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Indonesia will lift solar energy rules to unleash green investment

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Indonesia will temporarily ease rules that have slowed development of solar power in the coal-dependent country, lifting one of the many legal roadblocks to the archipelago’s goal of reaching net zero emissions by 2050.

The government will cancel the requirement that solar projects use a majority of locally produced materials until 2025, when Indonesia’s first solar panel factory is expected to start production. By conservative estimates, the country could generate more than 4,000 times its current solar output.

Speeding up the energy transition has been a priority for President Joko Widodo, and relaxing the “local content” requirement for solar was one of more than a dozen policy reforms laid out in the draft investment plan for the $20 billion Just Energy Transition Partnership that Jokowi negotiated with US and other wealthy countries.

The plan points to several huge challenges for the JETP, including not enough in grants or low-cost loans from wealthy nations, and the reluctance of private financial institutions to fund projects related to coal, including early retirements.

For Indonesia’s part, changing the solar requirements may be the easiest of the legal reforms that the plan calls for. The country currently generates fewer solar power than Norway, and much of what it does produce is shipped to Singapore.

The government aims to increase its solar power capacity fivefold in the next five years, according to the investment plan, but will need nearly $2.4 billion to achieve this.

It will also need to tackle other polices and laws that block efforts to replace coal with renewable energy. Among them: Indonesia currently subsidizes coal-based electricity; the state-owned utility is limited in its ability to raise money for investments in renewable energy; the use of “captive coal”, which are built-for-purpose plants that don’t supply the electrical grid, is widespread and growing.

Restrictions on the sale of state assets also limit the options for closing coal plants. Specifically, it bars selling a state asset for below book value, and while it was designed to prevent corruption and cronyism, it frustrates the kinds of deals that facilitate early-retirement of coal power.

The investment plan suggests the legislature make clear that it wouldn’t be a criminal act under these specific circumstances.

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