Analysis of Indonesia’s Energy Sector: A Potential Energy Behemoth

Written by Sarthak Sharma

Introduction

In August 2020, Indonesian President Joko “Jokowi” Widodo highlighted his country’s plans for a pivotal shift in the energy domain. President Jokowi reaffirmed Indonesia’s aim for tackling “fossil energy domination” while promoting “massive downstreaming to produce higher-value” products and move away from a commodity-driven energy sector. Recently, the country implemented policies that leverage key resources necessary to meet the increasing demand for cleaner energy worldwide. The aforementioned developments are potentially game-changing, because Indonesia, along with being a prodigious energy consumer, is a resource-rich state capable of gaining a prominent foothold in a transitioning global energy market. These events may prompt geopolitical friction between major global powers interested in tapping into the country’s strategic prospects. Even so, questions remain whether Indonesia, a developing country with unique political and socio-economic concerns, will emerge as a dominating player in the energy sector.

Leveraging Rare-Earths

In January 2020, the Indonesian government banned exports of unprocessed nickel and encouraged processing in the country in a bid to export higher-value mineral products, increase foreign investment, and develop technological expertise. Globally, the demand for nickel continues to surge with much of it stemming from electric vehicles (EVs). With Indonesia accounting for roughly 30% of the world’s nickel production and 22% of global reserves, it aims to exploit this critical material and become the main producer of nickel-based products. Currently, this strategy appears successful, as international corporations rush to set up ore-processing facilities in the country. South Korea’s Hyundai Motor Group and LG Energy Solution started construction on the first EV battery plant in Southeast Asia in the Indonesian province of West Java. However, the policy of banning unprocessed minerals to boost domestic competitiveness raises concerns of resource nationalism--a potentially unwise move amid a global pandemic that greatly impacted nickel demand. Nevertheless, with Indonesia possessing 80% of the minerals needed to manufacture lithium batteries, the country may hold a vital strategic position in a rapidly growing battery technology sector.

Potential for Renewables

The International Renewable Energy Agency (IRENA) expects Indonesia’s electricity demand to triple between 2015 to 2030. This forces the country to maintain a delicate balance between meeting its burgeoning energy demand and reducing carbon emissions. Compared with other Asian giants such as China and India, Indonesia has a higher share of renewables in its energy mix. The country is now committed to expanding its renewable potential and plans to achieve 23% renewable energy use by 2025, potentially reaching more than 30% by 2030. Additionally, Indonesia currently ranks as the largest producer of biofuels and the second biggest geothermal energy generator in the world.

Even with these promising developments and statistics in the renewable sector, Southeast Asia’s largest economy continues to fuel its growth using nonrenewables--a reasonable approach from an emerging market’s standpoint. The country’s vast archipelago adds layers of complexity to establishing a reliable and clean national energy grid. For example, most of Indonesia’s power comes from a centralized system, which creates transmission and distribution hurdles to remote locations. In addition, variations in regional climate require diverse renewable technologies in different parts of the country. With Indonesia’s energy demand growing rapidly, the intermittent nature of renewables is another concern for electricity suppliers. As Indonesia improves its energy infrastructure, it must prioritize a more distributed approach to power generation, focusing on local energy sources.

Fossil Fuel Emergence?

Indonesia is the largest producer of oil in Southeast Asia and supplies the most natural gas in the region. In 2020, Indonesia ranked as the world’s largest exporter and the third-largest producer of coal. Yet, even with all the resources, the world’s fourth most populous nation requires sizable fossil fuel imports to cover its domestic energy demand. Due to a complex business environment, limited downstream capabilities, and political barriers, Indonesia’s energy sector is less competitive compared to its foreign counterparts. President Jokowi’s plans for “massive downstreaming” of fossil energy may facilitate the transformation of the country’s energy market. Downstreaming refers to the final process in the production of goods and provides the ability to produce higher-value products and exports (e.g., refined petroleum instead of crude oil). As Indonesia capitalizes on its resources, improved downstream capabilities, coupled with regulatory reforms, provide industrialization opportunities, regional competitiveness, and strategic advantage.

Indonesia traditionally extended large fossil fuel subsidies to buttress the economic mobility of its population. However, fuel subsidies are being viewed as wasteful government expenditures that contribute to greenhouse emissions and traffic congestion. Indonesia now works on tackling fossil fuel subsidies and providing more targeted subsidies that mainly benefit the poor. Amidst greater calls for clean energy, an uncertain global fossil fuel market, and Indonesia’s strategic decisions in rare-earths, investments and policies in fossil fuel may prove to be less lucrative.

Pivoting to Nuclear?

Large amounts of uranium and thorium can be extracted from unconventional sources such as rare-earth deposits. Indonesia looks to exploit these byproducts from its abundant rare-earth resources and has begun researching mineral purification and separation technologies for radioactive material extraction. The country currently operates small experimental nuclear facilities but could expand operations to commercial and strategic activities through greater capacity-building in the sector. Indonesia’s Defense Ministry appears interested in building a reactor for national security purposes such as power generation for marine vehicles. The ministry signed an agreement with ThorCon International, a U.S.-based nuclear power company, to collaborate on the research and development of a small molten salt reactor (MSR). Russia and China also entered joint agreements with Indonesia to develop reactors in the country.

Indonesia seems to be the clear nuclear frontrunner in Southeast Asia. Yet, the country does not view atomic energy as a priority in its energy mix and has set sights on renewables to meet its climate objectives. With on-and-off commitment from the government, there is uncertainty about the timeline for the development and construction of nonexperimental reactors. Indonesia appears risk-averse when it comes to nuclear energy with the former energy minister saying that they “do not need to raise any controversies''. Furthermore, earthquake-prone Indonesia may be hesitant to fully invest in nuclear power, especially after the Fukushima disaster in 2011. Despite these hurdles, it may be beneficial for the country to have a firm timeline and regulatory framework for the nuclear sector and view it as a source that could help reduce carbon emissions and provide downstream capabilities.

Geopolitical Confrontation

The United States and China are displaying strategic interest in Indonesia--a rivalry that may spill over to the energy sector. Indonesia portrays itself as non-aligned and resists getting involved in the geopolitical tussle between the U.S. and China. Considering Indonesia is a major regional power, Jakarta will likely not bend to the demands of other states unless it has secured its interests first. For the U.S., however, Indonesia's democratic regime and territorial disputes with China provide openings to formally align with Indonesia and hasten the process of developing a strategic partnership. With China having the largest rare-earth reserves in the world and controlling 80% of the trade, it becomes a strategic necessity for the U.S., and its partners, to woo countries like Indonesia.

Conclusion

The Indonesian government and population must fully realize the economic potential of the resources available to them. At the same time, the country must ensure that its practices do not exceed environmental limits and exacerbate the climate crisis. For the U.S. and other countries, sustainably developing Indonesia’s capabilities present an avenue for cooperation. This sort of collaboration will improve Indonesia’s economic stature and provide it with much-needed technological capacity in the energy domain. As an emerging market, Indonesia is in a unique position to leverage its energy potential for geopolitical gain but it is also constrained by political barriers and a global environmental challenge that could threaten its rise.