According to one local startup venture-capital firm, the region’s most populous and power-hungry city holds the key to SEA’s fossil-fuels wean-off
In South-east Asia’s energy sector, fossil fuels continue to dominate, comprising around 83% of the region’s energy mix and largely overshadowing the 14.2% contribution from renewables. Among the latter, solar energy remains notably underutilized.
While Vietnam has made significant strides, achieving an impressive 20.5% share of its power from solar, Indonesia still lags substantially, with less than 1%. In fact, ass South-east Asia’s most populous country, Indonesia accounts for 40% of the region’s power consumption. Roughly 40% of its off-grid areas are scattered across islands beyond Java. It is unlikely that the country’s national grid will reach most of these places soon.
Behind this complication in infrastructure development is a broader challenge facing the region: how can SEA harness abundant renewable resources effectively?
Early retirement of coal
According to Helen Wong, Managing Partner, AC Ventures, the regional prospects for solar energy are compelling.
The region has a technical potential of 17TW — more than 20 times the capacity needed to meet the net-zero emissions target of 2050 — yet current renewable energy capacity stands at a mere 99GW.
“Against this backdrop, opportunities are afoot and investors are already hedging their bets today in the region’s renewable energy space. The Just Energy Transition Partnership (JETP) for Indonesia was launched in November 2022 at the G20 Leaders’ Summit in Bali. It is an agreement to mobilize an initial US$20bn in public and private financing to decarbonize the nation’s energy sector. The country has resolved to accelerate renewables domestically, with a recently revised target of achieving 19%–21% renewable energy by 2030,” Wong reiterated.
A big part of the plan involves the early retirement of Indonesia’s coal plants, which currently account for 60% of the local energy mix. To bridge the production gap, an aggressive ramp-up in renewable energy investments is required, targeting an annual generation of 36GW from solar photovoltaics alone, a sevenfold increase from the investments recorded between 2018 and 2021.
Wong noted: “The urgency to do something about climate change is clear, especially in SEA. Looking at Indonesia, specifically, part of the problem is that there has historically been an over-investment in coal, which has resulted in a surplus of cheap electricity. In this sense, the JETP discussion should be viewed as encouraging for global climate investors. That said, the regulatory framework in Indonesia still has to contend with a lot of subsidies still going to fossil fuels, particularly coal, making it quite difficult for solar to compete.”
Add to that the fact that PLN, which manages the grid, is the only off-taker for solar energy, and the organization is “not too keen to actually purchase more solar energy.”
Backing solar power fruitfully
How do investment firms evaluate the opportunity of solar energy projects in emerging markets like Indonesia?
In SEA, the key is in originating the right projects and ensuring that financing costs allow for a good internal rate of return and the overall payback period. Wong summarized: “Subsidies, while nice to have, can lead to market volatility; and solar prices have come down so much that they are close to parity with fossil fuels. Note that utility-scale solar projects require the large capital expenditure that fluctuate according to the tenders from PLN. Residential-scale solar projects are a bit harder to scale. So to me, projects at the commercial and industrial subsector scale — where firms can build or lease on-site renewable power plants for self-consumption are the most promising market.”
One obvious hurdle for even the continually-improving business proposition of solar power is financing, because the initial costs are substantial. As investors, firms like AC Ventures need to understand how long the operational stakeholders can manage the payback of their initial investment and how they handle their cash flows. So, what needs to happen for broad solar implementation to be accelerated in Indonesia, given that increased grid connection between Indonesia’s main islands is likely to be achieved by 2028 at the earliest?
Wong pointed out: “The grid needs to be upgraded to be able to handle more intermittent sources of energy like solar. More than US$300bn is needed not just in distribution but also in transmission for renewable energy. The energy transition in the rest of the SEA region is also imminent. Fortunately, we see considerable support from development finance institutions. We are optimistic about the potential for more blended-financing solutions, possibly with guarantees of first loss from entities like the World Bank, which would significantly bolster the industry.”
On the technology and digitalization front, Wong pointed to the use of solar yield optimization tools such as trackers and software that assess the suitability of rooftops for solar installations, underscoring these as enhancements rather than fundamental solutions. As green financing gains impetus, the use of Internet of Things sensors in detailed auditing of renewable-energy projects is becoming increasingly vital for facilitating loan approvals and attracting necessary debt financing alongside equity in the investment landscape, Wong said.
“Once these projects scale and mature, (stakeholders) can then look to securitize the assets,” Wong said with a gleam.
