Jakarta, Indonesia – In the heart of Southeast Asia, fossil fuels still dominate the energy landscape, comprising a staggering 83% of the region’s energy mix. Renewable sources, although gradually increasing, account for only 14.2%. Among these, solar energy remains notably underutilized. While Vietnam has made significant strides with 20.5% of its power sourced from solar, Indonesia lags significantly behind, with less than 1% solar penetration.
Indonesia’s off-grid areas, scattered across islands beyond Java, present a unique challenge. Approximately 40% of these regions remain disconnected from the national grid, making infrastructure development particularly complex. This encapsulates a broader challenge for the region: effectively harnessing its abundant renewable resources.
To put things into perspective, a one-gigawatt power plant can supply energy to approximately 750,000 homes. Globally, our civilization currently runs on about 17.7 terawatts of power from all sources—oil, coal, natural gas, and alternatives such as solar, wind, and hydropower.
Helen Wong, Managing Partner at AC Ventures and a prominent climate investor in Southeast Asia, discusses the outlook on solar energy in Indonesia. As the region’s most populous country, Indonesia accounts for 40% of Southeast Asia’s power consumption.
Early Retirement of Coal
The prospects for solar energy in Southeast Asia are compelling. The region has a technical potential of 17 terawatts—over 20 times the capacity needed to meet the net-zero emissions target of 2050. However, current renewable energy capacity stands at a mere 99 gigawatts.
Opportunities are emerging as investors hedge their bets on the region’s renewable energy space. The Just Energy Transition Partnership (JETP) for Indonesia, launched in November 2022 at the G20 Leaders’ Summit in Bali, aims to mobilize an initial US$20 billion in public and private financing to decarbonize the nation’s energy sector. Indonesia has set an ambitious target of achieving 19%-21% renewable energy by 2030.
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A significant part of this plan involves the early retirement of Indonesia’s coal plants, which currently make up 60% of the local energy mix. To bridge the inevitable production gap, an aggressive increase in renewable energy investments is necessary, targeting an annual generation of 36 gigawatts from solar photovoltaics—a sevenfold increase from investments recorded between 2018 and 2021.
Helen Wong emphasizes the urgency of addressing climate change in Southeast Asia. “The urgency to do something about climate change is clear, especially in Southeast Asia. Looking at Indonesia, specifically, part of the problem is that there has historically been an overinvestment in coal which has resulted in a surplus of cheap electricity. In this sense, the JETP discussion should be viewed as encouraging for global climate investors,” she states.
Starting with Commercial and Industrial
Helen remains optimistic about the outlook for solar energy in Indonesia over the next decade. She explains that AC Ventures most often encounters three types of solar projects: utility-scale, which requires significant capital expenditure and fluctuates according to tenders from PLN; the commercial and industrial subsector, where companies can build or lease on-site renewable power plants for self-consumption; and residential, which is currently harder to scale.
The most promising subsector in Indonesia’s solar energy market is the commercial and industrial space. “Xurya, our portfolio company, is the largest player in Indonesia’s commercial and industrial market today, supplying clean power to multinationals. They currently have a capacity of about 200 megawatts,” Helen shares.
Backing the Winners in Solar
Investment firms evaluate solar energy projects by looking at the internal rate of return and the overall payback period. Helen notes, “In Southeast Asia, solar energy is still at a very early stage. The key is in originating the right projects and ensuring that financing costs allow for a good internal rate of return. Regarding subsidies, while nice to have, they can lead to market volatility and solar prices have come down so much that they are close to parity with fossil fuels.”
Helen highlights the use of solar yield optimization technology, such as trackers and software that assess the suitability of rooftops for solar installations, as enhancements rather than fundamental solutions. The integration of IoT in auditing renewable energy projects is also becoming vital, supporting detailed auditing to facilitate loan approvals and attract necessary debt financing alongside equity.
“Financing is quite critical as the initial costs for solar projects are substantial. As investors, we need to understand how long the company can manage the payback of their initial investment and how they handle their cash flows,” Helen explains.
Accelerating Broad Solar Implementation
Helen outlines the importance of upgrading Indonesia’s power grid to handle more intermittent sources of energy like solar. Increased grid connection between the nation’s main islands is likely to be achieved by 2028 at the earliest.
“More than US$300 billion is needed not just in distribution but also in transmission for renewable energy,” she notes. “The grid needs to be upgraded to be able to handle more intermittent sources of energy like solar. In the context of venture investing, we at ACV are keen to back the winners in this space and help with the imminent energy transition in Southeast Asia at large.”
About AC Ventures
AC Ventures (ACV) is a top venture capital firm that invests in tech-enabled businesses focused on Indonesia and Southeast Asia, with over US$500 million in assets under management. The firm empowers entrepreneurs with more than capital by combining operational experience, industry knowledge, deep local networks, and resources. ACV’s team has invested in over 120 regional tech companies since 2012. With a team of more than 35 professionals led by Adrian Li, Michael Soerijadji, Helen Wong, and Pandu Sjahrir, it has offices in Jakarta and Singapore.
