Accelerating Indonesia’s green energy transition is one of the most challenging and crucial tasks in reducing climate emissions in Asia. At the heart of this transition is Indonesia’s state-owned electricity and utility company, Perusahaan Listrik Negara (PLN).
Together with my co-leads, we recently completed a three-week in-person course, working with 25 PLN managers from various departments on their strategies and capacity to green PLN, as part of an Australia Awards Short Course with site visits in Australia and Indonesia. This has been a rare opportunity to gain insights into PLN and, more broadly, into state-owned energy enterprises (SOEs), which are prevalent across Asia and the Pacific. This collaboration has given me hope that the green energy transition is possible but massive challenges remain in PLN’s business model, strategy, green finance capability, and governance, which must be addressed through strong, adaptive leadership from the board to the managers.
Indonesia’s green energy transition dilemma
To understand Indonesia’s relevance in the green transition and the fight against climate change, consider the following:
- Indonesia aims to become the fourth-largest economy worldwide by 2045, requiring significant economic growth.
- This growth has been supported by Indonesia’s vast fossil fuel reserves, with an estimated 146 years of coal reserves at current production rates.
- These reserves have enabled PLN to provide “cheap” (and subsidised) electricity.
- The Indonesian government’s Domestic Market Obligation (DMO) even mandates coal producers to allocate a portion of their production for domestic use, allowing PLN to purchase coal at a capped price of USD 70 per tonne.
- Unsurprisingly, PLN, the quasi-monopolistic electricity company, expanded its fossil fuel energy production by 50 per cent between 2013 and 2023.
- Thus, eather than moving towards greener energy, PLN has deepened its reliance on fossil fuels, which now account for over 80 per cent of its energy production in 2023. As a result, Indonesia’s CO2 emissions have risen by 50 per cent over the past decade.
These developments stand in contrast to Indonesia’s commitment to have a net-zero power sector by 2050. The Minister of Energy and Mineral Resources has issued a national electricity plan (RUKN) with a coal-phase-out roadmap for 2050 and ambitious green energy targets. PLN accordingly developed its 2021-2030 Electricity Supply Business Plan (RUPTL). This plan broke with PLN’s traditional reliance on fossil fuels and stipulates that most power generation projects must be renewable energy projects. Importantly, the RUPTL also suggests a break from PLN’s quasi-monopoly grab on electricity generation characterised by few independent power producers (IPPs)—in addition to PLN’s monopoly on energy transmission and distribution—and stipulates that a bigger share of the new power plants must be developed by Independent Power Producers (IPP). Furthermore, the Indonesian government issued several presidential regulations to support the expansion of renewable energy and the early retirement of existing coal-fired power plants (CFPPs) to reduce emissions (e.g., Presidential Regulation No. 112 of 2022).
Progress over the past few years toward either goal has been slow at best. Renewable generation capacity is far from expanding at the proposed rates, and independent power producers (IPPs) are not fully engaged. As of Q4 2023, of the 19.6 GW of renewable projects outlined in the RUPTL, only 0.97 GW have reached commercial operation, and the renewable energy share has dropped to 10.4 per cent—a significant gap from the 23 per cent target set for 2025. Early retirement of coal-fired power plants (CFPP) is also not progressing, despite significant efforts by the Just Energy Transition Partnership (JETP) supported by the G7, the Asian Development Bank’s (ADB) Energy Transition Mechanism (ETM), and ongoing negotiations to retire the 660 MW Cirebon coal plant.
Adressing the core challenges to green the state-owned power company
The underlying reasons for PLN’s slow progress in greening are complex. Beyond the obvious challenges plagueing electricity companies worldwide, such as lack of finance, the need for more energy storage, smarter energy systems, and insufficient human capacity—three key levers stand out for PLN to accelerate its green transition progress: rebalancing its business model, becoming green finance ready, as well as strong governance and leadership.
Rebalancing PLN’s business model
First, PLN needs to balance its business model to capitalise on its unique advantages as a state-owned enterprise (SOE) to accelerate the green energy transition while maintaining competitive electricity prices, rather than retaining its quasi-monopoly in energy production. PLN’s SOE status offers clear advantages: its strong BBB credit rating enables it to raise capital in international markets at relatively lower costs. It should leverage these funds to invest in riskier green energy projects, particularly in rural electrification, which typically attract fewer private partners. Meanwhile, higher-return or lower-risk projects can be handled by private companies, with PLN reducing its stake. This approach could attract more investors, rapidly expand green electricity production at a lower cost, and ensure that PLN supports a just and inclusive green transition.
At the same time, PLN should fully realise its grid monopoly to generate a significant portion of its income from transmission rather than relying on subsidised electricity production. PLN needs to recognise that its grid and distribution systems are its most valuable assets, not its power plants. Currently, PLN views building and operating its electricity grid as a cost centre rather than a profit centre. For example, when PLN plans a new power plant in a remote area, the cost of connecting the plant to the grid and transmitting electricity is seen as a sunk cost, significantly increasing the cost of the project.
In contrast, in “unbundled” energy markets, which separate electricity generation and transmission, the transmission network operator charges electricity producers or clients for transmitting power, making healthy returns. A transmission operator would need to be regulated as a natural monopoly. By separating transmission operations into an independent company (which could still be owned by PLN but with its own profit and loss responsibilities), PLN could support more green energy IPPs. This shift would enable PLN to focus on generating revenue from transmission rather than utilising its funds for energy production. Moreover, PLN could benefit from Indonesia’s massive, yet untapped, rooftop solar potential. Currently, PLN’s business model, which centres on power production, discourages allowing private rooftop solar operators to feed electricity into the grid, as this threatens sales from PLN’s generation assets. However, with an independent and profit-driven transmission and distribution company, PLN could buy surplus electricity from rooftop solar owners at relatively low costs and sell it at higher prices through its grid, making a healthy margin. In other words, it would socialise generation costs while focusing on transmission and distribution.
Becoming green finance ready
Second, PLN needs to become green finance-ready to mobilise more and cheaper financing from domestic, regional, and international capital markets. Some progress has been made, such as the publication of its Sustainable Finance Framework in 2022 and an ESG rating by Sustainalytics in May 2024. However, international green investors expect higher standards regarding green investment strategies, brown divestment strategies, transparency, and governance than PLN currently implements. PLN must improve its green finance credibility by enhancing climate finance and emissions reporting, and developing a clearer strategy, followed by concrete action to “green up its act.” This should include a clearer path for early retirement of its coal-fired power plants (CFPPs). Despite receiving domestic regulatory and international financial support, along with private sector interest in buying out CFPPs for early retirement, progress has been slow. This is likely because PLN’s valuation of its CFPPs is based on inflated accounting standards that support its balance sheet, setting a price too high for interested investors. Selling CFPPs at their actual financial value for environmental sustainability would hurt PLN’s financial sustainability. To address this, PLN would need to work with the Indonesian government and funders to mobilise green equity injections to balance its books when accelerating CFPP write-downs and allow legal extraordinary write-downs and balance sheet losses.
Adaptive leadership and governance
Third, and perhaps most challenging, PLN requires strong governance and leadership from the top and throughout its subsidiaries. Leaders must recognise that the path to a green PLN doesn’t rely on simple technical fixes. Using a metaphor: one cannot simply add a larger battery to a car to make it electric. These challenges require:
“Adaptive leadership that embraces change, challenges the status quo, and fosters experimentation and innovation”.
Adaptive Leadership
This starts with the board, delivering a clear message and demonstrating the risk appetite needed to steer PLN towards a greener future. It demands collaboration between political and business leaders to support change from the top down, including reducing reliance on the domestic market obligation for coal subsidies. Equally important is empowering PLN managers and employees to collaborate on operationalising a green PLN by finding and implementing new solutions outside the traditional scope of work. This approach will also require leaders to accept that many solutions rely on hands-on experience and experimentation rather than defaulting to tried and tested methods, which have not yielded the desired results. Finally, greening PLN will require steadfast leadership, as many senior managers may resist change due to fear of losing power and status. The board must play a critical role in setting the tone and, if necessary, shedding unnecessary ballast.
Addressing these three areas won’t solve all the problems for a green PLN, but they will steer the company in the right direction. What gives me hope is that change at PLN has already begun. The people we had the privilege of working with were acutely aware of the challenges and were working hard to find creative, ambitious, and implementable solutions to green PLN.
Professor Christoph Nedopil is Director, Griffith Asia Institute.
