Barriers to Renewable Energy Investment in the Indonesian Power Sector

Indonesia has set ambitious targets of increasing the share of renewable energy in electricity supply and reducing greenhouse gas emissions relative to a baseline. But despite abundant renewable energy resources and policies to promote renewable energy, the country has experienced only slow additions in renewable electricity supply. Future expansions in generation capacity are planned to rely heavily on coal-based power supply. This thesis examines the barriers to renewable energy in Indonesia, provides a detailed case study on the effectiveness of specific renewable energy policy instruments in a developing economy context and applies mean variance portfolio (MVP) theory to analyse power supply outcomes. This thesis provides a historical analysis of the effectiveness of policies to incentivise renewable energy supply in the Indonesian electricity sector. Empirical analysis of supply trends covers the period 1990–2015, while perceptions of the effectiveness of regulatory incentives are based on stakeholder interviews conducted in 2011 and 2012. The main finding is that a combination of regulatory uncertainty in the Indonesian power sector, financial weakness of the national electricity utility Perusahaan Listrik Negara (PLN) and ineffective feed-in tariffs have had a dampening effect on renewable energy investment. In the absence of credible, mandatory renewable energy targets for PLN, the utility has prioritised coal and gas over renewables. An important reason being that renewable power projects carry higher upfront investment costs and, until now, have been more expensive per unit of power output. Feed-in tariffs have been rendered ineffective as they were set at levels too low to act as premium prices, with PLN and independent power producers locked into lengthy negotiations over contracts, thus slowing project implementation. Taking the long view, the thesis uses MVP theory to analyse the risk-mitigation potential of renewables in PLN’s future electricity supply mix. This analysis identifies the cost risk trade-off of various electricity mix scenarios and provides a quantitative measure to assess the potential benefits from diversifying energy production. The findings are that the average system costs for various future technologies are in a narrow range, with renewables cheaper than conventional generation technologies, especially when carbon costs are included. The risk of investing in the power sector, defined as cost risk and measured by the standard deviation of past cost streams, differs significantly across generation technologies and is lower for renewables. Energy portfolios containing a large share of renewables combined with energy efficiency measures are now preferable in cost and risk terms, although at higher discount rates the cost advantage is less pronounced. This thesis concludes that policy reforms need to focus on continuing to move towards cost-reflective tariffs to improve PLN’s financial footing. Combined with continued declining costs of renewables, feed-in tariffs could become more effective when set at levels that truly act as premium prices. They could be combined with quantitative instruments such as renewable portfolio standards to help overcome institutional bias against renewables within PLN, especially in a period of transiting towards a cost-effective tariff system and phasing out of subsidies

The Manpower Law of 2003 and its Implementing Regulations: Genesis, Key Articles and Potential Impact

This paper reviews Indonesia's Manpower Law 13/2003 and related regulations, against a backdrop of slow employment growth, business concerns about the legislation and government attempts to change it in 2006. The paper focuses on severance rates and dismissals, short-term contracts and out-sourcing, and minimum wages, also briefly discussing other articles, and comparing the law with those in neighbouring countries. It suggests that certain articles have contributed to significantly higher wage costs and reduced flexibility in the management of labour in Indonesia's formal sector, even though compliance is by no means universal within the private sector. Key provisions, especially large increases in severance rates, and needs criteria imposed for the purpose of setting minimum wages, are also out of step with labour market policies in other developing countries. Circumstantial evidence suggests that these measures have adversely affected the investment climate and damaged prospects for a recovery in employment

Survey of recent developments

By June 2006, the government had largely completed the difficult tasks of stabilising macroeconomic conditions following the October 2005 fuel price increases, and of drawing up a blueprint to improve infrastructure and the investment climate. On the macroeconomic front, the main issues related to how, and how quickly, the economy could return to the growth rates of late 2004 and early 2005, given still low levels of private and public investment. Sound macroeconomic policies had delivered a stronger rupiah and reduced inflationary pressures, albeit with continued decelerating rates of growth. Private consumption and investment having slowed, government spending had become the key driver of growth, but major delays in public spending continued in the first four months of the year. The reform agenda includes an impressive raft of new laws, or revisions to old ones, in investment, taxation, customs and labour, all of which were covered under a special Presidential Instruction. However, actual reform was slowed by substantial political obstacles. There was growing concern about divisions within the cabinet on the reform package, and about the capacity of the ministerial team to guide reforms quickly through the bureaucracy and the parliament. This included doubts about the resoluteness of President Susilo Bambang Yudhoyono (SBY) on reform initiatives in the face of vocal opposition (as in the case of labour reform), and about Vice President Jusuf Kalla's commitment when political or business interests close to him were opposed to change (as in the case of divestment of shares in Indonesia by the giant cement multinational, Cemex). Given likely delays in the reform package's impact on output and employment, uncertainty persists about the level of support the 'duumvirate' is prepared to offer reformist ministers, and about the political clout of the reformers themselves, as the government moves into the middle period of the electoral cycle. Examples of weak policy making include watered-down investment reforms, the seemingly 'quick-fix' approach underlying a proposal to set up special economic zones, and unsatisfactory handling of continuing disputes in the mining sector. A backdown on labour market reforms, at least for the present, has probably been the biggest setback to date in the SBY-Kalla team's attempt to promote investment: A poorly managed reform effort in terms of both substance and political strategy. Two other events shook Indonesia during the Survey period. A massive earthquake hit the Yogyakarta region on 27 May, killing nearly 6,000 people and leaving thousands homeless. And on the political front, the attorney general controversially dropped corruption charges against the ailing former president, Soeharto