Review of Policies for Indonesia’s Electricity Sector Transition and Qualitative Evaluation of Impacts and Influences Using a Conceptual Dynamic Model

Abstract

Indonesia’s final energy demand is projected to increase by 70% in the next decade, with electricity expected to account for 32%. The increasing electricity demand poses a potential threat to national emissions reduction targets since fossil fuels generated 86% of the electricity in 2018, associated to 50% of the national CO2 emissions. Indonesia plans to reduce its CO2 emissions by 29% by increasing the total electricity generated from renewables, using a set of market-based and regulatory policies. However, economic, social, and environmental issues may arise from the widespread adoption of renewable energy. This study explores the economic, social, and environmental effects of renewable energy policies in the electricity sector. Our work presents an advance over previous studies that attempted to understand the electricity sector energy transition from a system perspective by exploring the structural feedback between it and economic, energy, and environmental systems. This enables the assessment of different energy policies using more macro indicators, which further emphasize the novelty of our work. A combination of system dynamics modelling and a policy analysis framework was applied to explore these issues. Our study proposes a dynamic hypothesis that the price of energy increases over time, in the absence of substitution, becoming a limiting factor in the transition to renewables in the electricity sector. The fiscal budget was found to be a bottleneck for renewable energy adoption in the electricity sector in Indonesia. We found that a fossil fuel depletion premium could be a potential supporting policy to enable the smooth phasing-out of fossil fuels and support a sustainable energy transition.