Enhancing Decentralized Renewable Energy Investment to Achieve Indonesia’s Nationally Determined Contribution

This report analyzes barriers to private investment in Indonesia's decentralized renewable energy (DRE) sector, identifying regulatory hurdles, low returns on small-scale projects, and limited financing as key obstacles. Using Sumba Island as a case study, it proposes four innovative business models (including VOE and LOE joint ventures and PPPs with availability payments) and three financial instruments (risk pooling, asset-backed securities, and guarantees) to attract private capital and achieve national electrification and climate targets.

• There is a significant investment gap in Indonesia's energy system, with government funding covering only a small fraction of the required investment to reach renewable energy targets by 2025. The report notes a "98% gap in investment per year" between government funding and the estimated IDR 140 trillion per year needed to meet targets.
• Private investment in DRE is hindered by four main barriers: regulatory constraints, unattractive returns on small-scale projects, lack of access to innovative financing, and a lack of risk-mitigation instruments. Specifically, the process of obtaining a business area (Wilayah Usaha) is problematic because the minimum administrative level for release is one district, which can be too extensive for small-scale project economic calculations.
• Small-scale DRE projects are often financially unattractive to private investors due to high upfront costs and low returns. A model for a small-scale Solar PV project in Sumba showed a Payback Period (PBP) of 7.10 years; the report states that a PBP longer than 5 years is considered a "low return on investment and unattractive for commercial loans."
• Local banks in Indonesia show a low appetite for renewable energy financing. In 2018, renewable energy financing amounted to USD 4.9 billion, which represented only "11% of total loans in the utilities sector" compared to other utilities like gas, water, and electricity.
• The report proposes four innovative business models to unlock private investment, though none address the regulatory barrier of business area release. These include: 1. VOE and Private Sector Joint Ventures to address off-taker uncertainties. 2. PPPs using Availability Payments to ensure return on investment and reduce risk perception. 3. LOE and Private Sector Joint Ventures to reduce upfront investment needs. 4. Special Allocation Fund (DAK) and Private Sector Joint Ventures to cover capital expenses via grants.
• To complement business models, the report suggests three innovative financial instruments: Risk Pooling Investment Schemes to increase economies of scale, Asset-Backed Securities (ABS) to pool loan portfolios into security products, and Guarantee Instruments to address security gaps for small developers with insufficient balance sheets.

APA

Wijaya, M. E., Haesra, A., & Mecca, B. M. (2020). Enhancing Decentralized Renewable Energy Investment to Achieve Indonesia’s Nationally Determined Contribution. Climate Policy Initiative. https://www.climatepolicyinitiative.org/wp-content/uploads/2020/05/Enhancing-Decentralized-Renewable-Energy-Investment-to-Achieve-Indonesia’s-NDC.pdf

Chicago

Wijaya, Muhammad Ery, Alke Haesra, and Brurce Muhammad Mecca. Enhancing Decentralized Renewable Energy Investment to Achieve Indonesia’s Nationally Determined Contribution. Climate Policy Initiative, 2020. https://www.climatepolicyinitiative.org/wp-content/uploads/2020/05/Enhancing-Decentralized-Renewable-Energy-Investment-to-Achieve-Indonesia’s-NDC.pdf.

Wikipedia

{{cite report |last1=Wijaya |first1=Muhammad Ery |last2=Haesra |first2=Alke |last3=Mecca |first3=Brurce Muhammad |title=Enhancing Decentralized Renewable Energy Investment to Achieve Indonesia’s Nationally Determined Contribution |publisher=Climate Policy Initiative |date=May 2020 |url=https://www.climatepolicyinitiative.org/wp-content/uploads/2020/05/Enhancing-Decentralized-Renewable-Energy-Investment-to-Achieve-Indonesia’s-NDC.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{wijaya2020enhancing, author = {Wijaya, Muhammad Ery and Haesra, Alke and Mecca, Brurce Muhammad}, title = {{Enhancing Decentralized Renewable Energy Investment to Achieve Indonesia’s Nationally Determined Contribution}}, institution = {Climate Policy Initiative}, year = {2020}, month = may, url = {https://www.climatepolicyinitiative.org/wp-content/uploads/2020/05/Enhancing-Decentralized-Renewable-Energy-Investment-to-Achieve-Indonesia’s-NDC.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }