IEA (2022), An Energy Sector Roadmap to Net Zero Emissions in Indonesia, IEA, Paris https://www.iea.org/reports/an-energy-sector-roadmap-to-net-zero-emissions-in-indonesia, License: CC BY 4.0
When Indonesia declared independence in 1945, its GDP per capita was more than ten-times lower than today. Since then, its economic development has been an extraordinary success story. From 1968 to today, Indonesia has been the fourth-fastest growing large economy in the world, joining Korea, Singapore and China in sustaining very rapid growth over half a century. The share of the population below the national poverty line has fallen from 60% in 1970 to less than 10% today. Today, Indonesia is the world’s fourth-most populous country, seventh-largest economy, twelfth-largest energy consumer, and the largest coal exporter.
Indonesia’s GDP fell by nearly 15% in the wake of the Asian Financial Crisis in 1997. In response, the country unleashed a wave of reforms, and over the next two decades, its economy changed substantially. Indonesia shifted from a net oil exporter to a net oil importer in 2003. The share of the oil and gas sector in GDP fell from 10% in 2000 to around 2.5% in 2021, accompanied by a fourfold decrease in the share of government revenues from the sector. No longer an oil exporter, Indonesia is still highly dependent on fossil fuels. Exports of coal and natural gas make up nearly 20% of net goods exports.
Indonesia’s total energy supply increased nearly 60% from 2000 to 2021. As energy demand rose, coal stepped in to fill the gap. Per unit of energy consumed, its energy sector now emits one-third more CO2 than in 2000. Total energy sector emissions have grown faster than energy demand, more than doubling over the last two decades. In 2021, energy sector emissions were around 600 million tonnes of carbon dioxide (Mt CO2) – making Indonesia the world’s ninth-largest emitter. Yet, per capita energy CO2 emissions are only 2 tonnes, half the global average.
Indonesia’s ambitious target of reaching net zero emissions by 2060 or sooner is an integral part of its overarching development goal of becoming an advanced economy by 2045. Despite the country’s achievements, a long path to this stated goal remains. GDP per capita at purchasing power parity today is 30% lower than the world average, and economic development is regionally imbalanced and highly resource dependent. The islands of Java and Bali are home to 60% of the country’s population and 75% of manufacturing GDP. Other regions specialise in natural resource extraction. Indonesia’s net zero emissions target needs to be seen as part of its necessary transformation on the path to becoming an advanced economy by 2045. This includes: economic diversification from a concentration in natural resources; economic development across the archipelago driven by knowledge, technology and innovation; and leveraging its competitive advantage in many clean energy value chains.
As part of its long-standing co-operation with the Government of Indonesia, the International Energy Agency (IEA) prepared this report “An Energy Sector Roadmap to Net Zero Emissions in Indonesia” in close collaboration with the Indonesian Ministry of Energy and Mineral Resources (MEMR). The IEA’s contribution complements – and has benefited from – the high-quality modelling and analysis that is already being conducted in Indonesia to flesh out its net zero emissions target. This roadmap comes at a historic moment for Indonesia as it holds the G20 Presidency for the first time in 2022 – and at a time of severe turbulence in world energy markets.
There is no one path to net zero emissions for Indonesia. This report presents a pathway to reach this goal, not the pathway. The IEA and MEMR’s joint work on this roadmap has identified a number of clear near-term priorities for Indonesia on its journey to net zero emissions by 2060, or sooner. Our analysis is centred on the IEA’s Announced Pledges Scenario (APS), in which Indonesia reaches net zero emissions on an economy-wide basis by 2060, with deep cuts in energy sector emissions. The report also develops an accelerated scenario, the Net Zero Emissions by 2050 Scenario (NZE).
Achieving net zero emissions by 2060 is a long journey that requires immediate and sustained action. Energy efficiency, renewables in the electricity sector, and the electrification of transport need to be kick-started now. To 2030, these three levers provide around 80% of the emissions reductions from the energy sector needed to put Indonesia on the road to net zero emissions. The technologies for efficiency, electrification and renewables are commercially available and cost-effective, provided that the right policies are put in place.
Between now and 2060, Indonesia will add huge quantities of energy consuming appliances, machines, factories and infrastructure to its capital stock. More than 2 billion square metres of new residential floor area are constructed between 2021 and 2030 in the APS, increasing Indonesia’s residential building stock by close to four-times the total land area of the Special Capital Region of Jakarta. There are 22 million additional air conditioners in 2030 compared with today, as ownership rates rise from only one-in-ten households to more than one-in-three. Steel production increases by 5 million tons (Mt), with the equivalent of 30% of today’s production capacity added by 2030. The stock of passenger cars increases from 11 million today to 23 million by 2030.
In this context, it is imperative that energy efficiency policies be strengthened robustly, including pricing and subsidy reform. In the APS, mandatory minimum energy performance standards for buildings, appliances and equipment, combined with policies to rapidly electrify motorbikes and passenger cars, reduce final energy demand by almost 10% in 2030 relative to a business-as-usual scenario, increasing to 33% by 2060. Subsidy reform provides effective incentives to boost the efficient use of energy, including switching to electricity in some end-uses. Consumers save an average of USD 100 per household on energy bills in the APS in 2030 relative to a business-as-usual scenario. The savings increase to USD 500 in 2050.
More than 25 gigawatts (GW) of solar PV and wind capacity are installed by 2030 in the APS, up from around 0.4 GW today. Early growth of renewables is essential to lay the foundation for the industry to scale up strongly after 2030. This is a path to transform the current power mix in which coal provides 60% of generation and solar PV and wind account for less than 1%. Today’s generation mix is characterised by substantial over-capacity, which is the result of overly optimistic electricity demand projections in the past.
Solar PV and wind for power generation have a large role to play in achieving the net zero pathway, but policy reforms are essential for them to fulfil that role. Without effective reforms, solar PV and wind projects risk being economically uncompetitive relative to coal and natural gas power plants. Recent auction results in Indonesia for solar PV and wind revealed costs twice as high as those in comparable emerging market and developing economies.
The critical challenge for the transition today is to create opportunities for renewables to expand their contribution to the electricity generation mix. Four key policy reforms are needed in the near term:
- Contract adjustments to allow coal and natural gas plants to operate more flexibly and at lower capacity factors. IEA analysis suggests that this kind of contract reform can save more than 5% of costs across the electricity system in 2030, reducing curtailment of available renewables capacity and avoiding the dispatch of high cost, emissions-intensive power plants. Reforms of existing contracts need to be done in a manner that ensures that investors receive an adequate return and that confidence in the sector is not compromised.
- Remunerate system services provided by coal, other power plants and eventually battery storage and demand side flexibility. Coal continues to play an important role in electricity security to 2030, providing 50% of peak capacity.
- No new coal beyond the current pipeline and retire ageing coal capacity. Retirements should accelerate after 2030 and the need for planned coal plants should be revaluated.
- A favourable regulatory environment for development and operation of renewables capacity. This includes clear schedules for substantial competitive auctions, transparent and attractive tariffs, effective provisions for land and transmission system access, and guaranteed priority dispatch.
While efficiency, electrification and renewables can deliver much of the needed cuts in emissions, reaching deep emissions reductions calls for deploying additional clean energy technologies. For example, around a quarter of the emissions reductions needed by 2050 in the APS are delivered by hydrogen and hydrogen-based fuels, nuclear, electrification of some industrial processes, and carbon capture, utilisation and storage (CCUS). By 2060, around 190 Mt CO2 is captured with CCUS – almost one-third of today’s emissions. Total electricity generation devoted to hydrogen production is around 220 terawatt-hours by 2060, almost as much as current total demand in all sectors.
Energy demand centres in Indonesia are not close to its ample renewable energy resources. Inter-regional undersea transmission capacity is needed to interconnect electricity generation in resource rich areas to Indonesia’s demand centres. By 2050 in the APS, Java is importing nearly half of its electricity from neighbouring islands.
Deploying the needed technologies requires innovation at the global level to bring down costs; co-ordinated, cross-sectoral and long-term planning across supply, infrastructure and demand in Indonesia; and large investments in infrastructure and demonstration projects. International co-operation, technology transfer and financial support will be essential.
Historically, Indonesia has invested around USD 20 billion per year in its energy sector. With growing GDP and energy demand, this is set to increase in any outlook. However, a pathway to net zero emissions is more capital intensive. By 2030, investment is around USD 8 billion higher per year in the APS than in a business-as-usual scenario, with investment in renewables generation and grids (USD 25 billion) more than the current investment in the entire energy sector. Investment in energy efficiency climbs to USD 10 billion annually by 2030, a fivefold increase on today. Mobilising this level of investment will require significant policy reforms as well as international support.
Indonesia spent about USD 24 billion on net oil imports in 2021, and this is expected to rise to around USD 35 billion in 2022 as world prices spike. By 2050, net imports of oil and gas reach USD 100 billion in a business-as-usual scenario. This implies that Indonesia spends a higher share of GDP on imported fossil fuels than it does today. In the APS, electrification and efficiency dampen consumption of imported fossil fuels, and the oil and gas import bill is more than three-times lower than in a business-as-usual scenario by 2050. The difference in import bills between the two scenarios to 2050 is bigger than the difference in investment in clean energy technologies. This means that the clean energy transition delivers lower total energy system costs for Indonesia.