Dr. Surya Darma, Vice Chairman of The Indonesian Renewable Energy Society, discusses the attraction of Indonesia for Investors and its plan to develop natural resources into value added industries.
The recent inauguration of President Joko Widodo is the country’s first election of a ‘businessman’ for presidency. This landmark move has created excitement and raised hopes in Indonesia. How would you assess the government's ability in handling key administrative issues (e.g., good governance, infrastructure, economic stability, etc.)?
I think there is a big hope from the people of Indonesia on the new president. Now you can see also what happened, the problem in the energy sector. Before there was a big gap between the rich and the poor people, while on the other hand the subsides are not going to the right people. But you see the government finally announced that the subsides will decrease, at least it could go from 6500 to 8500 RP, that’s almost market price for the Premium type of fuel, because premium is RON88, if you use RON 92 or 95 the price is 9.500 RP or something like that so maybe for the RON88 it is almost market price. And then there is a big chance for the government to prove they are efficient in their mission, to reach the prosperity and also reach the good governance and reduce the corruption and the bureaucracy. I think this is the main problem here, the bureaucracy, and permit issues, to reduce permit issues. I think there is big hope and excitement.
Regarding the renewable energy sector, it wants to reduce the subsidies on this fossil fuel. This means the renewable energy sector will increase the competition in terms of pricing. We did not compete with the unfair treatment. We treat the fossil fuel by using subsides but here there is a market price, renewable energy is at market price so it is very hard to grow and very hard to develop if you do in a different playing field, you have to play in the same field whit the same rules, a fair game. I think this is a very good window now for the renewable energy sector.
Do you think getting fuel subsidies for instance would help the government to reach these ambitious targets of having 23% of energy mix from the renewable energy in 2025 as well as reducing greenhouse gas emission by 26% by 2020?
Yes, we have to have a good roadmap for that, our new energy policy also increased from 17 up to 23% by 2025, but this is very challenging. We have to push very hard to reach efficiency, we need a good roadmap. For each type of energy, it is hard to reduce the oil, and by what years, let’s say every three years or every five years and then hold to increase the use of the gas and convert the oil into gas. We have a lot of gas, the gas also should compete with these subsidies. Because the gas is not subsidised.
And then how to make the roadmap of how to increase renewable energy, lets say instead of using a 100% of fuel, mix it with biofuel, because Indonesia right now is the biggest producer of the Crude Palm Oil (CPO) and also the biggest exporter for CPO. So if you can convert this biofuel into fuel, you can mix lets say the mandatory amount right now of 7%, but this mandatory level is never really reached. So why shouldn’t this target be mandatory to the industrial sector or to the automotive sector, to the factories, power plants, etc. so they can use that biofuel of 7% and then 10% and increase it up to 15%. If you can increase this then Indonesia can reduce the use of oil by 30%, which is a fantastic number.
This is part of the METI’s roadmap, but to which instance do you collaborate with the government to implement what it is said in your roadmap?
Firstly we have to collaborate with the Minister of Energy of course; secondly we have to work also with KADIN (the Indonesian Chamber of Commerce and Industry) that represents the industrial and private sectors. And we have to work with the Minister of Industry and the Minister of Trade because they have the policy to export or not to export the biofuel or CPO. If we export of course we are going to have the dollars for the country but on the other hand we have to import the oil, those are big numbers as well. So instead of exporting and reimporting you do it here and build the refinery and the economy can grow. Because the problem here is that we don’t have enough refineries to convert the CPO to biofuel, that is also why we need industries, and these are also opportunities for the private sector, to invest and add value, build infrastructure, etc. And of course once we do this, because this is located in the remote area it will also create local economy for the people, it will increase the welfare for people. So I think we are going to have multiple effects by using and converting the CPO instead of only exporting, so we can reduce the use of oil.
It is something we see in many sectors nowadays in Indonesia, the shift from just exporting raw materials to a more value added industry. With this shift a lot of investment and know-how is needed, maybe from foreign actors to help Indonesia continue in its development. The UK has been involved in different sectors such as the oil and gas sector, where it is bringing experts for drilling as an example. Do you think we can extend this potential cooperation bearing in mind Britons are well known for their know-how?
Yes if I make a balance from one side of the business, activities and regulations but on the other side we have to increase our people’s capacity. What we always support is only on this side, the business sector, regulations, the rules, but we forgot developing the capacities of the people, I think in the future we have to look for balance, how to upgrade the people, how to make the business attractive, they can grow together. I juts came back from Sumatra, there if we look at the palm oil industry development, the local people can only be employed as drivers or other very low positions, and they asked who is going to upgrade them there. So what I propose is in terms of people development, what we agreed to do is to develop the strategy to upgrade the human resources in Indonesia. If you see the targets that are set increasing is very strict, if you see the geothermal sector right now our capacity is about 1342MW, but they are going to develop the target by 2025 to at least 6000MW. That means almost 5 times more energy, but what about the human resources? Do you have the people to make this happen, to increase the capacity almost 5 times in 10 years? It is a big problem, where do the experts come from? Nobody can answer now. I asked to the government, and they said the companies should do it. I asked the companies and they said no, we have to see the first graduate and that means no experience, it takes time to train, but this is a period of only ten years, nobody had realized. Yesterday I presented this and everybody was wondering. We have to think about it. I tried to learn what the New Zeeland did in the past because they have very good experience in this; they started developing geothermal energy from 1950s up to 2000. In 50 years the increase was very slow, but since the year 2000 the increasing of capacities is very stable, almost the same with our target now. I asked them what did they do with the people and they explained first they made the people. How do you make the people? To train from the first graduate the geothermal capacities, but it takes time. For the bigger companies, the international companies, they can also fix the people, they take them from related activities, not only from the geothermal, they train and fix them to the geothermal activities, they hire from everywhere. If the business attractiveness is there, if it is not there, lets say because the price is decided by the government, like a selling price, like here subsidies, it is too high for the companies to hire and contract, it will cost more and more money to hire people. From this lesson I learned I think we have to do it also here. I think it is good for the UK to collaborate with Indonesia, let’s say for geothermal energy we collaborate with New Zeeland or Iceland but for biofuel we have to collaborate with the UK. I think the UK is very aggressive to promote the bio energy. I think the same thing happened in the other sector of renewable energy, in bio it will increase very sharply but we don’t have any experience, the experienced are very few, and we have to increase this. How are we going to do it? We need collaboration, that’s the way, from the UK or Europe, maybe Germany. We cannot achieve the target by our own, for the business we need to fund it but on the other hand the people are also needed.
Indonesia and the UK have agreed to increase the number of exchange students from prestigious universities, this could benefit the sector.
We can use the UK institutions and so we can do in Indonesia, collaborate with UK, do some lectures here.
Another point that interests the UK is the environmental aspect of the businesses. With the recent change in geothermal law the concern is how you are going to get the balance between the country’s aim of reducing the greenhouse gas emission but at the meantime the need to reach the potential that is crucial for the energy needs of the country, since most of the subsidies are in the protective forestry area. What is your opinion on how is the country going to manage the balance?
Before the Government worried about us destructing the forest while doing the exploration in the reservation area, but actually what geothermal energy needs is the forest, the geothermal can’t exist without the forest. I don’t think the geothermal industry will destroy the forest because they need it, but now the Government and the Parliament realized that the regulation is low, the geothermal is defined as a mining activity. Once you say mining activities are prohibited in the forest area, they will find that the geothermal is an energy which is used as a facilitator to extract the energy but not liquid, the liquid is facilitator of the energy, actually the energy comes from the air, and then this liquid will be ejected again into the air, so we expect that the geothermal industry can’t destruct the forest area.
Regarding foreigners penetrating the Indonesian market, what is the best way of entering the market? What are the options to explode the geothermal sector?
The law allows the international participation in the country but the international investor should start with an Indonesian company, even the share of the international investor is up to 90%, so that means 10% should be domestic, should be an Indonesian partner. So you can create a joint venture with only 10% international and 90% local investment or the other way around.
Europe can be a big market for Indonesia.
Yes right now Europe is a big market for CPO but not for biofuel. It could be for both, I think Europe should prioritize it because the consumption of biofuel has increased domestically but if you use this CPO to export, you have to increase the import of oil, so we have to balance it.
What is your opinion on regarding the recent merges and legal changes the government implemented in order to attract more investors into the renewable energy sector?
I think what the government wants to do on the business side is that all the renewable energy activities should be attractive and economically feasible. Maybe the changes of regulations are to make the business attractive for the private sector, government’s guarantees, financial guarantees, etc. that is for private the sector. I think this is only right hand sided, business attractiveness, but the government forgot about the people that will manage all these activities.
We have some examples of financing projects, like the Sarulla Geothermal Power Project and regarding the hydroelectric sector some were financed by subsidies. Bearing in mind London is the financial capital of Europe, its Stock Exchange is the fourth largest in the world and that the UK is looking at Indonesia, do you think the right message is they should bring the capital instead of bringing their companies?
Yes I think so, but the financing also, like in Sarulla Geothermal Power Project they are bringing both, they brought the financials and the company. Here the local partner we have is a consortium between the financing company from Japan, the manufacturer of the power plants from the US and then the local company Medco. The consortium is Sarulla Operations Limited. We can use this type of consortium also for others and for the UK. Maybe the UK doesn’t have enough experience in the geothermal activity but maybe some companies have the financial institution to support. We can also duplicate this kind of consortium for CPO. The manufacturer and the financials may also come from the UK.
You brought up a very important issue before saying that the government and the private sector are focusing on the exploitation of the resources but they are forgetting about the people. We had the honour of meeting Hon. Andrinof Chaniago, Minister for National Development Planning who told us about the priorities of the Indonesian Government’s Agenda. The main priority is to reduce that inequality between the two Indonesians that you were mentioning before, the high income level one and the one who lives in the rural areas, which is usually the one that experiences the bad consequences of the energy sector. Now that the renewable energy sector is offering them possibilities to use their crops, like palm oil or sugar cane, do you think that could be the key to achieve that equality in the society, how do you evaluate the role of renewable energy sector in here?
I think the people should increase gradually; it is very hard if you are of a very low-income level and then become a very high level or even middle level, it will make people unstable. But if they increase gradually we can see if their background or education level is good, we can train them into a certain level. They should feel that they own the project; we have to create that situation that they feel they own the project and that they need the project and that we also need them. There is a very big gap but if they own the project I think it will make the project stable and easy to manage. One day maybe they can say this is our future here and our next generation could become a manager, not only the driver. I think that the most important is that we have to develop gradually, maybe in certain levels we don’t need a university background. But the human kind treat is vital, if you see on the rural areas they have a very low level, maybe we need to increase that.