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Bali Mission for Clean Energy

Recommendations to the Bali Clean Energy Forum

BCEF National Expert Team, 9 February 2016

Clean Energy Imperative

Clean energy is no longer just an option. Under various international frameworks, countries have committed to the transition towards reliable, less carbon intensive, more efficient and more accessible modern energy.

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The Sustainable Development Goals adopted in the United Nations General Assembly in September 2015 includes the goal of ensuring access to affordable, reliable, sustainable and modern energy for all. The goal aspires significant improvement in energy access, energy efficiency and share of renewable energy. Furthermore, it calls for enhanced international cooperation to facilitate access to clean energy research and technology and expanding infrastructure and upgrade technology for supplying modern and sustainable energy services for all in developing countries.

In December 2015, countries under the UNFCCC committed to the Paris Agreement that pledges to hold the increase of global average temperature to well below 2° Celsius above pre-industrial levels and to pursue efforts to go as low as 1.5° Celsius. Such commitment calls for rapid decarbonization of the global energy system.

In light of urgent needs to mitigate risks of climate change, as well as providing energy access for all to reach development goals, the transition towards clean energy is imperative.

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Transition pathways

Recent developments have shown strong signs of transition towards a less carbon intensive and cleaner global energy system. Renewable energy continues to show rapid increase. Global investment in renewables doubles consistently over the last years. In terms of net addition to overall generation capacity, renewable energy outpaced fossil fuel investment significantly. In 2014, global

net investment of renewable energy reached USD 242.5 billion taking a wide lead over fossil fuel s’

estimated USD 132 billion 1 . In 2015, despite weakening of European economy, as the powerhouse of renewable energy investment, and plunge in fossil fuel commodities prices, clean energy investment still reached its highest ever figure of USD 328.9 billion with a nearly 30% increase of new power

generation capacity 2 .

Drastic change is also taking place in the fossil fuel sector. Price of oil has plunged more than 70% since June 2014. Natural gas consumption has increased almost 50% making it the fastest-growing among the fossil fuels. China and the Middle East are the main centres of gas demand growth. Low gas prices in North America drag down prices elsewhere creating an ample supply of competitively

1 REN21, Global Status Report, 2015 2 Bloomberg New Energy Finance, 2016

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priced gas globally. Where it replaces more carbon-intensive fuels or backs up the integration of renewables, natural gas is a good fit for a gradually transition toward decarbonising energy system 3 .

With the Paris Agreement capping global average temperature increase at 2° Celsius above pre- industrial levels implies that the annual rate of reduction in global energy intensity needs to more than double from 1.1% per year today to 2.6% by 2050. Moreover, current national policies pledged under the UNFCCC are still 60% above the level of emissions required to remain on track on just 2° Celsius warming by 2035. The International Energy Agency (IEA) proposes a bridging strategy that could deliver a peak in global energy-related emissions by 2020. The peak can be achieved relying solely on proven technologies and policies, without changing the economic and development prospects of any region, and is presented in a “Bridge Scenario”. The Bridge Scenario depends upon measures include: 1) increasing energy efficiency, 2) progressively reducing the use of the least- efficient coal-fired power plants and banning their construction, 3) increasing investment in renewable energy technologies in the power sector from USD 270 billion in 2014 to USD 400 billion in 2030, 4) gradual phasing out of fossil-fuel subsidies to end-users by 2030, and 5) reducing methane emissions in oil and gas production 4 .

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Moreover, in its most recent Energy Technology Perspectives, IEA also notes that growing demand for energy and the infrastructure needed to provide it creates a unique opportunity for emerging economies to reduce CO2 emissions by deploying low-carbon technologies. During infrastructure build-out, emerging economies can be early movers in applying a systems approach to the roll-out of advanced low-carbon technologies 5 . This is important to highlight particularly since access to modern electricity and clean cooking facilities is still a global concern. Around 1.3 billion people globally lack access to electricity to fulfil basic needs such as lighting. Furthermore, around 40% of global population still relies on solid fuels that cause indoor air pollution leading to respiratory and other diseases 6 .

Bridging the Gap, Promoting Global Partnership

Ambitious global commitments can only be achieved through innovative global partnerships. Collaborative efforts among nations are exemplified by, among others, commitments of G20 energy ministers, expressed through their communiqué 7 , in the comprehensive agenda comprise of Voluntary Collaboration on Energy Access, Voluntary Options for Renewable Energy Development and Voluntary Energy Efficiency Investment Principles.

Ambitious global commitments can only be achieved through innovative global partnerships. Collaborative efforts among nations are

Such collaboration needs to be enhanced by linking public and private sector which is crucial to bring clean energy technologies to market. Outreach of policymakers to researchers and businesses supports the developments of and investments in the technologies, policies and good practices needed to reduce costs and further progress towards a more clean, efficient and sustainable energy system. Furthermore, innovative regional and international collaborations are required to ensure clean energy technologies spread to markets where they are most needed at both utility and off-grid scale.

  • 3 IEA, World Energy Outlook, 2015

  • 4 IEA, World Energy Outlook, 2015

  • 5 IEA, Energy Technology Perspectives, 2015

  • 6 Lim SS. et al., A Comparative Risk Assessment of Burden of Disease and Injury Attributable to 67 Risk Factors and Risk Factor Clusters in 21 Regions. The Lancet, 2012

  • 7 https://ec.europa.eu/energy/en/news/g20-energy-ministers-meeting-focuses-sustainable-energy-access-

energy-efficiency-and-renewables

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Mission Innovation and the Breakthrough Energy Coalition announced at COP21 in Paris are important impetuses of global initiatives to accelerate clean energy technology innovation. In order to be effective in achieving the aspirations of clean energy transition, these initiatives have to cover collaborative formulation and implementation of policies that enable sustainable solutions at various scales, making clean energy technologies widely available to accelerate technology diffusion, employing a wide diversity of clean, safe and sustainable energy solutions, and enabling new technologies to be integrated into existing energy systems. Furthermore, these initiatives also have to be more representative and inclusive of emerging and developing economies while taking into consideration their specific objectives.

Indonesia’s contribution – a new integrated approach

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As one of the world’s emerging economies, Indonesia’s energy consumption is projected to increase significantly. The country’s steady economic growth rate ranging at 5-6% needs to be maintained in

order to address development needs. Energy demand resulting from the expected economic growth is projected to 4.9% until 2025 annually 8 . Indonesia is at the crossroad of transitioning from fossil to renewable energy. Excluding widely used traditional biomass, the country’s primary energy supply is currently dominated by fossil fuels: oil (46%), coal (31%), and gas (18%) with limited 5% share of

renewable

energy despite
energy despite

the enormous and highly diverse potential throughout the archipelago 9 .

The country is endowed with significant potential for hydropower (75,000 MW), geothermal (28,910 MW), biomass (32,654 MW), solar (4.80 kWh/m2/day), wind (3-6 m/s), and ocean energy (49,000 MW) 10 . Among which only 10% of hydropower, 5% of geothermal and 5% of biomass potential has been utilized. In addition, Indonesia is the world’s largest crude palm oil (CPO) producer with a total

of 32.5 million tonnes of CPO produced in 2015 11 .

A successful undertaking of clean energy transition in Indonesia will contribute to global energy transition in at least two regards. First of all, being among the world’s biggest economies, Indonesia’s energy system will contribute to the global effort of decarbonization. Secondly, the effort will provide a model for integrated approaches to boost clean energy transition that can be replicated in other areas. Being a significant player in the South East Asia and South Pacific region, Indonesia can also become hub between the region and the other parts of the world for innovative international collaborations that aim towards accelerated clean energy technology diffusion.

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Looking at the national experiences in Indonesia, the national expert team identifies seven highly interlinked challenges that require innovative integrated approaches to address. Moreover, these challenges are expandable both to the regional and to the broader international context.

  • 1. Acceleration challenge

Indonesia’s National Energy Policy adopted in 2014 mandates that the share of renewable energy in primary energy mix to achieve 23% by 2025. The current rate of 5% renewables contribution translates to the requirement of massive addition of renewable energy production over the next ten years. Looking at the power sector alone, with the current planned national power generation

8 National Energy Council, Indonesia Energy Outlook 2014 9 Ministry of Energy and Mineral Resources, Handbook of Energy & Economic Statistics of Indonesia, 2014 10 Ministry of Energy and Mineral Resources, 2015 11 Indonesia Palm Oil Association, 2016

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capacity to achieve 64.2 GW in 2022 12 , and existing 10.6 GW generation capacity coming from renewables 13 , a minimum of 4.1 GW additional new power plants utilizing renewable energy resources are required. In parallel with this increase in renewable energy resources there needs to be an equally strong effort to improve energy efficiency to curb the increase in demand in electricity and reduce the costs of the transition to a clean energy future. If Indonesia implemented best practice efficiency standards on air conditioners, it would deliver within five years electricity savings equivalent to 10% of current total coal generation. This is equivalent to the output of three large coal plants. Savings would amount to $3 billion and 11 Mt of CO2 emissions.

Governance issues

Two main sub-challenges are identified within this element. Firstly, administrative processes for energy infrastructure projects in general are in need of drastic enhancement to secure delivery.

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According to the World Bank’s Doing Business 2016, Indonesia ranks poorly in key elements that are

related to energy investment projects. In categories such as ‘Starting a business’, ‘Dealing with Construction Permits’, ‘Trading Across Borders’, and ‘Enforcing Contracts’, Indonesia is ranked, respectively at 173, 107, 105, and 170 out of 189 economies 14 .

Secondly, bold national targets are not yet accompanied with strong policies to encourage renewable energy acceleration. At the ministerial level, a relatively complete set of feed-in tariffs (FITs) are available covering solar, biomass, hydropower and geothermal. However, the effectiveness of these policies is highly limited due to the combination of limited government funding support and a highly regulated electricity market. As result, additional costs of renewable energy have to be borne by the state electricity company which leads to very limited space for acceleration.

  • 2. Risks of renewable energy resources

Without high-quality assessments of renewable energy resources, the risks of projects are greatly magnified, and private financing will be correspondingly harder to obtain. Resource assessments for wind, hydro, and biomass in particular need to be available on a site-specific basis. General assessments may be limited in providing necessary information for funding, but will still be valuable for site identification especially in the context of solar power. Moreover, for project financing purposes, detailed assessment is required (e.g. at least one year of reliable and auditable data) 15 .

Without high-quality assessments of renewable energy resources, the risks of projects are greatly magnified, and private

Resource assessment for renewable energy is also challenging due to the massive scale of resource assessment needs, both from the perspective of geographical coverage as well as the scope of technologies. In the off-grid context, resource assessment alone is not sufficient to determine sustainable schemes of clean energy provision. Due to the needs of consuming produced energy domestically, socio-cultural and domestic economic assessment is required to ensure social and economic feasibility.

  • 3. Supply chain approach for technology diffusion

  • 12 State Electricity Company, RUPTL, 2013

  • 13 National Energy Council, Indonesia Energy Outlook 2014

  • 14 World Bank, Doing Business, 2016

  • 15 World Bank, Financing renewable energy: Options for Developing Financing Instruments Using Public Funds,

2011

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Globally, regions with limited access to energy infrastructure also have very limited domestic clean energy technology manufacturing capacity. Limited access to clean energy technologies ultimately results in high capital investment as well as high operation and maintenance cost for renewable energy. Lack of access also implies the needs of importing from international technology providers. This creates additional potential for bureaucratic hurdles as well. Moreover, limited availability of technology and supporting industries reduces the off-grid advantages of on-site renewable energy generation. The flexibility to be independent from existing grid infrastructure gives renewables the advantage of lower investment requirements related to network connection. This is particularly advantageous for providing electricity to remote areas. However, development of supporting industries (e.g. suppliers, workshops, etc.) may be slower in these locations resulting in high operation and maintenance costs that drag down price competitiveness of off-grid renewable energy technologies.

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  • 4. Grid connectivity

As an emerging economy with archipelagic geographical feature, infrastructure development is a huge challenge in general. Secondary energy production is constrained with grid availability, e.g. electricity grid and gas pipeline network, that is further constrained with availability of transport infrastructure. In Java, different challenge has emerged. Congestion of existing transmission line has occurred due to burgeoning demand despite widespread availability of grid network in the island.

In terms of electricity, it is important to note that current setting of a highly regulated electricity market also contributes to the connectivity challenge. The State Electricity Company is the main electricity utility company in Indonesia. This implies that the company is highly burdened with enormous requirement of infrastructure building. This burden is then passed through to power producers making already more costly renewable energy products even less economically feasible.

  • 5. Financial viability

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Financial viability is the aggregation of various challenges discussed above. Under commercial approaches, all challenges ultimately contribute to making clean energy more expensive and highly uncompetitive with conventional fossil fuels. While partial addressing of the above challenges might contribute to increasing financial viability of renewable energy projects, this may not be the case for remote areas. In regard to providing access to marginalized and remote areas, the above challenges are organically present. This may lead to the conclusion that costs are simply too high particularly in regard to clean energy provision. Such situation calls for sustainable and innovative non-commercial approaches. In light of the above discussions, it is then important to note that such approaches may have the potential to require a new set of regulatory basis, institutional building as well as implementation mechanism.

  • 6. Socio-cultural challenges

Being social, economic and culturally diverse archipelago, infrastructure and economic development throughout the country have to be able to address local needs and contexts in order to achieve sustainable operation. In terms of providing energy access, demand assessment has to be made in areas where energy market is close to non-existing. Therefore, it is required that planning of energy

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infrastructures goes beyond economic and financial approaches and also reaches social and cultural aspects with deep involvement of the local community.

It is important to again highlight that the challenges that have been discussed above are highly interlinked. Due to vast geographical spread, grid infrastructure is particularly challenged with administrative and regulatory issues as well as land acquisition. Unavailability of centralized infrastructure creates a competitive edge for initial investment of off grid renewable energy provision, but, at the same time, it also downgrades the competitiveness due to unavailability of local supporting industries making operation and maintenance very costly. The geographical widespread of energy demand as well as clean energy resources calls for immense need of resource assessment in order to reduce risks in operation. From the demand side perspective this also translates to needs of going beyond financial and technological approaches but also socio-cultural.

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The national expert team suggests that clean energy transition requires strategies focusing on governance transformation and technology diffusion as two main pillars (see picture below). The two pillars encompass aspects that include innovative policy reforms, financing, technology transfer, data acquisition and transparency, as well as domestic energy industry development. These are aspects that are also necessary to implement and achieve global commitments in Goal 7 of the Sustainable Development Goals and the Paris Agreement.

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Picture: National Expert Team’s Suggestion for transition strategy of Bali Mission for Clean Energy

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It is important to note that holistically addressing clean energy challenges applying the Bali Mission transition strategy may require institutional restructuring as well as national policy reform to implement.

Going forward: Indonesia Centre of Excellence for Clean Energy

The National Expert Team highly suggest that the Centre of Excellence for Clean Energy is established as an independent institution with capability to manage funds coming from various sources as well as actively contributing to policy making. The Centre of Excellence should operate covering the full process of technology diffusion. It should also be a hub for international collaboration nationally and internationally. Multiple interventions across the clean energy value chain should be conducted by the Centre of Excellence starting from research and development, ground-truthing, policy recommendations, financing mechanisms, project development and operation. To avoid overlapping of functions and ensure synergy with existing institutions and initiatives in addressing clean energy challenges, the National Expert Team recommends focus areas of the Centre as below:

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Project coordination and acceleration

One-stop coordinating office for regulatory and administration issues for clean energy projects Implementing stringent energy efficiency standards for building, appliances, and vehicles in collaboration with ASEAN partners

Decision support system

Macro and micro level data management and analysis to support decision making at various levels (policies and regulations as well as project development)

Resource assessment

Coordinate implementation of clean energy resource assessment mobilizing external resources Data accessible to public under Sustainable Energy One Map

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Off-grid clean energy development

Development of national policies related to off-grid clean energy projects covering aspects e.g. regulations, financing mechanisms, etc. Coordinating implementation of off-grid clean energy projects

Development of national energy technologies and supporting industries

Identification of relevant potential technologies for building energy Research incubator oriented at up-scaling/mass production/commercialization of potential clean energy technologies Facilitating investments for technologies and supporting energy industries

Innovative financing mechanisms

Utility scale financing mechanisms

Non-commercial approaches for small scale off-grid projects

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