Maintaining Indonesia’s economic growth, especially during this health crisis, relies on the government’s ability to provide electricity access from sustainable sources to all parts of the country. It is time for Indonesia to rethink rural energy.
Work from home, a luxury many cannot afford
Indonesia has recorded some of the highest number of positive COVID-19 cases in South-East Asia. In response, local governors and mayors have enforced semi-lockdown measures, making social distancing mandatory. In addition, many businesses have closed their offices, requiring employees to work from home. This is only feasible, however, for urbanites with access to reliable sources of electricity. The story of households and healthcare facilities in rural, outermost small islands of the archipelago is much different.
While social distancing and maintaining productivity at home are critical to avoid the economic and health crisis of COVID-19, limited or no access to reliable electricity, even for healthcare facilities, means most underserved islands in Indonesia are left with limited options to stay productive and contribute to the economy.
To understand the stark contrast in energy inequality across Indonesia, let’s take Sumba Island in East Nusa Tenggara as a rural example. Located in one of the poorest provinces in Indonesia, Sumba is not fully connected to the centralized grid and over one-third of its households (34.32%) do not have access to electricity; even the two-thirds that do have access receive only a few hours of electricity in a day. This results in many households relying on diesel as their primary source of energy. Though diesel is easily accessible and might appear cheaper in the short term, it can be very costly in the long run as it relies heavily on global oil price fluctuations. It is also a limited resource, not a fuel that can be renewed. So, improving rural electrification from renewable sources will be key to maintaining the island’s economic resilience.
Limited electricity is affecting rural health
Increasing unemployment and health uncertainties have led to almost 1 million workers leaving commercial regions, such as the greater Jakarta area, even before the president officially declared an exodus ban in mid-April. There is a chance that some of these workers are carriers of the virus, making it important for rural areas to prepare for a potential outbreak. And to be equipped to tackle an outbreak, a consistent supply of electricity for healthcare is imperative. For instance, other than medical equipment for lab testing and general operations, essentials like pneumatic ventilators require 70-150 watts of power and need to operate constantly for life-support.
Unfortunately, public health facilities (puskesmas) in provinces of the archipelago’s outermost region – mainly comprising of small islands – have no choice but to rely on diesel-powered generators; meaning healthcare services in these regions are vulnerable to the many insecurities that come from relying on global oil supplies. In addition to the insecurity of diesel supply, these generators, primarily designed for urban buildings to use as back-up during power outages, have low capacity, are noisy, smelly, and require frequent replacement when used daily.
Villages that do use diesel generators try hard to avoid the costs of purchasing diesel, by only turning it on for a few hours at night. The pollutants from diesel emissions are so notoriously high, even the State Electricity Company (PLN) has urged for the phasing out of diesel generators for urban use. But the dependency on diesel is higher in rural areas than urban, precisely because of PLN’s limited reach in rural areas; 12% of healthcare facilities in East Nusa Tenggara and 18% in West Nusa Tenggara run on diesel, in comparison to 9% in Jakarta and 1% in West Java.
This is hardly the kind of stable energy source we wish to equip our healthcare services with. And in the long run, dependency on diesel is neither good for a clean Indonesia we hope for, nor is it sustainable.
Driving clean energy access to undeserved regions
Decentralized renewable energy – small-scale energy generation units that deliver energy to local customers – is a possible solution to accelerate electrification in remote areas. Decentralized renewable energy serves not only as a clean, cheaper and sustainable source of energy, but is also in line with Indonesia’s National Energy Policy, which aims for 23% of Indonesia’s electricity energy mix to be from renewable energy sources by 2025.
There are indeed challenges to adopting decentralized renewable energy in Indonesia’s rural islands. One of the key challenges being a 98% gap in government funding per year towards improving the energy system, making it a requisite for the Government of Indonesia to attract other sources of finance, especially private players. But regulatory constraints, lack of suitable low-risk business models and lack of innovative financing make the sector unattractive for private investors.
This is a shame given that in fact there are multiple ways to attract financing for decentralized renewable energy systems. A recent report by Climate Policy Initiative lists at least seven innovative financing mechanisms that would improve financial viability. These recommendations place an emphasis on empowering village-owned or locally owned enterprises with capital injection from fiscal instruments such as the village fund or the special allocation fund, and scaling that up by inviting private sector investment through joint venture schemes. The study shows how these business models fix the main barriers: risk and return on investment, off-taker uncertainty, prohibitively high up-front cost.
However, one barrier remains that can only be fixed by policy reform and political will. Current rules on applying for a power distribution Business Area (Wilayah Usaha) are prohibitively complicated, to the point that it actually discourages decentralized renewable energy projects. If the government is serious about building economic resilience in the nation’s outermost regions, the “Business Area” policy must be revisited.
These recommendations are a win-win for all – it will scale-up energy access to the most underserved regions, make small islanders energy secured, ensure public health resiliency, maintain economic productivity, contribute towards the national clean energy target and importantly, it will help everyone breathe easier. Rural electrification investment generates economic benefits, while innovative financing schemes is one of the key ways to achieve that. For private investors, it will be a clean, attractive sector to invest in with a huge potential – according to our research, some business models are able to improve the bankability of off-grid renewable project that inherently reduce business risk.
With the dawn of COVID-19 and the uncertainties that come along with it, there is an immediate need for policymakers to create an investment environment that lowers risk perceptions of private players, nudging capital flow towards decentralized renewable energy. This will allow Indonesia to build a clean, sustainable, resilient and equitable economy it deserves.