The Political Economy of Indonesia’s Renewable Energy Sector and Its Fiscal Policy Gap

Abstract

This research paper identifies fiscal policy gaps that occur in Indonesia’s renewable energy (RE) sector and analyses its political economy. Primary data from 37 stakeholders and secondary data from fiscal policies from Indonesia’s 2007–2017 taken from Ministry of Finance (MOF) and Ministry of Energy and Mineral Resources (MEMR) regulation databases. The fiscal policy data were analysed using a cluster approach and meta-synthesis method. The results show that Indonesia has experienced multi-faceted principal-agent problems between PT PLN, the agent with sole authority to manage electricity transmissions, and various principals, namely the Ministry of State Owned Enterprises (MSOE), the MEMR, the Ministry of Industry (MOI) as the intermediary between domestic and foreign RE industries, and the MOF. While changing the MEMR’s feed-in-tariff (FiT) policies sends an uncertain policy signal, the MOF’s fiscal incentive policies other than FiT to promote RE development in Indonesia remain sub-optimal; the fiscal policies required to incentivise a large volume of small- and medium-scale investment in RE are absent. Differentiated tax rates and tax-break periods for national and foreign companies on the micro, small and medium scales could significantly accelerate the development of RE by both domestic and foreign companies, supporting Indonesia in achieving its sustainable development goals and emission reduction targets under its nationally determined contribution.