Investment Incentives for Renewable Energy: Case study of Indonesia

This case study by the International Institute for Sustainable Development (IISD) assesses investment incentives for renewable energy in Indonesia, specifically focusing on geothermal power, hydropower, biomass power, and biofuels. It examines the institutional, regulatory, and financial frameworks intended to attract investment and identifies significant barriers, including inter-ministerial conflict, market distortions caused by fossil fuel subsidies, and a lack of technical capacity among bidders and financial institutions.

• Indonesia's energy sector is characterized by a rigid oligopolistic structure dominated by state-owned enterprises, particularly the state electricity company (Perusahaan Listrik Negara, or PLN), which maintains a near-monopoly on the transmission, distribution, and sale of power.
• The Indonesian government has implemented a variety of investment incentives for renewable energy, including financial tools like the Geothermal Fund Facility (GFF) and the Indonesia Infrastructure Guarantee Fund (IIGF), fiscal incentives such as income tax reductions and import duty exemptions, and market supports like feed-in tariffs (FIT).
• Significant market distortions exist because the government continues to heavily subsidize gasoline and under-price electricity generation, which creates incentives that directly contradict those intended to promote renewable energy investment.
• Geothermal energy development faces high upfront resource exploration risks and regulatory hurdles, specifically from the Forestry Law (Law No. 41/1999), which prohibits mining activities in protected forest areas. While the Geothermal Fund Facility (GFF) aims to mitigate exploration risk, its effectiveness is limited by a lack of sufficient geological data and inadequate drilling equipment.
• Hydropower projects, particularly micro- and mini-hydro, suffer from a lack of 'bankability' due to the limited capacity of project developers to create acceptable proposals and the limited experience of Indonesian banks in assessing renewable energy loans.
• The biofuel sector is hindered by a lack of political will, poor coordination between ministries, and a conflict between energy security and food security, as expanding oil palm plantations for biodiesel may have significant land-use implications.
• Coordination failures between central and local governments have led to the cancellation of some geothermal projects because local governments promised feed-in tariffs that exceeded the official ceilings set by the central government.
• The government has set ambitious targets for renewable energy, including a goal for renewables to make up 25 per cent of the total energy mix by 2025, though actual progress in areas like biofuels has been slow, with mandatory biodiesel consumption targets only partially met in 2011.

APA

Damuri, Y. R., & Atje, R. (2013). Investment Incentives for Renewable Energy: Case study of Indonesia. International Institute for Sustainable Development. https://www.iisd.org/system/files/publications/investment_incentives_indonesia.pdf

Chicago

Damuri, Yose Rizal, and Raymond Atje. Investment Incentives for Renewable Energy: Case study of Indonesia. International Institute for Sustainable Development, 2013. https://www.iisd.org/system/files/publications/investment_incentives_indonesia.pdf.

Wikipedia

{{cite report |last1=Damuri |first1=Yose Rizal |last2=Atje |first2=Raymond |title=Investment Incentives for Renewable Energy: Case study of Indonesia |publisher=International Institute for Sustainable Development |date=2013 |url=https://www.iisd.org/system/files/publications/investment_incentives_indonesia.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{damuri2013investment, author = {Damuri, Yose Rizal and Atje, Raymond}, title = {{Investment Incentives for Renewable Energy: Case study of Indonesia}}, institution = {International Institute for Sustainable Development}, year = {2013}, url = {https://www.iisd.org/system/files/publications/investment_incentives_indonesia.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }