A Coherent Fiscal Policy Framework for Promoting Renewable Energies and Energy Efficiency in Indonesia

Vivid Economics worked with the Low Carbon Support Programme to the Indonesian Ministry of Finance formulating a series of recommendations to improve the fiscal policy frameworks for renewable energy and energy efficiency in the country. It draws on extensive in-country stakeholder engagement, document review and review of international experience.

The report finds that a coherent approach to renewable energy development rests on three separate, but related, pillars. First, the project economics of renewable energy investments must be appropriate to allow investors to make appropriate – but not excessive – returns. Second, finance must be readily available for good investment opportunities on reasonable terms. Finally, and underpinning each of the other pillars, the political economy context must provide investors with the confidence that they are investing within a stable regulatory regime.

To unlock energy opportunities opportunities, it is crucial to have a coherent fiscal framework which rewards improvements in energy efficiency and penalises wasteful energy use, within a context in which enhanced budget sustainability remains crucial. To this end, the report sets out a series of priority interventions across all sectors of the economy which include sustaining reductions in energy subsidies; new fiscal incentives for investments in energy efficient capital equipment; and enhanced financing opportunities for energy efficiency investments. These proposals build on international best practice while being firmly rooted in the specifics of the Indonesian context. To maximise the effectiveness of these fiscal policies, it is crucial that they are implemented alongside regulatory and administrative policies in the domain of the Ministry of Energy and Mineral Resources.