How are Indonesia and Malaysia traversing the bumpy road to renewable energy?

Gone are the days when climate change was talked about in future tense – it is happening now and happening fast. With more extreme weather events battering the region, Southeast Asia (SEA) must champion not only disaster anticipation and preparedness but also disaster mitigation equally well. As energy consumption in the region is projected to double in the next two decades, Southeast Asia is set to become a significant contributor of greenhouse gases. Therefore, it is essential that the region’s reliance must shift from fossil fuels to renewable energy quickly. A study by ACI provides an overview of renewable energy policies of two Southeast Asian countries – Indonesia and Malaysia, both of which have Net Zero or Carbon Neutrality targets. It investigates their progress by assessing their renewable energy policy designs and takes stock of the challenges faced, with a greater focus on solar energy.

Indonesia’s energy policy landscape is informed by energy diversification and self-reliance themes and can be understood as follows. First, since the 1990s, renewables have proportionally increased in Indonesia’s energy mix, with hydro and geothermal power dominating the country’s renewable energy capacity. The potential, however, remains far from achieved. Second, coal seems indispensable as it is used for domestic consumption and exports. Third, the proportion of electricity generated by renewable energy has grown steadily since the 1990s but remains far behind coal (Figure 1). The authors argue that Indonesia’s renewable transition is primarily hindered by, first, an inability to attract sufficient investments for renewable energy projects. On one hand, the country’s renewable energy policy approach is best described as “a cumulation of several overlapping plans”, and important benchmarks such as Photovoltaic (PV) capacity targets have been ambiguous at best. The authors argue that this overlap has resulted in a lack of clarity and a contradictory development path. Second, Indonesia’s lack of expertise in PV manufacturing, project development, and, thereby, poor placement in global supply chains makes investments in small-scale PV projects prohibitively expensive. Further, the Independent Power Producers in the country struggle to profit from PV ventures due to the Indonesian government’s competition-neutralizing regulations. Third, the country’s state-owned utility company, Perusahaan Listrik Negara (PLN), has a stronghold over Indonesia’s energy transition. As such, the company itself is navigating a conundrum: how to phase out fossil fuels, given coal’s economic, social, and political value? Lastly, there is uncertainty in the country’s policy regime due to a lack of coordination among ministries of trade and the environment. This further deflates investor confidence.

Faced with similar environmental and energy issues, policy responses of the two neighboring ASEAN countries – Indonesia and Malaysia, broadly differ. Much like the Indonesian experience, Malaysia also relies heavily on fossil fuels. The country’s energy landscape can be summarized as follows. First, Malaysia imports coal and natural gas to satisfy its growing electricity demand. Second, in line with expectations, Malaysia’s energy mix is disproportionately tilted towards fossil fuel usage (Figure 2). Third, leveraging the advantage of solar PV in providing stable energy access to marginalized groups, the Malaysian government has launched several programs to electrify its rural areas. Fourth, Malaysia approved a landmark scheme called Feed-in tariff (FiT) in 2010 that paved way for the rapid adoption of solar and other renewable energies such as biomass, biogas, solar PV, small hydro, and geothermal. FiT paid an energy premium to the developers of these renewables based on the electricity successfully exported to the grid and a few other criteria. The success of this program led to further extensions of solar programs to include self-consumption and large-scale solar auctions. The study notes that Malaysia has been consistent in diligently modifying and implementing schemes that support the rapid development of its solar capacity. The country, nonetheless, faces challenges owing to the decentralized nature of governance structures.

While a bulk of the aforementioned challenges are institutional, the role of politics cannot be overlooked. The authors contend that political divisions within a society govern the range of policy choices available and could eventually dictate the choices – creating winners and losers. Moreover, this distributional approach to investigating energy policy could explain “policy failures or success with reference to regulatory capture by powerful interests”. Given Southeast Asia’s vulnerability and the urgency to preempt climate change catastrophes, there is a greater need for further research in the area. Remaining within the policy domain, the authors advocate the pooling of strengths and cooperation among ASEAN neighbors to counter the roadblocks in a synergistic manner.

By Shubhangi GUPTA

Researchers: CHEN Xian An, Kevin, Weng Han TAN, Say Jye QUAH

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