects.
1.0 ● Sustainable debt is overwhelmingly issued by
1
0.8 corporates. Between 2011 and 2020, they issued $6.9
0.5 0.5 billion, whereas projects only accounted for $0.4 billion.
0.5
0.5 ● The vast majority of instruments is denominated in U.S.
0.3 0.2
dollars, at $7.2 billion, with only a fraction in rupiah
0 ($0.04 billion).
2011 2014 2017 2020
Asset finance Clean energy sustainable debt

Source: BloombergNEF. Note: Sustainable debt here only includes issuances from the power industry (utilities, renewable energy and power generation).

27
Financial ecosystem, capacity and financing needs

Capex declines and falling cost of

debt and equity benefits PV
LCOE assumptions Comment
2020 2030 ● Financing conditions are currently most
favorable to coal and gas, which reflects
PV Wind Coal Gas PV Wind Coal Gas the market‘s reluctance to finance new
Capex renewables projects.
1.05 1.84 1.53 0.87 0.4 1.65 1.49 0.85
($m/MW) ● However, steep Capex declines for PV, in
addition to a more favorable cost of debt
Debt ratio 70% 70% 75% 75% 70% 70% 55% 67% and equity, will help it overtake coal and
gas by 2030.
Cost of
debt (bps)
1050 1050 650 850 747 747 755 822 ● Despite improved financing conditions,
capex for wind remains high until 2030.
Cost of
equity
12% 12% 10% 10% 9.3% 9.3% 13.6% 10.7% ● On an LCOE basis, PV is the best-suited
technology to add or replace power-
generating capacity in the next 10 years.

Source: BloombergNEF. Note: Green = improvement, yellow = stable, red = deterioration. PV = fixed-axis PV, wind = onshore wind, gas = CCGT.

28
Financial ecosystem, capacity and financing needs

Summary: Future clean power investment

depends on mitigation of market risks
Opportunities Challenges

Replacement of fossil assets with renewables capacity Shallow financial sector

Given Indonesia’s large installed coal capacity, clean power investment can The Indonesian financial sector is relatively shallow, in particular regarding
focus on successively greening and replacing the fleet. familiarity of financing renewables. Few domestic financing entities and instruments
exist, which are further hampered by regulatory bottlenecks. There is a lack of
Indonesian rupiah liquidity for renewables projects, with PPAs with IPPs signed in
U.S. dollars, incurring PLN significant hedging risk.

Leverage advanced sustainable finance regulation Financial viability of coal

Indonesia’s regulation on sustainable finance is advanced, with growing Financing conditions for new power plants currently favor coal and gas, with
familiarity of the market with bonds. Amongst others, state utility PLN can make coal remaining cost-competitive in the next 10 years. In combination with the
use of this, as its rating is comparable to that of the Indonesian government. government’s prioritization of coal, this will make it harder for renewables.

Relaxed foreign ownership rules High risk perception

While likely small in impact, changes to foreign investment restrictions in early Both domestically and abroad, there is high perceived investor risk for Indonesia.
2021 will help to facilitate the possibility of international investors entering the Issues such as regulatory changes, offtaker and currency risk as well as issues
market. Formerly limited to a maximum of 49%, power plants above 1MW can surrounding land acquisition, project execution and grid availability impact
now be up to 100% foreign-owned. investors‘ willingness to enter the market. Moreover, many are first awaiting the
Presidential Act on Renewable Energy, due to be released later in 2021.

Use lessons from geothermal investment Lack of financing options for small-scale assets in particular

Lessons from previous geothermal investment regarding co-investment structures While accessing finance for utility-scale assets is not without challenges, the
and policy incentives can prove a template for de-risking other renewables financing options small-scale projects can access are even scarcer.
technologies. The (non-)fiscal incentives from early 2021 will help.

29
Leveraging
intermediaries to
accelerate clean
power investment
Indonesia

30
Leveraging intermediaries to accelerate clean power investment

PV provides the largest economical

investment opportunity to 2030
Least-cost investment pipeline, 2020-2030 Investment outlook to 2030
● Under the RUPTL 2019, the Indonesian government assumes
$ billion
large hydro and geothermal additions will meet its 2025 target,
45 yet progress on projects has been limited. In the current draft
Onshore wind
RUPTL 2021, PV gains a more prominent position at the
expense of geothermal. BNEF‘s New Energy Outlook sees a
Biomass large role for small-scale PV, in particular in the next 10 years.

30 ● The technology with the most least-cost potential in terms of

24 24 Utility-scale PV investment volume and capacity added is PV. The outlook for
small-scale PV amounts to $19 billion in the next decade, with
$7.2 billion for utility-scale PV.
Geothermal
15 ● Based on the existing project pipeline, the outlook sums
geothermal at $14 billion.
Small-scale
PV ● There is a limited role for onshore wind at $1.7 billion.
3
● Given the least-cost outlook and current lack of procurement
0 pipeline, this might suggest supporting small-scale decentralized
2016-20 2021-25 2026-30 energy within regulatory means as well as assisting in PLN in
‘greening‘ its assets.
Source: BloombergNEF. Note: Theoretical pipeline assumes least-cost technological potential. Includes select renewables technologies only.

31
Leveraging intermediaries to accelerate clean power investment

Indonesia currently lacks the enforcement of

necessary market fundamentals
Power sector Financial sector and regulation Financial intermediation
Fund-raising and fund-deployment through:
Well-designed, stable Power sector Minimum availability Minimum depth of
of domestic banks domestic private Loans, credit lines or Early-stage risk
clean power unbundling &
and NBFC and public markets credit facilities capital
incentives private participation

Transparent Guarantees to
Reliable offtaker Adequate foreign
Policy stability investment guidelines abate lack of Grants
(bankable PPAs) investment rules
& processes credit rating

Unsubsidized, cost- Clear rules on land Currency risk Blended finance

Domestic bond Equity stakes
reflective power acquisition, grid mitigation options facility
market (private or public)
tariffs access

Clear licensing and Access to Access to Bond (re-)financing Securitization of

Clear rules on self- international international bond instruments assets (e.g. asset-
permitting
generation public markets markets (private or public) backed securities)
procedures

Limited foreign Adequate Advanced regulation

ownership Limited local content sustainable finance (e.g. securitization of
restrictions restrictions regulation power assets)

Grid investment Clear political

(flexibility, ancillary decarbonization Green taxonomy
services etc.) roadmap

Source: CFLI, BloombergNEF. Note: Full color = availability; dotted lines = partial availability; blank = remaining opportunity.

32
Leveraging intermediaries to accelerate clean power investment

Indonesia‘s enabling environment requires

improvement to properly leverage intermediaries
● Through its highly regulated, but at times poorly enforced processes, Indonesia is lacking many of the necessary market
fundamentals in order to attract clean power investment. The clean power policies introduced in the past decade have
done little to incentivize renewables.
● In the power sector, the lack of a clear project pipeline and current thermal overcapacity greatly impact the vitality of the
market. Moreover, many existing regulations or incentives are not fully enforced, causing investor uncertainty. Overall,
there is a need for the Indonesian government and/or PLN to provide a clear direction and incentives in order to
accelerate utility-scale renewables build.
– Acceleration opportunity: There is a need to translate success with geothermal investment to other utility-scale
technologies, including through enhancing clean power incentives and simplifying project development procedures.
This must also be adapted to providing adequate incentives to small-scale projects and facilitating corporate offtake.
● In the financial sector, the lack of domestic and, to a certain extent, international involvement can largely be attributed to
the lack of procurement pipeline, high risk perception, regulatory bottlenecks and uncertainty.
– Acceleration opportunity: clear regulations in terms of renewables support will help to activate more entities of the
investment chain, with short-term opportunities presenting themselves in the form of tapping bond markets.

33
Leveraging intermediaries to accelerate clean power investment

Action area 1: Addressing the lack of

project pipeline and overcapacity
The success of Indonesia’s energy transition depends on opening up a clear project pipeline and addressing the current issue of
capacity oversupply by successively greening or replacing uneconomic and/or low efficiency coal plants.

Investment opportunities Enabling environment opportunities

● Once a clear project pipeline is in place, domestic and international ● Capacity building can help to draw up a clear procurement pipeline to
financial intermediaries can help PLN, its subsidiaries and IPPs to allow IPPs to enter the market. PLN could, for instance, open tenders
deploy and raise the necessary funds to install new utility-scale that allocate capacity based on power systems needs and prioritize
renewables capacity. To accommodate the increasing share of least-cost renewables and storage. In addition, supporting regulatory
intermittent renewables on the grid, investment into transmission and changes to put in place stable and attractive clean power incentives and
distribution will also be needed. simplifying project development procedures will help decrease investor
uncertainty. This will include revisiting provisions on self-generation and
● Investment opportunities include:
decentralized energy as well as power tariff regulation.
– PLN can make use of its good access to the bond market to raise
transition or green bonds to finance new clean capacity and loans or ● Due to the low cost of coal, DFI support to further lower the cost of
pooled debt funds for investment into transmission and distribution. renewables and storage can prove an incentive for PLN to replace
Together with concessional support, solar PV with storage in thermal with renewables capacity. However, due to the inextricable
particular can provide a clean solution to greening the fleet. socioeconomic links to the mining sector, lowering the cost alone will not
move the market.
– Using securitization to pool uneconomic or undepreciated coal
assets off PLN‘s balance sheet and free up capital for new ● Support in enabling the securitization of coal assets could provide fresh
investment in clean replacement resources (see Slide 38). This can capital off-balance sheet to help pay down existing debt (see Slide 38).
also provide a means of incurring revenue to support impacted
mining communities.

34
Leveraging intermediaries to accelerate clean power investment

Action area 2: Scaling up and greening

decentralized energy in rural areas
Due to Indonesia‘s geography, decentralized energy offers a key investment opportunity to increase power access and reliability and
decrease dependence on diesel gensets. Technical assistance is needed to adjust provisions on derogating power to remote areas in
particular.
Investment opportunities Enabling environment opportunities
● There is a role for domestic intermediaries to deploy funds to PLN, ● Technical assistance is needed to implement the regulatory changes
its subsidiaries and, in areas where PLN’s reach is limited, entities to allow for derogation from PLN in remote areas and more actively
such as municipally-owned enterprises (BUMD) for new involve entities such as BUMD in power generation. Clear
decentralized and diesel-PV hybridization projects. regulations surrounding offtake and greater enforcement of net
metering will provide investors with more clarity.
● Loans, credit lines or other forms of financing can help to grow the
small-scale PV and storage as well as genset hybridization market. ● Supporting the capacity building of the small-scale market and
Especially for entities other than PLN, this will likely require DFI offering suitable financing mechanisms will help to familiarize
support. In particular, DFI funding can prove valuable to lower the lenders with the technology and grow the market.
further “prove” and lower the cost of storage.
● Enabling the regulatory changes and supporting e.g. BUMD in the
● Once the market has gained more familiarity, aggregating small- securitization of projects with a similar profile could help access a
scale projects to access further investors can be of interest. wider range of investors.

35
Leveraging intermediaries to accelerate clean power investment

Action area 3: Scaling up the self-

generation market
In addition to greening the utility-scale fleet, efforts need to be made to spread the renewables market in breadth too. Installing self-
generation facilities can improve power reliability for large industrials and commercials. There is a need to develop suitable financing
mechanisms for smaller commercial users, which are currently underserved.
Investment opportunities Enabling environment opportunities
● Financial intermediation has a role to play in offering suitable ● While large international corporations have piloted this model,
financing mechanisms to C&I entities where the regulatory financial access for local C&I might require DFI support, particularly
environment allows. for SMEs. DFI support can help to cultivate market familiarity and the
development of self-generation projects coupled with storage
● While international C&I will likely continue to rely on international
through loans, credit lines or other forms of financing facilities. At a
capital, DFIs can support domestic banks and NBFC in deploying
later stage, it can be useful to explore and support the securitization
funds to small-scale PV and storage projects of SMEs.
of assets for projects with a similar profile.
● Once these more traditional instruments have been proven on the
● DFI funds could be particularly helpful to “prove” and bring down the
market, securitization of projects with a similar profile can be
cost of small-scale storage.
considered as a next step to access further investors.

36
Leveraging intermediaries to accelerate clean power investment

Action area 4: Activating the domestic

financial sector
In light of the constrained renewables investment environment in Indonesia due to the lack of project pipeline, thermal overcapacity and
regulatory environment, many local financial players are not sufficiently familiar with renewables financing, with many IPP projects to
date financed in overseas currency.
Investment opportunities Enabling environment opportunities
● In order to better activate domestic intermediaries and familiarize ● This is largely an enabling environment activity, yet technical
them with fund-deployment to renewables, DFIs could support assistance combined with DFI funds can help PT SMI to develop and
Indonesia’s national development bank PT SMI (or an entity) in offer various risk mitigation instruments such as full or partial
providing de-risking mechanisms like first-loss positions or guarantees. Alternatively, a project preparation facility using blended
guarantees. finance could prove another way to offer risk mitigation instruments.
● Once enabling environment issues have been addressed, it will be
useful to support the development of the local financial market for
more rupiah-based liquidity. Current PPAs in U.S. dollars incur
significant costs to PLN through forex and hedging risk, which was
exacerbated during Covid.

37
Leveraging intermediaries to accelerate clean power investment

Action area 5: Enabling a just transition

away from coal
The decarbonization of Indonesia‘s power sector will depend on supporting PLN on its energy transition journey, addressing the current
issue of capacity oversupply, and replacing uneconomic or undepreciated coal assets with clean capacity. This will require advisory
services to PLN and support in implementing suitable financing instruments.
Investment opportunities Enabling environment opportunities
● Once a clear government commitment has been set, domestic and ● The coal transition is a challenge that requires a clear decarbonization
international intermediaries can raise finance to decommission coal commitment from the highest political level and collaboration between a
assets and replace these with least-cost renewables and storage. At the variety of stakeholders, from mine operators holding long-term coal
outset, this will likely require DFI support. offtake contracts with PLN to mining sector employees. Technical
assistance needs to support these dialogs and processes, such as the
● PLN, its subsidiaries and IPPs that have PPAs with PLN can for
renegotiation of fuel supply contracts or exiting coal PPAs with IPPs.
instance raise green/transition bonds on the project or corporate level.
As PLN has good access to the bond market, this could prove a useful ● PLN will likely require support in structuring the adequate financial
avenue to take. In addition, using securitization to pool and refinance instruments to decommission coal assets. Technical assistance in
uneconomic or underused coal plants off-balance sheet can provide adjusting regulation to allow for securitization of assets can not only be
funding for clean replacement capacity. Depending on the design, part useful in terms of raising debt to pay down coal assets but can also be a
of the revenue could support communities impacted by the coal valuable mechanism to raise finance for impacted communities, such as
transition. for job training programs. DFI support is likely necessary to initially
“prove” such a financing mechanism.
● Further innovative financing mechanisms provided purely by DFIs such
as decarbonization loans can prove valuable in establishing the market. ● DFI support to collaboration with institutional investors could additionally
facilitate pre-identifying lenders and designing bonds to match their
investment criteria.

38
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