Fossil fuels still dominate Southeast Asia, accounting for 83% of the energy mix. Renewable energy contributes only 14.2%, despite its significant potential, especially for solar energy. Vietnam leads the region with 20.5% of solar energy, while Indonesia lags far behind with less than 1%.
About 40% of Indonesia's territory, especially outside Java, is still not connected to the grid. The likelihood that they will be connected in the near future is low. This reflects a major challenge for Indonesia: how to effectively harness its abundant renewable energy potential, especially in remote areas.
Southeast Asia's Renewable Energy Potential
Today, the world's energy demand is 17.7 terawatts (1,000 gigawatts to a terawatt) from various sources (oil, coal, natural gas, and other alternate sources). One gigawatt of electricity generation can power approximately 750,000 homes.
Southeast Asia has a huge renewable energy potential of 17 terawatts, which is 20 times the amount needed to achieve net-zero emissions by 2050. In reality, however, the region's renewable energy capacity only reaches 99 gigawatts.
As a country that contributes 40% of the region's energy consumption, Indonesia has significant potential for solar energy.
Helen Wong, Managing Partner of AC Ventures, emphasizes the need for an energy transition to renewable sources such as solar energy to combat climate change in Southeast Asia.
While the opportunities are substantial, several challenges need to be addressed, including:
- Electricity Grid Enhancement: Significant upgrades to the electricity grid are required to support the transition to renewable energy.
- Investment: Large investments in renewable energy are needed to meet targets. In Indonesia, the target is 36 gigawatts per year from solar photovoltaics, seven times the investment level of 2018-2021.
- Early Retirement of Coal Power Plants: Coal power plants, which contribute 60% of the national energy, need to be retired early.
Despite these challenges, the future of solar energy in Southeast Asia, particularly in Indonesia, remains bright.
The Just Energy Transition Partnership (JETP) for Indonesia was launched at the G20 Summit in Bali in November 2022 to raise $20 billion from public and private funds to support Indonesia's energy decarbonization.
Indonesia is committed to accelerating the use of renewable energy with a target of 19%-21% by 2030.
Wong also highlights the urgency of transitioning to renewable energy sources in Southeast Asia, including Indonesia, to combat climate change. One of the main challenges Indonesia faces is significant subsidies for fossil fuels, especially coal. Additionally, policy and regulatory changes are needed to encourage PLN to purchase more solar energy and support the development of this sector.
However, Wong remains optimistic about the prospects of solar energy in Indonesia in the coming decade. She sees opportunities in three types of projects:
- Utility-scale: Requires significant capital and depends on PLN tenders.
- Commercial and Industrial: Companies building or leasing renewable power plants for self-consumption.
- Residential: More challenging to measure and still in the early stages of development.
According to Wong, the most promising subsector is commercial and industrial. Xurya, a company in AC Ventures' portfolio, is the largest player in this market in Indonesia, supplying clean energy to multinational companies with a capacity of around 200 megawatts.
Evaluation of Solar Energy Projects in Indonesia: Key Factors
In developing markets like Indonesia, investors pay close attention to two main factors when evaluating solar energy projects:
- Internal Rate of Return (IRR): Measures the profitability of an investment relative to its risks.
- Payback Period: Determines the time taken to recover the initial investment capital.
Although energy subsidies can cause price fluctuations in the market, the cost of solar panels has significantly decreased and is now approaching price parity with fossil fuels.
In addition to economic factors, Wong also stated that technology plays a crucial role in project feasibility:
- Solar Yield Optimization Technology: The use of trackers and specialized software to assess roof suitability for solar panel installations is key to enhancing efficiency and energy production.
- Internet of Things (IoT): IoT devices are increasingly used in renewable energy project audits, providing detailed data needed for financing.
Financing solar energy projects is also a significant consideration:
- Initial Costs: Initial investments for solar projects are generally substantial.
- Cash Flow Management: Investors need to understand how companies manage cash flows and achieve their investment returns.
- Mixed Financing Solutions: Support from development financing institutions and first-loss guarantee schemes from entities like the World Bank can help facilitate project funding.
Towards the Future of Solar Energy in Indonesia
The widespread implementation of solar energy in Indonesia requires significant improvement in the electricity network infrastructure. Inter-island connectivity is predicted to be realized by 2028, with investment needs exceeding $300 billion for the distribution and transmission of renewable energy.
Wong emphasizes the need for network enhancements to accommodate intermittent renewable energy sources such as solar energy. AC Ventures, as a venture capital company, is committed to energy transition in Southeast Asia, with a focus on solar energy development in Indonesia. Substantial infrastructure upgrades, although challenging, are key to achieving a sustainable future for renewable energy in this region.
