Financing Renewable Energy in Indonesia: A CGE Analysis of Feed-In Tariff Schemes

This paper examines the impact of promoting clean (renewable) energy production through feed-in tariff (FIT) schemes on Indonesia’s economy and on greenhouse gas (GHG) emissions. For numerical analysis, we designed a hybrid computable general equilibrium (CGE) model that explicitly incorporates electricity generation technologies. The Indonesian FITs have been stipulated in Government Regulation No. 79/2014 on National Energy Policy. We assume that the government sets a 15% subsidy rate for renewable generation technologies. Two possible financing schemes are implemented: (i) the FIT is paid by electricity consumers through the endogenous electricity tax rate; and (ii) the FIT is financed by a carbon tax adjustment. The results show that the effects of both FIT scenarios on macroeconomic and CO2 emission accounts are negligible. These negligible effects are due to the low shares of renewables (geothermal and hydro) generation load in total electricity mix. Therefore, we argue that Indonesia’s current FIT regulation is insufficient to boost the national clean energy production and therefore is ineffective to reduce the national emissions.