ARTICLE IN PRESS

Energy Policy 35 (2007) 3952–3966

www.elsevier.com/locate/enpol

The economic potential of bagasse cogeneration as CDM

projects in Indonesia
Dewi Restutia,, Axel Michaelowab
a
Environmental Engineering, Hamburg University of Technology, Harburger SchloX straX e 36, 21079 Hamburg, Germany
b
Political Economy and Development, Institute of Political Science, University of Zurich, Mühlegasse 21, 8001 Zurich, Switzerland
Received 18 October 2006; accepted 21 January 2007
Available online 26 March 2007

Abstract

Surplus bagasse in Indonesian sugar mills is potential for grid-connected electricity-generating projects under Clean Development
Mechanism (CDM) scheme. In addition, it is further perceived to considerably support the efforts to address prevailing crises in domestic
sugar industry and power generation sector. This paper aims at analyzing the economic potential of bagasse cogeneration as CDM
projects in Indonesia with the main deliverables of total emission reductions per year and Certified Emission Reduction (CER) earnings.
The analysis was made by following the applicable methodologies and based on publicly available data from official and other sources on
the websites. The results show that with the electricity displacement potential at 260,253 MWh, Indonesia could generate Greenhouse
Gas (GHG) emission reductions as much as 240,774 (large scale) or 198,177 tCO2 (small scale) per annum from the recently-employed
low efficiency cogeneration leading to the earnings of about US$1.36 or 1.12 million, respectively. Out of 6 regional grids where the
electricity from the project activities can be grid-connected, the primary emission reductions potentials are encountered in Java-Bali and
Southern Sumatera grids. Additionally, various barriers in technical, institutional, financial, and other aspects have been identified as the
justifications to pass the additionality test.
r 2007 Elsevier Ltd. All rights reserved.

Keywords: Bagasse cogeneration; CDM; Indonesia

1. Introduction the Annex I countries to reach their legally binding GHG

In response to global warming, all countries throughout
the world are called for efforts to cope with it. Indus-
trialized countries, i.e. Annex I countries (United Nations
Framework Convention on Climate Change (UNFCCC),
2005a) in particular are required to reduce their GHG
emissions to 1990 levels during the first commitment period
2008–12 (United Nations Framework Convection on
Climate Change (UNFCCC), 2005b). CDM is one of the
flexible mechanisms defined in the Protocol1 that enables
Corresponding author. Tel.: +49 404 2878 2438;
fax: +49 404 2878 2375.
E-mail address: dewi.restuti@tu-harburg.de (D. Restuti).
1
Other mechanisms are International Emission Trading (IET), which
allows the Annex I countries to sell and buy part of their emission budgets
for Assigned Amount Units (AAUs) among themselves, and Joint
Implementation (JI), where an Annex I country receives emission credits,
called Emission Reduction Units (ERUs), by implementing an emission
emissions targets in a cost effective way with involvements
from developing countries, i.e. Non-Annex I countries
(United Nations Framework Convention on Climate
Change (UNFCCC), 2005c). In parallel to GHG emission
abatement, projects under CDM will benefit the host Non-
Annex I countries in achieving sustainable development
goals as a consequence of financial and technological
assistances (Ministère de l’Èconomie et al., 2005). Emission
credits generated from the CDM projects are called CERs.
As stipulated by the Kyoto Protocol, there are two basic
criteria that must be fulfilled by the CDM projects:
additionality and sustainable development (United Nations
Environment Program (UNEP), 2004). In terms of
additionality, the project must generate GHG emission
(footnote continued)
reduction project in another Annex I country with a defined emission
target.

0301-4215/$ - see front matter r 2007 Elsevier Ltd. All rights reserved.
doi:10.1016/j.enpol.2007.01.014
 ARTICLE IN PRESS
D. Restuti, A. Michaelowa / Energy Policy 35 (2007) 3952–3966
reductions, which are additional compared to the business-
as-usual situation where the project activity does not exist
in order to ensure that the emission reductions are real and
not fictitious. Meanwhile, in terms of sustainable develop-
ment, the project should comply with sustainable develop-
ment criteria in social, economic, and environmental
aspects as defined by the host country.
The CDM projects can be carried out in a number of
sectors, such as energy sector for the substitution of fossil-
fuel-combustion with renewable energy derived from
biomass (Republic of Indonesia—National Information
Agency, 2003). Given the high concentration of agriculture
in land use, Indonesia can take part in the CDM project
development of this sector, particularly by benefiting
from sugarcane residues in sugar mills (i.e. bagasse) for
electricity generation via prevailing cogeneration. Further,
Indonesia can take advantages from the CDM projects on
bagasse cogeneration to address current power crisis in
generation sector in conjunction with achieving the goals of
sustainable development.
This paper aims at analyzing the potential of bagasse
cogeneration as CDM projects in Indonesia in regard
to its prospective role as a substitute for fossil-fuel power
plants. The undertaken analyses focus on the economic
aspect with the deliverables of total emission reductions per
year and earnings from the reductions (Sections 2 and 3.4).
The reviews on international carbon market and prices
(Section 3.3) and domestic electricity market (Section 3.2.2)
are incorporated as well to add the discussions about the
economic potentials. Section 3.1 concerning sugar industry
in Indonesia and Section 3.2 about power sector in
Indonesia provide the evidences on the benefits of CDM
bagasse cogeneration projects to sustainable development.
Lastly, Section 3.5 concerning barriers associated with
bagasse cogeneration and its development as a CDM
project is presented with respect to the additionality test.
2. Methodology and data used
In regard to the additionality requirement, the baseline
GHG emissions in principle were compared against the
emissions avoided that would have occurred on the absence
of the project activity. In this case, the project baseline is
the continuation of the business-as-usual practice where
only a certain amount of bagasse is utilized to generate
electric and thermal energy in the sugar mills. Further, on
the absence of the project activities, the electricity would
have been generated by the operations of existing and
newly added fossil-fuel power plants.
Since the project activities may fall into either large or
small scale, two methodologies were applied in determining
the baseline GHG emissions and subsequently the GHG
emission reductions. For large scale projects, the baseline
calculation referred to Approved Consolidated Methodol-
ogy 0006 (ACM006) ‘‘Consolidated Baseline Methodology
for Grid-Connected Electricity Generation from Biomass
Residues’’ (United Nations Framework Convention on
3953
Climate Change (UNFCCC), 2005d). Meanwhile, for
small-scale projects whereas either the renewable/co-firing
unit adds 15 MW of the installed capacity at the maximum
or the sum of all forms of energy output from biomass
based co-generating system is 45 MWthermal at the max-
imum, Appendix B of the Simplified Baseline and
Monitoring Methodologies for Type I—Renewable Energy
Projects, particularly ‘‘I.D. Renewable Electricity Genera-
tion for a Grid’’ (United Nations Framework Convention
on Climate Change (UNFCCC), 2005e) was followed.
2.1. Large-scale projects
From the general types of the project activities for grid-
connected power generation from fired biomass residues
presented in the ACM0006, the aimed projects activities
were categorized as power capacity expansion projects (i.e.
the installation of a new biomass power generation unit,
which is operated next to existing power generation
capacity fired with either fossil fuels or the same type of
biomass residue as in the project plant). Subsequently, the
project activities had been assessed as the followings that
add their eligibility under this methodology:
 The bagasse is the only biomass type used in the project
plants as a predominant fuel.
 The implementation of the projects does not result in an
increase of the processing capacity and other substantial
process changes.
 The bagasse is not stored for more than 1 year.
 The significant energy quantities required to prepare
the bagasse for fuel combustion are only from the
transportation.
Out of the possible baseline scenarios for the power
capacity expansion projects as listed in the ACM0006,
Scenarios 11 and 12 were noticed as the most plausible
baseline scenarios in the manners of how power and heat
would be generated and what would happen to the bagasse
on the absence of the project activities, as shown in Table 1.
Based on these scenarios, the specific formulas for
determining the GHG emission reductions were identified.
The baseline GHG emissions, as one of the variables in
the formulas representing the CO2 emissions from fossil-
fuel power plants connected to the grids, were determined
by calculating the Grid Emission Factor (GEF) in tCO2e/
MWh. This factor corresponds to combined margin (CM),
which results from operating margin (OM) and build
margin (BM) with a 50–50 weighting. The OM presumes
that the project predominant effect is to affect the
operation of current power plants or, in other words, the
project activities will avoid a proportional fraction of fossil
fuel-based generation units in the grid system while the BM
represents an outlook on what type of electricity facilities
would have otherwise been built or built sooner had the
project activities not been implemented and thus conse-
quently be likely to be delayed rather than replaced by the
 ARTICLE IN PRESS
3954 D. Restuti, A. Michaelowa / Energy Policy 35 (2007) 3952–3966
Table 1
Baseline scenarios of the Indonesian CDM bagasse cogeneration project
activities
Project type Scenario Baseline scenario
Power Biomass Heat
Power capacity expansion projects 11 P4a and P5b B2c H5d
Power capacity expansion projects 12 P4 B2 H4e
Source: (UNFCCC, 2005d).
a
The generation of power in existing and/or new grid-connected power
plants.
b
The continuation of power generation in an existing power plant, fired
with the same type of biomass as in the project activity, and implementa-
tion of the project activity, not undertaken as a CDM project activity, at
the end of the lifetime of the existing plant.
c
The biomass is used for heat and/or electricity generation at the project
site.
d
The continuation of heat generation in an existing cogeneration plant,
fired with the same type of biomass as in the project activity, and
implementation of the project activity, not undertaken as a CDM project
activity, at the end of the lifetime of the existing plant.
e
The generation of heat in boilers using the same type of biomass
residues.
project activities (Kartha et al., 2002). The margins were
all calculated by following the section ‘‘Baseline’’ in
ACM0002 ‘‘Consolidated Baseline Methodology for
Grid-Connected Electricity Generation from Renewable
Sources’’ (United Nations Framework Convention on
Climate Change (UNFCCC), 2005f) and applicable for
the first crediting period of either years 1–7 or years 1–10.
In this paper, different GEFs in six regional grid systems
where the existing sugar mills are located and the project
activities can be grid connected; i.e. Northern Sumatera;
Southern Sumatera; Java-Bali; South East and South
Sulawesi; North and Central Sulawesi and Gorontalo
(Suluttenggo); and Central and South Kalimantan grids, as
illustrated in Table 2, were calculated. Based on the reviews
on harvested areas and sugarcane production during the
period 2001–03, as obtained from Research Center of
Indonesian Sugarcane Plantation, the bagasse production
was estimated and used to determine the GHG emission
reductions generated from the project activities.
2.2. Operating margin
For the purpose of determining the OMs, the data on
grid electricity production and fuel consumption obtained
from the websites of Indonesian Ministry of Energy and
Mineral Resource (MEMR) (2004) and Directorate Gen-
eral of Electricity and Energy Utilization (DGEEU) (2004)
and the associated information from other sources (Inter-
governmental Panel on Climate Change (IPCC), 1997a, b,
2000; Pertamina, 2005; Simmons, 2000) were utilized.
However, since the data series from the associated regional
grid systems that follow 3-most-recent-year, official-source-
derived and publicly available conditions, as required in the
ACM0002, were not statistically available on the websites
Table 2
Number of sugar mills in Indonesia in 2005 by Province and the associated
Regional Grid Systems
Province Number Regional Grid System
North Sumatera 2 Northern Sumatera
South Sumatera 1 Southern Sumatera
Lampung 5 Southern Sumatera
Banten 1 Java-Bali
West Java 5 Java-Bali
Central Java 9 Java-Bali
East Java 32 Java-Bali
DI Yogyakarta 1 Java-Bali
Gorontalo 1 North and Central Sulawesi,
and Gorontalo
South Sulawesi 3 South East and South Sulawesi
South Kalimantan 1 Central and South Kalimantan
Total 61
Source: Ministry of Industry (2006) and Own Additions.
(except those in year 2003), the data from the national grid
system during the period 2001–03 were then used to
calculate the generation-weighted average CO2 emission
factors to gain the trend of the latest-3-year data. Based on
the trend obtained, it was then decided whether the
utilization of data only in year 2003 for calculating the
OMs in the associated regional grid systems was acceptable
or not.
The method utilized for calculating the OMs, either in
national or regional basis, was the simple OM due to data
constraints and the low-cost/must-run resources percentage
of lower than 50%.2 As a consequence, the OMs were
calculated as the weighted average rate of the CO2 emission
factors from all generation power plants serving the grid
system, excluding those of the low-cost/must-run power
plants, on an annual basis.
2.3. Build margin
For the determination of the BMs, an approach had
been constructed to estimate the BMs since none of the
options of ‘‘ex ante’’3 and ‘‘ex post’’4 as described in the
2
With a driver of data constraints, possible methods applied for
calculating the OM in sequence follows: (1) Dispatch Data Analysis OM,
(2) Simple adjusted OM, and (3) Average OM or Simple OM, depending
on the share of low-cost/must-run resources in the total grid power
generation (450%: the Average OM and o50%: the Simple OM) which
is calculated based on an average of the grid power generation data within
5-most-recent years. By definition, the low-cost/must-run resources
include hydro, geothermal, wind, low-cost biomass, nuclear, and solar
generation.
3
Based on the most recent information available on already-built power
plants in the sample group consisting of either the five power plants that
have been built most recently or the most recent power plant capacity
additions to the system that comprise 20% of the system generation (in
MWh), based on the larger generation.
4
For the first crediting period, an annual update of the BM emission
factor is required for the year in which actual project generation and
associated emission reductions occur. For subsequent crediting periods,
the BM emission factor should be calculated ex ante.
 ARTICLE IN PRESS
D. Restuti, A. Michaelowa / Energy Policy 35 (2007) 3952–3966 3955

ACM0002 was able to be undertaken due to data grid system to obtain an OM-to-BM factor, which
unavailability and inapplicability. In this case, the data subsequently was used to determine the fossil fuel-
concerning the capacity addition projects in 2004–13 from based generation weighted average BM resulting from
the state-owned electric company (PLN) in 2004, as the multiplying with the formerly-obtained OM (i.e. the
provided by PT Data Consult (2004), as well as other fossil fuel-based generation weighted average OM).
sources (Energy Information Administration (EIA), 2004; (3) The ‘final’ BM (i.e. the all electricity generation-
Indonesia Infrastructure Summit 2005, 2005; Ministry of weighted average BM) was obtained by applying the
Energy and Mineral Resources (MEMR), 2005; Strategies– following formula:
Industry Canada (strategies.gc.ca), 2003; US Commercial
BM all electricity generationweighted average
Service, 2005) were utilized.  
The principle of the approach is a comparison between 100  % capacity add:all lowcos t=must run resources
¼
the total shares of capacity additions in 2004–13 and 100
generated electricity in 2003, after being altered, in order to  BM fossil fuel generationweighted average . ð1Þ
get a multiplying factor for the conversion from the fossil
fuel-based generation weighted average OM to the fossil
fuel-based generation weighted average BM, namely an 2.4. Small-scale projects
OM-to-BM factor, and afterwards incorporating the shares
of capacity additions from low-cost/must-run resources to The baseline GHG emissions for small-scale projects were
result in the final BM (i.e. the all electricity generation- determined by calculating the GEF (tCO2e/MWh) that
weighted average BM). The sequence steps of the approach corresponds to either the weighted average emissions of the
follow: current generation mix that includes the hydro, geothermal,
wind, low-cost-biomass, nuclear, and solar generation (i.e.
(1) The shares of generated electricity in 2003 and capacity the all electricity generation-weighted average OM) or the
additions in 2004–13, namely ‘original’ shares, for each average of the approximate OM and BM (i.e. the CM for
power plant type in the associated regional system the large scale projects). The selection between these two
were, respectively, converted to the shares basing on options was made based on a conservative consideration to
the coal carbon emission factor, namely ‘coal-carbon- obtain the lower value for the GEF.
emission-factor-basing’ or ‘converted’ shares. It was
undertaken by multiplying the ‘original’ share with a 3. Results and discussions
converting factor. The converting factor was identified
by dividing the carbon emission factor of natural gas, 3.1. Sugar industry in Indonesia
fuel oil, or diesel (tC/TJ) with the carbon emission
factor of coal (tC/TJ). 3.1.1. Prevailing crisis in sugar mills
(2) The total ‘converted’ shares of capacity additions in During years 1987–96, as demonstrated in Fig. 1,
2004–13 were divided by the total ‘converted’ shares of Indonesia produced sugar at more than 2 million t (Mt)/
generated electricity in 2003 in the associated regional year with the peak of 2.5 Mt in 1993. Since that period, the

Harvested Area (ha) Production (ktonne)

Consumption (ktonne) Import (ktonne)
3,000 450,000
Production, Consumption, and

400,000
2,500
350,000
Harvested Area (ha)
Import (ktonne)

2,000 300,000
250,000
1,500
200,000
1,000 150,000
100,000
500
50,000
0 0
76 78 80 82 84 86 88 90 92 94 96 98 00 02
19 19 19 19 19 19 19 19 19 19 19 19 20 20
Year

Fig. 1. Historical sugar production, consumption, and import as well as harvested area in Indonesia, 1976–96 and 2000–03. Source: Food and Agriculture
Organization (FAO) (1997) and Research Center of Indonesian Sugarcane Plantation (RCISP) (2005).
 ARTICLE IN PRESS
3956 D. Restuti, A. Michaelowa / Energy Policy 35 (2007) 3952–3966
30 497
Production, and Required Steam
Crushed Sugarcane, Bagasse
24.8 25.5
25
373
20
(Mtonne)
15 12.4
7.9
10
5 100
0 0
2001
Crushed Sugarcane (Mtonne)
Required Steam (Mtonne)
Potential of Power Generation (GWh)
Fig. 2. Crushed sugarcane, bagasse production, required energy, and power generation potential in 2001–03. Source: Research Center of Indonesian
Sugarcane Plantation (RCISP) (2005) and own calculation.
production has started decreasing to less than 2 Mt/year
due to a significant decline in land productivity and mill
inefficiency. Meanwhile, annual sugar consumption in
Indonesia has, indeed, been growing to more than 3 Mt
in the following years (3.3 Mt in 2005) as a result of steady
population growth, rising incomes, and the growths of
food and beverage industries. However, since the domestic
sugar production is able to fulfill only at about half of the
sugar consumption, import has been practiced at fluctuat-
ing annual rates, in addition to another reason of low
quality of sugar.
Similar to the trend of sugar production, the total
planted areas have declined since its peak of 423,000 ha
with the sugarcane production of 32 Mt in 1994. Out of
approximately 350,000 ha of sugarcane-planted land as
shown by the latest-3-year data in Fig. 1, about 65% were
located in Java with the yields of 54–79 t/ha; less varying
than those in Sumatra (44–85 t/ha). About 70% of the total
sugarcane plantations were cultivated by farmers with
small-to-medium-sized holdings, mainly in Java, while the
rest were by sugar factories (Guerin, 2002).
There were 61 sugar mills identified in 2005, as provided
in Table 2, whereas about 90% were publicly owned and
organized into management units, called Perseroan Terba-
tas Perkebunan (PTPs), while the rest were privately
owned. The privately owned mills, however, had higher
productivity given the fact that they contributed to 35% of
the total sugar production (Guerin, 2002). The crushing
capacities varied from 1000 to 10,000 t of cane per
day (TCD) (an average of 3000 TCD) resulting in the
total of 181,000 TCD. Out of this figure, approximately
134,000 TCD or 74% were situated in Java and the
remaining in the outer islands (Winrock International,
1991). The sugar mills employed low-efficiency boilers of
which around 66% installed were working with a pressure
of up to 15.3 kg/cm2 (Abdullah, 2001).
511 550
Potentialof Power Generation and
452 500
22.6 450
Generated Power (GWh)
383
400
339
350
300
12.8
11.3 250
8.2 200
7.2 150
50
2002 2003
Bagasse Production (Mtonne)
Generated Power (GWh)
Most of the mills have been operating with inadequate
milling capacities using antiquated machinery derived from
the Dutch colonial era, thus, leading to high production
costs. A severe economic crisis in 1997, a shortfall in
sugarcane production due to limited lands for sugarcane
production and the issue on cultivation methods, an
increasingly severe competition with other more profitable
crop commodities, a lack of investment, poor management
practices, and inefficient government policies, have,
furthermore, suffered Indonesia’s sugar industry resulting
in impacts on the livelihood of the mill workers and
farmers, and, in worst case, the closure of some mills,
primarily in Java. Various measures including the estab-
lishment of various associated programs/policies and state
controls, the expansion of sugar production in the outer
islands, the provision of incentives for private investors and
farmers, the rehabilitation of existing sugar plants espe-
cially in Java, and the construction of new sugar plants,
have been taken to awaken domestic sugar production and
to achieve its rapid growth for self-sufficiency.
3.1.2. Bagasse production and its potential for electricity
generation
Alongside sugar, sugar mills in Indonesia also generate a
wide range of by-products. These include leaves/trash,
molasses, residual cake, and bagasse, which to some
extents have been considered as economic products for
instances as animal feeds, a substrate for fermentation
process, fertilizers, and energy, respectively.
As illustrated in Fig. 2, over 7 Mt of bagasse per annum
from the crushed sugarcane of more than 23 Mt were
produced in the period 2001–03.5 At these amounts of
bagasse, the potential of power generated could reach more
5
Each tonne of sugarcane produces bagasse at approximately 320 kg
(Winrock International, 1991).
 ARTICLE IN PRESS
D. Restuti, A. Michaelowa / Energy Policy 35 (2007) 3952–3966 3957

50,000 210,000

Peak Demand and Installed

Electricity Production(GWh)
180,000
40,000

Capacity (MW)
150,000
30,000 120,000

20,000 90,000

60,000
10,000
30,000
0 00 0
01

02

03

04

05

06

07

08

09

10

11

12

13
20

20

20

20

20

20

20

20

20

20

20

20

20

20
Year
Peak Demand(MW) National Installed Capacity (MW)
National Electricity Production (GWh)

Fig. 3. Historical and forecasted national installed capacity and electricity production as well as forecasted peak demand, 2000–13. Source: Directorate
General of Electricity and Energy Utilization (DGEEU) (2004), Ministry of Energy and Mineral Resources (MEMR) (2004), and Perusahaan Listrik
Negara (PLN) (2002a, b, 2005a, b, c).

than 450 GWh.6 In spite of the use of low-efficiency-based increased by only 0.7% in an average reaching
cogeneration,7 most sugar mills (medium-to-large scale) 25,562 MW in 2003. At this growth rate of installed
have produced the required energy (steam: 11.3–12.8 Mt capacity, an average increase in national electricity
and power: 338.7–383 GWh in the period 2001–038) by production is observed at 6.9% per year resulting in total
combusting bagasse and still leave considerable amounts in electricity of 112,998 GWh in 2003, as illustrated in Fig. 3.
excess.9 Part of these amounts have been used for other From the 2005 installed capacity of 28,356 MW, about
purposes such as, primarily, production of paper and 77% was mostly allocated for Java-Bali and the remaining
paperboard, agricultural mulch, production of chemicals, reserved for the outer islands. This was due to higher
and, in a few cases, cattle feeds. Nevertheless, the sales of power demands in Java-Bali that consumed about 80%
excess electricity to the grid are possible and even can be of Indonesia’s total power supply as a result of huge
increased substantially when employing more efficient populations and heavy loads of activities.
cogeneration. The operating power plants comprised a number of
types, including hydro, combined cycle, steam-gas fired,
3.2. Power sector in Indonesia steam-coal fired, steam-oil fired, geothermal, gas turbine,
biomass, and diesel power plants. By energy source, coal-
3.2.1. Installed capacity and electricity production based power plants produced the electricity primarily at
National installed capacity has been growing over the over 37%, followed by natural gas- and fuel oil-based
years to meet increasing demands, but only around half of power plants at over 20% and 13%, respectively, as shown
the total residential customers have access to electricity in Fig. 4.
(53% or 32.15 million customers among over 215 million Based on a low scenario, the national installed capacity
populations in 2003). The data in years 2000–03 show that is forecasted to stand only at 31,058 MW by 2013 (an
the national installed capacity, which was predominantly average increase of 1.2%) leading to the production of
provided by PLN while independent power producers 204,713 GWh (an average increase of 6.6%). From this
(IPPs) of non-captives and captives at around 15%, figure, it is very likely that power shortage in Indonesia
would still occur given the fact that the peak demand is
6
Each tonne of cane crushed in traditional sugar mills generates projected to grow at 6.6% in average (Java-Bali: 6.1% and
10–20 kWh of electricity (Cane Cogen India, 1999). outer islands: 8.1% per year) to result in 38,949 MW by
7
The boilers produces pressures in the range of only 20–45 kg/cm2 with 2013.
back pressure turbine generators employed.
8
Referring to typical steam and power requirements in a sugar mill
below (Ecoinvest, 2000; Shirgaokar, 2002), the internal energy require- 3.2.2. Domestic electricity market
ments were estimated with the nature of low efficiency as only this type of As a consequence of substantially enhancing electricity
cogeneration was employed in Indonesian sugar mills. demands, power blackouts have been forced in some
regions since PLN is not able to balance it with its supply
 Steam: 500 kg per tonne of crushed sugarcane (low to high efficiency) and overall development in power generation capacities.
 Power: 15 kWh (low) to 34.5 kWh (high) per tonne of crushed
sugarcane There have been limited budgets for new investments
9
About one third of the bagasse produced can supply enough steam and due to PLN’s unhealthy finance and this condition is
power for the mill’s requirements (Casten, 2004). further worsened by an increase in crude oil and diesel
 ARTICLE IN PRESS
3958 D. Restuti, A. Michaelowa / Energy Policy 35 (2007) 3952–3966

120.00

Shares of Generated Electricity (%)

Biomass,0.01 Biomass, 0.01 Biomass,0.01
100.00 Hydro,11.55 Hydro,8.05
Hydro, 9.18
Geothermal, 5.76 Geothermal,5.57
Geothermal,5.98
80.00 Diesel, 5.79 Diesel, 7.02
Diesel, 6.87

60.00 Coal, 37.38 Coal, 39.67 Coal, 41.11

40.00
Fuel Oil,13.31 Fuel Oil, 16.48
Fuel Oil,17.93
20.00
Natural Gas, 25.99 Natural Gas, 22.03 Natural Gas,20.30

0.00
2001 2002 2003
Year

Fig. 4. Shares of generated electricity by energy source, 2001–03. Source: Directorate General of Electricity and Energy Utilization (DGEEU) (2004) and
Ministry of Energy and Mineral Resources (MEMR) (2004).

prices and difficulties in obtaining foreign loans/debts given National Electricity 2003–20,11 which recently serves as an
its poor track record showing that many of its previous implementation guidance for Indonesian stakeholders in
projects have suffered long delays in the implementation the national electricity industry and a map of strategic
stage. actions for the development of the national power industry,
Another reason of why this serious electrical crisis occurs identifies, among others, the following needs that demon-
is because rated capacities of the power plants throughout strate the large opportunities for private sector (Ministry of
the country are very low as a result of aging plants. It is Energy and Mineral Resources (MEMR), 2003):
observed that in 2003, the rated capacities were 88.6% of
the installed capacity comprising 92.8% in Java-Bali and
 Preparing investment schemes in electricity supply
only 77% in the outer islands. Additionally, relatively high
business through the application of competitive market
power losses (14.2% in average during years 2000–03),10
structure and rules, economic tariffs, and incentives.
inefficiency in management and operation, as well as the
 Reducing the government’s role (good governance) and
1997 financial crisis have also contributed in creating the
empowering the roles of independent institutions and
electrical crisis in Indonesia.
electricity business players.
Provided the prevailing conditions, as described above, it
can be seen that opportunities have been largely opened
3.3. International carbon market and prices
for the IPPs to involve in power generation business.
Participations from private sector to provide investments
The international carbon market has been remarkably
for capacity addition projects will certainly be expected
emerging during the years that encompass credit-based
and, on the other side, commitments from the government
markets through project-based mechanisms (i.e. CDM/JI)
to encourage the participations are consequently required.
as Kyoto compliance-based schemes and allowance-based
The promulgation of Law No. 20/2002 concerning
markets from international or domestic emission trading
Electricity Affairs had once demonstrated the govern-
schemes (e.g. European Union Emissions Trading Scheme
ment’s efforts to provide a conducive business climate in
or EU ETS, UK Emission Trading System, etc.) as
power business, regardless its annulment and being
voluntary-based schemes. This situation has evidently been
replaced by Law No. 15/1985, as it opened a decentralized
demonstrated by the volumes exchanged through both
electricity system and a liberalization market for private
markets along with respective market values since 1998, as
sector’s involvement, particularly in the upstream sector,
illustrated in Fig. 5, and is, indeed, impacted particularly
and aimed at reducing PLN’s monopoly in the national
by an important role of the EU ETS, which is currently
electricity market gradually. However, the annulment of
observed as a dominant market in the international level
the Law No.20/2002 does not indicate that the private
given its characteristics.
sector will then be prohibited from undertaking business in
The EU ETS is mandatory for all 25 EU member states
power sector (further information regarding the annulment
and has linkages to other trading schemes through
is provided in Section 3.5.3 concerning Institutional
negotiated agreements as well as to CDM/JI as a result of
Barriers) because the Blueprint for the Development of
the EU ETS Linking Directive. In this manner, the scheme
allows the use of CERs and ERUs from 2005 and 2008,
10
Distribution and transmission losses contributed at 9.1–13.9% and
11
2.3–2.6%, respectively, resulting from both technical and non-technical It states that electricity supply needs to be increased as much as
aspects. 1400 MW per year.
 ARTICLE IN PRESS
D. Restuti, A. Michaelowa / Energy Policy 35 (2007) 3952–3966 3959

Total Known and Estimated Market Value

Allowance-based Transactions (MtCO2e)
120 600

Volume Exchange through Project-and

100 500

80 400

(US$ Million)
60 300

40 200

20 100

0 0
1998 1999 2000 2001 2002 2003 2004 2005
Year
Volume Exchanged through Project-based Transactions (MtCO2e)
Volume Exchanged through Allowance-based Transactions (MtCO2e)
Total Known Market Value (US$ Million)
Total Estimated Market Value (US$ Million)

Fig. 5. Volumes exchanged through project- and allowance-based transactions (MtCO2e) as well as total known and estimated market value (US$Million)
by year. Source: IETA (2005). *Data for allowance markets are only for January–March 2005.

respectively, to be converted to EU allowances or EUAs (i.e. As a consequence, increased CERs are expected in the
a compliance unit of the EU ETS) and ensures the continued coming years, taken together the demands from the CDM
use of CERs after 2012. In fact, the EU member states have project-based mechanism and the EU ETS. Thus, the
indicated a demand of about 140 MtCO2 per year for both potential of CDM for the credits is large that many
CDM and JI credits in their National Allocation Plans of governments, industry, and non-governmental organiza-
the EU ETS (Kjellen et al., 2005). tions have primarily focused to benefit from it.
The total demands for Kyoto units are forecasted to In terms of carbon prices, a wide gap between the EUAs
reach 925 MtCO2e by 2010 from a range of and the CERs/ERUs is observed in the current year that
600–1150 MtCO2e. From this figure, the estimated market has raised concerns from host countries and project
potential of CDM is a demand for the CERs at sponsors. Within the period January 2004–April 2005,
250 MtCO2e (ranging from 50 to 500 MtCO2) by 2010 the CERs have been traded between US$3 and 7.15/tCO2e
with the price of US$ 11/tCO2e or at a total demand of with a weighted average of US$5.63/tCO2e (IETA, 2005)
1250 MtCO2e by 2012. The estimates were established by and a preference in the range of US$3–6.5/tCO2e (Point
assuming the continued preference on CERs and ERUs by Carbon, 2004). Meanwhile, at the start of the EU ETS
the buyers, the restricted sales of surplus Kyoto units at phase 1, the EUAs were introduced with the price of less
40% or approximately 540 MtCO2e by Russia and than US$8.3/tCO2, but then substantially rising to about
Ukraine, as well as the unlimited CER supply as a result US$35.5/tCO2 in July and around US$26/tCO2 in Novem-
of a sustained flow of new CDM projects. The minimum ber 2005 (Trexler, 2005).
demands by industry (about 45 MtCO2e) combined with Kjellen et al. (2005), IETA (2005), and Trexler (2005)
the planned purchases by governments (about 50 MtCO2e) have presented the rationales of the higher prices of the
in Europe yield an annual demand for CERs and ERUs of EUAs as the following:
at least 100 MtCO2e (Haites, 2004).
Among all Kyoto mechanism systems, the CDM,  The EU ETS is a short-term market (2005–07), which is
however, is the only component recently functioning. The limited to CO2-based reductions.
following are the reasons:  The recent prices of the EUAs do not reflect long-term
equilibrium prices between supply and demand in the
 The JI does not formally begin until 2008. EU ETS due to:
 The IET system can only be expected once the necessary J large uncertainties over national allocation plans
infrastructures are already in place, which cannot be since not all EU member states have implemented the
expected in the near time. Linking Directive.
 There are economic incentives for Russia and Ukraine J relatively thin volumes traded as the supply of the
to limit the sales of their ‘‘hot air’’ allowances that CERs is limited and the credits from the JI and the
support the market for the CERs. IET cannot be used.
 ARTICLE IN PRESS
3960 D. Restuti, A. Michaelowa / Energy Policy 35 (2007) 3952–3966

Table 3
Sugarcane yield and crushed sugarcane in Indonesia by Province, 2001–03

Province Sugarcane yield (t/ha) Crushed sugar cane (t)

2001 2002 2003 2001 2002 2003

East Java 77 79 74 11,332,141 12,632,852 11,088,885

Central Java 61 63 62 2,096,848 2,559,134 2,136,696
DI Yogyakarta 70 74 77 316,367 365,732 368,644
West Java 68 54 59 1,524,406 1,157,723 1,190,479
North Sumatera 72 52 70 1,043,270 676,633 659,617
South Sumatera 85 53 53 715,096 641,805 650,894
Lampung 80 81 63 7,089,664 6,558,988 5,538,156
South Sulawesi 44 50 51 716,641 817,259 486,044
North Sulawesi 53 462,963
Kalimantan NA 64 NA NA 123,038 NA
Indonesia 74 73 67 24,834,433 25,533,165 22,582,377

Source: RCISP, 2005.

Table 4
Grid emission factors (GEFs) in the associated Regional Grid System

Grid Large-scale projects (tCO2/MWh) Small-scale projects (tCO2/MWh)

OMa BM CM (GEF) OMb CMc GEFd

Northern Sumatera 0.63 0.26 0.45 0.55 0.45 0.45

Southern Sumatera 1.05 1.04 1.05 0.81 1.05 0.81
Java-Bali 0.89 0.94 0.92 0.77 0.92 0.77
South East & South Sulawesi 0.76 0.31 0.54 0.51 0.54 0.51
North and Central Sulawesi, and Gorontalo 0.54 0.39 0.47 0.36 0.47 0.36
Central and South Kalimantan 1.23 1.33 1.28 1.12 1.28 1.12

Source: Own Calculations.

a
Excluding the low-cost/must-run power plants.
b
Including the low-cost/must-run power plants.
c
Equal to CMs for large scale projects.
d
Corresponding to OM, except in Northern Sumatera (i.e. CM).

 Project-based emission reductions are subject to im-
portant registration and delivery risks. In contrast, the
EUAs are government-issued, compliance-grade assets,
and smaller delivery risks in forward contracts within
Europe.
their excess allowances, and the EU ETS allowance
allocations (Trexler, 2005).
3.4. GEFs and emission reductions for CDM bagasse
cogeneration projects

In the case of CER prices, the largely varying traded
values is influenced by expectations on the project’s ability
to obtain the status as the Protocol’s project activities and
the future delivery of the CERs that would eventually
define contract terms.12 In addition, policy and market
uncertainties may also affect the spread of CER prices,
which among others correspond to availability of the CER
supply, timing in the materialization of market majority
demands in relation to the implementation of domestic
measures for Kyoto compliance, the post-2012 use of
CERs, actions taken by Russia and Ukraine in regard to
12
From the lowest to highest possible prices, the types of the contracts
can be ‘‘World Bank’’, Standard Off-Take, Guaranteed Delivery, and
Exchange Contracts (Point Carbon, 2004).
The calculation results on the generation-weighted
average CO2 emission factors (OMs) in the national grid
system within 2001–03 show that they are not significantly
different (0.85–0.87 tCO2/MWh). Thus, the utilization of
data only in year 2003 for calculating the OMs in the
regional level has been considered acceptable (Table 3).
Table 4 presents the list of GEFs derived from the
relevant OMs, BMs, and CMs in the associated regional
grid systems. It is observed that the GEFs in two regional
grid systems where bagasse has primarily been produced
(i.e. the Java-Bali and Southern Sumatera grids) are high,
either for large or small-scale projects.
The boundaries of the project activities were subse-
quently reviewed in order to identify which emission
sources be included and excluded for determination of
 ARTICLE IN PRESS
D. Restuti, A. Michaelowa / Energy Policy 35 (2007) 3952–3966 3961

Table 5
Project boundaries for the potential Indonesian CDM bagasse cogeneration projects

No Source Gas Justification

Baseline
1 Grid-connected electricity CO2 Included Main emission source.
generation
CH4 Excluded For simplification (a conservative calculation) since the emissions
are immaterial.
N2O Excluded For simplification (a conservative calculation) since the emissions
are immaterial.
2 Uncontrolled burning or decay CO2 Excluded CO2 emissions from bagasse are assumed not leading to changes
of surplus bagasse of carbon pools in LULUFC sector.
CH4 Excluded Following the ACM0006, the emissions from this source are
neglected when the baselines are Scenario 11 and 12.
N2O Excluded As explained above. In addition, the emissions from the natural
decay or uncontrolled burning are not anthropogenic sources of
emissions included in Annex A of the Protocol Kyoto and, thus,
should not be included (a conservative calculation).

Project activity
3 On-site fossil fuel consumption CO2 Excluded For simplification, it is assumed that the volumes of fossil fuels
due to the project activity used are not material with a consideration that they are only used
(stationary or mobile sources, for start ups.
e.g. co-fired power plants)
CH4 Excluded The emissions are negligible.
N2O Excluded The emissions are negligible.
4 Off-site transportation of CO2 Excluded On-site transportation is the most likely case, thus, the emissions
bagasse can be neglected.
CH4 Excluded The emissions are negligible.
N2O Excluded The emissions are negligible.

5 Combustion of bagasse for grid- CO2 Excluded CO2 emissions from bagasse are assumed not leading to changes
connected electricity generation of carbon pools in LULUFC sector.
CH4 Excluded For simplification since the emissions are very small (and the CH4
emissions from uncontrolled burning or decay of surplus bagasse
in the baseline scenario are excluded).
N2O Excluded For simplification since the emissions are very small.
6 Bagasse storage CO2 Excluded CO2 emissions from bagasse are assumed not leading to changes
of carbon pools in LULUFC sector.
CH4 Excluded For simplification since the bagasse is stored not longer than one
year; producing very small emissions.
N2O Excluded For simplification since the emissions are very small.

Source: Own Additions.

both baseline and project emissions. Table 5 illustrates the
results of identification. The GHG emissions from gener-
ated steam and electricity for own utilization is outside the
project boundary/baseline since bagasse combustion for
that purpose is a standard procedure in sugarcane mills. In
conclusion, the emission sources for the baseline are
restrictedly due to electricity generation from grid-con-
nected power plants and the gas type is solely CO2
emissions. Thus, the GHG emission reductions base on
net changes in fossil fuel consumptions of the grid power
plants as a result of electricity displacement by bagasse
combustion.
The leakage from the project activities that may occur
and leads to an increase in emissions from fossil fuel
combustion elsewhere due to the diversion of bagasse to
the project plants has been addressed by defining the net
quantities of bagasse utilized for exportable electricity
generation after excluding the portions for other pur-
poses.13 Accordingly, the estimated GHG emission reduc-
tions from Indonesian CDM bagasse cogeneration projects
in tCO2/year have been calculated in a variety of the net
quantities of bagasse utilized: from 50% to 80% of surplus
bagasse, with the assumptions that all project activities are
large and small scale, respectively (Table 6).
From the potential of electricity displacement at
260,253 MWh, Indonesia is expected to generate GHG
emission reductions as much as 240,774 or 198,177 tCO2/
year if assumed all project activities are large or small scale,
respectively. Out of 6 regional grids where the electricity
from the project activities can be grid connected, the largest
13
For instance, selling some of surplus bagasse, which is then used as
fuels in adjacent ethanol mills and has been practiced prior to the project
activities.
 ARTICLE IN PRESS
3962 D. Restuti, A. Michaelowa / Energy Policy 35 (2007) 3952–3966
Table 6
Estimated emission reductions from the Indonesian CDM bagasse cogeneration projects
Grid Estimated emission reductions (tCO2)a
Large-scale
80% of surplus bagasse
Northern Sumatera 1882–3765
Southern Sumatera 39,375–78,750
Java-Bali 76,079–152,158
South East and South Sulawesi 1209–2419
North and Central Sulawesi and 1001–2003
Gorontalo (Suluttengo)
Central and South Kalimantan 840–1680
Indonesia 120,387–240,774
Source: Own calculations.
a
Following the rule of thumb that each tonne of cane crushed generates electricity in the range of 10–20 kWh.
emission reduction potential at more than 55% can be
encountered in Java-Bali grid, followed by those in
Southern Sumatera. It is reasonable given the fact that
most sugar mills (79%) were situated in Java-Bali resulting
in the highest capacities coupled with the high GEF. The
value of the overall GHG emissions reductions can reach
about US$1.36 million (large scale) or US$1.12 million
(small scale) per annum, by applying the CER weighted
average of US$5.63/tCO2 during the period of January
2004–April 2005 (IETA, 2005).
3.5. Barriers associated with bagasse cogeneration and its
development as a CDM project
In order to assist the project developers in demonstrating
the additionality of the proposed CDM project activities
meaning that they are happening due to the revenues
earned from the CERs, a tool introduced by the CDM
Executive board, called the additionality test, is normally
adopted. The test comprises a series of steps that include
identification of alternatives to the project activity,
common practice analysis, investment analysis, barriers
analysis, and impact of registration of the proposed project
activity as a CDM project activity (United Nations
Framework Convention on Climate Change (UNFCCC),
2005g).
In regard to the identification of alternatives to the
project activity, coal-based electricity generation is seen as
an alternative to the project activities, which would export
electricity generated from bagasse cogeneration to the
grids. This is because the coal-based electricity generation
projects are perceived to be more financially viable
compared to the bagasse-derived electricity generation
projects and even to the other thermal electricity genera-
tion projects. It is evident by the facts that this type of
power plants is predominant in the national electricity
generation, as shown in Fig. 4, and PLN has planned to
expand the share of this type of power plants in the
upcoming capacity addition projects. Meanwhile, the result
Small-Scal—e
50% of surplus bagasse 80% of surplus bagasse 50% of surplus bagasse
1177–2353 1882–3765 1177–2353
24,609–49,219 30,520–61,040 19,075–38,150
47,549–95,099 64,023–112,040 40,014–80,029
756–1512 1153–2306 721–1441
626–1252 775–1550 485–969
525–1050 735–1470 459–919
75,242–150,484 99,089–198,177 61,930–123,861
of common practice analysis briefly presents that the
proposed project activities are considered as non-core
projects that sugar mills would have, as they are not related
to an attempt of increasing sugar production.
In the following sections, brief analyses concerning the
barriers associated with the bagasse cogeneration projects
are discussed. When the projects are developed not under
CDM, the barriers may hinder their development. How-
ever, in contrary, the barriers will be considered as
justifications to accept the projects as the CDM projects
in view of the additionality test and thus, the CER earnings
help the project developers to overcome the barriers.
3.5.1. Investment analysis and financial barriers
In the investment analysis, the assessment aims at
determining whether or not the proposed project activities,
without the revenues earned from the sale of CERs, are
economically or financially less attractive than other
alternatives. This can be undertaken by identifying one of
various financial indicators; among others is Internal Rate
of Return (IRR),14 which is subsequently to be compared
to either the IRRs of the alternatives, namely the
investment comparison analysis, or a relevant benchmark
value representing standard returns in the market,15
namely the benchmark analysis. A sensitivity analysis
should additionally be conducted in both analyses in order
to show whether or not the conclusion concerning the
financial attractiveness is robust to reasonable variations
on the critical assumptions. In regard to the latter method,
the prevailing commercial lending rate, which is influenced
by the discount rate, is presented to gain the likely
14
IRR is defined as the discount rate that equates the present value of
the future cash inflows of an investment to the cost of the investment itself.
All relevant costs, revenues (excluding CER revenues), and critical techno-
economic parameters and assumptions (e.g. lifetimes and discount rate)
should be included in the calculation.
15
It is derived from government bond rates, estimates of the cost of
financing and required return on capital (e.g. commercial lending rates), or
a company internal benchmark.
 ARTICLE IN PRESS
D. Restuti, A. Michaelowa / Energy Policy 35 (2007) 3952–3966
threshold of the IRR. Thus, in order to pass the investment
analysis, the IRRs of the project activities should be lower
than the threshold.16
The Bank Indonesia (BI) rate, which in this case
represents the discount rate, stood at 12.75% in December
2005, from 7.42% in January 2005, and is observed the
highest throughout the year (Bank of Indonesia (BI),
2005a). It was caused by the instability of domestic macro
economy, which was remarkably affected by external
shocks of the global monetary tightening cycle and the
soaring world oil prices leading to sharply increased
demand for foreign currency on the domestic market.
Given the fact that the inflation pressure will still exist, the
high BI rates are projected to continue in the 2006 year as
follows; 14.25% in the 1st and 2nd quarter, 13.5% in the
3rd quarter, and 12% in the 4th quarter (Goeltom, 2005;
Standard Chartered Bank (SCB), 2005). Meanwhile,
similar to the BI rates, the interest rates of Rupiah credit
in commercial banks for investment had also been growing
from 13.98% to 14.92% in October 2005 with the BI rate
of 11% (Bank of Indonesia (BI), 2005b) and likely in the
range of 16–17% in December 2005 (by the time of the
research, the rate had not been officially provided).
From the illustrations above, it can be seen that the
prevailing commercial lending rate was high and is
expected to remain high in the following years, especially
in 2006, given the foreseeing discount rates as a result of
unfavorable economic situation. This fact may particularly
impact the project activities as barriers for the develop-
ment, because the lending rates of 16–16.5% are considered
the maximum for Indonesian business, as stated by the
chairman of Indonesian Chamber Commerce and Industry
(Hidayat, 2005). Thus, there will be difficulties in accessing
underlying finances for the project activities.
However, in regard to the additionality test, the
financially unattractiveness of the project activities, in this
case with the IRRs of lower than the prevailing commercial
lending rate (16–17%), would lead to the fulfillment of
conditions in the additionality test, in term of financial
aspect. The revenues earned from the CERs would then be
used to make the project activities happen as a means to
effectively mitigate the risks during the development and to
render them attractive investments.
3.5.2. Technical barriers
One of barriers in the technical aspect is associated with
bagasse availability throughout the year. This is primarily
valid to sugar mills operating with relatively small-scale
crushing capacity and/or situated in Java. The surplus
bagasse, particularly during off-season, might not be
sufficient enough for continuous exports of generated
electricity. There could also be the case that the supply of
16
As per November 25, 2005, the available IRRs from nine bagasse
cogeneration projects, which were in the validation process, stood at
8–18.42% with varying discount rates applied (United Nations Frame-
work Convention on Climate Change (UNFCCC), 2005h).
3963
bagasse is disrupted because the farmers substitute their
sugarcane crop with more profitable ones, such as rice.
Accordingly, this condition should be one of the clauses
clearly identified in Power Purchase Agreements (PPAs)
between the mills and PLN, and, hence, PLN will have the
grids supplied from other sources, e.g. its thermal power
plants, as a back up. Meanwhile, concerns in the mills
themselves should not be raised since the generation of
exportable electricity is not their core business anyway.
Moreover, given the fact that bagasse is a waste product,
bagasse cogeneration can serve as a technology or
treatment upon its disposal as per required by environ-
mental regulations, whilst simultaneously obtaining eco-
nomic benefits.
Another technical barrier is in accordance with the
operation of efficient high-pressure boilers (technological
uncertainties), which may be adopted for expanding
electricity generation. This high-pressure cogeneration
technology is new in Indonesia and even throughout
the world to some extent, as most sugar mills still rely on
the operation of inefficient low-efficiency boilers with the
pressure range of 20–45 kg/cm2. A lack of experience and
poor or insufficient skills will not enable local mills to
operate and manage cogeneration projects by themselves.
Consequently, there is a considerable risk in accordance
with the operation of this cogeneration technology.
In addition, the technical barriers might also arise from
the problems associated with the combustion of bagasse
itself, regardless of a high level of its current utilization as a
source of energy in sugar mills. Some physical and chemical
properties of bagasse, such as moisture content, bulk
density, melting properties of ash, and volatile content
might complicate the combustion process and bagasse
transportation/storage/feeding, cause fouling/scaling/cor-
rosion of the heat transfer surfaces, as well as result in large
dimensions of the equipment for flue gas treatment (Bapat
et al., 1997; Hellwig, 1985; Werther et al., 2000) that
eventually lead to uneconomic upon its utilization.
3.5.3. Institutional barriers
The Law No. 20/2002 about Electricity Affairs was once
in effect to liberalize the national power sector in response
to the prevailing power crisis in Indonesia. Under this Law,
the government allowed private sector to involve in
electricity industry with a feature of open competitions in
power generation and retail, but not in transmission and
distribution. It was believed that the competition imple-
mentation through a market mechanism would stimulate
an improvement in services, transparencies, and efficiencies
of the generation segment leading to lower prices where
customers had choices.
On December 15, 2004, the Law was annulled by the
Constitutional Court of Republic Indonesia with the
reasons as follows:
 It is against the Indonesian Constitution Article 33 in
which the state must own and control the sources of
 ARTICLE IN PRESS
3964 D. Restuti, A. Michaelowa / Energy Policy 35 (2007) 3952–3966

electricity generation given the fact that electricity is 3.5.4. Other barriers
crucial for the welfare of Indonesian people. In addition to the aforementioned specific barriers, there
 The privatization policy may harm Indonesian economy are other associated barriers that might also hinder the
in the long run. project activities as follows:
 The annulment reflects Indonesian civil society’s effort
to strengthen economic sovereignty of the country over  Managerial resource barrier. This is due to the fact that
International Financial Institutions (IFIs). experienced personnel who are capable of managing
electricity transaction in the mill may not readily
available yet.
As a result of the annulment, the former Law No. 15/  Organisational barrier. It rises since a sugar mill has to
1985 automatically replaces the Law No. 20/2002. The Law deal with the economics of electricity generation and
No. 15/1985, however, has yet included some aspects and distribution, bureaucracy, and PPAs.
circumstances such as participations from private sector,  Local CDM consultancy barrier. This barrier exists as a
competency certifications of human resources, safety and result of a limited number of local CDM consultants,17
environmental protections, regional autonomy, as well as a especially for developing Project Design Documents
priority on the utilization of renewable energy and local (PDD) and performing validation and verification. This
primary energy recourses, as which already provided in the situation may lead to high transaction costs for the
Law No. 20/2002. Furthermore, it has put PLN back to its project because the project developer has to obtain these
original position as a solely state-owned entity responsible services from international CDM consultants.
for generating, transmitting, and distributing electricity to
the public.
The government has subsequently issued Government
4. Conclusions
Regulation No. 3/2005 concerning Changes on Govern-
ment Regulation No. 10/1989 (Supply and Utilization of
The analysis upon the economic potential of bagasse
Electricity), which is supported by Ministry Regulation
cogeneration projects under CDM scheme in Indonesia is
No. 9/2005 about Participation Process for Private Sector
provided in conjunction to two CDM basic criteria of
in Electricity Business. The issuance of these two regula-
sustainable development and additionality. With respect to
tions is expected to give legal certainty in power business.
sustainable development, the development of such projects
However, some argue that the Government Regulation No.
could contribute considerably in addressing the prevailing
3/2005 is in opposition to the currently applicable
crisis experienced by domestic sugar industry due to
electricity law, i.e. the Law No. 15/1985 since in fact, it is
significant declines in land productivity and mill efficiency
not too different from the annulled Law No. 20/2002.
as well as the crisis in power generation sector. PLN’s
Besides, there has already existed a government regulation,
incapability to balance the enhancing demands with its
which elaborates the Law No. 15/1985 in detail, i.e. the
supply and overall development in power generation
Government Regulation No. 10/1989 concerning Supply
capacities has, indeed, led to large opportunities for the
and Utilization of Electricity.
IPPs to involve in power generation business.
Provided the recent situation, it is still unknown of
A review on the international carbon market is
whether or not there will be favorable climate for private
supportably included presenting the substantially emerging
sector to be engaged in electricity business and how far the
market. Taken together the demands from the CDM
extension of the private sector participation will be
(1250 MtCO2e by 2012) and the EU ETS (140 MtCO2e/
allowed. The upcoming new electricity law, which is
year, including ERUs), the potential of CDM for the
currently being drafted by the government (i.e. DGEEU),
credits is huge. In the case of carbon prices, the CERs had
is expected to be able to answer concerns raised due to the
been traded between US$3 and 7.15/tCO2e within the
applications of both the annulled Law No. 20/2002 with its
period January 2004–April 2005 and are projected to reach
nature of privatization/liberalization and the currently
US$11/tCO2e by 2010 while the EUAs had been fluctuating
applicable Law No. 15/1985 with its nature of monopoly
to around US$26/tCO2 in November 2005.
and, particularly, to determine market structure and rules,
In regard to the additionality, the GHG emission
business and technical regulations, electricity prices, and
reductions are based on net changes in fossil fuel
sector governance and supervision. Otherwise, the confu-
consumptions of the grid power plants as a result of
sions and doubts among existing and potential investors in
electricity displacement by bagasse combustion. From the
Indonesian electricity business obviously still continue to
potential of electricity displacement at 260,253 MWh
exist and they will be more reluctant to involve in electricity
resulting from recently employed low-efficiency cogenera-
industry resulting in the deterioration of power supply
tion, Indonesia is expected to generate GHG emission
services. For bagasse cogeneration projects developed
under CDM, this situation, however, will be a justification 17
The prevailing consultants are NGOs, such as Pelangi, Yayasan Bina
to pass the additionality test as institutional barriers due to Usaha Lingkungan (YBUL), and Carbon and Environmental Research
uncertainties in policy and regulatory framework. Indonesia (CER Indonesia) (Sari et al., 2005).
 ARTICLE IN PRESS
D. Restuti, A. Michaelowa / Energy Policy 35 (2007) 3952–3966
reductions as much as 240,774 or 198,177 tCO2 per annum
if assumed all project activities are large or small scale,
respectively. Out of 6 regional grids where the electricity
from the project activities can be grid-connected, the two
largest emissions reductions potential can be encountered
in Java-Bali (455%) and Southern Sumatera grids. The
value of the overall GHG emissions reductions can reach
about US$1.36 million (large scale) or US$1.12 million
(small scale) per annum.
In spite of its potential, various barriers in technical,
institutional, financial, and other aspects might hinder the
development of bagasse cogeneration projects. Neverthe-
less, the identified barriers represent the justifications to
pass the additionality test upon the acceptance as the CDM
projects.
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