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

The report analyzes the financial feasibility of decentralized renewable energy (DRE) in Indonesia, specifically in underserved regions like Sumba Island. It identifies four primary barriers to private investment: regulatory constraints regarding business area permits, the unattractiveness of small-scale projects due to low returns and off-taker uncertainty, limited access to innovative financing from local banks, and a lack of risk-mitigation instruments. To address these, the authors propose four business models: joint ventures with Village-Owned Enterprises (VOEs), Public-Private Partnerships (PPP) using availability payments, joint ventures with Locally Owned Enterprises (LOEs), and a Special Allocation Fund mechanism with joint operations. Additionally, the report suggests financial instruments such as risk pooling, asset-backed securities, and guarantee instruments to improve the risk-return profile for investors.

• There is a massive 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 "gap of 98% in investment per year" to improve the system.
• Private investors face four main barriers in the DRE sector: regulatory constraints, unattractive small-scale projects, lack of innovative financing, and a lack of risk-mitigation instruments. Regulatory hurdles specifically involve the complicated process of obtaining a "business area (Wilayah Usaha)" from the Ministry of Energy and Mineral Resources (MEMR), as most areas are legally bestowed to the state-owned utility PLN.
• Small-scale DRE projects are often financially unattractive because they have higher unit costs and lower returns on investment compared to large-scale projects. In Sumba, a modeled solar PV project with an investment of IDR 3.86 Billion had a payback period of 7.1 years, which is considered "low return on investment and unattractive for commercial loans".
• Local banks in Indonesia show a low appetite for renewable energy investment; in 2018, renewable energy financing accounted for only 11% of total loans in the utilities sector. This is compounded by high commercial loan interest rates, which remained above 10% per annum between 2015 and 2018.
• The report proposes four innovative business models to mitigate investment risks: joint ventures with Village-Owned Enterprises (VOEs) to address off-taker uncertainty; PPPs using "availability payment" to ensure regular disbursements and government commitment; joint ventures with Locally Owned Enterprises (LOEs) to reduce upfront investment needs; and the use of the Special Allocation Fund (DAK) to cover capital expenses.
• To further catalyze investment, the report suggests three financial instruments: Risk Pooling Investment to increase economies of scale, Asset-Backed Securities (ABS) to securitize loan portfolios, 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} }