Yohanes Pandu Wicaksono – Indonesia faces a defining challenge in decarbonising its power sector – adapting a state-dominated electricity market to unlock its renewable energy potential. Indonesia's national utility corporation Perusahaan Listrik Negara (PLN) dominates generation, transmission and distribution, shaping investment, grid access and planning. Yet in 2024, renewables accounted for just 14.6 per cent of its energy mix.
The transition is urgent because Indonesia's power system remains carbon intensive. Coal still provides two thirds of Indonesia's power, while fossil fuels account for over 80 per cent. This reliance made Indonesia the world's seventh-largest CO2 emitter in 2023, with emissions reaching 659 million tonnes of CO2, including 326 million tonnes from electricity and heat production alone.
Under its Electricity Supply Business Plan for 2025-34, Indonesia plans to add 69.5 gigawatts of capacity, with 61 per cent of new power plants coming from renewable energy. Infrastructure investment by PLN and the private sector over the period requires around US$180 billion. Yet investment has stagnated since 2021 due to short-term financing, high infrastructure costs and local content requirements. Only US$1.7 billion was secured in 2024, far below the roughly US$18 billion in investment needed per year.
The challenge of managing electricity is intensified by Indonesia's geography – more than 17,000 islands lead to uneven infrastructure and differences in service quality. The sector also faces fragmented governance, with several ministries sharing overlapping roles, slowing permitting procedures, investment decisions and reforms.
Beyond financing constraints, several structural barriers deter renewable energy investment and innovation. Frequent regulatory changes and shifting tariff frameworks reduce policy predictability and weaken investor confidence. Land acquisition remains a challenge for utility-scale projects, with overlapping land claims and lengthy permitting processes increasing development risks. Local content requirements raise project costs, while limited and uncertain grid access constrains independent power producers and increases curtailment risk.
The experiences of China, Vietnam and the Philippines offer lessons for Indonesia as it considers its own path to reform.
China's experience shows how state-owned enterprises can drive renewable expansion when given autonomy within a coordinated planning framework. Following the breakup of the State Power Corporation of China in 2002, competition was introduced among generators while the state retained control over transmission and system planning. State-owned subsidiaries invested early in wind and solar in response to policy signals. Market-based dispatch and regional trading later created more space for renewables on the grid. While progress varied across regions, strong central coordination ensured alignment with national priorities, demonstrating that competition and state control can coexist.
Vietnam illustrates the strengths and limits of incentive-driven renewable expansion. Generous feed-in tariffs introduced after 2017 triggered rapid growth in solar and wind capacity, but grid development failed to keep pace, leading to widespread curtailment. Though private investment increased quickly, the state retained dominance over transmission and retail. Vietnam's experience shows that incentives alone are insufficient and must be matched by grid readiness, regulatory capacity and coordinated system planning.
The Philippines highlights the risks of liberalisation without strong regulation. Reforms introduced in the early 2000s created a competitive wholesale market, but market concentration persisted and most electricity continued to be traded through long-term contracts. Weak regulatory oversight contributed to price volatility, limited renewable uptake and rising household electricity prices. This shows that competition alone does not guarantee efficiency or decarbonisation without effective regulation and contract design.
These regional experiences suggest that Indonesia's challenge is not how far to liberalise, but how to redesign the state's role. PLN's mandate could shift from sole operator to system integrator, retaining responsibility for planning and reliability while enabling private firms and subsidiaries to compete in renewable generation.
Market opening should proceed gradually, beginning with generation and supported by stronger regulation and institutional coordination. Renewable incentives need to align with grid readiness and spatial planning, particularly outside Java, while legacy take-or-pay contracts and coal-linked obligations should be reviewed to restore system flexibility and reduce fiscal risk.
Indonesia's electricity reform options are also shaped by a broader nationalism paradigm surrounding natural resources. The 1945 Indonesian Constitution mandates that land, water and natural resources be controlled by the state for the benefit of the people, a principle that continues to influence energy policy. The Constitutional Court has repeatedly interpreted electricity as an essential public service that must remain under significant state control. These legal and political foundations constrain the scope of liberalisation and reinforce the need for reform strategies that improve state capability and system performance.
Indonesia's 2060 net-zero commitment provides a long-term anchor for reform, but policy and investment signals must become more consistent with that direction. The electricity sector has expanded access and supported growth, yet the current state-centric structure risks slowing the shift to a low-carbon system. The most credible path is strategic, sequenced reform that strengthens regulation, modernises the grid and reshapes PLN's mandate to integrate renewables at scale while maintaining public welfare obligations.
Success will depend on how well reforms are sequenced and aligned with Indonesia's long-term goals – not market liberalisation. By learning from regional peers and avoiding the pitfalls of over-concentration and unchecked liberalisation, Indonesia can build a cleaner, more resilient energy future.
[Yohanes Pandu Wicaksono holds a Master of Science in Sustainable Energy Systems from the University of Edinburgh.]
Source: https://eastasiaforum.org/2026/01/02/liberalisation-alone-wont-power-indonesias-energy-transition