Community-Driven Renewable Energy Projects Propel Eastern Indonesia’s Energy Transition, Says Research

Achieving the 1.5°C Paris Agreement goal requires a just energy transition, shifting from fossil fuels to renewable energy (RE) to foster decarbonization and sustainable economic growth. For rural Eastern Indonesia, extending reliable and affordable energy access to the last mile of the population is crucial. RE mini-grids can efficiently provide sustainable electricity for remote households and small businesses.

Despite Indonesia’s National Energy Policy and Enhanced NDC targets emphasizing an inclusive energy transition, private investment in small-scale RE projects faces barriers such as high costs, interest rates, perceived risks, and lack of de-risking instruments. Consequently, private sector interest in these projects has been minimal.

To address these barriers, the Climate Policy Initiative (CPI) conducted research on overcoming financing obstacles for decentralized RE investment in Eastern Indonesia, examining four case studies in East Nusa Tenggara and East Kalimantan. These studies revealed that successful RE projects share a common element: a community-driven approach with full ownership and consensus on financing and management aspects, even without private sector involvement.

Financing Models for Decentralized RE Projects

CPI’s 2020 report highlighted decentralized RE as a viable solution for increasing energy access and accelerating electrification in underdeveloped areas. This model can address barriers such as limited access to finance and high investment risks, deterring private investments. Government capital injections and partnerships with the private sector can strengthen regionally owned enterprises through schemes such as:

1. Village-Owned Enterprise (VOE) and Private Sector Joint Venture: Village governments’ understanding of local electricity users can reduce reliance on costly debt financing.
2. Public-Private Partnership (PPP) using Availability Payment Scheme: Regular disbursements maintain public service levels, ensuring investment returns and reducing risk perceptions.
3. Special Allocation Fund and Private Sector Joint Venture through Joint Operation Mechanism: Grants cover capital expenses, improving projects’ return on investment.

Case Studies: Community-Based RE Projects in Eastern Indonesia

1. Muara Enggelam: A VOE effectively manages a solar PV grid, supporting local livelihoods. The project was funded by a Special Allocation Fund and enhanced by community consensus, reducing operational costs and reliance on government funds.
2. Watukarere: Mismanagement and lack of community ownership plagued this government-funded project, limiting its effectiveness and sustainability.
3. Mata Redi: A donor-led project with comprehensive support, including physical infrastructure, vocational training, and management by a VOE, successfully powered households and public facilities, fostering economic growth.
4. Treweng: A community-driven approach ensured successful mini-grid use, although the presence of competing electricity sources led to stranded assets.

Policy Recommendations for Rural Electrification

• An inclusive, sustainable approach to developing community-based RE mini-grids is crucial, with projects grounded in local needs and active community participation.
• Community-based RE should be part of broader economic development, involving cross-governmental functions, international donors, NGOs, and other non-state actors.
• The Indonesian government should enhance awareness, improve frameworks, and foster innovative financing mechanisms for community-based RE mini-grids.
• Investment frameworks should leverage public finance to attract international donors and private finance, including capacity support for subnational governments and human capital development.

Indonesia’s journey toward electrifying its last mile should focus on inclusive, community-driven projects to achieve universal energy access and sustainable development goals.