Scaling Up Renewable Energy Investments Lessons from the Best Practice Models in Indonesia

Transcription

1 Scaling Up Renewable Energy Investments Lessons from the Best Practice Models in Indonesia Authors Fabby Tumiwa and Imelda Rambitan Instiute for Essential Services Reform (IESR) 0

2 TABLE OF CONTENTS EXECUTIVE SUMMARY 2 1. ENERGY ECONOMY OF INDONESIA Energy Poverty and Rural Energy Why Indonesia s energy sector needs reform Existing Policy and Program on Renewable Energy 6 2. POLICY ENVIRONMENT FOR RENEWABLES Institutional Framework Financing Renewable Energy THE POTENTIAL OF RENEWABLES: LESSONS FROM CASE STUDIES Methodology 12 Case study 1: Cinta Mekar Micro-Hydro Power Plant Project 13 Case study 2: Improved Cook-Stove at Kulon Progo ANALYSIS Policy Requirements to Scale Up Renewable Energy Development Bbased on the case studies Key Considerations to Scale Up and Expand Investments in Renewable Energy Community Renewable On-grid/Off-grid Project: How can these best practices be replicated and sustained? Factors That Enable or Constrain the Replicability/Mainstreaming of Renewable Energy in Indonesia GENERAL MODEL OF REPLICABILITY CONCLUSION REFERENCES 1 1

3 EXECUTIVE SUMMARY This paper presents the key findings and valuable lessons from a study on renewable energy projects in Indonesia. It answers the key questions: How can renewable energy best practice models (BPMs) from Indonesia, an archipelagic country with a population of over 70 million that lacks adequate access to basic electricity, be replicated? What recognizable contributions do renewable energy options they make to the sustainable livelihoods of local communities? What policy implications do renewable energy investments entail if they are to be replicated and be made cleaner, more accessible and more affordable in other communities and localities? In addressing these questions, the authors, who are civil society practitioners specializing in the field of renewable energy and energy efficiency research, have looked at the opportunities and challenges in the current energy economy of Indonesia. To ground the analysis and recommendations, the authors embarked on two project case studies: the Cinta Mekar Micro-Hydro Power Plant Project and improved cook-stove at Kulon Progo. The case studies focus on the following: efficiency and effectiveness of the project implementation in both tangible and intangible terms, project implications on various policy making processes/levels, and the issues or concerns that may need to be addressed in future project replications or scale ups. This research found that renewable energy development, at least in the context of Indonesia, requires enabling, enforceable and resourced policies and regulations at the national and local levels. Other support strategies such as fiscal incentives, feed in-tariffs, soft-loans, grants and technical assistance are equally important for developing renewable energy. For successful renewable energy projects at the local level to be replicated and for services to be more accessible, affordable and cleaner, the following elements of good governance and technical and project management need to be seriously considered. Initiation: Non-governmental organizations usually play this role. They bring the idea to the community. NGOs help communities to understand the benefits of a project, promote cooperation, and take part in crafting the initial agreement. Institutional development and community participation: Locally-based institutions must be created to ensure sustainability and community ownership of the project. Local participation from the early stages of a project is of utmost important. The local community must be involved in the design, planning, and management of the project. Financing: Project financing, including soft loans, grants and community counterpart, must be available. It is important to solicit a contribution from the direct beneficiary of the project (e.g. the local community). This will help to foster a sense of project ownership in the community. If the local community cannot cover the cost, external funding from donor agencies must be available. An option for financial cooperation such as a public-private-partnership (PPP) should be considered depending upon the nature of the project. Direct financial benefit for the local community. Renewable energy investments should be able to help community organizations reduce, if not eliminate, their dependence on external sources of funding. Lesser reliance on loans can lead towards greater local ownership of these projects. Soft loans are an effective tool for villagers. Since this type of loan stresses the importance of repayment, the villagers encourage users to pay and work to collect payments on time. This research sends an important message to international financial institutions like the World Bank Group (WBG). While the Bank has been involved and plans to remain involved in promoting the renewable energy development in Indonesia, it is important that its resources be focused on the following areas: policy development support, investment finance, technology transfer and capacirty building. These roles are elaborated below. 2

4 In terms of policy development, the Bank s global and country knowledge and influence can be used to bring about long-term policy and regulation that supports renewable energy technology. The Bank can also exert its influence to improve tariff and subsidy policies for fossil fuel and to incentivize renewable energy. It can also provide technical assistance for creating a master plan and road map of renewable energy development including institutional set-up, fiscal support, and market development so that renewable energy projects can be easily replicated around the world. In terms of investment lending, the Bank s public and private sector financing can develop financing arrangements for renewable energy projects in the form of soft loans, small grants, and technical assistance. It can assist in preparing feasibility studies of potential projects, and work to reduce commercial risk of projects in order to draw private investment. Also, the Bank should consider noncommercial renewable projects, including distributed generation and mini-grid projects, particularly in rural areas that draw no interest from private sector financing. These types of development projects are consistent with the World Bank s mandate to reduce poverty. The Bank can be involved in technology transfer and capacity building. With its pool of specialists, country and regional presence, collaboration with international agencies, and connection with knowledge networks and expert groups, the Bank can facilitate the transfer of renewable energy technologies through various mechanisms in cooperation with other institutions such as bilateral development agencies and the private sector. The Bank can also encourage national and local policymakers to learn from experiences of other countries or Bank-supported projects to develop renewable energy policies and regulations in their own countries. 3

5 1. THE ENERGY ECONOMY OF INDONESIA Indonesia is a large country comprised of more than 17,000 islands covering 1.9 million square feet. The population of 228 million people inhabits 6,000 of those islands, with 70 percent of the population living on Java and Bali and the remainder disbursed throughout Sumata, Kalimanta, Papua, Nusa Tenggara and a variety of other islands (BPS, 2009). As an archipelagic nation, geographic and demographic circumstances make energy service provision particularly challenging. A vast energy infrastructure is required to ensure that fuel supply and distribution meets demand. Figure 1. Map of Indonesia International Financial Institutions (IFIs) such as the World Bank have played an important role in shaping and supporting energy projects in many developing countries. In Indonesia, for instance, the World Bank has worked closely with policymakers for over four decades to develop Indonesian energy policies as well as to finance energy projects. The World Bank s lending portfolio to Indonesia has declined since the early 2000s. The current World Bank s energy strategy is inappropriate for the present and future challenges posed by climate change. The World Bank Group (WBG) recently began to reshape its lending strategy and portfolio, with a particular focus on clean energy development as a climate mitigation strategy. The WBG energy strategy will serve as a guiding policy for the next ten years for all energy-related actions in terms of providing grants, loans, and technical assistance. As part of the strategy making process, the WBG is seeking views, inputs and comments from a range of stakeholders through face to face meetings, regional and local public consultations, and web based communications. This paper will respond to the new WBG energy strategy by providing input and an alternative view founded in Indonesian context and experiences. 4

6 1.1 Energy Poverty and Rural Energy Energy service provision is essential to improving the quality of life and well-being of the poor. Access to reliable and affordable energy is a prerequisite for economic growth and poverty reduction. Lack of access to modern energy services hinders people in meeting their basic needs, limits enterprise development and results in lower productivity and hence less opportunity for economic growth. Convenient and affordable energy service is also central for improving health, education, and for reducing the human labor required to meet basic needs. Modern energy services contribute to social development by helping to fulfill the basic human needs of nutrition, warmth, and lighting. Meeting these essential energy needs in a sustainable way requires a balanced energy portfolio that reflects for the economic, social, and resource conditions of countries and local communities. Renewable energy (RE) sources such as hydro, solar, geothermal, wind and bio-energy have an important role to play, alongside conventional energy sources (such as fossil fuels). This kind of diversified energy portfolio supports the achievement of the Millennium Development Goals (MDGs). In many rural or remote areas far from the national grid, tapping into and investing in renewables can have a greater comparative advantage than traditional energy sources such as coal and large hydro. Programs to provide access to modern energy services in Indonesia are particularly important in remote and rural areas. In remote areas and small islands, the energy infrastructure is insufficient and fuel distribution systems do not reach the poorest communities, making fuel supply and distribution prohibitively expensive for the country s poorest people. To overcome developmental gaps in Indonesia, the government has carried out rural energy projects. Most investors and government officials view these rural energy projects as small-scale and nonprofitable, and therefore provide limited support for these kinds of projects. However, in remote areas with no access to oil, natural gas, or electricity through national networks or grids, the use of renewable energy technologies and the exploitation of locally available renewable energy resources are the only economically and environmentally viable options for the provision of energy services. The successful implementation of such energy projects is vital for rural development. A number of RE projects have failed owing to the lack of priority given to local involvement, training and ownership, as well as the lack of institutional capacity to support the long-term sustainability of projects. Moreover, it has often been observed that the planning and implementation of rural development and energy development projects are carried out independently by different agencies at the national and sub-national level. Consequently, rural energy projects are perceived as stand-alone development projects. In order to have a meaningful and positive impact on the rural poor, energy projects should be developed within the framework of integrated rural development, which takes into account that any sustainable sustainable development programs incorporate economic, social and environmental considerations. For example, income-generating activities from energy services can ensure the local communities long-term affordability of those services and, hence, support the sustainability of the projects. 1.2 Why Indonesia s energy sector needs reform In 2007, the electrification rate in Indonesia reached 64 percent while only 60 percent of Indonesian villages were electrified 1 (DESDM, 2008). Moreover, not one island in Indonesia had 100 percent electrification. Even Java, the most populated island in Indonesia, had only 74 percent electrification, the 1 An electrified village does not necessarily mean that all households in that village have access to electricity services. If only one household in a village has electricity through grid connection or renewable sources (such as PV), it can be categorized as an electrified village. 5

7 highest rate in the country. Papua had an electrification rate of 22 percent, the lowest among other main Indonesian islands (World Bank, 2004). The electricity system in Indonesia is comprised of an interconnected and distributed or isolated grid. Interconnection systems only exist in Java, Bali and Sumatra, where 80 percent of the country s electricity is generated. Electricity consumers outside of those three islands are connected through smallgrid and diesel-based generators. In the urban and semi-urban areas, kerosene still dominates as the primary cooking fuel, although its usage declined after the government introduced Liquid Petroleum Gas (LPG) as a fuel in Most rural areas in Indonesia still rely heavily on traditional biomass such as firewood and rice husk. In 2007, biomass energy contributed about 274 million barrel oil equivalent (MBOE) of the total final energy consumption (MESDM, 2008). The demand for energy in Indonesia continues to rise as a result of the increasing population and improvements to the standard of living. The form of energy that is currently most produced and used is fossil fuels, including oil, natural gas, and coal. However, fossil fuels are not a renewable form of energy, and as time passes and wide-spread exploitation of fossil fuels continues, the supply will eventually be exhausted. Despite the fact that Indonesia s fossil fuel production is the highest in the region, the country does not have abundant fossil energy resources. In 2009, the reserve and production ratio (R/P) for oil, natural gas, and coal were 23, 55, and 83, respectively. Recently, crude oil production has been 0.95 million barrels per day (bpd). Crude oil production is expected to reach 1 to 1.1 million bpd in 2015, and net imported oil is expected to reach between 0.4 and 0.6 million bpd over the next five years to meet Indonesia s petroleum demand of million bpd. The supply and distribution of petroleum has been a challenge over the last decade. Fuel shortages have occurred regularly over the last five years, particularly around Java and Bali. In addition to the decreasing availability of fossil fuels, other problems have surfaced, such as reduced subsidies for fuel that result in immediate fuel price increases. In addition, the government rations the subsidized fuel available to the market to create scarcity 2. Thus, the population that already experienced trouble in accessing fossil fuel energy will suffer greater difficulties procuring these fuels in the future. It is certain that fossil fuels will become increasingly expensive, until finally they will be unaffordable for most of the population. Indonesia relies heavily on fossil fuels to meet its energy demands despite the fact that fossil fuel reserves are limited and declining. Electric power plants in remote areas and outer islands are powered by diesel-fueled generators that add to the high cost of electricity. There is, however, a huge potential for renewable energy to dominate Indonesia s energy portfolio. For much of Indonesia s relatively isolated islands and regions, provision of basic energy needs by renewable energy resources and technology is an economically and environmentally viable option. 1.3 Existing Policy and Program on Renewable Energy The Government of Indonesia (GoI) has set targets to meet basic rural energy needs in the short term through small scale RE projects. According to the Central Statistic Bureau of Indonesia, about million rural people (19 percent of the total population) lived below the national poverty lines of 204,000 2 Amount of fuel subsidy is set annually in the national budget upon agreement between the executive and parliament. The amount of subsidy is calculated based on the assumption of volume of fuels and price of crude oil. 6

8 rupiah per month in Improving access for the rural poor to modern forms of energy such as electricity will help to create new economic activities and sources of income in rural areas. Renewable energy projects at the community level began to develop in the mid-1980s. Foreign assistance in the form of grants and technical assistance contributed to RE projects until the late 1990s. Just before the Asian financial crisis in 1997, the Indonesian government, financed by World Bank and Global Environmental Fund (GEF), designed an ambitious program to install one million solar home systems (SHSs). This project was postponed after the crisis and later scaled down before being completely terminated in 2003 due to the infeasibility of the economics of SHS. Later, photovoltaics (PVs) development stalled because the foreign assistance for PVs was no longer available. In the 2000s, the development of micro-hydro received more attention from government. The government has been trying to promote private investment in micro-hydro power plants both on-grid and off-grid. Moreover, the oil price increase in 2005 led the GoI to encourage the implementation of renewable energy by introducing policies and regulations that would facilitate the development of renewable energy technologies. The basis for renewable development in Indonesia is outlined in Presidential Regulation No. 5/2006 on the National Energy Policy. It sets national targets for an optimal energy mix in 2025: (i) less than 20 percent from oil; (ii) more than 30 percent from gas; (iii) more than 33 percent from coal; (iv) more than 5 percent from biofuel; (v) more than 5 percent from geothermal; (vi) more than 5 percent from other renewables, especially biomass, nuclear, micro-hydro, solar and wind; and (vi) more than 2 percent from liquefied coal. 4 Further support for renewable energy is stipulated in the Law No. 30/2007 on Energy. Articles 20 and 21 of the Energy Law stated that both central (national) and local governments are responsible for developing and increasing the supply and utilization of renewable energy. Incentives (i.e. subsidies) can be provided for those who develop renewable energy for certain periods of time until project is sustainable. 3 There is a different baseline used to calculate poverty line between Indonesia and the World Bank. The National Statistics Agency of Indonesia uses indicators of minimum basic needs (foods and non-food) required to meet the standard of living. The World Bank uses indicator of per capita spending of 1US$ PPP and 2US$ PPP per day. 4 This Presidential Regulation is currently being reviewed by a National Energy Council that was established under the mandate of Law No. 30/2007 on Energy. 7

9 2. POLICY ENVIRONMENT FOR RENEWABLES One of the key policies that encouraged investment in renewable energy was the tariff for renewable energy projects. The Feed in Tariff (FiT), enacted in early 2000, encourages investment in grid-connected renewable energy. FiT resulted from the earlier policies (outlined below), which have demonstrated challenges and opportunities to scale up investments in renewables. Ministerial Decree No. 2/2004 on Green Energy Policy: The objective of the Green Energy Policy is to enhance sustainable energy supply and utilization of RE technology through maximum utilization of RE sources for electricity generation and fuel, the efficient utilization of energy, and raising public awareness on energy efficiency. Ministerial Decree No. 1122/K/30/MEM/2002 on Small Distributed Power Generation Using Renewable Energy: This decree was launched with the objective of promoting renewable smallscale power plants by allowing enterprises to sell their power production or surplus power to the state-owned power company s (PLN) power grid. The maximum allowable capacity of the power plant is up to 1 MW. The electricity price is 60 percent of the utility s production cost if it is connected to the low voltage grid or 80 percent of the utility s production cost if it is connected to medium voltage grid. Institutions eligible to participate are cooperatives, private companies, and government-owned companies. Ministerial Regulation No. 2/2006 on Medium Scale Power Generation using Renewable Energy, and its Governmental Regulation No. 03/2005 on Electricity Supply and Utilization and its amendment, Governmental Regulation No. 26/2006: The Ministerial Regulation on Medium Scale Power Generation using Renewable Energy has a similar objective for renewable energy mediumscale power plants. The maximum allowable capacity of each power plant is 1-10 MW and the electricity price provisions are for small-scale plants. A purchase contract for 10 years or longer can be negotiated. Ministerial Regulation No. 31/2009 on Small and Medium scale Power Generation utilizing Renewable Energy: The regulation stated that the State owned power company (PT. PLN) has the obligation to purchase electricity from small- and medium-scale RE power plants which are developed by cooperatives, community chests or business entities (Power plant capacity 10 MW). The price is regulated for medium and low voltage grid connections, as well as the interconnection system, determined by f-factor. Based purchasing price is 656/kWh x f, if connected to medium voltage grid, and 1004/kWh x f, if connected to low voltage grid. The f value for the grid system is 1.0 in Java and Bali, 1.2 in Sumatra, 1.3 in Kalimantan/Sulawesi and 1.5 in Papua/Nusa Tenggara (eastern part of Indonesia). Since the Ministerial Decree on Small Distributed Power Generation using Renewable Energy was launched in 2002, some RE power plants (mainly micro-hydro/mini hydro constructed by small-scale enterprises) have been interconnected to the PLN s grid, and others are being constructed. By 2007, eight small-scale and medium-scale distributed renewable projects with 10 generating units and a total capacity of 3.3 MW have connected to the grid. By the end of 2007, 31 projects with MW total capacity were ongoing or under negotiation. Mini hydro will be further developed and is expected to contribute some 0.2% to total energy supply by year In addition to FiT, there have also been recent policy incentives (see Table 1) that promote biomass such as risk husk and agricultural waste (Tumiwa, 2007). 8

10 Table 1. Summary of Existing National Laws and Policies that Support Renewable Energy Policies Presidential Regulation No. 5 year 2006 (National Energy Policy) Law number 17 year 2007 on Energy Law number 30 year 2007 on Electricity Level of Implementation National National National Context Indonesia is trying to achieve the optimal energy mix composition by the year 2025, including RE and water. The policy mentioned that by 2025, RE should supply at least 5% of energy demand. The law enforces the development of RE in Indonesia regarding its effort to lower the country s dependency on fossil fuel. The law supporting the provision of energy access and also RE development. Note The policy itself does not clearly state the number of microhydro power plant generation that need to be built. Law number 17 represents Indonesia s 20 year development plan. The law would guide all activities and policies needed regarding development within the range years. The law recognizes the importance of developing RE to reduce the dependency on fossil fuel. The law encourages the development of microhydro in Indonesia. Another boost for renewable energy development came from the Presidential Instruction (Inpres) No. 1/2010 on the Acceleration of the Implementation of National Development Priority in 2010 that laid out targets for renewable energy-based rural electrification projects that consist of photovoltaic (3.55 MW), micro-hydro power plant (1.53 MW), and 50 self-sufficient energy villages (SSEV). All these projects must be completed by the end of Institutional Framework The main governmental institution that regulates the development of renewable energy in Indonesia is the Ministry of Energy and Mineral Resources (MEMR) and its agencies: The Directorate General of Electricity and Energy Utilization (DGE&EU) formulates policy and programs for RE development; The Directorate General of Minerals, Coal and Geothermal (DGMC&G) formulates policy and programs for geothermal development; The Research Center of Electricity and Renewable Energy executes R&D in RE technology; and, The Training Center for Electricity and Renewable Energy executes training in RE for human resources and technology application. The extensive policy and implementation requirements of energy efficiency and renewable energy options are not presently reflected in the institutional structure, as they are not covered by a single Directorate within DGE&EU. However, since 2009, there has been a plan to establish a new directorate responsible for a renewable energy and energy efficiency program called the Directorate General of Energy Efficiency, 9

11 Conservation and Renewable Energy. This new directorate is expected to be established in 2010 and fully operational in The National Development Planning Agency (BAPPENAS) has several roles in renewable energy projects. More precisely, BAPPENAS key functions are to consolidate national planning (including energy), prioritize renewable energy projects, prioritize rural electrification projects, determine the level of government support, and appoint government project partners. 2.2 Financing Renewable Energy In the past, renewable energy programs were funded by sources outside of Indonesia, mainly through bilateral cooperation from developed countries. In the 1980s-1990s, various PVs programs were funded by Australia and Japan, while the World Bank and GEF funded very few. Switzerland and Germany supported a micro-hydro development program during that period. Germany also supported several biogas programs in the 1990s. The United Nations Development Program (UNDP) and GEF have supported a micro-hydro development project called Integrated Micro-hydro Development and Application Program (IMIDAP) 5 since the mid 2000s. The Asian Development Bank (ADB) worked to prepare institutional arrangements and policies for renewable energy during the early 2000s. In addition, there were various cooperation and capacity building programs on renewable energy in the 1990s and 2000s funded by government of the Netherlands. Since 2009, the Netherlands government funded an initiative called National Biogas Program that aimed to install 10 thousand domestic biogas plants by As external funding for renewable energy projects declined in the late 1990s and early 2000s, renewable energy project funding came mostly from the Indonesian government. However, various grants and technical assistance or loans from bilateral cooperation and multilateral institutions remain available for specific project types. There are different financing schemes for renewable energy projects but most funding comes from the annual national development government budget. Sources of funding for renewable energy projects: National development government budget: This is currently the main source of finance for renewable energy. After approval by the Development Planning Agency (BAPPENAS), the budget is allocated to government agencies such as the Ministry of Energy and Mineral Resources, Ministry of Health, Ministry of East Indonesia Development and the Agency of Technology Assessment and Application (BPPT) to finance renewable projects. Regional government budget: Since Indonesia s decentralization process started, and especially since the issuance of Law No. 22/1999 on Regional Governance and Law No. 25/1999 on the Fiscal Balance between the Central Government and the Regions, the funding for provincial and district governments has significantly increased. This has increased the available budget for financing RE projects in the regions. Grants/technical assistance or loans from bilateral and multilateral donors: These funds are channeled through BAPPENAS. Project proposals prepared by government agencies are sent to BAPPENAS which evaluates the proposals and tries to identify a donor to fund the proposal. Because there is a high political priority for activities related to global climate change, more funds have become available in recent years for financing renewable energy projects. State-owned electricity company (PLN): The company allocated a small portion of their annual budget to develop renewable energy. According to the regulation, PLN in position to purchase electricity from renewable energy independent power producers. Local entrepreneurs: Local entrepreneurs, who see business prospects from renewable energy projects, are a limited but fast growing source of funding

12 Since 2005, the Ministry of Energy and Mineral Resources (MEMR) has accelerated the rural electrification program using renewable energy resources. In 2006, the GoI allocated billion rupiah ($44 million) to install micro-hydro power plants, wind power, centralized PVs plants and solar home systems (SHS). The next year, the allocation was about 300 billion rupiah ($33 million) for similar projects. In 2009, the budget allocation for renewable energy for rural electrification projects increased three times that of the 2006 allocation and reached 1,000 billion rupiah ($100 million). In 2010, the Indonesian government planned to distribute about 2,000 billion rupiah ($200 million) to fund renewable based rural electrification project through the special allocation fund scheme. The rural electrification fund was distributed via the local governments and ministries. This fund finances renewable energy projects at the local level that are considered economically feasible. Priority is usually given to the poorest communities and/or the most underdeveloped areas. 11

13 3. THE POTENTIAL OF RENEWABLES: LESSONS FROM CASE STUDIES 3.1 Methodology We assessed two case studies: a micro-hydro power plant and the cook-stove project carried out by a local community and non-governmental organization in Indonesia. The case studies are selected from a set of projects using several key criteria, including: (a) having a recognizable contribution to sustainable livelihoods in local communities by enhancing energy accessibility at affordable prices and in cleaner ways; (b) having policy implications on the national policy regime; (c) replicability of the project model in question, if and when resources are made available. To analyze the case studies, we referred to three key questions: 1. In mainstreaming RE in Indonesia, what are the policy requirements/institutional arrangements to realize this? 2. What are the key considerations to scale up and expand investments in RE? 3. How can RE projects be replicated in Indonesia? What are the factors that would enable or constrain the replicability or mainstreaming of renewable energy in Indonesia? Given the limited time for conducting field research, we relied largely on available public information and conducted focus group discussions and interviews with those involved in the projects to process our findings. 12

14 Case study 1: Cinta Mekar Micro-Hydro Power Plant Project Project Description The Cinta Mekar Micro-Hydro Power Plan (MHPP) project is a small 120 kilowatt (kw) micro-hydro power plant aimed at generating electricity to be connected to the grid. Cinta Mekar is a village situated in the Subang district, West Java province, about 150 km from the capital city of Jakarta. The project utilizes the run-off water from the Ciasem River, with a water flow rate of around 1,500 liters/minute. The output power is about 120 kw from two water turbines. The project was completed and launched on April 17, Figure 2. Cinta Mekar MHPP illustration MHPP was initiated by an NGO called Yayasan IBEKA, in partnership with the PT Hidropiranti Intibakti Swadaya (HIBS), UNESCAP, and the people of Cinta Mekar village. The project is considered by IBEKA as a public-private partnership (PPP) as it is funded and managed by public and private institutions. According to IBEKA, the total project cost of USD $225,000 was borne equally by three parties: a multilateral donor agency called UNESCAP; a private company, HIBS; and Yayasan IBEKA itself. Both UNESCAP and HIBS contributed $75,000 to cover the investment cost of the power plant, while IBEKA contributed $75,000 for micro-hydro dissemination, social preparation, and a training facility provided for the local community. Ibeka s funds came from other donors and in this project HIBS provides technical assistance and the contractor to build the facilities for the MHPP. 13

15 Ownership Table 2. Summary of Cinta Mekar MHPP Koperasi Mekarsari (Mekarsari Coop) 50% shares PT Hidropiranti Intibakti Swadaya (HIBS) 50% shares Investment Cost and Sources of fund Power Purchase Agreement (PPA) Total project cost: $ 225,000, comprises of: UNESCAP: $ 75,000 (grant for Cinta Mekar Coop, as 50% share) HIBS: $ 75,000 (as 50% share) IBEKA: $ 75,000 (dedicated for social preparation and MHP training facility on site) Purchase by PT PLN (State-owned power company) Purchase price: Rp. 432/kWh ($ 4.5 cents) Connected to medium voltage grid Cinta Mekar s villagers established a cooperative called Mekar Sari, and together with HIBS they created a joint venture that has legal rights to sell electricity to PLN. Both members of the party contributed equal amounts of capital, and therefore have a 50 percent ownership stake in the venture. The joint venture sells the electricity generated by the plant to PLN, the state-owned electricity company, under a Power Purchase Agreement (PPA) for a low voltage tariff and a medium voltage connection. The electricity is sold with a tariff of 432 rupiah (or $0.045) per kwh. During operation, monthly sales revenue from the plant is approximately 25 million rupiah 6. After depreciation and maintenance costs, the total net monthly profit is approximately 10 million rupiah (roughly $1,000), which is shared equally by the Mekarsari coop and HIBS. According to the agreement prepared in the initial stage of the Cinta Mekar MHPP project, Mekar Sari s share of the profits are to be returned to the community with special priority given to the poor. The Mekar Sari Cooperative has returned the profit to the Cinta Mekar village in the following ways: providing electricity connection, paying fees for education and schooling for the poorest households, building a health clinic, providing seed capital for income-generating activities, village infrastructure development, and other activities. Key Features of the Project The project is considered a great successful by as all stakeholders as it is the first community-based MHPP that connects and sells electricity to the grid, as well as the first PPP project. MHPP continues today, and thus stakeholders continue to derive benefits from the project. The project was aimed not only at providing electricity to the local community and the surrounding area, but also at generating income for the village through the sale of power to the grid. The project is largely successful as a result of the community s capacity for self-management. A great benefit of this project is that the community is able to use the generated income to empower themselves through investment or production activities instead of mere infrastructure development. The community has used the money to build a health care clinic, provide scholarships, supply villagers with electrical access, and offer seed capital for income-generating activities. A key success factor for this project was an emphasis on community involvement in the planning, development, and implementation stages. While similar projects often view the community solely as the 6 Monthly sales revenue is calculated assuming an average production of 100 kw x 24 hours x 25 days x Rp

16 beneficiary, Cinta Mekar involved the community as a main player and owner, allowing the villagers to develop and manage the project. The success of this MHPP proves that a public-private partnership is a feasible and workable option for renewable energy projects. The determinant factors in this project s success were: (1) available public funding for the community (2) equal ownership of the venture between the two parties. The Mekar community is relatively poor and lacked the capacity and resources to generate half of the investment cost for the joint venture. Therefore, public funding was necessary to provide capital for the community. The donor agency UNESCAP provided partial funding, which allowed the community to take a position of equal ownership. Both parties to have equal power in decision-making. In the Cinta Mekar case, ownership does matter. Because the local community owns half of the project, the villagers are motivated to operate the plant as well as maintain the surrounding infrastructure and ecosystem. Specifically, the water stream is of great importance to this project, so the community is invested in protecting the adjacent forest and water source to ensure the sustainability of the project. An additional motivator is the projected revenue stream that will continue to flow to the community as long as the plant operates. Conclusion Cinta Mekar MHPP is a successful project. Its success is demonstrated by the folloing: (a) electricity generation comes from clean and renewable resources (hydro power), (b) it is connected with the electricity grid but at the same time able to provide connection for the poor household through subsidized scheme, (c) project implementation is based on the equal partnership of NGOs, the local community and a private investor, with support from multilateral institutions and government endorsement; (d) the project promises sustainable electricity generation and a continual revenue stream from the power purchase agreement contract with the utility company; (e) the project contributes to gradual poverty reduction. The impacts of this project will be seen in the long-term, but public investment in basic social infrastructure such as health and education will immediately begin to build the foundation for a better community. Government regulations have benefited the Cinta Mekar project. Regulations enacted prior to the project allow small-scale power producers to sell electricity to the state-owned power utility (PLN). The utility purchases the electricity from the MHPP at a rate determined by the government. The utility benefits from this arrangement as the purchase price is lower than the cost of electricity generation at a lower or medium voltage distribution. These regulations have created opportunities for small-scale renewable energy projects to connect to the grid. The initial investment of $2,500 to $3,000 per kw is high for poor communities that lack the capacity and resources to independently finance the project. The community in Cinta Makar was able to establish equal participation with financial support from external sources. Without this support, community participation would be greatly reduced. Cinta Mekar s model and arrangement can be replicated if several conditions are met: (1) external financial support is available, (2) participation of local community is created through awareness raising and capacity building activities, (3) willingness of local community to participate in the project sustains beyond the completion of the project itself; (4) policy and regulatory supports are in place, (5) the utility is willing to purchase electricity from the plant at a reasonable and fair price that benefits both the utility and the community, thus creating financial incentives for both parties involved. 15

17 Case study 2: Improved Cook-Stove at Kulon Progo Project Description Kulon Progo district, which is located in Yogyakarta province, is well known for its coconut sugar production. Most of the villagers work as coconut farmers and some of the farmers make coconut sugar on very a small scale, often operating out of their homes. Coconut sugar is one of the most important commodities of villages in the district and its production makes a significant contribution to the local economy. To produce coconut sugar, the villagers use nira 7 which they heat for four hours on a traditional threehole stove fueled by firewood. This technique has proven to be unsafe because it results in indoor air pollution. Women, who spend much time in the kitchen, have suffered from acute respiration infection due to the excess smoke produced by the fire-wood. Because they conduct their day-to-day business in the kitchen, their children (especially infants), who are close by, eventually suffer from the same illness. The improved cook-stove (ICS) project was initiated by Yayasan Dian Desa, a Jakarta-based NGO that focuses on community development and improvement of biomass utilization. The ICS project was implemented in two sub-villages of Gunung Rego and Gunung Kukusan which are part of the Haryo Rejo village in the sub-district of Kokap. The improved cook-stove (ICS) project was an effort to help local farmers and coconut sugar producers reduce the cooking time for the sugar and use less fire-wood. Overall, its objective is to improve productivity and reduce the production cost of coconut sugar. The idea was to modify the existing threehole stove to be more efficient (by requiring less wood for fuel) and much healthier (by eliminating the excessive smoke in the kitchen). In terms of using the new stove model, the improved cook-stoves do not significantly differ from the traditional stoves, which are preferred among villagers. The primary difference is structural. The ICS has improved heat distribution that results in fuel-wood efficiency and an integrated chimney stack that funnels smoke up into the air. Since installing the ICSs, the villagers have seen changes in their kitchens. The excessive smoke that caused illness has been notably reduced, and cooking time is shorter. The use of fuel-wood has been cut by 50 percent, which means women can spend less time collecting wood and more time on other productive, income-earning activities. Conclusion ICS is a simple technology with enormous benefits. The successful dissemination of this technology in two Kulon Progo villages was determined by several factors: 1. Acceptance by the local community or beneficiaries of the new or improved technology. 2. Willingness to participate in the entire project cycle, including the decision-making process and financing a portion of the project activities. Ownership by the beneficiary of the program is important to ensure the sustainability of the project. 3. The technology was relevant to the economic needs of the local community. Furthermore, the technology had the potential to create economic opportunities for the community. 4. Technology transfer to the beneficiaries was important to ensure the local community has the knowledge and capacity to replicate the technology on a larger scale and at a lower cost. 7 Nira is the liquid sapped from the coconut s young flowers 16

18 5. An available financing instrument is critical for the long-term sustainability of the project. Free technology undermines the project s long-term goals. The technology must be provided at an affordable and reasonable cost. 17

19 5. ANALYSIS Studies of projects and discussions with key stakeholders in renewable energy business 8, suggest that renewable energy development is still facing some key challenges, in particular at the macro level. These challenges include: 1. Policies, Regulation, Legal, and Institutional: a) Poor long-term planning and renewable energy objectives for the future b) Ad-hoc policy, poor coordination among government agencies at the national and subnational level and a fragmented approach c) The absence of fiscal incentives to support investment in renewable energy d) High subsidies to electricity generated by conventional energy/fossil fuels 2. Market and Financing: a) In general despite the huge potential of renewable energy resources, the market for renewable energy technologies remains small; currently, most of the renewable energy projects are carried out for rural electrification b) High upfront investment cost, low ability to pay, and long-term pay-back period c) High perception of risk by financial institutions d) Funding availability is limited and unsustainable, mainly from government funding 3. Industrial: a) Poor industrial design and manufacturing capability at the domestic level b) Poor technical know-how on key renewable technologies c) Poor after-sales service 4. Cultural: a) Externally derived problems in rural communities leading to social fragmentation a) In the communal renewable energy system, leadership is a key determining factor on the successful management of the system 5.1 Policy Requirements to Scale up Renewable Energy Development Based on the Case Studies As evidenced from the Cinta Mekar MHPP case, government policy can be an enabling factor for developing renewable energy. The 2002 Ministerial Decree that set the tariff structure for small renewable energy projects has provided sound legal and financial instruments that contribute to the feasibility of project development. The Kulon Progo improved cook-stoves case illustrates that a government policy to limit the subsidy on kerosene has indirectly created scarcity and, in turn, a very high price in rural locations. The local community, unable to pay the high price for kerosene, has no option but to continue using fire-wood to maintain the low production cost of sugar. Additionally, the collection of fire consumes a great deal of time, which has created incentives for villagers to adopt the improved cook stove project. It is clear from these two case studies that renewable energy policies (such as tariffs for purchasing renewable energy) and other policies that affect non-renewable energy (such as limited kerosene 8 IESR carried out roundtable discussion with prominent stakeholders in renewable energy business and policy makers in March Some interviews with some people from government, industry and non-governmental organizations had been carried out in order to understand the barriers and challenges of renewable energy development in Indonesia. 18

20 distribution or increasing the price of fossil fuel) may impact renewable energy development. The latter creates a suitable environment for a renewable energy project to be implemented successfully. However, a single policy will have only a limited impact on the development of RE. Hence, a policy framework to enhance renewable energy development at the national level is required. The framework should include the following key good governance and investment strategies: 1. Long-term, national renewable energy development target, with clear pathways on how to achieve the target, including sufficient budget allocation for research, development, and deployment of renewable energy technologies. 2. Effort to develop the renewable energy market by starting a multi-year, public investment program (through grant, incentives, and government-owned projects) with clear objectives and quantity targets to meet, including industrial support for technology development. 3. Implement fiscal incentives: subsidy to users, tax rebate to users and manufacturers, concessional duties/taxes on renewable energy equipments, and long-term loan interest to manufacturers and users. 4. Limit subsidies for fossil-fuel electric power generation and shift the subsidy to create fiscal incentives for renewable energy projects. 5.2 Key Considerations to Scale Up and Expand Investments in Renewable Energy There are four major factors to consider when replicating or scaling up investments in renewable energy, especially in regards to accessibility, affordability, manageability and potential for expansion. These factors include financing arranagements, financing institutions, tariff regimes, and industrial and manufacturing (technological) support Financing Financing is a key bottleneck for developing renewable energy. For a large scale, nation-wide development, renewable energy development requires the following: (1) both domestic and foreign investment, (2) viable contract period to make renewable energy investment bankable, (3) cost-reflective and transparent energy pricing, (4) market mapping, (5) long term budgeting, (6) research funding for renewable energy, and (7) funding for technology acquisition. For local projects, there is a need to accelerate new investment by small and medium enterprises (SMEs), local communities and civil society organizations in off-grid renewable energy technologies by reducing start-up costs, involving lending institutions, promoting local manufacturing/maintenance capability and improving community awareness. Public-private financing is one viable financing instrument for RE projects. For projects that demand high capital expenditure such as micro-hydro, various financial sources are needed. If the local community has limited capacity to contribute financially to the project as discussed in the Cinta Mekar case study, external financing from foreign-aid or foreign donor institutions is required. However, for small projects that require low capital, financial contribution from the local community may be sufficient to cover the basic cost and do not require financing from external sources Financing Institution The creation of a specific government institution that functions as market facilitator to bridge the affordability and profitability gap is necessary. One key role of this institution is providing long- 19

21 term finance, low-interest loans, and managing risk. Local banks can channel the funds using a common scheme that has been set up by the government Tariff Regimes Introduce a Feed-in Tariff (FiT) for electricity produced by small- and medium-scale renewable energy systems based on the avoided cost as determined by the independent electricity regulatory body. Recover the incremental costs of these renewable energy systems from the electricity consumer rather than from the Government budget. From the Cinta Mekar case study, specific FiT regulations have helped the project connect to the grid and receive financial benefits despite the relative weakness of the Indonesian FiT compared with other countries. This tariff setting has helped the micro-hydro project to run and although small, it provides financial incentives for the local community Industrial and Manufacturing (Technological) Support Strengthen the domestic manufacturing capability, minimize components importation, set up renewable technologies standards, make testing facilities available, appropriate technology transfer (from foreign countries), strengthen research and training, aim for simple design, and have mechanisms to maintain continued availability. In the case of Cinta Mekar, the local company, PT HIBS, has the engineering capacity to manufacture the equipment for a micro-hydro power plant. PT HIBS also has the technical expertise to design and build the plant, and provide capacity building to the local communities. This range of competencies has proven useful because reduced the project cost. In the improved cook-stove case, a local NGO provided the technology and know-how that can be easily transferred to the local community, which helped to reduce the cost of the project. 5.3 Community Renewable On-Grid/Off-Grid Project: How can these best practices be replicated and sustained? A successful community-level RE project must emphasize the role of community in the project development and implementation. The beneficiary community should be involved from the early stages of project design onward. In two case studies, evidence shows that community ownership is directly related to the success project. Civil society organizations (CSOs) and non-governmental organizations play an important role in developing successful community renewable projects. Compared to government-funded projects executed mainly by private companies or contractors, CSOs and NGOs have more flexibility in disseminating pertinent information, managing the local community s participation and involvement, setting up local institutions, carrying out capacity building and training, and monitoring and evaluating the impact and continuity of the project. In contrast, government contractors usually have limited time to carry out projects and have limited or no budget to carry out social development and/or capacity building for the local community. A successful community-level RE project is usually supported by innovative financing mechanisms. Case studies prove that a public-private partnership (PPP) can work successfully. In the MHPP case, the financing came from both the government and international agencies. Implementation of the project was carried out by NGOs that facilitated community involvement by setting up a community-based institution, 20

22 as well as providing training. The role of the private company includes planning, design, and manufacture of the components required for the projects. Private companies provide technology transfer and technical know-how to the project s beneficiaries Factors that Enable or Constrain the Replicability/Mainstreaming of Renewable Energy in Indonesia Institutional Institutional factors are central to project sustainability in both case studies. Community involvement in the institution is important. Therefore, capacity building is greatly needed to empower communities to oversee the management of future projects. Most cases suggest developing a cooperative institution at each project site. The institution should manage all expenses related to electricity procurement, such as infrastructure maintenance, spare part procurement, and operator wages. The institution would also be responsible for collecting all payments for the electricity. These responsibilities should be assumed by a locally operated institution rather than a national one Financial All case studies have shown that there are several ways to ensure the financial sustainability of RE projects. These include: village or community initiative, grants, and soft loans. A common thread throughout all case studies is the local community s need for financial independence from external sources of funding. Financial provision provides this independence, which leads to local ownership. Soft loans are an effective tool for villagers. Since this type of loan stresses the importance of repayment, the villagers encourage users to pay and work to collect payments on time Technological Technology is vital for any RE project. An important, yet under-emphasized, factor is the capability of the technology s operator. Many donors give away modern technology but do not work to improve local technological capacity, such as troubleshooting, maintenance and other required know-how. It is important not to separate technology from capacity building and training for operators. New projects must also consider the willingness by the community to use energy produced from new technology. People who are unfamiliar with the technology may have little interest in using energy produced by it. If this is the case, additional efforts must be taken to increase community acceptance and understanding of the technology. This can be done through a demonstration site or activity Social Communities must contribute to the project in order for it to be successful and eventually sustainable. In order to get community involvement, the project must work within the social framework of the community. This is highly important, because the community will eventually operate and maintain the project, which results in its long-term sustainability. 21

23 Civil Society Role and Participation In both case studies, civil society or NGOs play a key role in promoting RE projects. Assisting the communities from the very beginning, they introduce the idea to the community, emphasize community ownership, and help to manage project funds and set up local institutions. CSOs also help the community adopt the new technology. At several successful micro-hydro sites, the communities attempted to build smaller electricity generators prior to the RE project, yet failed. These kinds of experiences may have a negative effect on the perception of micro-hydro technology. CSOs must step in and explain the benefits of the technology, most importantly access to electricity. 22

24 6. GENERAL MODEL OF REPLICABILITY Based on the cases presented in this report, the analysis of the constraints and opportunities of renewables in the context of Indonesia s energy economy and related literature, this paper argues that a project must be sustainable in order to be successfully replicated. The following model illustrates the factors necessary for replicability. involvement + + ownership responsibility+ + sustainability replicability + Figure 3 General Model on Replicability 9 Sustainability is best achieved when the community has a sense of ownership over the project. This must be present for the community to eventually take over all aspects of operating the system. When attempting to replicate the success of these case studies, community involvement must be a priority. Community ownership motivates local actors to take greater responsibility and accountability in maintaining the system. Increasing their responsibility will enhance their involvement with and ownership of the project. Using this model, sustainability is likely to be achieved. 9 The model was build using a System Thinking analysis tool. The sign + (positive) in the middle of the loop means that it will have the same effect on all elements of the chain. If one element decreases, then the others will follow; when an element increases then the others will follow. The loop explains that if the sense of ownership increases, then it will increase the sense of responsibility of the community. Whenever the sense of responsibility increases, the involvement of the community to the project increases as well. Likewise, when any element decreases, the rest will follow. 23

25 Based on the two case studies presented, communities felt a sense of ownership by assuming an active role in the entire project process. A more partcipatory planning process also motivated project stakeholders to look more deeply at the costs and benefits of the project, possible risks, and ways to mitigate them. Since leadership was assumed by duly elected and trusted leaders with some standards or guide for design and implementation, members felt that they had a stake on the project, whatever the performance and outcomes are. When attempting replication, the best plan involves a pilot site where several villages are able to see a successful demonstration of the new technology that can be applied to their own communities. Cinta Mekar, for example, has been a pilot site for several micro-hydro projects. Many microhydro operators came to Cinta Mekar to learn of its benefits. Using the pilot site as a reference encourages other communities to learn more and attempt replication. The General Model on Replicability can be used as a rough replication guide. However, improvements to the model can be made to further its effectiveness. 24

26 7. CONCLUSION This research finds that renewable energy development, at least in the context of Indonesia, requires enabling, enforceable and resourced policies and regulations at the national and local levels. Other support strategies such as fiscal incentives, feed in-tariffs, soft-loans, grants and technical assistance are equally important for the scaling up of development of renewable energy. For successful renewable energy projects at the local level to be replicated and services to be more accessible, affordable and cleaner, the following elements of good governance, technical and project management need to be seriously considered. Initiation: Non-governmental organizations usually play this role. They bring the idea to the community. NGOs help them to understand the benefits, promote cooperation, and take part in crafting the initial agreement. Institutional development and community participation: Locally-based institution must be created to ensure sustainability and ownership of the project. Community participation from the early stage is very important. The local community must be involved in the design, planning, and management of the project. Financing: Project financing must be available. It is important to solicit a contribution from the direct beneficiary of the project (e.g. the local community). This will help to foster a sense of ownership. If the local community cannot cover the cost, external funding from donor agencies must be available. An option for financial cooperation such as a public-private-partnership (PPP) should be examined depending upon the nature of the project. Direct financial benefit for the local community. Renewable energy investments should be able to help community organizations reduce, if not eliminate, their dependence on external sources of funding. Lesser reliance on loans can lead towards greater local ownership of these projects. This research also brings forth an important message to the international financial institutions like the World Bank Group. While the Bank has been involved and plans to remain involved in promoting the renewable energy development in Indonesia, it is important that its resources be focused on the following areas: policy development support, investment finance, technology transfer and capacirty building. These roles are elaborated below. In policy development, the Bank s global and country knowledge and advisory services can help improve long-term policy and regulation that supports renewable energy technology. The Bank can also improve tariff and subsidy policies for fossil fuel, and incentivize renewable energy. It can also provide technical assistance for creating a master plan and road map of renewable energy development including institutional set-up, fiscal support, and market development. In investment lending, the Bank s public and private sector financing can assist in creating financing arrangements for various renewable energy projects in the form of soft loans, small grants, and technical assistance. It can assist in preparing feasibility studies of potential projects, and can help to reduce commercial risk of projects in order to draw private investment. Also, the Bank should focus on noncommercial renewable projects, distributed generation, and mini-grid, particularly in rural areas that draw no interest from private sector financing. These projects support the World Bank s mandate to reduce poverty. The Bank has a history of technology transfer and capacity building. With such services, it can facilitate the transfer of renewable energy technologies through various mechanisms in cooperation with other institutions such as bilateral development agencies and the private sector. Finally, it can assist national and local policy makers learn from experiences of other countries or Bank-supported projects to develop RE policies and regulations. 25

27 8. REFERENCES Biro Pusat Statistik (Central Statistic Bureau), 2009: Data Strategis BPS (BPS Strategic Data), BPS, Jakarta. Ibeka, 2007, Community Private Partnership Pro-Poor Infrastructure: Cinta Mekar Microhydro Training Power Plant, a presentation by Ibeka in the Seminar on Policy Options for the Expansion of Community-Driven Energy Service Provision held by the UNESCAP in Beijing on March 11-12, Accesible at %20Cinta%20Mekar.pdf Ibeka, 2008, Community Private Partnership Pro-Poor Infrastructure: Cinta Mekar Microhydro Training Power Plant, a presentation by Tri Mumpuni (Ibeka) in the Discussion Sharing Experience of Financing Mechanisms for Low Carbon Projects in Indonesia held by the National Council for Climate Change in Jakarta on September 9, WWF, 2009, Cinta Mekar MicroHydro Plant Adopts Community-Based Microhydro Management. Accessible at Community-Based-Microhydro-Power-Plant-Management-System DGEEU, 2009, Bring Village to Live with Self-Management Power Plant. Accessible at