PT Perusahaan Listrik Negara (PLN) has a clear path forward for the energy sector’s sustainable growth. Its New Energy Paradigm, especially the focus on greener energy, has received a much-needed commendation from its counterparts in the region. But to make this strategy a reality requires help from other stakeholders, particularly investors and lenders, both local and international.
In the last episode of a seven-part series about Indonesia’s New Energy Paradigm, Andrew Kinloch, Managing Director at Logie Group Limited, Hot Martua Bakara, Executive Vice President for Corporate Planning at PT PLN (Persero), David Dovan, Investment Specialist at Asian Development Bank (ADB), Daniel Mallo, Head of Natural Resources & Infrastructure Asia Pacific at Société Générale, Nadia Soraya, Partner at HHP Law Firm (a member firm of Baker Mckenzie), and David Cao, Managing Director at Solmax Bioenergy, conclude that while there are some hurdles along the way, the investment climate for Indonesia’s energy sector remains bright.
PLN’s move to include 23% new and renewable energy in its energy mix by 2025 is welcome news for international lenders, particularly ADB. “Policy-wise, ADB as an institution can no longer finance coal, so we are definitely looking forward to seeing more tenders on renewables, particularly solar and wind, going forward,” says Dovan. As a result, the country is seeing more willingness for long-term investments, with Daniel Mallo sharing, as an example, a recently signed 15-year transaction on two solar projects in the country, 8MW in Lombok and 15MW in Sulawesi.
If we put COVID-19 aside for a second, Indonesia is still a country with typically high growth rates and has an unmet energy demand.Daniel Mallo
A country with a huge potential for renewables, Indonesia has to grab all available opportunities knocking at its door, especially on the fundamentals and the availability of capital, according to Mallo. “If we put COVID-19 aside for a second, Indonesia is still a country with typically high growth rates and has an unmet energy demand.” In the same way, renewables hold the “sweet spot where investors want to deploy capital.”
For Indonesia, this means geothermal and hydro. In fact, ADB encourages PLN to look at these baseload alternatives as “more and more banks and financial institutions are stepping away from coal,” says Dovan. Mallo supports this, saying that capital for coal will dry up soon, citing the recent exits by Singaporean and Japanese banks and the confidence that even Chinese banks will “at some point get pressured to embark on their own energy transition.”
PLN enjoys a good reputation within the investment community. Its BBB investment grade rating proves that capital will remain available for the state utility despite COVID-19’s impact on energy sales growth. The question, therefore, is how conducive the investment environment in Indonesia is to attract the needed funding, and this is where the government plays a significant role.
Regulations in Indonesia often discourage investors, as they do not feel “very stable” with the frequently changing policies, reveals Cao. There are also issues around whether one regulation can actually work with other existing regulations, Soraya adds. Hence, they believe it’s crucial for the government to review existing processes to allow easy entry for investors. Recently, the government seemed to heed this call with the passing of omnibus laws, including one that “promises to simplify business permits and land acquisition processes and ease foreign ownership requirements,” says Soraya. While the law is “ambitious”, Kinloch believes the investors are looking forward to seeing the doors it would open.
There are other challenges nonetheless, although PLN, along with the government, is working to address these concerns. “Renewable projects are more expensive compared to coal and fossil fuel, so this is another holdup,” says Soraya, with the tariffs on renewables deemed too high for investors, who will seek other markets in which to deploy their capital. PLN knows this but acknowledges that the company has revenue coming from tariffs as well. Bakara suggests that in order to encourage lower tariffs, the government has to set renewable energy tariff regulations that at the same time can ensure support to PLN.
FOREX volatility and difficulties with the bank side, particularly domestic ones as they increasingly shift to environmental and social guidelines vis-à-vis their ability to lend, likewise pose a problem. The former has always been a part of the equation, says Kinloch and Cao, and the latter can be overcome with PLN’s greener goals, says Mallo. In addition, Soraya believes making the project documents and agreements more bankable for lenders can help draw more funding for PLN.
Investments are crucial to realise Indonesia’s energy targets, there is no question that the country has the resources to achieve these targets, or that PLN’s strategy will fall short. What matters is how the government resolves investors’ concerns to ensure the country is on par with its neighbours in attracting available capital. Should this happen, the ambitious 23% renewable target for 2025 could well become a reality.
To hear a full recording of the discussion on “Supporting Indonesia’s Energy Sector Growth through Domestic and International Investment”, click HERE.
- Hot Martua Bakara – EVP Corporate Planning, PT PLN (Persero)
- David Dovan – Investment Specialist, Asian Development Bank (ADB)
- Daniel Mallo – Head of Natural Resources & Infrastructure, Asia Pacific, Société Générale
- Nadia Soraya – Partner, HHP Law Firm (member firm of Baker Mckenzie)
- David Cao – Managing Director, Solmax Bioenergy
- Andrew Kinloch – Managing Director, Logie Group Limited