Indonesia has taken a big step in developing renewable energy by issuing the Minister of Energy and Mineral Resources Regulation Number 5/ 2025, which regulates the mechanism of power purchase agreements (PJBL) from green energy-based plants. This regulation provides contract certainty of up to 30 years, ensuring long-term stability for investors. In addition, the price mechanism based on the Highest Benchmark Price (HPT) or negotiations with PLN allows electricity prices to be more competitive, especially for intermittent-based plants such as solar and wind power. With the recognition of carbon credits and renewable energy certificates (RECs), the regulation also opens up opportunities for developers to obtain funding from carbon markets and ESG financing schemes.
In addition, the regulation allows solar, wind, and marine power plants to use energy storage technologies, such as batteries and pumped hydro, to improve the reliability of the electricity system and overcome intermittency. Another step forward is the recognition of the Deemed Dispatch mechanism, which ensures that if PLN is unable to absorb electricity from the plant for some reason, PLN is still obliged to pay compensation, even if it is not in full. Liquidated Damage penalties are also more flexible, where operational delays are only subject to sanctions within a maximum of 180 days, providing better protection for project developers from uncertainties beyond their control.
Even though this regulation is progressing in the development of renewable energy in Indonesia, several things still need to be criticized if the main goal is to accelerate the energy transition. One of the biggest drawbacks of this regulation is the absence of a more flexible scheme to accommodate different types of renewable energy projects. Electricity prices from renewable energy are set based on HPT (Highest Benchmark Price) or negotiations with PLN, which can make it difficult for small projects to develop due to price uncertainty. In addition, this regulation does not guarantee 100% of electricity purchases by PLN, opening a gap for restrictions (curtailment) in the event of an oversupply on the grid. This can cause financial losses for developers, who still have to bear all risks in land acquisition, permitting, and development delays, while PLN only bears the risk of transmission network readiness and currency exchange rate volatility.
In addition, this regulation still imposes many penalties on developers. Reliability penalties (Availability Factor/Contracted Energy), VAR, frequency, and ramp rate can be a big burden, especially for small-scale or intermittent energy-based projects. This penalty is calculated based on the amount of electricity (kWh) that the plant cannot supply, so in the event of technical problems or extreme weather, developers can suffer huge losses. This is compounded by the absence of additional financial support, such as tax incentives, subsidies, or soft credit, which could make investing in renewable energy more attractive. In comparison, Vietnam and the Philippines have provided tax holidays and special financing schemes for green energy projects, which should be a reference for Indonesia in accelerating the energy transition.
The Big Challenge: Curtailment Risks Still Threatening
One of the major risks for renewable energy developers in Indonesia is curtailment, which is the restriction of electricity production by PLN for technical or economic reasons. In many cases, electricity from renewable energy cannot be channeled to the grid even when the plant is ready to operate, so developers suffer losses because they cannot sell the electricity they have generated.
Curtailment can occur for several reasons:
Limited Network Capacity → If the PLN grid is unable to accommodate power from renewable energy plants, then PLN can limit the supply of electricity from solar power plants or PLTB to maintain system stability.
PLN Chooses Cheaper Electricity from → Coal Due to the DMO that limits the price of coal to only USD 70/ton, electricity from coal-fired power plants is often cheaper than renewable energy. As a result, PLN prefers electricity from coal-fired power plants and limits electricity from solar power plants or coal-fired power plants.
Overcapacity → Several regions in Indonesia experience an excess of electricity supply, especially in areas with large coal-fired power plants. Because coal-fired power plants cannot be easily reduced, electricity from renewable energy is forced to be curtailed.
Curtailment is already a problem in Vietnam after a huge surge in solar PV investment. To address this, Vietnam implemented a compensation system for developers who experience curtailments beyond their control. Meanwhile, in Germany, energy storage systems and integration with the electricity market have significantly reduced the risk of curtailment.
Indonesia has started to deal with this problem through the Deemed Dispatch mechanism in the Minister of Energy and Mineral Resources Regulation Number 5/ 2025, but this scheme still needs to be clarified to truly protect developers. If curtailments remain high without full compensation, investors will be hesitant to enter the renewable energy sector in Indonesia.
Priority Dispatch: Protection for Renewable Energy That Doesn’t Yet Exist in Indonesia
One of the mechanisms implemented in several countries to accelerate the energy transition is Priority Dispatch, which is a policy that requires electric power system operators to prioritize electricity from renewable energy before using electricity from fossil fuel plants.
In the European Union, this mechanism has been implemented in the Renewable Energy Directive (RED II), which requires electricity from renewable energy to be the first choice in the electricity system before other plants are activated. Countries such as Germany, Spain, and Denmark have implemented Priority Dispatch for many years, which has helped them increase their share of renewable energy in the national energy mix.
Vietnam has also begun to implement a similar approach, especially after a surge in solar PV investment in 2019-2021. Although it does not have as strict regulations as the European Union, Vietnam provides incentives for grid operators to absorb more renewable energy.
In Indonesia, Priority Dispatch has not yet become part of the regulation, so PLN still has the flexibility to absorb electricity from coal plants first, which is cheaper due to coal price subsidies through the Domestic Market Obligation (DMO) policy. If Indonesia wants to accelerate the energy transition, the Priority Dispatch mechanism must be implemented so that electricity from renewable energy is prioritized in the electricity system.
AEER Coordinator, Pius Ginting assessed that “One of the major risks for renewable energy developers in Indonesia is curtailment, which is the restriction of electricity production by PLN which causes losses because electricity cannot be distributed to the grid. The Deemed Dispatch mechanism in the Minister of Energy and Mineral Resources Regulation Number 5/ 2025 has been introduced to deal with this problem, but the mechanism needs to be clarified to protect developers and attract investors to develop NRE in Indonesia”.
Analyzed by Timotius Rafael and Ronaldo Martua
