Indonesia's solar energy awakening: Overcoming coal dependence through strategic climate Investing

• Targets 19-21% renewable energy by 2030, aided by US$20 bil climate finance deal
• AC Ventures sees potential in underutilized solar energy market, backing startups

For decades, Indonesia's energy landscape has been dominated by coal, a fossil fuel that currently accounts for a staggering 60% of the nation's energy mix. However, a shift is on the horizon, driven by the urgency of addressing climate change and the immense potential of solar energy in the world's largest archipelagic state.In November 2022, the Just Energy Transition Partnership (JETP) was launched at the G20 Leaders' Summit in Bali, mobilizing an initial US$20 billion (RM94.37 billion) in public and private financing to decarbonize Indonesia's energy sector. The country has set ambitious revised targets, aiming to achieve 19%-21% renewable energy by 2030, a significant leap from its current reliance on fossil fuels.

One of the main challenges is the remote geography of Indonesia's off-grid areas, with around 40% scattered across islands beyond Java. It's unlikely the national grid will reach most of these areas soon, complicating infrastructure development and underscoring the broader regional challenge of effectively harnessing abundant renewable resources. 

At the heart of this transition lies the promise of solar energy, a virtually untapped resource in Indonesia. Despite having less than 1% of its power generated from solar, the nation is part of a region with a staggering technical potential of 17 terawatts of solar energy – more than 20 times the capacity needed to meet the 2050 net-zero emissions target.

"The urgency to do something about climate change is clear, especially in Southeast Asia," says Helen Wong, Managing Partner at AC Ventures. "Looking at Indonesia specifically, part of the problem is that there has historically been an overinvestment in coal, which has resulted in a surplus of cheap electricity."

Overcoming challenges

However, realizing Indonesia's solar energy potential is not without its challenges. The regulatory framework remains skewed towards fossil fuels, with subsidies still heavily favoring coal, making it difficult for solar to compete. Additionally, the state-owned utility company PLN, which manages the grid and serves as the sole off-taker for solar energy, has been reluctant to increase its purchases from solar sources.

A key part of the JETP plan involves the early retirement of Indonesia's coal plants, which currently account for a staggering 60% of the local energy mix. To bridge the inevitable production gap, an aggressive ramp-up in renewable investments is needed, targeting an annual generation of 36 gigawatts from solar photovoltaics alone – a sevenfold increase from 2018-2021 investments.

"PLN is not too keen to actually purchase more solar energy," explains Wong. "The grid also needs to be upgraded to handle more intermittent sources of energy like 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.

"The most promising subsector in Indonesia's solar energy market right now is the commercial and industrial space," says Wong, highlighting Xurya, AC Ventures' portfolio company and the largest player in this market, currently supplying clean power to multinationals with a capacity of around 200 megawatts.

When evaluating solar energy projects, AC Ventures focuses on key metrics such as internal rate of return and payback periods. While subsidies can be beneficial, Wong emphasizes that the declining costs of solar energy have brought it close to parity with fossil fuels, reducing the need for market-distorting subsidies.

Backing the winners

AC Ventures is optimistic about the potential for innovative financing solutions, such as blended financing models with guarantees from institutions like the World Bank, to bolster the solar energy industry. The firm is keen to back the winners in this space, supporting ventures that leverage cutting-edge technologies like solar yield optimization tech, trackers, and software for assessing 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.

"As investors, we at ACV are keen to back the winners in this space and help with the imminent energy transition in Southeast Asia at large."

The road ahead

As Indonesia grapples with the urgent need to address climate change and reduce its reliance on coal, the nation's vast solar energy potential presents an increasingly compelling solution. 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 represents not only an opportunity to drive sustainable change but also a promising investment landscape ripe 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.