By Mehmet Enes Beşer
Indonesia’s energy transition isn’t failing because Jakarta lacks ambition. Ambition is easy. Announce a target, pledge a phase-out, attend a summit, repeat the word “green” often enough and the headlines will do the rest. The real constraint is more mundane—and far more damaging: a policy architecture that keeps coal artificially cheap while making renewable projects financially awkward, risky, and often unbankable.
That architecture is doing exactly what it was built to do: protect price stability, shield the state utility from shocks, and keep the political cost of electricity low. But it’s also locking the country into the very dependence it claims it wants to escape. And as external carbon and battery rules tighten in major markets, Indonesia is discovering that energy policy is no longer just energy policy. It is industrial policy, trade policy, and competitiveness policy all at once.
Start with the most basic distortion: coal “wins” because the system makes sure it does. Indonesia’s Domestic Price Obligation (DPO) caps the price of coal supplied to coal-fired power plants. When global coal prices rise above the cap, the difference doesn’t vanish—it is pushed onto producers, effectively subsidizing coal-based electricity and lowering the apparent cost of power from the existing fleet. That might look like good consumer protection in the short term. In the long term, it behaves like a wall that renewables keep running into.
Now consider the investor’s view. With renewables, it’s a big upfront cost, where you spend the money upfront, and it’s not until later that you get it back. As such, the financing terms—how certain the revenue is, the currency risk, the terms around curtailment, the terms around change in law, the reliability of the offtake agreement—are as important as the sun and wind. Indonesia’s model stacks too much of that risk on developers while pushing tariffs down through ceilings and procurement structures that often treat the lowest number as the main proof of success. In a system where coal power is cushioned and renewables are squeezed, private capital will do what private capital always does: go where returns are clearer and risk is priced fairly.
The single-buyer structure reinforces the problem. Independent power producers largely sell to PLN on fixed-term contracts, with pricing rules that can leave little margin for error across the life of a project—especially when financing costs rise, or currency moves. Indonesia has tried to improve bankability: the Energy Ministry’s newer guidelines for renewable PPAs extend contract durations (up to 30 years) and add clearer provisions in several areas. That is progress. But “better PPAs” cannot fully compensate for a market design where coal is shielded, renewable tariffs are constrained, and grid risks are not shared in a way lenders trust.
The result is a transition that is loud on targets and slow on delivery—because the underlying price signals point in the opposite direction.
What makes this more urgent in 2026 is that the outside world is no longer neutral about carbon intensity. The EU’s Carbon Border Adjustment Mechanism (CBAM) entered its definitive regime on 1 January 2026, creating a pathway for imported carbon-intensive goods to face carbon-related costs at the border. Even where the initial scope is limited, the direction is clear: emissions increasingly translate into trade friction.
At the same time, the EU’s battery rules are turning “embedded emissions” into an industrial filter. Carbon footprint requirements and the coming battery passport regime are designed to make the supply chain legible—traceable, measurable, and eventually penalized if it is too dirty. For a country betting big on nickel and battery-linked industrialization, this matters. If your smelters run on coal-heavy power, you may still ship volumes, but you risk shipping at a discount—financially or politically—into markets that increasingly treat carbon as a quality defect.
This is the crux: delayed reform doesn’t preserve optionality. It raises the eventual adjustment cost.
If Indonesia waits until border fees, carbon footprint disclosure, and investors’ pressure are imposed on its exporters, it will be forced to adopt hasty measures, such as last-minute subsidies, emergency regulatory actions, and politicized blame games. Such a transition is costly and volatile. The cheaper path is to correct incentives now, while there is still room to sequence reform and protect vulnerable households.
So what would a serious, investment-grade reform agenda look like—one that doesn’t require Indonesia to buy its way out with endless subsidies?
First, phase out the coal distortions gradually but credibly. This does not mean flipping a switch and inviting an electricity-price revolt. It means setting a transparent glide path: narrowing the coal price cap over time, compensating only where genuinely necessary, and replacing blanket distortions with targeted support. If the goal is affordability, then subsidies households directly or through lifeline tariffs—not by permanently rigging the generation market in coal’s favor.
Second, make renewables bankable by design, not by exception. That means procurement that rewards reliability and delivery, not just the lowest bid on paper. It means standardized PPAs with clearer risk allocation: predictable curtailment rules, credible dispute resolution, and tariff-setting mechanisms that reflect real costs—including financing and currency risks—rather than assuming developers can absorb every macro shock. Indonesia has already moved to update PPA guidelines; the next step is to ensure the rules translate into consistent contracting practice that financiers recognize as stable.
Third, align grid and market rules with industrial reality. The big players in industries, especially in industrial parks or export-oriented industries, require reliable and clean energy in large quantities. If Indonesia aims to become a battery and EV hub, it must be able to provide industries with an opportunity to access renewable energy in a viable manner, whether through green tariffs offered by utilities or renewable energy certificates that are backed by actual renewable energy output. If clean electricity remains a boutique product, Indonesia’s “down streaming” dream will collide with carbon accounting.
Fourth, treat carbon exposure as a competitiveness issue now, not later. Indonesia doesn’t need to copy Europe’s ETS overnight. But it does need a credible framework for measuring, reporting, and reducing emissions in trade-exposed sectors—cement, steel, chemicals, and especially the energy-intensive processing tied to minerals. The moment carbon becomes a line item in export negotiations, the countries that already have measurement systems and decarbonization pathways will adjust faster and cheaper.
Finally, stop confusing “keeping prices low” with “keeping the economy strong.” While artificially cheap coal may drive cheap power in the short term, it locks in a technology trajectory in which money becomes concentrated in old fossil systems, skilled labor and supply chain expertise depend upon them, and cleaner technologies stall in attempting to scale up. The more that happens, the harder it becomes to pivot even though the economics increasingly favor cleaner technologies.
Indonesia’s advantage is that it still has time to choose an orderly transition over a forced one. It has immense renewable potential, a large domestic market, and a strategic industrial position in minerals and manufacturing that many countries would envy. But potential does not finance projects. Price signals and rules do.
If policymakers want renewables to be built at the speed the rhetoric implies, they need to stop asking the private sector to do something irrational: invest heavily in a market where the state has decided, through caps and contracting structures, that the incumbent fuel must always look cheaper.
Coal is not “naturally” unbeatable in Indonesia. Policy made it unbeatable. Policy can also unmake that advantage—carefully, gradually, and with the kind of leadership that trades a little short-term comfort for long-term strength.