Indonesia’s solar energy awakening: Overcoming coal dependence through strategic climate Investing
- Target 19- 21 % alternative energy by 2030, aided by US$ 20 bil climate finance package
- AC Ventures sees potential in neglected renewable electricity market, backing companies
For years, Indonesia’s power landscape has been dominated by fuel, a fossil fuel that now accounts for a staggering 60 % of the nation’s electricity mixture. However, a change is on the sky, driven by the need to address climate change and the enormous potential of solar energy in the largest archipelagogue in the world. In November 2022, the Just Energy Transition Partnership ( JETP ) was launched at the G20 Leaders ‘ Summit in Bali, mobilizing an initial US$ 20 billion in public and private financing to decarbonize Indonesia’s energy sector. The nation has revised its ambitious goals to achieve 19 % to 21 % of renewable energy by 2030, a significant improvement over its current dependency on fossil fuels.
One of the main problems is the distant landscape of Indonesia’s off- network areas, with about 40 % scattered across islands beyond Java. It’s unlikely that the national grid will soon achieve most of these locations, which will put pressure on infrastructure development and highlight the need to harness the region’s vast renewable resources.  ,
The promise of renewable energy, a nearly untapped resource in Indonesia, is at the center of this move. The country is a part of a region with staggering technical potential of 17 gigawatts of solar energy, more than 20 occasions the power needed to meet the net-zero emissions destination in 2050, despite having less than 1 % of its power from solar.
” The necessity to do something about culture shift is distinct, mainly in Southeast Asia”, says Helen Wong, Managing Partner at AC Ventures. Part of the issue, in particular, is that there has generally been an overinvestment in fuel, which has resulted in a glut of cheap electricity, “looking at Indonesia.”
Overcoming obstacles
Nevertheless, realizing Indonesia’s renewable electricity potential is not without its problems. Solar energy is still battling it out with subsidies that are still greatly favored by fuel, which is a distorted regulatory framework toward fossil fuels. Also, the state- owned utility company PLN, which manages the grid and serves as the sole off- taker for renewable energy, has been afraid to raise its purchases from renewable sources.
The early retirement of Indonesia’s coal plants, which account for a staggering 60 % of the local energy mix, is a crucial component of the JETP plan. An aggressive ramp-up in renewable investments is required to bridge the unbridled production gap, with a target generation of 36 gigawatts from solar photovoltaics alone, a sevenfold increase from investments in 2018 and 2021.
“PLN is not too keen to actually purchase more solar energy”, explains Wong. ” The grid needs to be upgraded to accommodate more sporadic sources of energy, such as solar, which will require significant investments.”
Despite these obstacles, investors like AC Ventures see immense potential in Indonesia’s solar energy market. Wong notes that the firm often encounters new ventures in three distinct categories: utility- scale projects, which require substantial capital expenditure, commercial and industrial subsectors, where companies can build or lease on- site renewable power plants for self- consumption, and residential projects, which are currently harder to scale.
Commercial and industrial space, according to Wong, is the most promising subsector in Indonesia’s solar energy market right now. Xurya, AC Ventures ‘ portfolio company and the largest player in this sector, is currently providing clean power to multinational corporations with a capacity of around 200 megawatts.
AC Ventures emphasizes important metric when evaluating solar energy projects, such as the internal rate of return and payback periods. Wong points out that subsidies can be beneficial, but that the decline in solar energy costs have resulted in less need for market-different subsidies.
Backing the winners
AC Ventures is optimistic about the potential for creative financing strategies to boost the solar energy sector, such as blended financing models with guarantees from organizations like the World Bank. The company wants to support the companies that succeed in this field by utilizing cutting-edge tools like solar yield optimization technology, trackers, and software to assess rooftop suitability.
” Increased grid connectivity between the nation’s main islands, likely achievable by 2028 at the earliest, is crucial for accelerating broad solar implementation across Indonesia”, Wong notes, emphasizing the over US$ 300 billion needed for renewable energy distribution and transmission upgrades.
We at ACV are eager to support the companies that succeed in this field and contribute to Southeast Asia’s looming energy transition as a whole as investors.
The road ahead
Indonesia’s enormous solar energy potential is an increasingly compelling solution as the country struggles to deal with the urgent need to address climate change and reduce its dependence on coal. With the right investments, regulatory support, and grid upgrades, solar energy could play a pivotal role in Indonesia’s energy transition, helping the country achieve its ambitious renewable energy targets.
For climate investors like AC Ventures, this transition is both a chance to promote sustainable change and a promising investment landscape with potential. By backing the winners in Indonesia’s solar energy market, firms like AC Ventures are positioning themselves at the forefront of a revolution, one that could unlock a brighter, more sustainable future for the nation and the region.
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