GLOBAL GREEN GROWTH INSTITUTE GREEN INDUSTRY MAPPING STRATEGY BUSINESS CASE – SOLAR PV IN EAST KALIMANTAN AUGUST 2014
GGGI – Green Industry Mapping Strategy
TABLE OF CONTENTS EXECUTIVE SUMMARY ............................................................................................................................ 3 Setting the scene................................................................................................................................. 3 The Opportunity.................................................................................................................................. 3 The challenges..................................................................................................................................... 3 The Recommendations ....................................................................................................................... 3 1.
Introduction .................................................................................................................................... 4
2.
Needs Analysis ................................................................................................................................ 5 2.1 Overview ................................................................................................................................. 5 2.2 Opportunity Analysis............................................................................................................... 5 2.3 Stakeholder review ................................................................................................................. 7 2.4 Situation Analysis .................................................................................................................... 9 2.5 Policy analysis ....................................................................................................................... 11 2.6 Size of the opportunity ......................................................................................................... 12 2.7 Current state of the market .................................................................................................. 14 2.8 Summary ............................................................................................................................... 14
3.
Cost benefit ................................................................................................................................... 15 3.1 Market segmentation ........................................................................................................... 15 3.2 Cost benefit by market segment........................................................................................... 16 3.3 Cost benefit of solar PV for investors ................................................................................... 16 3.4 Cost benefit of solar PV deployment .................................................................................... 18 3.5 Cost benefit of solar PV for Government .............................................................................. 19 3.6 Investment Required ............................................................................................................ 20 3.7 Economic benefit .................................................................................................................. 21 3.8 Environmental Benefits......................................................................................................... 21 3.9 Summary ............................................................................................................................... 23
4.
Key Challenges .............................................................................................................................. 24 4.1 Regulatory framework .......................................................................................................... 24 4.2 Investment environment ...................................................................................................... 24 4.3 Market and Project finance .................................................................................................. 25 4.4 Technical capabilities ............................................................................................................ 25 4.5 Summary ............................................................................................................................... 25
5.
Recommendations and next steps................................................................................................ 26 5.1 Levers to support utility solar PV investors .......................................................................... 26 5.2 Levers to support on-grid household solar PV investors ...................................................... 27 5.3 Levers to support off-grid solar PV investors........................................................................ 28 5.4 Other policy incentives ......................................................................................................... 29 5.5 Summary ............................................................................................................................... 29
References ............................................................................................................................................ 30 Annex 1: The solar PV value chain ........................................................................................................ 31 Annex 2: Solar PV performance analysis, East Kalimantan................................................................... 32 Annex 3: Solar PV cost benefit modelling assumptions........................................................................ 34 Annex 4: Grid emissions intensity ......................................................................................................... 35 Annex 5: Solar PV workshops................................................................................................................ 36
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EXECUTIVE SUMMARY Setting the scene The province of East Kalimantan has a wealth of resources, in particular oil, natural gas and coal, and the development of palm oil. At the same time, access to energy is not universal in East Kalimantan: the electrification rate remains low by national standards (63% of the population), while around 200,000 households rely on kerosene for cooking and 100,000 people use fuel-wood as fuel for cooking (Central Bureau of Statistics, 2011). With forecasts of electricity demand increasing 400% by 2025, there will be significant opportunities for new electricity generating capacity to be deployed.
The Opportunity East Kalimantan offers a strong business case for solar PV investment. Growing electricity demand, significant unmet electricity demand, and a substantial solar resource combine to provide an opportunity for significant solar PV deployment in East Kalimantan. Assisted by a Governmentbacked support mechanism, investment in solar PV could generate long-run returns of around 8% per annum1. A modest build program, delivering around 3% of East Kalimantan's electricity demand in 2025, would see investment of around $330m over 10 years. Opportunities for deployment companies and supply chain business would be generated, supporting additional economic activity in the East Kalimantan and wider Indonesian economy. Solar PV development at this scale would deliver meaningful environmental benefits: under the business case scenario evaluated, avoided CO2 emissions in 2025 would be around 250kt/year, with further avoided SO2, NOx and particulate matter emissions. Up to 5,400 additional jobs could be created, while total economic output of the province (GDP) would be higher following significant solar PV deployment than under a business-as-usual scenario.
The challenges While the Government supports solar PV development through a feed-in tariff (FIT) tendering process, the implementation of this policy creates significant barriers to participation, particularly at the local level. The uncertainty and additional cost associated with the FIT tendering process, the capacity constraints of the process, and the lack of support for household-scale and off-grid deployment act as severe barriers to investment. More broadly, electricity planning in East Kalimantan is focussed on grid expansion and traditional electricity generation (coal, oil and gas), with current plans not recognising a meaningful role for solar PV in East Kalimantan. This is unfortunate: with over 30% of the population not connected to the grid, and demand often exceeding supply, a broader view of the potential for other forms of electricity generation would be economically, environmentally and socially beneficial.
The Recommendations Creating the right conditions for solar PV deployment to flourish in East Kalimantan centres on simplification of the regulatory framework that applies to solar PV development. Key areas to consider include: a) reform of the current FIT tendering process to support for local businesses seeking to participate in the FIT tendering process; b) extending FIT support to household solar PV deployment; and c) supporting off-grid solar PV deployment through new incentive mechanisms. 1
This represents a particular investment scenario. Potential investors would need to conduct their own modelling to confirm the potential for investment in solar PV in Indonesia.
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1. Introduction The Government of Indonesia (GoI) has an ambitious plan to become one of the world’s developed countries by 2025, with a gross domestic product (GDP) of USD $4 - $4.5 trillion (MP3EI, 2011). In the meantime, the government has a domestic target to reduce greenhouse gas (GHG) emissions by 26% below business as usual levels by 2020, and by 41% through international support (GGGI, 2013). The growth pattern of Indonesia is heavily dependent on extractive industries, which poses a significant challenge for the government to simultaneously support strong economic growth whilst also delivering significant emissions reductions. In October 2011, Indonesia launched the National Action Plan for the Reduction of GHG emissions (RAN-GRK) as a work plan in accordance with the national target to reduce emissions by 26% from BAU by 2020. In order to facilitate this effort, the government has assessed and revised industrial abatement policies in renewable energy, waste management, and energy efficiency. As one of the many efforts to combat greenhouse emission in Indonesia, the Green Industry Mapping Strategy (‘GIMS’) was jointly developed between GGGI and the Indonesian government in 2012, to assess the opportunity for accelerated investment in a range of green technologies in Indonesia, including the additional environmental and economic consequences against a business as usual forecast. GIMS forms Component 1C of a broader green growth program between GGGI and the Indonesia Government, the GoI – GGGI Green Growth Program. The Green Growth Program is a comprehensive program to develop a green growth framework and a suite of tools that can be used to help stream green growth into existing planning and investment appraisal processes (GGGI, 2013). By working closely with the central government, together with provincial administrators of East and Central Kalimantan, the Green Growth Program has helped identify and prioritise green growth opportunities along with a number of criteria related to both sustained economic growth and GHG emission reduction potential (GGGI, 2013). This business case for solar PV deployment in East Kalimantan is an output of the GoI-GGGI Green Growth Program. The business case sets out the opportunity for solar PV deployment in East Kalimantan, and examines the benefits of solar PV from a range of stakeholder perspectives. Supporting a program of solar PV deployment in East Kalimantan could unlock significant new investment, deliver environmental and economic dividends, and assist in providing electricity to the 30% of East Kalimantan that does not have access to grid electricity. To achieve these benefits, reform to current solar PV policies will be needed: current barriers to investment in solar PV would need to be addressed for utility investors, on-grid and off-grid electricity users to support significant new solar PV deployment. This business case identifies the limitations of current support mechanisms, and suggests areas for potential reform that would support the wider deployment of solar PV in East Kalimantan.
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2. Needs Analysis 2.1
Overview
Access to electricity is a fundamental driver for economic & social development, and environmental objectives. Electricity use per capita is highly correlated to wealth (GDP per capita), highlighting the link between electricity use and economic development (Figure 1). Access to electricity enables children to study after dark, farmers to pump water for crops, and foods and medicines to be refrigerated (SEA, 2014). Electricity can also displace other forms of energy such as wood, reducing pressure of forest reserves as well as the labour associated with fuel collection.
Electricity use per Capita
100,000
10,000
East Kalimantan Indonesia
1,000
100
10 10
100
1,000
10,000
100,000 1,000,000
GDP per Capita Figure 1: Relationship between per-capita GDP and electricity demand (World Bank, 2011)
Indonesia currently has a relatively low per-capita demand for electricity, placing it in the lowest 20 percentile of per-capita electricity users in the world: while East Kalimantan has a significantly higher GDP per capita than the Indonesian average, its per-capita electricity demand is below that of other countries with similar wealth. Combined with low rates of access to electricity, these data suggest that there is a significant opportunity to both increase access to electricity, and increase electricity use, in East Kalimantan.
2.2
Opportunity Analysis
The opportunity for solar PV in East Kalimantan reflects a combination of the characteristics of East Kalimantan, the advantages of solar PV, and the local and national impact of solar PV deployment. Characteristics of East Kalimantan East Kalimantan presents a range of characteristics that align with solar PV deployment, including: 
Low rate of electricity grid connection: A significant proportion of East Kalimantan does not have access to grid electricity. Solar PV offers an alternative to further expansion of the existing grid network, particularly in remote or low population density areas.
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High local costs of electricity production: East Kalimantan is one of the higher cost regions for electricity generation in Indonesia, with its reliance on diesel for a majority of electricity generation increasing subsidy costs to government. High per-capita income: with the second-highest per-capita income in Indonesia, there is the potential for households to invest directly in solar PV deployment Existing shortfall in electricity generation: blackouts occur in East Kalimantan, highlighting the immediate need for additional electricity generating capacity Low investment from IPP’s: East Kalimantan has one of the lowest rates of electricity generation by independent power producers in Indonesia (Relatively) small population across a large area: with low population densities, particularly in rural areas, grid expansion will become increasingly expensive Strong and consistent solar resource: straddling the equator, East Kalimantan has a strong solar resource that varies little by season
Advantages of solar PV deployment The characteristics of solar PV deployment offer a number of advantages over other technologies, including:
On- or off-grid application: solar PV can deliver off-grid electricity in locations that do not have access to electricity, as well as integrating with electricity grids in urban environments Modular deployment: the size of the solar PV installation can be scaled to the demand. Additionally, the modular nature of solar PV makes transporting the equipment viable in extremely remote areas Low maintenance requirements: with no moving parts, or fuel requirements, solar PV has low maintenance requirements Supports quality of life: silent operation, no odour, no liquids to be spilt and no additional land requirements when deployed on existing roofs (e.g. in urban areas) contributes to the quality of life of people using solar PV Cost advantages: while having an up-front capital cost, solar PV has no on-going fuel costs and low operational costs. Low emissions: solar PV does not produce GHG emissions in operation
Local and national impacts The deployment of solar PV at scale would deliver a range of benefits to East Kalimantan and Indonesia, including:
Contributing to energy security: Indonesia is a net importer of oil; with oil contributing to electricity generation both on-grid and off-grid, solar PV has a role to play in reducing Indonesian reliance on oil imports and associated costs Avoided costs: Indonesia is currently pursuing a grid expansion program to provide access to electricity for a greater proportion of the population. While access to grid electricity has improved, further grid expansion to increasing remote areas of the country could significantly increase grid expansion costs. The deployment of solar PV can avoid the expense of further grid expansion to areas that do not currently have access to electricity (or rely on local diesel generation), and also avoid grid upgrade costs for urban areas where demand is rising.
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Economy-wide benefits: the deployment of solar PV will create local value associated with the deployment of solar PV and subsequent generation of electricity. In addition, reduced reliance on alternative electricity sources such as diesel will improve Indonesia’s balance of payments.
The solar PV value chain The value chain for solar PV extends from raw material extraction through to manufacturing, finance and deployment (see Annex 1): this business case focusses on the value that would arise from deployment of solar PV in East Kalimantan. By focussing on deployment, solar PV meets the provincial opportunity for electricity generation, investment and environmental benefit. However, by supporting solar PV deployment, East Kalimantan will generate a “market pull” for additional solar PV units, indirectly supporting the broader value chain. The degree to which this creates value in East Kalimantan or Indonesia will be contingent on the competitiveness of local versus imported components. Through discussions with local manufacturers, it is clear that domestic production costs are significantly above import costs for key components: this is implicitly recognised in the structure of the FIT tender process, which offers differential FIT rates depending on the proportion of local content (see Section 2.5). Expansion of the domestic solar PV manufacturing industry would create economic impacts beyond those estimated for deployment in this business case.
2.3
Stakeholder review
The successful deployment of solar PV in East Kalimantan will involve a wide range of stakeholders, including business associations, investors, government, donors and public and private companies. Understanding the role of that key stakeholders that will play in the future deployment of solar PV in East Kalimantan will facilitate development of the sector: these roles are set out below. Government landscape Ministry of Energy and Mineral Resources The Ministry of Energy and Mineral Resources (ESDM) is the overarching government body for the energy sector. ESDM oversees the electricity master plan, which lays out the future goals and targets for the sector. The Directorate General of Renewable Energy and Energy Conservation, which sits under the ESDM, is the chief regulator for renewable energy. In 2013, ESDM issued Regulation of ESDM No. 17 of 2013 (Reg. 17/2013) to stipulate (i) new procedures for purchase of power from solar photovoltaic power projects in Indonesia which require developers to bid in capacity quota tenders; and (ii) feed-in-tariff for solar photovoltaic power projects at the cap of US$0.25/kWh, or US$0.30/kWh if the photovoltaic module contains 40% or more local components (see Section 2.7 for further details). Perusahaan Listrik Negara (PLN) PLN is the state-owned electricity company. It owns most of the generation assets, transmission and distribution infrastructure and is the only "authorised agency of electricity business" permitted to provide electricity to the public.
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GGGI – Green Industry Mapping Strategy Ministry of Finance The Ministry of Finance plays a key role in reforming fiscal transfer and revenue policy instruments in Indonesia. International experience demonstrates that fiscal policies can provide effective levers for the promotion of solar PV. Currently, the Ministry is developing fiscal policies to promote renewable energy. These policies include tax, expenditure, and financing policies. National Development Planning Agency (BAPPENAS) In accordance with Presidential Decree No. 4 and No. 5 of 2002 on the organization and operating of the State Minister for National Development Planning/National Development Planning Agency, the main task and function of BAPPENAS is to implement national development planning and support human resource composition and education. Ministry of Industry (KP) KP administers industry and trade activities such as the registration of companies, metrology, business and market development domestically, and conducts research and development for the enhancement of industry and trade. In solar PV, they play a key role in the development of the manufacturing and deployment markets. East Kalimantan Regional Planning Agency (Bappeda Kaltim) Bappeda Kaltim is responsible for regional planning and development in East Kalimantan. Bappeda Kaltim has recognized that the province’s current GDP drivers – oil, coal, and gas – will diminish in coming decades, and is working to develop a new economic opportunities based on renewable resources, secondary processing, and technology. Private Sector landscape The role of the private sector is crucial in the development of solar in East Kalimantan; however the lack of deployment in Indonesia means that not many local companies exist. In terms of the manufacturing industry, there do exist some small local manufacturers, however they are faced with increased competition from China and downward pressure on costs to production. Investors and Financial Institutions There is an extensive network of rural branches of Indonesian banks, providing the geographically dispersed access to finance. However, their limited experience with financing solar PV technology means that these projects are often not considered for the provision of capital. Additionally, there is interest among international investors and donor organisations to support the deployment of solar PV. However, the experience to date has involved small scale pilot programs, including a programme run by UNEP called the Indonesia Solar Loan (ISL) Programme. Whilst smaller programmes have experienced some success, studies indicate that stronger government support is required to encourage larger scale adoption. Deployers of solar PV There are currently vendors operating in both solar PV and solar hot-water systems deployment. However, most of the existing vendors operate under government contracts. These companies face the issue of high initial investment costs, coupled with high per unit market development and transportation costs (especially in remote areas).
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GGGI – Green Industry Mapping Strategy Manufacturers In regards to manufacturing, Indonesian regulation requires certain electrical goods and services to contain specified amounts of local elements. The amount depends on the source of energy, the size of project and the type of technology used. With solar PV technology, components for central systems such as hybrid, on grid and pumping systems are mainly imported from China and assembled in country. In addition to the stakeholder groups discussed here, two workshops were held to syndicate the solar PV opportunity assessment with key stakeholders in East Kalimantan and Jakarta. A summary of the workshops, together with attendees, is provided in Annex 5.
2.4
Situation Analysis
East Kalimantan The Indonesian province of East Kalimantan is located on the eastern coast of the island of Kalimantan, approximately 1,300km north-east of Jakarta. East Kalimantan straddles the equator: its borders North Kalimantan, South Kalimantan and Central Kalimantan (all Indonesian provinces), while its western border is with Sarawak (Malaysia). East Kalimantan is divided into six regencies, which are further sub-divided into 89 districts. Population East Kalimantan has a population of 3.05m, with almost 60% of the population living in cities. In rural areas, the population density is around 25 people per square kilometre, the second-lowest population density outside of Papua. The distribution of East Kalimantan’s population is biased towards coastal and low-lying areas, including the main cities of Samarinda (capital), Balikpapan and Bontang (Figure 2). Solar energy resource East Kalimantan has a substantial solar resource, with solar energy levels in major population centres such as Balikpapan, Samarinda and Bontang averaging around 1,600-1,700kWh/m2 per year (Figure 3). This is higher than that found in cities such as Sydney, Madrid and Rome, and substantially higher than in Germany and the UK (where solar PV has been extensively deployed). The solar resource in East Kalimantan shows small changes in month to month electricity generation potential. This provides for a relatively constant electricity production pattern across the year (Figure 4), with amorphous silicon solar PV panels delivering around 8.5% more energy over the year than an equivalent-sized crystalline silicon solar PV. (Refer to Annex 2 for site-specific electricity production estimates for Samarinda, Kongbeng & Barong Kongkok.)
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Figure 2: Population distribution of East Kalimantan (SolarGIS, 2014)
Figure 3: Distribution of annual solar energy, East Kalimantan (solarGIS, 2014)
Electricity generation by month (kWh/kWp)
160 140 120 100 80 60 40 20 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Month c-Si panel kWh/kWp
a-Si panel kWh/kWp
Figure 4: Monthly generation of electricity from a 1kWp solar PV system in Central Balikpapan, East Kalimantan 76112, Indonesia (solarGIS, 2014)
Electricity demand and supply Total electricity demand in East Kalimantan was 650kWh per person in 2012, slightly below the Indonesian average of 725kWh/person (PLN, 2012), with households accounting for 60% of all electricity sales by PLN in East Kalimantan. Grid electricity is available to 63% of the people living in East Kalimantan, with electricity demand from grid connected households being the second-highest of all provinces in Indonesia (Jakarta is the highest)2. This high demand for electricity services is likely driven by the provinces high per-capita income: with a GRP of IDR101m per capita in 2008, East Kalimantan generates around 6% of Indonesian GDP despite having just 1.5% of the population. Grid electricity is delivered to south-eastern parts of East Kalimantan via a transmission network that links a range of demand centres and generators: in addition, an islanded link has been established in the north-east of East Kalimantan (Figure 5).
2.5
Policy analysis
The policy environment for the deployment of solar PV has been slow to progress since the 2025 Target Presidential Regulation No. 5/2006, which specifies targets to increase the share of renewable energy to 17% by 2025. However, the recent introduction of MEMR No. 17 of 2013 demonstrates that the opportunities for solar PV do exist.
2
Note that PLN has not released an update of its data for East Kalimantan since North Kalimantan was formally inaugurated on 15 April 2013. Electricity data here refers to the combined area of East Kalimantan and North Kalimantan.
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Figure 5: Transmission network and major electricity generating assets, East Kalimantan (PLN, 2011)
MEMR Regulation 17/2013 Introduced in 2013, MEMR No. 17 of 2013 was established to define new procedures for the purchase of power from solar photovoltaic power projects in Indonesia. This tariff applies to large scale on-grid projects only, and requires developers to bid in capacity quota tenders. It also establishes a feed-in-tariff for solar photovoltaic power projects at the cap of US$0.25/kWh, or US$0.30/kWh if the photovoltaic module contains 40% or more of local components. The policy also introduces a range of restrictions with the tendering process, and also limits those who can participate in a bid to Indonesian legal entities.
2.6
Size of the opportunity
There are two main markets for the deployment of solar PV in East Kalimantan: 

Off-grid applications: where solar PV is used to generate electricity in locations that currently lack access to electricity, or to displace existing local generation such as diesel-based generators; and On-grid applications: where solar PV is used to supplement existing centralised electricity generation.
The following estimates of the opportunity for solar PV in East Kalimantan reflect the physical constraints to the opportunity: population, demand levels, grid connection and estimates of uptake potential. This opportunity analysis does not include policy constraints (see section 2.5), which will have a major bearing on the solar PV opportunity in East Kalimantan. Solar PV in East Kalimantan
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GGGI – Green Industry Mapping Strategy Off-grid opportunity With 37% of the East Kalimantan population lacking access to grid-based electricity, there is significant potential market for electricity to be met by off-grid solutions. The demand for electricity that is not currently met by grid-based generation is estimated at 800GWh/y3 in 2012: this demand is either being met by non-grid generation (typical diesel generators), or is going unmet. Were solar PV to meet one quarter of this demand for off-grid electricity, the current market would be around 90MW of solar PV capacity. To 2025, the number of people off-grid is forecast to halve, while per-person demand increases: overall, off-grid demand for solar PV is forecast to increase to around 110MW. On-grid opportunity East Kalimantan’s current grid reaches around 63% of the population, and meets a household electricity demand of 1,400GWh/y (total East Kalimantan electricity demand was 2,334GWh/y in 2012). On a per-person basis, this is the second-highest household electricity demand in Indonesia: despite this, blackouts are a common occurrence (USA Department of State, 2012), suggesting that additional electricity demand from grid-connected users is going unmet. Were solar PV to meet 2.5%4 of current grid-connected household electricity demand in East Kalimantan, the current market would be for around 35MW of solar PV capacity. To 2025, the number of grid-connected households is expected to rise, while per-person demand rises: by 2025, around 110MW of solar PV would be required to meet 2.5% of East Kalimantan’s household electricity demand. Uncertainties The estimates of opportunity size provided above represent one potential scenario for the deployment of solar PV in East Kalimantan. Key uncertainties are set out below:
Off-grid demand: per person demand for off-grid household electricity may be lower than on-grid demand levels, as off-grid households may have lower incomes and less need for electricity services. At the same time, a significant roll-out of solar PV for off-grid households could avoid future grid expansion, resulting in a higher proportion of people remaining offgrid in the future (and thus contributing to additional demand) On-grid demand: per person demand for on-grid household electricity could be affected both positively and negatively by future economic growth rates. At the same time, slower grid expansion would moderate the growth rate for grid electricity from households Household electricity demand: solar PV deployment has been scaled against household electricity demand. However, household demand represents around 60% of total grid electricity demand: were grid connected solar PV to contribute to total electricity demand would materially increase the potential role of solar PV in East Kalimantan. Additionally, the occurrence of blackouts suggests that current electricity demand levels do not satisfy existing demand for electricity, pointing to further opportunity for additional generation
3
Based on modelled off-grid household demand only. Assumes that per-person off-grid demand is equal to the average on-grid per person household demand for Kalimantan. 4
By comparison, solar PV already meets around 5% of total annual electricity demand in Germany, and exceeds this level in other smaller projects.
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2.7
Penetration of solar PV: the estimate of potential contribution from solar PV for grid-based applications is considered conservative, as there are examples of higher penetration levels having already been achieved (e.g. in Germany). Achieving higher penetration levels would materially increase the market for solar PV in East Kalimantan
Current state of the market
Nationally, solar PV accounted for 0.01% of electricity production in 2012 (Observer, 2013), which equates to around 10MW nationally. East Kalimantan had around 2MW of grid-connected solar PV in 2012; forecasts suggest that no new solar PV development is expected before 2040, with the bulk of new and replacement generation anticipated to be provided by new coal-based thermal plant (RUED, 2013). Note: At an average of 1,650kWh/m2 per year, solar PV panels covering around 13km2 would generate electricity equivalent to East Kalimantan's entire current electricity demand5: this represents 0.009% of East Kalimantan's land area of around 139,500km2. Government support for solar PV deployment At the same time, the GoI has announced new policy measures to support solar PV (and other electricity generators), including feed-in tariffs and tendering for new projects via PLN. The Minister of Energy and Mineral Resource issued Regulation of MEMR No. 17 of 2013 to provide for: a) new procedures for purchase of power from solar photovoltaic power projects in Indonesia which require developers to bid in capacity quota tenders; and b) feed-in-tariff for solar photovoltaic power projects at the cap of US$0.25/kWh, or US$0.30/kWh if the photovoltaic module contains 40% or more local components. Further, the Regulation also provides that PLN must only purchase solar PV electricity from developments that have been approved through a tendering process that is managed by the Directorate General of Renewable Energy and Energy Conservation. This process is subject to an annual cap on capacity, and has numerous hurdles to overcome including: significant administrative and technical requirements ahead of the bid, a bid guarantee of 2% of total investment (to be provided by a local bank), deposit of 20% of total investment in a local bank within 15 days of winning the bid (Hadiputranto, Haddinoto & Partners, 2013). Importantly, the bid process establishes the GoI feed-in-tariffs (set out above) as being ceiling rates, with winning tenderers offering at or below these rates to be successful.
2.8
Summary
The environmental, social and economic landscape of East Kalimantan provides an opportunity for the development of solar PV, and for it to contribute to the economic and environmental development of the province. The following section considers the business case for pursuing this opportunity.
5
Assumes a conversion efficiency of 15%. This does not account for the timing of electricity production and demand.
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3. Cost benefit The cost benefit of solar PV development in East Kalimantan is dependent on a range of factors: most important of these are physical and policy setting (Section 2) and the perspective of the stakeholder. In this section the cost benefit is set out for a range of stakeholders in East Kalimantan: Section 3.1 identifies the different market segments, with the following sections setting out the cost benefit for these different market segments.
3.1
Market segmentation
The opportunity for solar PV deployment in East Kalimantan is spread across four distinct segments of investors and businesses (Table 1), with each segment facing particular opportunities, challenges and constraints. Access to the GoI FIT is highly important in determining the cost-benefit of solar PV (Table 1): this is because subsidised electricity tariffs in Indonesia make competing against gridbased electricity non-economic for solar PV. For off-grid applications, solar PV will be a preferred option where the alternative source of electricity is higher cost (e.g. diesel-based generation). Table 1: Business case for investing in solar PV, by market segment.
Market segment
With a FIT
Without a FIT
Utility solar PV investor
Yes
No
On-grid household solar PV investor
Yes*
No*
Dependent on cost of alternative generation*
Dependent on cost of alternative generation*
N/A
N/A
Avoided subsidy costs
Avoided subsidy costs
Off-grid solar PV investor Installer Government
*Subject to capital availability. See Barriers section. N/A: not applicable.
Utility solar PV investor The utility solar PV investor segment refers to those businesses that develop on-grid solar PV power stations as part of the FIT tendering process that was launched in Indonesia in late 2013. Currently, investors targeting this segment of the market are constrained by the capacity limits that form part of the tendering process: in the first tender round that opened on 4 November, 140MW of solar PV development potential across 80 sites in Indonesia was made available. On-grid household solar PV investor Households represent a large but currently inactive market segment for solar PV in East Kalimantan. Households offer a clear opportunity for solar PV development: the solar PV capacity delivers electricity at the point of demand; grid connection allows solar PV to integrated into the existing electricity network; and by mounting panels on existing roofs, no additional land is required for solar PV development. In countries with large amounts of solar PV (e.g. Australia, Germany) the vast majority of this capacity has been installed by households on domestic roofs. However, current requirements in Indonesia prevent this segment of the market from growing.
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GGGI – Green Industry Mapping Strategy Off-grid solar PV investor Off-grid solar PV offers an opportunity for both households and other remote sources of demand access to electricity at a cost that is lower than typical alternatives (e.g. diesel-based generation). The cost-effectiveness of solar PV in these circumstances will be influenced by the level of subsidy included in alternative fuels such as diesel: where high subsidies are present, extension of the FIT to off-grid solar PV could be used to correct the relative pricing of electricity from different sources. Solar PV installer Installers provide a service to solar PV investors: they deploy solar PV panels and associated equipment for companies and individuals that wish to own and operate solar PV systems. Because of this, the business case for PV installers is dependent on the scale and timing of deployment, and not (directly) on the performance or economics of the solar PV system itself. Government Solar PV offers GoI an alternative form of electricity generation that could reduce costs, and deliver secondary benefits include environmental benefits, job creation (particularly in regional areas) and reduced dependence on energy imports (particularly oil).
3.2
Cost benefit by market segment
The cost benefit of solar PV is assessed differently for different stakeholders:
For investors in solar PV: the cost benefit of solar PV reflects the net profitability of investing in solar PV electricity generating capacity; For installers of solar PV: the cost benefit of solar PV reflects the gross margin between the cost of installation and the price charged for installation. For GoI: the primary benefit from solar PV deployment arises from reduced energy subsidy
costs for government
3.3
Cost benefit of solar PV for investors
Investment in solar PV delivers a return through either payment for the electricity generated, or the avoidance of costs associated with alternative forms of electricity generation. In Indonesia, the GoI offers a feed-in-tariff (FIT) of USD0.25/kWh for electricity from solar PV systems, rising to USD0.30/kWh for systems incorporating a significant proportion of locally produced components (Section 2.5). The lifetime cost of electricity generation from solar PV systems is subject to a number of variables, many of which change by country or region. Solar PV’s cost structure, with high up-front capital costs and minimal operational costs, makes cost estimates particularly sensitive to assumptions such as capital costs and discount rates (see Annex 3 for base assumptions). Based on the assumptions in Annex 3, the Internal Rate of Return (IRR) for new solar PV projects is estimated at 8.3% for projects using imported components (based on an installed capital cost of USD2,600/kW), and 8.0% for projects using local components (based on an installed capital cost of USD3,200/kW ): the sensitivity of these IRR figures to capital cost is shown in Figure 6. The project lifetime cash-flow for a 4kW solar PV system shows that with high up-front costs, access to capital is a key consideration for solar PV investments (Figure 7). Based on the assumptions in Annex 3, the project would break even in year 9-10 (discounted cash flow basis), emphasising the importance of long-term certainty in revenuegeneration. Solar PV in East Kalimantan
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Figure 6: Sensitivity of IRR to capital cost for both imported and domestically sourced components
Figure 7: Cash flow for a typical solar PV investment
The above cost benefit analysis demonstrates that solar PV offers a viable investment option under the right investment conditions. However, the viability of solar PV investment depends on who is carrying out the investment: the cost benefit of solar PV is highly dependent on the individual carrying out the investment, and the conditions under which the investment is made.
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3.4
Cost benefit of solar PV deployment
In many countries, there is a separation between investors in solar PV capacity, and the companies that deploy the solar PV capacity. This is particularly apparent in the household solar PV sector in countries such as Germany, Australia, the UK, USA, Italy and Spain, where household investment in solar PV is the main driver of increasing solar PV installed capacity. In these cases, householders (investors in solar PV) pay a third party to source and install the solar PV system on their roof (installers). The profitability of installers is unrelated to the operation of the solar PV, other than for households which will not invest in solar PV unless it is economic to do so. For installers, the business case for deployment is the gross margin that they can make on each installation at the time of deployment: as with other industries, gross margin will be higher where demand exceeds supply (of deployment companies). For solar PV, government policy also plays a role: should subsidy make solar PV investment particularly attractive, investors may tolerate higher deployment costs (i.e. higher profitability in the deployment sector) as it does not undermine the business case for investment in solar PV. The most recent data for solar PV deployment in Australia shows that gross margin for installers is around 16% of the total cost of a solar PV installation (Figure 8). Two factors that are likely to alter this in Indonesia are the availability of low-cost labour (increase gross margin) and higher transport costs (decrease gross margin): we assume that these effects are broadly equal, maintaining the gross margin for installers at around 16%.
Figure 8: Cost structure of solar PV deployment (Green Energy Markets, 2013)
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3.5
Cost benefit of solar PV for Government
Indonesia provides grid-based electricity at a subsidised rate, and meets the shortfall between electricity generation costs and tariff revenue via the national budget. For this reason, a comparison of electricity generation costs from a GoI perspective is important in establishing the relevance of solar PV for East Kalimantan.
Consumer subsidy
Generator subsidy
Consumer subsidy
For East Kalimantan, the average cost of electricity generation6 has been estimated at around USD0.17-0.20/kWh (Veldhuis & Reinders, 2013). Diesel is the dominant (and marginal) source of electricity generation, with fuel costs estimated at USD0.24/kWh and capital costs of USD0.55/kWh, while the average tariff for electricity is around USD0.06/kWh (Figure 9). This results in an average subsidy of around USD0.22/kWh for diesel-based generation.
Figure 9: Comparative costs of electricity generation in East Kalimantan (Source: (Indonesia Investments, 2013)
By comparison, the long-run cost of generating electricity by solar PV in East Kalimantan is significantly lower, around USD0.12/kWh (excluding grid costs and profit). By providing a solar PV FIT of USD0.25/kWh, the GoI is paying a net subsidy to solar PV electricity generators of around USD0.13/kWh, and a further consumer subsidy of USD0.045/kWh (Figure 9). This means that the overall subsidy paid by government for electricity from solar PV is around 4.5 cents per kWh less than for diesel-based generation. In addition, solar PV avoids grid expansion and upgrade costs, while the cost of electricity generation from solar PV is anticipated to fall further in coming years.
6
The cost estimates given here exclude an emissions cost. For modern coal-based electricity generators, an emissions cost of USD20/tCO2 is equivalent to an additional USD0.02/kWh electricity generated.
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3.6
Investment Required
Solar PV Investors For individual solar PV investors, the modular nature of solar PV means that the investment required to deploy solar PV systems is directly correlated to the solar PV capacity being developed. To achieve the scale of deployment set out in Section 2.4, investment of around USD330m would be required to be invested in solar PV deployment by 20257. This could be achieved through initial deployment in 2015, rising rapidly to 2020, with a relatively stable investment profile from 2020 to 2025 (Figure 10). This investment level reflects the use of imported components: investment costs will rise where domestic components are used, due to their higher cost.
Figure 10: Annual investment and generation scenario for East Kalimantan, with investment separated between off-grid and on-grid deployment.
Solar PV Installers With the gross margin of solar PV deployment companies proportional to investment value and deployment quantity, the profitability of the deployment sector would follow a similar profile to aggregate off- and on-grid investment profile shown in Figure 10. By 2025, gross margin for solar PV deployment companies in East Kalimantan would be around USD8m/year.
7
Assumes continuing cost reductions through to 2025, with gross margin maintained at current (relative) levels. Uptake profile follows the national profile.
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3.7
Economic benefit8
The deployment of solar PV in East Kalimantan will create economic impacts that extend beyond the solar PV sector itself. The GDP, value-add and employment impacts of the East Kalimantan solar PV scenario presented here are set out below for 2025. Due to the long-term nature of solar PV investment, additional economic activity will occur after 2025 from investments made prior to 2025: these additional impacts post-2025 are not included in this analysis. GDP impact The deployment of solar PV generating capacity has a positive impact on GDP, compared to a business-as-usual (BAU) forecast. GDP in 2025 was modelled to be around 1% greater in 2025 with the deployment of solar PV, with coal mining growing at a slightly lower rate through to 2025 as solar PV displaces some electricity generation from coal-fired generators. The increase in GDP is expected to occur mostly in rural areas, with around 60% of additional GDP arising from increased rural activities. Value add impact Aligned with the net increase in GDP, the deployment of solar PV in East Kalimantan would be expected to deliver a net increase in value-add in the province. Overall, value add is modelled to rise around 7.7%, suggesting a higher value from solar PV than from other electricity generation activities that it replaces. Again, the increase in value add is expected to occur mostly in rural areas, with around 60% of additional GDP arising from increased rural activities. Employment Impact Deployment of solar PV creates additional jobs in the economy. A majority of these jobs are located in the province in which the deployment occurs, as they involve physical activities at the site of deployment. As a result, an emphasis on off-grid solar PV deployment will tend to generate employment in rural areas. The solar PV scenario evaluated here is forecast to generate around 5,400 additional jobs in East Kalimantan: 3,600 (66%) of these would be directly related to solar PV deployment, with a further 1,800 indirect jobs being created in associated industries. Around 55% of total additional jobs would be expected to be created in rural areas.
3.8
Environmental Benefits
The direct environmental benefit of solar PV deployment in East Kalimantan is reduced CO2 and other emissions. Under the East Kalimantan scenario presented here, solar PV would avoid the release of around 253ktCO2/y by 2025 (Figure 119), with off-grid displacement of diesel contributing around 55% of the total emissions abatement10. Reductions in SO2 emissions (reduced by 95kt/y), nitrous oxide emissions (reduced by 79kt/y) and particulate matter (reduced by 14kt/y): refer to Figure 12. 8
All data presented in Section 3.7 is based on modelling carried out by the University of Indonesia, based on data output from the Deep Dive model for solar PV developed as part of this project. Original data from the University of Indonesia is presented separately in the report Green Industry Mapping Strategy: Macro-economic Impact Analysis (LPEM FEUI, 2014) 9
See Annex 4 for the grid emissions intensity data used to determine avoided grid emissions from the grid-connected solar PV capacity in the East Kalimantan scenario 10
Assumes diesel emissions factor of 0.91tCO2/MWh, grid emissions factor as per East Kalimantan fuel and generation forecast to 2025, and diesel displacement ratio of 90% for off-grid applications.
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1.20
300,000
1.00
250,000
0.80
200,000
0.60
150,000
0.40
100,000
0.20
50,000
0.00
Grid emissions intensity (t/MWh)
Grid emissions intensity (t/MWh)
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0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Year Emissions avoided - offgrid tCO2/y
Emissions avoided - ongrid grid tCO2/y
Grid emissions intensity tCO2/MWh Figure 11: Avoided CO2 emissions from on-grid and off-grid solar PV deployment, East Kalimantan
Figure 12: Avoided SO2, NOx and particulate matter emissions from electricity generation due to solar PV development, East Kalimantan
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GGGI – Green Industry Mapping Strategy Other environmental benefits A wide range of environmental benefits may accrue from the deployment of solar PV in East Kalimantan. For example, solar PV reduces the need for fossil fuel consumption, which in turn reduces the environmental effects of mining and combustion of fuels (e.g. thermal pollution of rivers). Land area and land-use On an area basis, solar PV generates 10-40 times the energy of biofuel crops; in East Kalimantan, solar PV would generate around 11x the amount of electricity per unit area as could be generated from biodiesel. Combined with the ability of solar PV to be installed on a dual-use basis (e.g. it can be installed on existing buildings, occupying no net additional land), solar PV can be a very land areaefficient form of electricity generation. Comparison with other renewables The current forecast for electricity generation in East Kalimantan includes a significant role for diesel (or biodiesel) in generating electricity. Were this forecast of electricity from solar PV to displace generation from biodiesel, it would remove the need for 18,000ha of forest land to be converted to palm oil plantation: this creates opportunities for conservation and (potentially) additional tourism activities. Alternatively, were solar PV generated electricity to avoid the need for fossil diesel generation, this would reduce East Kalimantan’s (and Indonesia’s) oil import requirements and costs. Alternatively, long-term capacity forecasts for East Kalimantan (RUED, 2013) suggest that around 200MW of new hydro-based electricity generating capacity will be developed by 2025. The solar PV scenario presented in this business case would generate electricity equivalent to around 95% of the output of the forecast hydro capacity.
3.9
Summary
Deployment of solar PV offers a cost-effective opportunity for electricity generation in East Kalimantan. Deployment at a scale set out here would result in additional economic and environmental benefits to East Kalimantan, when compared against a business-as-usual development approach. A combination of factors, including grid connection rates, solar radiation levels, electricity demand levels and other factors, combine to make solar PV a viable contributor to electricity generation in East Kalimantan. However, delivering this opportunity faces challenges: Section 4 sets out the key challenges, while Section 5 proposes reforms that would unlock the opportunity for solar PV investment and installation in East Kalimantan.
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4. Key Challenges The relatively slow uptake of solar PV in East Kalimantan highlights that they are some key challenges that must be overcome in order for the country to fully utilise its abundant solar resource. The barriers to the deployment of solar PV stem from both underlying economic factors and non-economic factors; namely regulatory, investment, market and technical barriers.
4.1
Regulatory framework
4.2
An appropriate solar PV FIT: Despite MEMR issuing a new regulation on solar power Feed-InTariffs (Reg. 17/2013), this mechanism is still constrained by the need to go through a tender process before PLN will be able to purchase power from solar PV. This ultimately restricts larger scale roll-out of solar PV. If the FIT was more widely accessible as it is in many other countries, and PLN were obliged to purchase power from Solar PV power producers, this would create greater incentives for solar power development. In addition, in order to incentivize small scale, off grid solar development, the FIT should be ‘deemed’, i.e. the FIT is equivalent to the expected generation per annum. Reliable off-take agreement: The current regulations for solar off-take agreements do not provide developers with great certainty as to their offtake arrangements. Without having any visibility on what exposures they would be taking on with PLN, it makes it very difficult to set an acceptable bid tariff. Solar development will not reach the scale targeted by the government until developers are given greater certainty. Efficient and transparent interaction with governmental authorities: Clarity and long term certainty is required in regulations that apply to solar PV deployment. In many circumstances, especially where international companies are concerned, deployment will not attract investment unless certainty is given on the regulations and procedures. Companies will be reluctant to invest if policies are negotiable and/or open to interpretation. Achieving social objectives: one of the key challenges for the deployment of solar PV is created by the subsidisation of fuel and electricity prices. Traditionally, the GoI has set the retail tariff payable for electricity, which is often less than the cost of production. The movement towards a market based consumer price is a key goal for the Indonesian power sector, and will be crucial to larger scale deployment of solar PV.
Investment environment
Sovereign risk: this is a key factor considered by international investors. Although there is growing confidence in Indonesia as a whole, factors such as corruption and institutional risks will always deter risk adverse investors. Investment barriers: The initial investment required for solar PV is significantly larger than that needed for fossil fuel based power generation sources, thus reducing the financial attractiveness of solar energy to investors. Reliable taxation: The tax burden on initially large capital outlays can be a barrier for many investors. By introducing schemes such as an accelerated depreciation benefit, this can help reduce the tax burden on Independent Power Producers.
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4.3
Market and Project finance 
4.4
Technical capabilities 
4.5
Financing options: A variety of debt/equity options need to be made available in order to spur investment in solar PV, ideally from domestic and foreign lenders, including commercial banks. Although financial institutions in Indonesia have extensive networks with rural branches throughout the country, most have limited experience with solar PB project finance. Some solar developers have utilised innovative financing mechanisms such as a Sukuk (Islamic finance), however these are in the minority.
Design, installation, operation and management: PV technology has yet to be implemented on a large scale in Indonesia, therefore a lack of knowledge and confidence exists in regards to the deployment of solar PV. In addition, the lack of knowledge of solar PV at the local community level creates a degree of scepticism, which encourages a movement to continue using diesel power generation due to its reliability. Education on the benefits of solar PV is required to ensure adequate uptake.
Summary
Whilst the challenges to greater levels of solar PV deployment appear to be vast, most are not unique to East Kalimantan and also not unique to the technology. The experience of other countries has demonstrated that levels of solar PV deployment can significantly rise with well-planned policy. These policy tools are described in the following section.
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5. Recommendations and next steps The business case presented here demonstrates the economic, social and environmental opportunity for solar PV in East Kalimantan: key pillars for pursuing a green growth strategy. With the right investment environment, developers and business entrepreneurs will be attracted to the opportunity presented here. However, this investment is unlikely to be forthcoming in the current investment conditions. In this section, reform options for utility solar PV investors, on-grid household solar PV investors and off-grid solar PV investors are put forward11. Key stakeholders – government, business and investors – need to work together to address the barriers identified. This should be mutually rewarding: accelerated investment in solar PV will deliver benefits to East Kalimantan, from economic, social and environmental perspectives. It is to the advantage of all stakeholders that these benefits, and the solar PV opportunity, are unlocked.
5.1
Levers to support utility solar PV investors
Current State Utility solar PV investors are supported by the FIT tendering process (see Section ), which establishes a 20-year power purchase agreement with PLN. System size under this system is typically 1-6MW, with the timing and location of capacity available for support specified by ESDM. The maximum FIT price is USD0.25/kWh for systems using less than 40% local components, or USD0.30/kWh for systems with greater than 40% local content. The scheme is only open to state-owned enterprises, LGOE’s and Indonesian companies (foreign companies would have to partner with a local company). The first round of tenders for solar PV developments across Indonesia offered 140MW of deployment potential across 80 sites: as of 1 March 2014, bids had been received on 11 sites, and FIT’s established at five sites. No solar PV development opportunities were made available for East Kalimantan in this first round12. Implications The structure of the FIT tendering process will only be attractive to large established companies, as the process establishes a range of administrative hurdles and capital requirements that would be difficult or prohibitive for small companies or new entrants to meet. By excluding smaller companies and new entrants, the opportunity regional and rural areas to benefit from the economic value (investment and jobs) associated with the projects will be reduced. Another implication of the structure of the process is the uncertainty in the scale and timing of future tendering rounds for additional solar PV capacity via the FIT process. This makes it difficult for companies to plan their business in advance, as they have very limited information on the potential pipeline of deployment opportunities beyond the current tender round. Again, this will disproportionately disadvantage smaller companies. 11
Solar PV installers are dependent on demand for solar PV deployment for their business case. As such, there are no specific recommendations for installers: rather, they will naturally benefit from an expansion in overall solar PV deployment in East Kalimantan. 12
In North Kalimantan, two sites with a combined capacity of 2.5MW were made available: one bid was received for one site, but the bid was disqualified for administrative reasons.
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GGGI – Green Industry Mapping Strategy Options for reform There are two primary ways in which the opportunity for utility solar PV investors in East Kalimantan could be supported. Amend the current national FIT arrangements There are a range of changes that could be made to the current FIT tendering process that would accelerate investment in solar PV, including:
Removing the need to contract with PLN: rather, PLN would offer a guaranteed offtake agreement Removing capital requirements: solar PV investors already face significant up-front costs. Adding to these creates an additional barrier for companies. Guarantee access to the FIT: rather than running a reverse price auction, access to the FIT should be automatic (subject to annual cap, with potential for further reform such as declining FIT rates) Manage development: the current contract locations could be used as a map of preferred development locations
(OR) Establish EK Government support program Working within the current FIT structure, the East Kalimantan provincial government could provide seed funding to finance local SME’s that are making applications under the FIT tendering process. While this approach will not create additional capacity under the FIT (as this is controlled by ESDM), it would improve the chances of local companies gaining the right to develop solar PV in the province, thereby increasing the likelihood of economic gains being felt by the province. This seed funding could take a number of forms, including:
Grants: to support business set-up costs Loans: at concessional rates Channelling of donor funding: the provincial government could secure funding at preferential rates from donors or government, and pass this through to bidders Market loans: seek funding from the market (though the risk premium for finance is likely to be very high)
The limitation on this approach is that the East Kalimantan government would be reliant on the ESDM-led FIT tendering process to make solar PV deployment sites available in the province. In the first round tenders, no new solar PV deployment sites were offered in East Kalimantan (see above).
5.2
Levers to support on-grid household solar PV investors
Current State At present, there is no automatic consent for household solar PV investors to install PV. At the same time, without access to a FIT the provision of subsidised grid electricity undermines the business case for household solar PV investment (see Figure 9), as the electricity subsidy (artificially) makes electricity from solar PV more expensive than grid electricity.
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GGGI – Green Industry Mapping Strategy Implications There are currently very low levels of adoption of solar PV (not economic), with little or no PV in areas of greatest electricity demand as households are dis-incentivised from investing in their own energy and energy security. The current state also increases costs to government: without household solar PV investment, grid upgrade costs will be higher, while government will face higher electricity subsidy costs. Options for reform There are a range of reforms that would unlock the opportunity for household solar PV investment, including:
5.3
Automatic consent for households to install solar PV: subject to safety and technical standards being met (e.g. that the installation is accompanied by a certificate from a qualified electrician). Establishing a new on-grid household FIT: this would be at a lower rate than the investor FIT, but it is needed to support the economic case for household investment in solar PV. Increase awareness of available options: even with the above reforms, households need to be aware of the options available to them.
Levers to support off-grid solar PV investors
Current State Electricity generation from solar PV is lower cost than from diesel (LCOE); in addition, the use of solar PV rather than diesel reduces other impacts such as GHG emissions, local air pollution, odour and the potential for oil spills. However, the capital cost requirements of solar PV (Figure 7) is a strong deterrent to its uptake by poorer households, as they cannot meet the up-front costs of the solar PV system (despite it being a cheaper form of electricity over the longer term). While utility investors have access to a FIT to assist with developing solar PV systems, off-grid solar investors do not. Implications For remote households and small villages, this can result in a continuing dependence on diesel, or where there is currently no electricity it could result in new investment in diesel-based electricity generation. From a government perspective, this reliance on diesel for electricity generation adds to national oil import requirements (Indonesia is a net importer of oil). Options for reform The provision by government of a combined capital grant and FIT scheme for off-grid households would support their transition away from diesel-based electricity generation. The capital grant component would reduce the capital barrier faced by poorer households, while the FIT component would create an ongoing incentive for maintenance. Paying the capital grant to the installer would simplify administration. Alternatively, the capital grant could be replaced by a loan from government (and accompanied by a slightly higher FIT).
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5.4
Other policy incentives
Alongside the measures suggested above, a range of complimentary measures could be pursued to support solar PV deployment. While each on its own is unlikely to address the current policy and market challenges facing solar PV deployment, each would add a measure of support to the sector Tax relief Proposals have been made for tax holidays and customs duties wavers for solar PV-related businesses and inputs. While this would improve profitability and lower capital costs, it may raise administrative complexities about policy ownership, definitions and dual use. It could also set a precedent for other sectors, which could create long-term complexity. Concessional finance Concessional finance would lower the borrowing costs for solar PV investors, and potentially address some of the capital cost barriers to investment. This would improve profitability for solar PV investors, but would transfer the risk to taxpayers or donor agencies (depending on who provides the finance). Energy subsidy reform Electricity subsidies are implemented in Indonesia to deliver social support objectives; however, electricity subsidies also alter the competitive balance between solar PV and other electricity sources. Consideration could be given to implementing alternate mechanisms to target energy subsidy while incentivising solar PV (e.g. graduated tariff structures). Stakeholder engagement & support Programs and information that help understanding of the technology and its potential would support broader understanding and appetite for solar PV deployment.
5.5
Summary
While the recently launched FIT tendering process for solar PV has generated some new proposals for solar PV deployment, the scale of capacity being put forward, and the speed with which the process is running, means that this approach to solar PV development is unlikely to deliver significant new solar PV capacity in the short to medium term. There are a wide range of options available to government to accelerate the deployment of solar PV: these include reforming the current FIT tendering process and/or reducing local barriers to participation in the tendering process (), creating additional demand for solar PV investment from grid-connected electricity users, and supporting the deployment of solar PV in off-grid situations (). Each of these areas of reform would deliver significant benefits, both environmental and economic. But to achieve these benefits, reform will be needed. Supporting and expanding the market for solar PV deployment will automatically expand the market for solar PV installers, and the local economic activity and jobs that will be created through their activities. This increase in demand could also flow through to local solar PV manufacturers, particularly if the GoI maintains its differential support levels for solar PV deployment based on minimum local content rules. At the same time, the GoI would achieve wider benefits such as reduced demand for diesel, and greater access to electricity.
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References GGGI. (2013, October). Green Growth Program. Retrieved January 2014, from http://gggi.org/wpcontent/uploads/2013/10/A4-low-Indonesia-oct.pdf Green Energy Markets. (2013). Small-scale technology certificates data modelling for 2013 to 2015. Hadiputranto, Haddinoto & Partners. (2013). Introduction of Solar Power Feed-In-Tariff and New Solar Power Purchase Procedures In Indonesia. Jakarta. Indonesia Investments. (2013). Indonesia electricity tariffs. Retrieved 2014, from http://www.indonesia-investments.com/news/todays-headlines/indonesias-electricitytariffs-raised-to-curb-energy-subsidy-spending/item1160 MP3EI. (2011). Masterplan for Acceleration and Expansion of Indonesia Economic Development 2011 - 2025. Ministry for Economic Affairs, Indonesia. Observer. (2013). Renewable origin electricity production by region and country. PLN. (2011, July). East Kalimantan Electricity Network. Retrieved March 17, 2014, from http://repit.wordpress.com/provinces/east-kalimantan/ PLN. (2012). PLN Operating Statistics. Jakarta: PLN. RUED. (2013). Provinsi Kalimantan Timu: Proyeksi Penyediaan Energi. Rencana Umum Energi Daerah. SEA. (2014, March 17). Universal Energy Access. Retrieved March 17, 2014, from Sustainable Energy for All: http://www.se4all.org/our-vision/our-objectives/universal-energy/ Solar Choice. (2014). Capital costs of solar PV installations. Retrieved 2014, from Solcar Choice: www.solarchoice.net.au SolarGIS. (2014). Retrieved March 18, 2014, from solargis.info solarGIS. (2014). pvPlanner. Retrieved from solargis.info USA Department of State. (2012). Indonesia Provincial Commercial Business Opportunities. Embassy Jakarta, Economic Division: USA Department of State. Veldhuis, A. J., & Reinders, A. H. (2013). Reviewing the potential and cost-effectiveness of gridconnected solar PV in INdonesia on a provincial level. Renewable and Sustainable Energy Reviews, 315-324. World Bank. (2011). GDP and Electricity Data. Retrieved March 17, 2014, from World Bank: www.worldbank.org
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Annex 1: The solar PV value chain Key stages in the value chain for solar PV manufacturing and deployment are shown in
Figure 13: Solar PV value chain, with the sectors relevant to deployment highlighted.
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Annex 2: Solar PV performance analysis, East Kalimantan This annex provides solar PV performance data for three locations East Kalimantan: Samarinda, Kongbeng & Barong Kongkok (Tongkok). Performance assessment and charting has been carried out using solarGIS pvPlanner model, using a range of data sources. For each electricity production assessment, the same set of standard conditions were used: c-Si solar PV panels; 5o inclination; north (southern hemisphere) or south (northern hemisphere) orientation; no tracking. Additional generation would result from 1- or 2-axis tracking; however, this would add to capital cost and maintenance, and therefore has not been included in the business case.
Samarinda, East Kalimantan Location and monthly generation data for a 1kWp c-Si solar PV array installed in Samarinda.
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GGGI – Green Industry Mapping Strategy Kongbeng, East Kutai, East Kalimantan Location and monthly generation data for a 1kWp c-Si solar PV array installed in Kongbeng.
Barong Kongkok, East Kalimantan Location and monthly generation data for a 1kWp c-Si solar PV array installed in Barong Kongkok.
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Annex 3: Solar PV cost benefit modelling assumptions The cost benefit analysis for solar PV was based on the following assumptions: Variable
Value
Capital cost13
USD2,600/kW installed (imported components) USD3,200/kW installed (domestic components)
Feed-in tariff
USD0.25/kWh indexed (imported components) USD0.30/kWh indexed (domestic components)
Discount rate
10%
Inflation rate
7%
Operating costs
0.5% of capital cost (indexed)
Average electricity tariff
USD0.06/kWh (IDR725)
PLN electricity generation cost (today)
USD0.15/kWh (IDR1663)
Electricity cost inflation rate
7.7%
Annual global in-plane irradiation
1,700 kWh/m2
System efficiency (years 1-10)
76.7%
System efficiency (years 11-25)
72.9%
Inclination
Optimal
Azimuth
North
Shading
None
Tracking
None
Module type
c-Si
Domestic module production cost
50% greater than imported module cost
Residual value of PV system
0%
Tax implications
Not considered
Other assumptions used to support analysis included in this report include: Variable
Value
Biodiesel production rate
4,750l/ha
Biodiesel production cost
$0.73/l
Diesel electricity generation efficiency
3.4kWh/l diesel
13
Based on Australian capital costs (Solar Choice, 2014). As Australia imports all significant solar PV components (modules, inverters, etc.), this is considered a reasonable estimate of international costs. Includes labour costs, which are comparatively higher in Australia than Indonesia. Domestic component costs reflect the module price difference between international and domestic suppliers, based on industry consultation.
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Annex 4: Grid emissions intensity The forecast emissions intensity of grid base electricity generation in East Kalimantan is given in the table below. This data was used to determine the avoided emissions resulting from new gridconnected solar PV capacity under the East Kalimantan scenario. Also shown is the cumulative offgrid and on-grid additional solar PV capacity under the East Kalimantan scenario.
Year
tCO2/MWh
MW Off-grid
MW on-grid
2010
0.810
0
0
2011
0.853
0
0
2012
0.854
0
0
2013
0.808
0
0
2014
0.887
0
0
2015
0.856
2
1
2016
0.882
5
2
2017
1.022
10
5
2018
1.081
18
10
2019
1.043
29
17
2020
1.006
45
28
2021
1.026
67
44
2022
1.016
91
62
2023
0.960
117
84
2024
0.901
143
108
2025
0.866
168
133
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Annex 5: Solar PV workshops Of the workshops and training sessions carried out as part of the GIMS project, two are particularly relevant to the Solar PV business case. These workshops were held in East Kalimantan (Balikpapan) on 10 October 2013, and Jakarta on 27 March 2014. Summaries of the workshops and attendees are set out below.
East Kalimantan Focus Group Discussion (10 October 2013) Gran Senyiur Hotel, Balikpapan, East Kalimantan This workshop was arranged by the GIMS team. The purpose of the workshop was to syndicate the emerging findings of the GIMS project with key decision-makers in East Kalimantan, with a particular focus on solar PV opportunities. The feedback received from this workshop was the province is interested in further understanding local regional opportunities. On the solar PV opportunity in particular, this interest was tempered by some uncertainty over the applicability of solar PV to East Kalimantan. Given the focus of the MP3EI for East Kalimantan is a significant expansion of the palm oil and associated biodiesel production, solar PV development did not have a high profile amongst the participants. As a result of this feedback received, this business case focuses very strongly on the specific characteristics of East Kalimantan in setting out a business case for investment. The business case includes East Kalimantan-specific solar radiation and population distribution data, together with monthly annual average solar radiation and location specific performance data for Samarinda, Kongbeng & Barong Kongkok. Separately, GGGI has continued its on-the-ground engagement in East Kalimantan, and has reported a considerable shift in perception towards solar PV amongst key decision-makers in the province.
Attendees Name
Institution
Fitriansyah
Badan Perijinan dan Penanaman Modal Daerah Provinsi Kaltim
S.Awaludin
Badan Perijinan dan Penanaman Modal Daerah Provinsi Kaltim
Ujang Rahmad
Bappeda Kaltim
Duma Mangale
Bappeda Provinsi Kaltim
Tutik priyantini
Bappeda Provinsi Kaltim
Reski Udayanti
Dewan Daerah Perubahan Iklim
Soeyitno Soedirman
Dewan Daerah Perubahan Iklim
Pranata
Dinas Pertambangan dan energi Kaltim
Desy Rahayu
Dinas Peternakan Kaltim
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Arif Fadillah
Disperindagkop Kaltim
Yuliansyah
Fakultas Kehutanan Universitas Mulawarman
Ade Cahyat
GIZ-Paklim
Iwied wahyulianto
GIZ-Paklim
Lenny Christy
GIZ-Paklim
Yuliana C Wulan
GIZ-Paklim
M. Shafik Avicenna
Perusda Ketenagalistrikan Kab. Kutai Kartanegara
Abdul Rachman
Perusda Ketenagalistrikan Provinsi Kaltim
Sujari
Pupuk Kalimantan Timur
Giulia Sartori
GGGI
Dyah Catur
GGGI
Hyewon Kwak
GGGI
Dr Graham Sinden
EY
Amanda Ryadi
EY
David Angdi
EY
Solar PV Business Case in East Kalimantan Workshop (27 March 2014) ESDM, Cikini, Jakarta This was the final workshop of the project, and brought together stakeholders from across Government (both national and provincial), industry and the donor community. The results of the business case for solar PV deployment in East Kalimantan were presented, with extensive discussion on the opportunity for solar PV, the challenges faced, and opportunities for support and policy reform. The over-arching concern from the attendees was the policy environment in which the development of solar PV could proceed, including barriers and options for addressing these barriers. There was considerable discussion over the current policy structure for incentivizing solar PV, and the effects that these policy approaches were likely to drive. A central issue was the structure of the GoI’s Feedin Tariff arrangements and the likely progress of the contracting process for solar PV being managed by PLN. As a result of this workshop discussion, it was agreed that the levers for support of utility, on-grid household and off-grid solar PV would be set out in this report, together with a brief discussion of other supporting mechanisms that could be pursued.
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Attendees Name
Institution
Nick Nurrachmad
APAMSI / Selijen
Budiman Setiawan
APAMSI / SUP
Berwel Juanda A Lubis
Bappenas
Moch Bara Ampera
BKF Kemenkyu
Penny Rahayu
DEA – EBTKE
Agus Triwandoyo
DEA-DZEBTWE
Nurcahyanto
DEK – MEBTKE
Edi Sartono
DEK EBTKE
Catur Wahyu Prasetyo
DEK-DSERTE
Amrullah
Distamb Prov
Vincenty
Distamb Prov
Qatro Romandhi
DSEBTKE-DEK
Harris
EBTKE
Melanie Todd
LCS
Jahen F Rezki
LPEM-FEUI
Abdurrachman Chaerul
PD Listric - Kaltim
Indah
PIP
Cangga Yudha Jaya
PIP-Kemenkyu
Machnijon
PLN Kaltim
Babang Sugandhi
SDEMP Bappenas
Rizka Siri
UKCCC
Mark George
UKCCU
Lucy Symons
UNDP
Anna van Paddenburg
GGGI
Kurnya Roesad
GGGI
Xiaoli Tang
GGGI
Chris Stephens
GGGI
David Angdi
EY
Adiandri Adyafitri
EY
Christina Larkin
EY
Dr Graham Sinden
EY
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