Indonesia’s green powerhouse promise: Ten bold moves

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The world stands at a pivotal point in the journey toward decarbonization—emissions need to reduce by half by 2030 and reduce steeply thereafter.1 This presents both immense challenges and significant opportunities.

Challenges include fostering global cooperation; strengthening climate policies; navigating technological transitions (including negative emissions technologies); overcoming infrastructure limitations; and securing substantial investments. In addition, a just transition is needed, one that includes reskilling workers and addressing socioeconomic disparities.

On the other hand, the transition to sustainability and clean energy presents a tremendous market opportunity, requiring unprecedented global investments of $8 trillion to $11 trillion annually to 2050 (Exhibit 1).2The net-zero transition: What it would cost, what it would bring,” McKinsey Global Institute, January 2022. Power generation, transportation, as well as land use, land-use change, and forestry (LULUCF) are three sectors at the forefront of this required transformation.

Net zero requires about $9.2 trillion annual investment in energy and land-use systems to 2050.

Global efforts are already underway. These include China having scaled up solar photovoltaic (PV) capacity to approximately 500 gigawatts (GW), Norway having successfully shifted to more than 80 percent of new car sales being electric vehicles (EVs), and Canada having the world’s largest carbon capture and storage (CCS) facility at 14.6 million metric tons per year (Mtpa).3 Developments such as these not only address urgent decarbonization needs, but also open new avenues for economic growth and innovation.

Indonesia’s strategic response to decarbonization

As the eighth-largest contributor to global greenhouse gas (GHG) emissions, Indonesia’s role in global decarbonization is increasingly critical. With historical trends indicating a potential doubling of its emissions by 2060 (versus a 2019 baseline), Indonesia’s commitment to reversing this trend is crucial (Exhibit 2).4

Indonesia's emissions have grown five percent per annum over past 15 years and are expected to double by 2060 if not abated.

The country has prioritized green growth, and its decarbonization efforts are starting to gain momentum. Expected to become the fourth-largest economy in the world by 2045, and boldly aiming to become a high-income economy within a similar time frame, Indonesia shows strong economic fundamentals with a 5 percent annual growth rate, stable inflation, and stable exchange rates.5 The government has also implemented various regulatory and fiscal incentives to encourage green growth, focusing on electric mobility, carbon markets, and renewable energy. In September 2022, Indonesia increased its Nationally Determined Contribution (NDC) targets, now aiming for a 31.9 percent unconditional emissions reduction (up from 29.0 percent) and a 43.2 percent reduction with international support (up from 41.0 percent) below a business-as-usual scenario by 2030. These targets include emissions reductions from LULUCF.6

Notably, the Just Energy Transition Partnership (JETP), established during the G20 Leaders’ Summit in 2022, further signifies Indonesia’s commitment to delivering a just transition for the power sector.7 Under JETP, Indonesia aims to cut carbon emissions to 250 million metric tons per year for its on-grid power sector by 2030, while simultaneously increasing its share of renewable energy generation to 44 percent.8

Finally, Indonesia’s endowment of critical minerals such as nickel—vital for electric vehicle (EV) batteries—along with its potential for carbon storage and nature-based solutions (NBS) positions it as a key supply side player in the decarbonization market.9 These natural resources and an enabling ecosystem could help to create substantial opportunities for businesses in renewable energy, EV production, and sustainable practices.

Ten bold moves to becoming a global beacon for decarbonization

In this article, we offer ten strategic initiatives that could help to speed up green growth in Indonesia, each of which could realize significant emissions reductions while maximizing economic value, job creation, and environmental protection. These encompass a wide range of activities and investments, from accelerating renewable energy adoption to developing innovative technologies in CCS. Together, they have the potential to position Indonesia at the forefront of the global fight against climate change.

Bold move 1: Greening the power sector

Indonesia’s energy sector, including end use electricity and the industry’s thermal energy consumption, transport, and buildings, accounts for around a third of national emissions, with remaining emissions primarily coming from land use change (such as deforestation and peatland degradation), forestry, agriculture, and waste.10 The power sector, mainly fueled by coal, is responsible for around 40 percent of these energy sector emissions. With the country’s power demand expected to increase by 50 percent by 2030 and quintuple by 2060, the challenge is to manage this growth without a corresponding growth in emissions.

The Indonesian government aims for net-zero emissions by 2060, while maintaining energy security and affordability.11 This goal will entail expanding power generation capacity to over 400 gigawatts GW by 2060, with around 75 percent of total capacity sourced from renewables by 2060.12 Indonesia possesses immense renewable resources, including over 550 GW in solar power, 450 GW in wind power, 100 GW in hydropower, 10 GW in geothermal power (the world’s largest source), and 20 GW in biomass. These resources mean that a net-zero power sector in Indonesia is theoretically possible, with more than 1.1 terawatts (TW) of total renewable energy potential. This presents a huge opportunity for Indonesia (Exhibit 3).

Renewable energy systems are key to decarbonizing Indonesia's power sector, requiring 75 percent penetration by 2060.

Realizing the power sector opportunity

The Indonesian government has laid out targets for renewable energy. The current goal is between a 17 and 19 percent renewable share in the energy mix by 2025, potentially rising above 30 percent by 2050.13 In line with this, the country’s latest power sector plan (RUPTL 2021–30) earmarks over 50 percent of new capacity for renewable energy, with 65 percent slated for development by independent power producers (IPPs).14 Recent momentum has been spurred by a memorandum of understanding (MoU) with Singapore for renewable electricity exports, as well as various initiatives by companies in domestic solar PV and battery energy storage systems (BESS) manufacturing.

Fossil fuels currently account for around 95 percent of the energy mix (85 to 90 percent of electricity generation). However, Indonesia also has an established base of hydropower and geothermal energy.15Global Energy Perspective 2022, McKinsey, April 26, 2022; James Guild, “Indonesia’s coming geothermal boom,” The Diplomat, November 21, 2023. Further, since 2020, it has started to transition to biomass cofiring in coal-fired power plants and, given its equatorial location, is increasingly focusing on solar PV.16 Renewable energy projects are primarily being developed by Perusahaan Listrik Negara (PLN, the state-owned electric utility), Pertamina (the state-owned oil and gas company that has primarily focused on geothermal), IPPs, and smaller-scale solar PV developers—although grid stability remains a significant constraint to large-scale intermittent renewables.17

The government has implemented specific local content requirements for renewable energy projects.18 These stipulate that projects must utilize a minimum percentage of domestic materials and labor, particularly for solar PV and BESS projects.

Future strategies

To effectively scale up its renewable energy sector and meet its ambitious goals, Indonesia’s decision makers could look to develop a multifaceted strategy encompassing policy incentives, investment, technology transfer, and international collaboration.19 Possible priority actions could include:

  • Renewable energy and energy efficiency policies and regulations: These could support the rollout and financing of both renewable energy and coal decarbonization, including taking action for:
    • Renewable energy: Renewable portfolio standards; capacity payments; bundled at-scale procurement (ideally at multi-GW scale using competitive process); net metering; simplified approvals; agreements with neighboring countries to export clean power (replicating the recent MoU with Singapore); partnerships with global leaders in renewable technology to facilitate the transfer of cutting-edge technologies to Indonesia; awareness campaigns to educate the public about the benefits of renewable energy and ways to participate (such as rooftop solar installations); and capability building programs to create a skilled workforce.
    • Transitioning from coal: Decision makers might consider low-emissions standards; a full transition to biomass firing in suitable coal plants; carbon pricing; mandatory CCS; tax incentives for plants that install clean technologies; and the selective phaseout of the oldest and most polluting plants.
  • Incentivizing the scale-up of local production of renewable energy equipment, including equipment such as solar panels, wind turbines, and batteries, which could reduce costs and increase accessibility. Joint ventures are already emerging within the solar PV industry—a positive indicator of the sector’s growth.
  • Improving Indonesia’s overall investment environment, by decision makers reviewing policy frameworks; tax incentives; streamlined regulatory processes; concessional finance; and risk-mitigation mechanisms. A national investment platform could be considered, where international investors use the platform to invest in specific special purpose vehicles (SPVs) or funds (see “Bold move 9: Funding the energy transition”).

In addition, the national grid will need to be adapted to handle the variability and decentralization of renewable energy sources, including developing and integrating energy storage technologies, as well as minimizing transmission and distribution losses.

Bold move 2: Delivering clean energy by strengthening and expanding the grid

The global transmission market, poised to reach $250 billion to $300 billion by 2030, is expanding rapidly, driven by factors that include rising energy demand, renewable energy integration, electrification of transport, and concerns over energy security.20 Within this dynamic environment, Indonesia could benefit from urgently enhancing its power grid, including by expanding interconnection and intra-island grids, thus linking clean energy resources with major demand centers such as Java and Bali.

Optimizing the clean energy opportunity

To expand and modernize its grid, Indonesia has been adding thousands of kilometers of transmission lines and new transformer capacity. It has also been developing interconnections between different islands to improve energy distribution and reliability and to alleviate strain on existing island power systems. This grid expansion and strengthening are necessary both to enable renewables at scale and to support captive power intended for mineral processing in the clean technology value chain, such as for EV batteries. Projects, such as the Java–Sumatra 3 GW interconnection project (planned for inclusion in Indonesia’s 2024–34 long term electricity plan, RUPTL) and the establishment of a power cable plant by LS Cable & System and Artha Graha Network, highlight ongoing efforts.21

Indonesia is also encouraging associated private investment in the electricity sector, with more than 60 percent of new capacity under RUPTL allocated to IPPs. The Indonesian government is working on improving the regulatory framework to facilitate these investments in the sector.22

In addition, the government has initiated programs to extend electricity access to rural and remote areas. These efforts often involve small scale, off-grid solutions such as solar panels and microhydro plants, alongside the extension of the traditional grid network.23

Future strategies

For Indonesia to accelerate strengthening and expanding its power grid, priority actions could include:

  • Upgrading transmission and distribution infrastructure, including replacing aging equipment and installing new, more efficient transmission lines. Current technologies limit the integration of intermittent power sources, potentially prolonging reliance on coal power.
  • Rolling out smart grid technology to enhance the integration of renewables, including solar power. Smart grid technology encompasses designing grids for bidirectional energy flow, essential for incorporating residential solar PV systems and preventing grid instability.
  • Developing the upstream transmission value chain—a vital action, as raw material prices are rising significantly (for example, copper by 32 percent and aluminum by 40 percent).24Global Energy Perspective 2022, April 26, 2022. Securing such materials is important to control project costs.
  • Developing low-carbon captive power plants, particularly necessary for energy-intensive industries such as mining and manufacturing to ensure a reliable power supply and reduce the burden on the public grid.
  • Collaborating with international organizations and countries to receive technical and financial assistance, including for technology transfer, capacity building, and funding for infrastructure projects.

Bold move 3: Accelerating electric mobility

The transportation sector in Indonesia currently accounts for approximately 10 percent of total anthropogenic emissions. Under a business-as-usual scenario, these emissions are projected to more than double, rising from around 150 MtCO2 in 2020 to approximately 350 MtCO2 per year by 2050.25 This surge will be fueled by population growth, economic growth, urbanization, and increasing preference for four-wheel vehicles (4Ws) to 2050. Delivering Indonesia’s net-zero aspiration is likely to be achieved mainly through the electrification of vehicles, the corresponding decarbonization of the power sector, and the adoption of hydrogen as a fuel alternative.

Benefiting from the electric mobility opportunity

Despite EVs currently holding less than 1 percent of total penetration across 4Ws and two-wheel vehicles (2Ws) in Indonesia, the foundation for a substantial shift is being laid.26Global Energy Perspective 2019, McKinsey, January 2019. The Indonesian government has banned the sale of fossil fuel motorcycles by 2040 and cars by 2050, offered incentives for upfront purchase prices and non-monetary benefits such as exemptions from the odd-even traffic rule for EVs.27Capturing growth in Asia’s emerging EV ecosystem,” McKinsey, June 30, 2022; “Transportation minister promotes EV benefits at electric vehicle funday,” Jakarta Post, November 21, 2022.

In a net-zero scenario, total EV sales penetration is forecasted to reach approximately 26 percent for electric two-wheelers (E2Ws) and 27 percent for electric four-wheelers (E4Ws) by 2030, and 100 percent for E2Ws and 86 percent for E4Ws by 2040.28 This translates to EV parc (the total stock of vehicles in use) penetration reaching 8 percent for E2Ws and 4 percent for E4Ws by 2030, and 68 percent for E2Ws and 26 percent for E4Ws by 2040.29 As a result, annual emissions from the transport sector are projected to reduce by approximately 2 MtCO2 in 2030 and 37 MtCO2 in 2040 compared to a fading momentum scenario (Exhibit 4).30 Private corporations are already participating in this shift: Gojek aims to completely transition its fleet to EVs by 2030 and Grab is set to deploy 26,000 EVs in Indonesia by 2025.31 E2W sales momentum in Indonesia has started to pick up with sales in 2023 nearly tripling, bringing the number of E2W to 62,000 units compared to 17,000 units in 2022.32 CAGR in E2W sales is poised to increase by more than 50 percent between 2023 and 2030 with expected sales of two million units by the end of this period.33 Electric trucks and electric light commercial vehicles are also high-potential future markets.

Total EV penetration is forecast to reach 6 percent for electric two wheelers (E2Ws) and 2 percent for electric four wheelers (E4Ws) by 2030, and 40 percent for E2Ws and 20 percent for E4Ws by 2040.34 This corresponds with a 3 MtCO2 per year emissions reduction versus business-as-usual by 2030, and 33 MtCO2 per year emissions reduction versus business-as-usual by 2040 (Exhibit 4).35 Private corporations are already participating in this shift: Gojek aims for a complete transition of its fleet to EVs by 2030 and Grab is set to deploy 26,000 EVs in Indonesia by 2025.36 Further, Indonesia is set to become a leader in E2W rollout, with the market already growing at an annual rate of more than 50 percent.37 Electric trucks and electric light commercial vehicles are also high-potential future markets.

Indonesia can reduce transport emissions via electric vehicles enabled by regulations, total cost-of-ownership parity, and market access.

Future strategies

For Indonesia to realize the full potential of electric mobility, priority actions could include:

  • Adopting more targets in line with COP28’s agreement to accelerate emissions reductions in this decade, which could see reducing internal combustion engine (ICE) vehicles and significantly scaling electric vehicle charging infrastructure (EVCI), including public charging stations and battery swap stations. This would signal a rapid EV transition to both manufacturers (OEMs) and consumers.
  • Addressing critical associated infrastructure barriers, in particular, new infrastructure that would require addressing high capital expenditure (capex) requirements through low-cost financing solutions; forming partnerships with real estate entities; optimizing station placement through geospatial analysis; upgrading grid infrastructure as needed; and harmonizing technical standards.
  • Establishing a comprehensive ecosystem for EVs, including third-party service and maintenance, a secondary market for EVs, and battery recycling—all of which could enhance the affordability and appeal of EVs compared to ICE vehicles. This may require adopting innovative business models to make EVs more affordable, such as separate financing for vehicles and batteries, offering “battery as a service,” and developing financing options for second-hand vehicles.

Bold move 4: Building the battery value chain

The role of batteries, especially lithium-ion (Li-ion) batteries, which often contain high nickel content within their cathodes, is increasingly becoming pivotal to the decarbonization of transportation and power sectors globally.38Battery 2030: Resilient, sustainable and circular,” McKinsey, January 16, 2023. Indonesia, with the world’s largest nickel reserves at about 21 million tons (approximately 20 percent of global reserves), is uniquely positioned in this evolving market.39 By 2030, global Li-ion battery demand in Indonesia is projected to soar from approximately 200 gigawatt hours (GWh) in 2020 to around 4,700 GWh, and from 0.2 to 13.0 GWh (Exhibit 5).40Battery 2030: Resilient, sustainable and circular,” January 16, 2023. Over 50 percent of this demand is expected to be fulfilled by batteries utilizing nickel cathodes.41 In the burgeoning global value chain, key segments such as cell manufacturing, active materials, raw material mining and refining, and battery pack assembly are anticipated to contribute significantly to the global revenue pool, estimated to be around $400 billion in 2030. Consequently, Indonesia has already significantly increased nickel production in recent years, building on an existing production base that was formerly primarily for the stainless steel sector.42 This will require a significant shift into production of higher-purity “Class 1” nickel (purity of at least 99.8 percent) that is required for Li-ion batteries, rather than “Class 2” nickel, which is primarily used in production of stainless steel.43

On a net-zero pathway, battery sales would be over 1.5 times of current trajectory scenario by 2030.

The battery value chain opportunity

Indonesia’s nickel resources and an enabling ecosystem could help open up opportunities in the battery value chain. The government recently announced a possible additional investment of around $32 billion for its domestic battery supply chain by 2026.44 South Korean conglomerate Hyundai also established Indonesia’s first EV manufacturing facility in 2022.45 In August 2023, a consortium led by another South Korean electronics company, LG, joined forces with the Indonesian government and Indonesia Battery Corporation (IBC) to establish a factory to manufacture EV battery cells, as well as a smelter and supplementary infrastructure, entailing an investment of $9.8 billion.46

Future strategies

For Indonesia to realize its potential as a global battery manufacturing hub, priority actions could include:

  • Establishing batteries as a national strategic priority, delivered sustainably to help attract both global and local industry players and ensure transfer of technological know-how. This effort could include improving the ease of doing business; developing infrastructure that adheres to environmental, social, and governance (ESG) standards; and implementing targeted education programs. In particular, key considerations could include how to ensure that nickel can be produced sustainably, including by using renewable energy, engaging local communities, providing local jobs, setting appropriate strict environmental regulations, particularly at mine sites, as well as setting the right domestic use and export mix.
  • Stimulating demand and manufacturing by possibly enhancing access to export markets through free trade agreements (FTAs) and offering manufacturing incentives to attract OEMs and battery cell producers. This approach could help trigger domestic demand as well as manufacturing sector demand.
  • Building an integrated value chain from mining and refining to cathode, cell, and pack manufacturing. This could assist in reducing production costs, alleviating supply chain bottlenecks, and extending reach into other lucrative segments of the value chain. For example, to manufacture battery cells, Indonesia will need to produce or import the materials required for battery anodes (such as graphite, copper, or silicon); electrolytes (for instance, lithium salts or organic solvents); and cathodes (primarily nickel). Recycling facilities and circular economy practices would help with this, giving Indonesia the ability in the future to reclaim materials such as lithium and cobalt that are not as widely available locally.

Bold move 5: Creating a carbon market with Indonesia’s abundant nature-based solutions

High-quality carbon credits (or carbon offsets) are an increasingly important part of the net-zero toolkit for organizations, particularly within hard-to-abate, high-emitting sectors such as aviation, cement, steel, and oil and gas.47Putting carbon markets to work on the path to net zero,” McKinsey, October 28, 2021.

Nature-based solutions (NBS) for carbon sequestration, including reforestation and mangrove and peat restoration, offer effective ways to sequester carbon from the atmosphere and generate carbon credits from real, on-the-ground projects. These solutions are frequently deployed in emerging markets where rich, diverse natural resources are often more available, cost effectiveness is higher, and social and environmental cobenefits are to be had. Indonesia has among the largest NBS potential of any country globally, translating to over 1.5 GtCO2 in carbon credit potential (Exhibit 6). With an increasing number of corporations committing to emissions reductions, the demand for all types of carbon credits in Indonesia is projected to grow tenfold from 2022 to 2030, reflecting a global trend.48A blueprint for scaling voluntary carbon markets to meet the climate challenge,” McKinsey, January 29, 2021. Beyond climate mitigation and economic returns, carbon credits are often valued for their cobenefits, including local economic growth, local community development, soil health improvement, water quality improvement, and biodiversity protection.49

Indonesia has the second-largest global nature-based solutions' potential after Brazil, at up to 1.5 GtCO2 per year.

However, ensuring the long-term viability of the market for nature-based carbon credits involves creating a robust, transparent, and effective system where carbon credits can be reliably quantified, verified, and traded. Accurate accounting, as well as verification of permanence and additionality, are essential to opening this market.

Shaping the carbon market opportunity

Momentum for NBS in Indonesia is accelerating, and various initiatives are underway:

Future strategies

Ways that Indonesia could position itself as a leading NBS hub include:

  • Finalizing a national decarbonization road map that is disaggregated by sector (including a carbon markets strategy) could give stakeholders interested in carbon markets clarity and confidence to invest in a voluntary carbon market, and the operationalization of Article 6 of the Paris Agreement.54
  • Ensuring collaboration between the public and private sectors to accelerate the improvement of carbon credit quality (in line with international standards) and the development of a carbon market ecosystem in the country. This could include support and incentives for credits-linked emissions reduction projects; streamlined regulatory and approvals processes; targeted sustainable financing; and mandated annual emissions measuring, reporting, and verification (MRV).
  • Connecting Indonesia’s carbon credit market to the world to attract foreign investment and facilitate price discovery, which would enable international buyers to access Indonesia’s market. This would be done by ensuring that domestic standards are of high integrity and compatible with international standards, and that projects are rigorously implemented and monitored over the long term, enabling domestic benefits.

Bold move 6: Developing green fuels for transportation

Low-carbon transportation cannot be delivered through electrification alone. Green fuels also have a significant role to play, and Indonesia is well-positioned to contribute to this shift. As the largest producer of biodiesel globally, and with significant potential for producing sustainable aviation fuel (SAF), Indonesia is poised to be a global biofuels player. This shift aligns with global trends and caters to growing demand, particularly from regions such as the European Union and North America.

Accelerating the biodiesel opportunity

Indonesia has taken several steps to increase its use of green fuels.

Bioethanol: E5 bioethanol-blended gasoline was piloted in 2023 in several gas stations.55 There is good potential for further bioethanol uptake, with the possibility to increase bioethanol-blended gasoline to 10 percent of total supply in the next 10 years. To ensure cost competitiveness, several ‘on-farm’ and ‘off-farm’ initiatives, such as mechanization in sugar cane plantations, as well as regulatory support like a waiver on excise tax, are needed for first-generation biofuel (1G). Second-generation biofuels (2G) currently are still substantially more expensive than 1G, and hence can be considered a mid to long term option.56 Key challenges for the sector include solving land availability challenges for 1G biofuels without compromising food security and making 2G biofuels available at scale, which factors like technological development and regulatory support could enable. Brazil, as an example, have succeeded in improving ethanol blending in gasoline, achieving a mandated blending rate of more than 70 percent, beyond the 27 percent mandated blending rate, enabled by establishing flex fuel vehicles that basically run on any mix of ethanol and gasoline, thereby opening the possibility of going beyond the typical blending limit of 10-20 percent recommended by automotive manufacturers for unmodified engine.

Biodiesel: The biodiesel blend mandate was increased to 35 percent nationwide in August 2023.57

Sustainable aviation fuel (SAF): With around 50 percent of global palm oil mill effluent (POME) production, a key feedstock for SAF, Indonesia is exploring SAF as a major component in reducing aviation emissions. However, due to the high cost of production compared with other types of aviation fuel, financial support or incentives may be necessary to unlock the SAF market. In addition, the use of POME is subject to regulatory sensitivities around palm oil-based fuel, despite POME being a waste product. Therefore, it will be increasingly important to monitor the supply chain using accurate accounting and traceability approaches.

SAF from used cooking oil: Used cooking oil (UCO) is another feedstock for SAF production. It is one of the cheapest and most sustainable feedstocks available globally along with POME. Despite less than 25 percent of UCO being collected in Indonesia today, the country is already a top three UCO exporter globally, with the UCO market projected to grow to around $2.5 billion in Indonesia by 2030.58

Future strategies

To successfully expand the use of green fuels, priority considerations for Indonesia include:

  • Creating a regulatory environment that enables competitive green fuel pricing versus fossil fuels and addresses high production costs and regulatory challenges around SAF. For example, other markets have proposed or introduced carbon taxation or other means of financial support (or both).
  • Scaling up bioethanol and biodiesel production and adoption, including through enhanced palm oil plantation efficiency, without compromising food security. The scale-up of bioethanol could focus on delivering sufficient feedstock and the development of production and blending facilities, while the scale-up of biodiesel (including better seeding and agrotechnology) could improve yields for biodiesel production.
  • Exploring the potential of clean hydrogen as a future energy carrier and regional export commodity, especially to energy importing nations such as Japan and South Korea. This would require advancements in production technology and specific regulations for e-fuels.

Bold move 7: Converting mature oil and gas fields into carbon stores

The global importance of CCS as a tool to mitigate GHG emissions is growing. CCS involves capturing CO2 emissions from industrial sources and storing them underground. CCS could contribute to a reduction of 2 to 6 Gt per annum of CO2 globally by 2050, representing 6 to 14 percent of current total emissions.59 In Asia, there are 12 commercial CCS facilities in operation, eight under construction, and 17 being developed. This is in addition to at least 15 pilot CCS facilities (as of November 2023).60 As one of Southeast Asia’s largest oil and gas producers, Indonesia’s potential to repurpose mature oil fields or saline aquifers for CO2 storage or enhanced oil recovery (EOR) is significant.

Increasing the CCS opportunity

Indonesia has been actively pursuing CCS, with ongoing evaluations of potential carbon capture, utilization, and storage (CCUS) sites and legislative advancements. As of November 2023, ten CCUS clusters were being evaluated, four CCUS projects were in early development, and three were in an advanced stage of development.61 Additionally, a presidential regulation on CCS and CCUS was released in January 2024.62 Efforts are also underway to map the CO2 storage capacity, and the Ministry of Energy and Mineral Resources is finalizing regulations specific to CCS for oil and gas areas. These developments demonstrate Indonesia’s commitment to integrating CCS as a part of its climate change mitigation strategy.

Future strategies

To inform effective CCUS implementation, Indonesia can draw lessons from international large-scale projects:

Bold move 8: Developing green industrial estates

Indonesia is aiming for between 17 and 19 percent renewable energy in its mix by 2025 and net-zero emissions by 2060.65 Central to this transformation is the development of green industrial estates (or hubs). These hubs are envisioned to be future centers of green innovation, crucial to reducing Indonesia’s substantial industrial CO₂ emissions, which account for 23.0 percent and 15.6 percent of the country’s direct and indirect energy related emissions, respectively.66

Concentrations of sustainability innovation

The Indonesian government has already initiated efforts to foster green industrial hubs emphasizing low-carbon utility and circular economy principles. These hubs are intended to serve as collaborative platforms for local and international companies, offering:

  • Economies of scale by facilitating cross-sector collaboration, with hubs enabling industries to share resources, reduce costs, and accelerate local industrial decarbonization. This includes developing shared infrastructure like clean power systems, smart grids, and CO2 and hydrogen pipelines.
  • Innovation and test beds, with hubs serving as living laboratories demonstrating the convergence of policy and technology for environmental impact.
  • Local development, with green infrastructure designed not only to support the industrial parks but also to provide clean energy to surrounding districts.

The Kalimantan Industrial Park Indonesia (KIPI) in Bulungan, North Kalimantan, is a flagship green industrial hub project. Planned as the world’s largest green industrial park, KIPI will focus on sectors such as EV battery manufacturing and clean energy production, with tens of billions of dollars of investment from international partnerships.67 Two other planned industrial parks are Arun Lhokseumawe and Sei Mangkei.68

Future strategies

To successfully establish and scale green industrial estates, priority actions for Indonesia could include:

  • Identifying strategic locations.This might include proximity to urban and transportation hubs; access to renewable utilities; availability of land with lower ecological value, low flood and natural disaster risk; appropriate zoning; and access to necessary raw materials. For example, Kalimantan offers renewable energy potential, and Java has existing infrastructure and is close to major markets.
  • Initiating pioneering projects and partnerships to create a foundation for a sustainable industrial ecosystem. For instance, public-private partnerships can help distribute risks between the public and private sectors, while partnerships with international technology providers can help bring in cutting-edge solutions for renewable energy, waste management, water conservation, and more.
  • Encouraging sustainable investments with fiscal incentives such as tax holidays and import duty exemptions, which can be vital in attracting both domestic and international investors.

Bold move 9: Funding the energy transition with green capital

Indonesia has set an ambitious target to reduce its GHG emissions by 43.2 percent by 2030 (approximately 31.9 percent unconditional and additional 11.3 percent conditional on international support).69 The country has excellent potential for sustainable growth but achieving these green growth targets and GHG reductions requires substantial investment, estimated at around $150 billion to $200 billion per annum to 2030.70 Consequently, engaging a diverse range of financial players and offering a range of green financial instruments are crucial for Indonesia’s green transition.

Sustainable financing can take three main forms: traditional loans from banks, bonds to domestic and international markets, and “blended finance” from public and private sources. The loans and bonds can be either sustainability-linked, where the interest rate or coupon rates change when sustainability goals are met, or project-based where the projects must be eligible green projects.

In Asia, green bonds and sustainability-linked loans form the majority of sustainable financing issued. Green, social, and sustainability bonds, typically issued by governments, public sector entities, or supranational organizations, are the largest part of the market (more than 50 percent), with sustainability-linked loans taking up much of the rest of the market in 2022.71

Blended finance brings a more unique value proposition as it is provided by a group of lenders between public and private sectors—development finance institutions (DFIs), multilateral development banks (MDBs), and investors. It can include many asset classes such as grants, equity, debt, concessions, tax exemptions, immunities to investors, insurance, and guarantees (Exhibit 7). For example, the JETP uses a blended-finance mechanism consisting of a mix of concessional loans, market-based loans, grants, guarantees, and other instruments.72

By balancing investment risks and returns, blended finance can move projects to bankable.

Investing in the green capital opportunity

In Indonesia, significant strides have been made in sustainable financing, particularly after the introduction of a sustainable financial road map by the financial regulator, OJK. Key developments include:

Future strategies

Indonesia has seen progress across key financing instruments and schemes, however, there is still more to do to meet its goals. For example, the annual average investment in renewables over the past five years has been $1.62 billion, which represents only 20.2 percent of the annual spend required for Indonesia to reach its 2025 goal.77 The funding deficit impedes the energy transition and underscores the challenges, such as high renewable energy tariffs; competition with subsidized fossil fuels; high capex requirements; and a lack of clarity and traceability of financial flows and allocation of public financing for renewable energy projects.

These challenges may also erode investor confidence in renewable energy investment in Indonesia, but nonpublic financing sources are strongly needed to fill the funding gap, which will complement public funding allocation to renewable energy projects. To further catalyze sustainable financing into Indonesia’s growth and decarbonization agenda, priority actions include:

  • Developing innovative, new financing mechanisms, while also strengthening capacity and expertise in sustainable finance. These include exploring new ways to raise capital for green projects such as expanding the use of finance instruments with higher leverage ratios (for example, insurance, guarantees, blended-finance structures, and currency hedging). It could also provide training and resources to financial institutions, investors, and other stakeholders on sustainable finance.
  • Promoting public–private partnerships to bring in more international capital, potentially through a national level investment platform. The government and the private sector could work together to develop and implement sustainable financing solutions, potentially including a national level investment platform that enables at-scale project procurement and financing. This could include increasing capital deployment from existing initiatives and institutions (for instance, the Bridgetown Agenda or MDB reform)78 and raising new international concessional climate finance as part of COP, G20, and the United Nations process, such as proposed COP28-linked blended finance funds, the loss and damage fund, and new global climate taxes or levies.

Bold move 10: Enabling a green economy

To become a green economy, the integration of policy, technology, and people (as well as finance) will be key to unlocking all sectors, with one crucial cross-cutting policy that could have a strong enabling effect on the carbon price (for example, via an Emissions Trading Scheme).79The net-zero transition: What it would cost, what it would bring,” October 28, 2021. Regarding technology, while many low-carbon technologies are manufactured outside the country, Indonesia could leverage global trends to attract new foreign investment and expertise in low-carbon manufacturing. Indonesia has a demographic advantage with its young, educated, and growing population, which enhances its attractiveness as an investment destination. Opportunities to further entice foreign companies and skilled professionals include financial incentives, robust infrastructure, and favorable visa and tax policies—potentially positioning Indonesia as an appealing alternative to traditional expatriate hubs such as Dubai or Singapore. It will be equally essential to continue to foster domestic talent.

Growing a green economy to achieve a sustainable future

Indonesia has taken initial steps to lay the foundation for a green economy. Key initiatives include:

Future strategies

To enhance its green economic landscape, Indonesia could consider the following priority actions:

  • Developing comprehensive green economy policies and regulations that help promote sustainable practices across all sectors, as well as incorporate sustainability into national and regional development plans. For example, a system that encourages corporates to disclose emissions, adopt net-zero goals and initiatives, and to influence lower-carbon consumer behavior and carbon pricing could help drive down emissions.
  • Facilitating manufacturing and the adoption of sustainable technologies in industries and households through incentives, grants, and awareness campaigns.
  • Enticing foreign companies and professionals while continuing to foster domestic talent, including through financial incentives, robust infrastructure, favorable visa and tax policies, university and employee programs, and countrywide, dedicated sustainability programs to meet these objectives.

Decarbonizing is considerably challenging for Indonesia, but the opportunities are equally significant. By utilizing its abundant resources relevant for the green transition and building on various strategic initiatives across industries and the public and private sectors, the country could position itself well in the global journey to net zero.

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