Executive Summary
Indonesia is Southeast Asia’s largest economy with a GDP of US$1.2 trillion in 2019, ranking 8th in the world based on purchasing power parity. Economic growth has remained steady in recent years, averaging over 5% over the last decade. Indonesia is 16th largest economy in the world and is a member of the G20 and the ASEAN group of nations.. President Joko Widodo (known as “Jokowi”) took office in October 2014 and pledged to improve infrastructure, diversify the economy, and reduce barriers to doing business in Indonesia as a means of increasing economic growth. Over the past decade Indonesia has enjoyed steady economic growth, though less than needed to pull the country into upper middle-income status. Sound macroeconomic policies, combined with growing domestic demand and high commodity prices, propelled economic expansion in recent years, but protectionist policies, corruption at all levels of government, poor infrastructure, weak rule of law, and labor rigidity continue to pose challenges.
Beginning in September 2015, the Government of Indonesia announced a series of economic reform packages to spur its GDP growth and encourage foreign investment. The announced reforms are a positive signal of the Jokowi administration’s desire to improve the business climate; the implementation and impact of the policy reforms, however, remains limited. Nonetheless, the Indonesian market has many positive attributes.
- Indonesia’s GDP 2019 per capita is US$4,164, exceeding many of its ASEAN neighbors such the Philippines and Vietnam, and with 270 million people, Indonesia’s economy comprises nearly half of ASEAN economic output.
- Indonesia is a thriving democracy with significant regional autonomy. It is located on one of the world’s major trade routes and has extensive natural resource wealth distributed over an area the size of the United States and comprised of 17,508 islands.
- The World Bank in 2017 classified 20% of Indonesia’s population as middle class and reported that this cohort was responsible for 43% of domestic consumption.
- In 2017 the number of internet users in Indonesia reached 143 million people or 54% of the population. Indonesians are among the most active users of social media such as Facebook, Twitter and Instagram.
- 40% of world’s geothermal resources are located in Indonesia.
Market Trends
With the decrease in production of fossil fuel, especially oil, as well as the global commitment to reduce the greenhouse effect, the Indonesian government has sought to increase the role of new and renewable energy in the country’s power sector. Blessed with rich natural resources, Indonesia has significant potential to expand its use of renewable energy. With the President’s Decree No. 79 of 2014 on National Energy Policy, Indonesia has set an ambitious target for the contribution of new and renewable energy to the energy mix to be at least 23% and 31% by 2025 and 2030 respectively. Indonesia has a very strong potential in the renewable energy (as shown as table below) to achieve that target. It is predicted that Indonesia will need US$66 billion of investment in the renewable energy industry over the next six years, a staggering US$13 billion of investment annually.
| Energy Type |
Potential |
| Hydro |
94.3 GW |
| Geothermal |
28.5 GW |
| Bioenergy |
PLT Bio: 32.6 GW and BBN: 200k Bph |
| Solar |
207.8 GWp |
| Wind |
60.6 GW |
| Ocean |
61 GW |
Source: Indonesia Ministry of Energy – New and Renewable Directorate (EBTKE)
The total potential renewable energy is equivalent of 442 GW utilized by power plants. Meanwhile for BBN(biofuel) and biogas as 200,000 Bph are used as fuel for transportation, households, commercial and industries. The utilization of renewable energy for the power plant in 2018 was 8.8 GW which was 14% of total capacity of Indonesia’s fossil and non-fossil power plants. The total capacity now is 64.5 GW. Most of new and renewable energy sectors are used for producing power with rest is used for transportation, industries, commercial and other sectors.
The state owned electric company, PLN, will add new power plants with total 75.9GW for the next 10 years throughout Indonesia as stated in Electricity Supply Business Plan or known as RUPTL 2017 – 2026. The development of renewable energy relies on local’s condition and on each region’s potential. For Sumba, East Nusa Tenggara area for wind power and solar. Sukabumi, West Java for wind farm. The government has pushed to utilize solar power for street lights, rooftop photovoltaic, etc.
Geothermal
Located in the ring of fire, Indonesia has significant amount of geothermal resources. The Indonesian government policy to push for the acceleration of geothermal is based on President Regulation No.5/ 2006, regarding energy mix policy, that is targeting the geothermal energy to contribute at least 5% by 2025 which is the target for geothermal installed that is 7.200 Mega Watt. Currently geothermal is utilized to support country’s energy resiliency and up to December 2019, the total installed capacity is 2130.6 MW which puts Indonesia as the second largest geothermal power producer in the world, behind United States and defeating Philippine.
Hydro
Another high potential of renewable energy resource in Indonesia is hydro energy. From Indonesia’s current installed capacity for renewable energy, 66% are from hydro and 27% from geothermal. Out of 94.3 GW hydro potential in Indonesia, there is only about 10% that has been utilized. Hydro power is quite common in Indonesia due to less sophisticated technology needed and less amount of investment. Based on Ministry’s Energy and Mineral Resources data, hydro power potential in Sumatera is 15.6GW (20.8%), Java is 4.2 GW(5.6%), Kalimantan is 21.6GW (28.8%), Sulawesi is 10.2GW (13.6%), Bali/ Nusa Tenggara Barat (NTB)/ Nusa Tenggara Timur (NTT) is 620MW (0.8%), Maluku is 430MW (0.6%) and Papua is 22.35GW (29.8%).
Wind
Indonesia is currently working on 1.7 GW wind power located across the country. There are 24 wind power plant projects being carried out under Independent Power Producer (IPP) sector companies. One that has been up and running is Sidrap Wind Farm, a 75 MW project developed by U.S. company UPC Renewable. The Sidrap project was launched by President Jokowi and has been the flagship of wind power in Indonesia. It is financed by the U.S. DFC (Development Finance Corporation) previously known as OPIC (Overseas Private Investment Corporation). Currently over 24 projects are under Feasibility Study (FS), construction, Power Purchase Agreement (PPA) Few areas that have more than 100 MW capacity of wind power resources. Those projects are in Sidrap and Jenoponto in South Sulawesi and both posses 200 MW capacity in total. Other strong wind potential areas such as Sukabumi, West Java (170 MW), Garut (150 MW), Lebak and Pandeglang (each with 150 MW) Lombok, West Nusa Tenggara (100 MW).
Solar
Solar energy has the potential in Indonesia to contribute more than 200 GW with efficient photovoltaic technology. However, despite being a tropical country that is also located on the equator, the utilization of solar energy in Indonesia is currently less than 100 MW. Solar energy potential is well spread throughout Indonesia with the highest potential is in West Kalimantan (20GW), South Sumatera (17GW) and East Kalimantan (13GW) In 2017, an initiative taken by the Indonesian government, working with local renewable industries, to strengthen resiliency in through achievement of renewable energy contribution as mandated to achieve 23% by 2025 whereas approximately 7GW from solar, launched a national program toward a million of photovoltaic in Indonesia. This program launched to accelerate the solar photovoltaic rooftop of residential housings, commercial buildings, public/ government buildings and industrial facilities across the country for achieving 1 GW by 2020. Further information, there are 800 public buildings targeted to have solar rooftop pv as government plan. Through Ministry of Energy and Mineral Resources, government allocated US$13 million for installing panels on boarding schools, clinics, orphanages, government offices and police stations in 17 provinces.
Biofuel
Indonesia has been experiencing a trade balance deficit for the last few years. The main contribution to the deficit has been due to significant import of fuel used for transportation, households, power, industries, etc.To reduce dependency on fuel import, especially on diesel, and maximize the country’s palm oil as the world’s biggest resources, President Jokowi launched B30 program. The program requires for mixing 30 percent of biodiesel (B30) into gasoline that used in industries, commercial, transportation, etc. Pertamina, as state owned energy company, has been tasked by the government to support the country’s biodiesel program. With the mandate, Pertamina is developing green refinery project to support the utilization of country’s vast palm oil resources to be used to support the biodiesel program.
Waste to Energy
Based on Presidential regulation No.35/ 2018 on the accelerated development of waste-to-energy plants based on environmentally friendly technology for 12 cities in Indonesia. Those cities are Jakarta, South Tangerang, Palembang, Bekasi/ West Java, Surabaya, Makassar, Manado, Semarang, Solo and Denpasar. In this year, there is a possibility for few tenders for the waste management treatment technology as in:
- Landfill Legok Nangka (West Java) : 1,820 ton of waste daily.
- Landfill Cipeucang (Tangerang Selatan) : 800 ton of waste daily.
- Landfill Suwung/ Sarbagita (ali) : 990 ton of waste daily.
The tenders for the technology selection for these projects are open and competitive for proven approaches that are environmentally friendly with low carbon emissions. The technology that would be chosen is expected to be able to reduce waste at least 85% or more. As of the end of July, 2020, the Legok Nangka waste treatment project if furthest along, receiving support of Indonesia’s Ministry of Finance through a US$1.1 billion Viability Gap Fund commitment. The West Java Government is currently completing its final preparation and administration preparation before the prequalification process can ben start by mid/end August 2020. The Legok Nangka Waste Treatment project is located in Legok Nangka to serve five municipalities in the greater Bandung city area, the project plan to accept 1,800 ton per day municipal solid waste from the respective area. The provincial and municipal government will contribute to the tipping / gate fee of USD 26 per ton, while the national government support through the VGF that mentioned above. Basic facilities including road access, gate and landfill that has been built by the government. The Legok Nangka project will run as PPP (public private partnership) scheme, an open international tender will be applied. It will be an open technology project. With a small note that incineration plant will not be preferred. The project owner which is the West Java government office is seeking a reliable investor, technology provider, and operator that can set up an effective consortium that may lead this project.
Ocean
The ocean plays significant role for many Indonesians as the country consists of around 17,000 islands. Many islands are located in remote areas especially in eastern part of Indonesia. The potential for ocean energy is quite high. Based on Ministry of Energy and Mineral Resources 2016 data, there are 3 types of ocean energy sources in Indonesia. The first type, wave energy that has 2 GW potential. The second type is tidal-current ocean energy that has 18 GW potential and the third one is ocean heat that Indonesia has 41 GW potential.
Competitive Landscape
State-Owned Companies
PT. Perusahaan Listrik Negara (PLN), is the main state owned power company and as the operator of power plant handling transmission and distribution of the power grid. Pertamina is another state owned company that is mostly in the oil and gas sector, but they are starting to be more active in the new and renewable energy industry as a power generating company, especially since the slowdown of oil and gas industry. Pertamina has been diversifying its portfolio as shifting some of their focus into the new and renewable energy industry such as geothermal and green refinery (biofuel) projects. PLN is the only power off-taker in the country. Hence, they have a significant role in the renewable energy industry. Both PLN and Pertamina each have subsidiaries companies that are active also in the renewable energy industry. But there is a state owned joint subsidiary company between PLN and Pertamina, PT Geodipa, that is in the geothermal drilling industry.
Independent Power Producer (IPP) Sector
Some local and multinational companies are active in the renewable industry in Indonesia as IPPs. As for the US industry, it has been participating in some new and renewable energy projects in Indonesia ranging from equipment supplying, consulting, engineering service, developing utility scale plant, etc. However European countries such as German, England, France, Denmark have also been quite active in the local market. Asian countries such as from China, Japan, Korea, Malaysia as well as Middle Eastern countries such as Uni Arab Emirates (UAE).
Currently below are some examples of multinational companies present in the market:
- ABB (Switzerland)
- China Micro Hydro (CMH), Topnich Energy, CMEC (China)
- Electric Vince Industries, Halliburton, ORMAT, UPC Renewable (US)
- Hitachi, Itochu, Inpex, Kyusthu (Japan)
- Korea Southern Power/ KOSPO (South Korea)
- Masdar (UAE)
- Total, EDF (France)
Similar with multinational independent power producers above, below are some examples of international renewable energy industry service and technology supplier companies active in Indonesia:
- ABB (Switzerland)
- AECOM (US)
- Black & Veatch (US)
- General Electric (US)
- Halliburton (US)
- Honeywell (US)
- Jacobs (US)
- Siemens (German)
- Schlumberger (US)
- Schneider, Siemens (German)
Best Prospects for U.S. Exporters
Important opportunities outside of Jakarta remain in energy and electricity transmission services. In 2014, Government of Indonesia has announced its intention to increase electricity generation by 35,000 MW by 2019. It has not been able to fully meet that goal but growth in power generation projects conventional and non conventional are expected to continue for the next decade. Important opportunities outside of Jakarta remain in energy and electricity transmission services. Opportunities for U.S. Exporter such as turbine, boiler, drilling technology, transmission and distribution equipment, smart grid technology, energy saving and efficiency technologies, etc.
Foreign, including U.S. companies, who wish to sell their products in the Indonesian market are required to appoint a local agent or distributor pursuant to Ministry of Trade (MOT) Regulation No. 36/1977 on Termination of Foreign Business Activities in the Trade Sector as amended and by Government Regulation No. 15/1998. Registration of an Indonesian agent or distributor with the Directorate of Business Development and Company Registration at the MOT is mandatory under Regulation of the MOT No. 11/M-DAG/PER/3/2006. Some U.S. companies sell their product or technology to Indonesia market, through their regional – based partner in Singapore, Thailand, Malaysia etc.
Regulatory Environment
The instability of regulation and policy on renewable energy industry by Indonesian government has been a major challenge for the investors. Other challenges such as land issue for project that goes through land conservation area such as in geothermal, investment etc. Investment in renewable energy especially for geothermal is challenging also because of the cost of investment upfront such as for drilling exploration activities. However recent initiatives such as back in 2018, President Jokowi streamlined the permit process in the government in order to boost Indonesia’s investment attractiveness including in the renewable energy. In addition to that, through the Paris agreement, the government targets to reduce energy’s emission by 10 times. That is 314 million CO2 by 2030. The energy’s emission reduction target by 2030 is set for 11% from Indonesia’s total target for emission reduction from all industry sectors, which is 29%. This energy’s emission reduction goal would be possible to achieve by increasing the number of fossil fuel energy contribution especially coal-fired and diesel power plants.
Indonesia’s trade deficit in recent years, which the majority of deficit has been due to import of fuel to meet country’s energy needs. The significant amount of import fuel has impacted on the government that it issued policy such as more utilization of country’s abundant supply of palm oil to be used for fuel or biodiesel for industries and known as Indonesia B20 and B30 programs.
Technical Barriers to Trade & More
The business environment in Indonesia is challenging, with Indonesia ranked 72 out of 190 countries in the Ease of Doing Business 2018 report by the World Bank. U.S. firms encounter complex bureaucratic and regulatory requirements which make it time-consuming to enter the market.
- Indonesian infrastructure and service networks have not been developed or maintained to keep pace with the growing economy, causing increased transaction costs and inefficiencies that hamper exporters and investors. Non-tariff barriers remain wide-spread and the bureaucracy can still be cumbersome. Laws are often opaque or conflicting. Import licensing procedures and permit requirements, product labeling requirements, pre-shipment inspection requirements, local content and domestic manufacturing requirements, and quantitative import restrictions impede U.S. exports.
- Although significant anti-corruption measures have been undertaken by the Indonesian government, corruption remains a concern for many businesses looking to operate within Indonesia. Indonesia ranked 96th on Transparency International’s Corruption Perceptions Index 2017. Companies are recommended to have a solid due diligence process in place and should consult with the U.S. Commercial Service prior to signing with agents and distributors.
- Significant rule-of-law issues persist. Formal dispute settlement mechanisms are not considered effective, and business and regulatory disputes— which would generally be considered administrative or civil matters in the United States—may be considered criminal cases in Indonesia. The court system is widely viewed as corrupt. In addition, international arbitration is widely discouraged by the government of Indonesia and it is difficult to have foreign arbitration awards enforced in Indonesia.
- Competition from third country firms such as Singapore, China, Japan, Australia, Korea, Russia, France, and other regional players is intense, and U.S. firms often have to significantly adapt their business model and pricing scheme to compete effectively.
- Official trade statistics understate market opportunities and American presence given the large numbers of U.S. shipments that are recorded as U.S. exports to Singapore, but which ultimately enter Indonesia, and U.S. sales in Indonesia that U.S. multinationals source via third countries.
- As part of improving the economy, local content regulation is getting more stringent including in the renewable energy industry. For an example in the solar industry, for the engineering services, manpower must be all local or dominated with locals. Despite concern of lack availability of local expertise in the respective industry.
