Achieving Resilience in the Energy Transition to Safeguard Indonesia’s Economic Growth & Sustainable Development/
IPA & Wood Mackenzie White Paper Executive Summary
Fossil fuels consumption has played a fundamental role in fuelling human development and driving economic growth but has elevated the atmospheric concentration of greenhouse gases (GHGs) beyond historical peaks, resulting in anthropogenic climate change. To address this existential threat, international organizations, governments, and civil societies have made a concerted effort to mitigate climate change through commitments such as the Paris Agreement and the Glasgow Climate Pact, with the goal of achieving net-zero emissions by 2050 to limit global warming to +1.5°C.
This objective calls for the fast deployment and scaling of low-carbon solutions, which requires unprecedented levels of investment in the energy transition. Multiple levers must be concurrently activated over the next decad
es, including technologies that are not yet economically and/ or technologically feasible. While there are various pathways to reach net-zero by 2050, some fundamentals remain:
- Renewable energy will play a pivotal role in decarbonising the power sector.
- In the face of sustained energy demand, gas will be the “bridge fuel” of the energy
- CCS/CCUS will be a key tool of decarbonisation, particularly for hard-to-abate
The energy transition, however, comes with its own set of challenges and risks that stem from the structural socio-economic changes that are needed to reduce anthropogenic emissions. For the energy transition to not only be successful but also fair and just, countries are now strengthening their energy resilience to ensure that reducing emissions does not come at the expense of economic growth and human development. Given limited time, limited resources, and competing interests, policymakers must balance trade-offs and establish priorities in their national energy policies across three categories: energy security, energy affordability, and environmental sustainability. These form the three pillars of the “Energy Trilemma.”
In Indonesia, policymakers have thus far prioritised energy security and affordability, focusing primarily on meeting the rapidly growing energy requirements of economic development, urbanisation, and population growth. This political choice, coupled with the vast hydrocarbon natural resources of indonesia, has resulted in an energy landscape characterised by the predominance of fossil fuels, the limited deployment of renewable energies, and the nascency of new low-carbon solutions. As Indonesia progresses on its energy transition journey, four macro-level themes will act as cornerstones of the country’s energy landscape:
- Growth in total energy supply to sustain economic growth (in line with the Vision of Indonesia 2045).
- Predominance of fossil fuels, especially for end-uses without economically competitive
- Growth in renewable power generation, to help decarbonise the indonesian
- Deployment of low-carbon solutions, limited by economic and technological readiness (e.g. the environmental benefits of EVs will be limited in countries with a carbon-intensive power sector).
However, with the country’s commitment to achieve net-zero emissions by 2060, various decarbonisation measures have been put in place which now introduce uncertainty over the shape and balance of indonesia’s future energy landscape. As indonesia delves into the details of balancing the priorities of the Energy Trilemma, several key questions remain unanswered:
- How quickly will energy demand grow? The implication on power generation in particular is
- How quick and effective will be the reduction in coal power generation? The actual impact of regulatory exceptions and the financing of early coal retirement remains
- How quickly can renewable power be scaled? Particularly in the face of wind/solar resources scarcity, infrastructure readiness, intermittency challenges, and overall economic
- What is the value of Indonesia’s domestic oil & gas production in achieving energy resilience?
- What role should CCS/CCUS play in Indonesia’s energy transition? Particularly as it now constitutes the only readily available and operational decarbonisation
This paper focuses on providing answers and actionable recommendations to the last two questions in a context where answers to the first three questions remain uncertain.
The value of domestic O&G production in achieving resilience in the energy transition
Unless the indonesian E&P sector undergoes a drastic revitalisation, today’s decrease in domestic oil & gas production in the face of increasing domestic energy demand will aggravate the country’s existing oil import dependency and will turn indonesia from a net exporter to a net importer of natural gas within the decade. Accordingly, the value of increased domestic oil and gas production is very clear:
- Oil as a fuel and an industrial feedstock: improved balance of trade and payment, reduction in fuel wholesale sourcing costs/subsidies, protection from price volatility and supply disruptions, in-country value capture, multiplier effect, and incremental value from
- Gas as an industrial feedstock: All the benefits listed above for oil are equally applicable in addition, as gas forms an industrial feedstock with limited substitutes, increased domestic production will protect industrial users against feedstock cost volatility and supply shortages risks. The development of domestic gas supply will also enable the downstreaming of the gas value chain, into natural gas derivatives such as ammonia and methanol.
- Gas as a fuel for power: With the structural uncertainty surrounding future power demand, coal power supply and renewable power supply, domestic gas production acts as a variable of adjustment to guarantee power security, limit cost volatility and offer a baseload power solution of lower carbon intensity than
- Excess gas supply: Any remaining supply can be exported to leverage booming regional
Considering Indonesia’s significant remaining oil & gas reserves, resources, and yet-to-find estimates as well the robust demand centres that exist domestically and regionally, both demand, and supply are in place. To grow domestic production, what Indonesia now needs is greater investment to connect the two by developing resources, carrying out exploration, and raising prospectivity, especially in frontier basins. Wood Mackenzie and IPA have identified four areas of improvements that, if addressed diligently, have the potential to materially increase indonesia’s investment attractiveness:
- Fiscal competitiveness: Limited incentives for existing projects and lack of flexibility in government share and cost recovery can hinder financial viability and attractiveness relative to peer
- Fiscal stability: Sudden unilateral changes in policies, uncertainty in assessing the impact of terms, and delays in finalizing laws pose challenges for long-term planning and erode investor confidence.
- Ease of doing business: Delays in project approvals, misalignments in regulatory actions, and a lack of clear long-term vision for CCS initiatives increase complexity and costs of CCS development.
- Net-zero E&P investments: Limited provisions for emissions reduction for Scopes 1-3 and offsets impede investment from environmentally conscious investors with corporate sustainability goals.
To address these blockers and considerations, Wood Mackenzie and IPA propose four actionable items:
- Develop a long-term energy roadmap which includes energy transition objectives and outlines the roles that different energy levers play in Indonesia’s future decarbonised energy landscape:
° Explicitly describe the energy levers (incl. domestic O&G and CCS/CCUS) and their expected contributions to Indonesia’s long-term energy transition, security, and affordability.
° Delineate the roles of the O&G stakeholders (private sector, SOE, regulatory, government) and their expected relationships/interactions in delivering the long-term roadmap.
° Specification of anticipated decarbonisation plans across the value chain (Scopes 1, 2, and 3).
- Establish an overarching legal framework: This framework should regulate all E&P activities within indonesia and enhance regulatory stability, transparency, and ease of doing
° Clear and permanent rules governing the authority & responsibilities of stakeholders.
° Clarity on legal enforcement mechanisms based on the new oil and gas law, prevailing regulations, & PSC/contracts.
° Mechanisms to alleviate the current fear or criminalization for both regulators and contractors.
° Streamlined procurement and licensing processes to reduce cost and accelerate development.
° Simplified, fast, and reliable licensing procedures, with improved ministry coordination.
- Enhance/redesign the fiscal regime: Analysing each fiscal term and its relative impact on contractor returns allows identification of potential enhancements to ensure fiscal
° Different sets of terms tailored to the specific challenges of different types of fields.
° Guaranteeing a negotiated, reasonable and project-specific rate of return with mechanisms to share upside opportunities and downside risks (e.g., R-factor, discretionary mechanisms).
° Incentives especially for existing brownfields and new marginal fields development (e.g.cring-fencing across PSC, investment credits, tax exemptions/holiday, CCS incentives).
° Domestic gas pricing mechanisms (e.g. reforming to a market price set by sellers & buyers).
° Contract flexibility (e.g., ability for existing PSCs to adopt new fiscal terms, flexibility to revisit new PSC terms, transferability of remaining definitive commitments to new areas).
° Other measures could include adjustments to royalty/FTP, maximum/minimum contractor profit share rate, profit sharing structure (stepped vs. sliding scale), DMO, etc.
- National GHG Emission Reduction Framework: Developing a transparent framework which aligns with international best practices can be a key step towards promoting a “low-carbon” O&G
° Development of a roadmap specifically for energy transition.
° Clear emission targets (e.g. measurable targets for reducing emissions based on NDC).
° Baseline standards (e.g. minimum operational and decommissioning).
° incentives and mechanisms to encourage companies to reduce carbon emissions, adopt low-carbon technologies, implement energy-efficient practices, and invest in CCUS projects (e.g. ensuring that GHG emission reduction activities are part of upstream oil and gas activities (Petroleum Operation) / part of the operating costs).
° Robust monitoring, reporting, and verification (MRV) to track emissions & ensure compliance which is in line with the industry’s best practice.
° incentivisation of collaboration & knowledge sharing, including R&D for clean technologies, based on partnerships across industry, academia, and research institutions.
The role and ambition of CCS/CCUS for Indonesia’s energy transition
The accelerated development of a robust CCS/CCUS industry in Indonesia will be crucial to reduce the country’s carbon footprint and drive economic growth while leveraging the country’s natural competitive advantages. If done successfully, Indonesia can extract significant value from:
- International emissions capture: Generate revenue from international emissions by providing storage services, enhance geopolitical standing as a regional leader in CCS offerings, and contribute to global climate
- Domestic emissions capture: Contribute to NDC, reduce local climate risks, improve overall investment attractiveness, enable the production of decarbonised products & services, and avoid carbon taxes on exports.
- New economic sector: Benefits associated with creating a new industry aligned with the green economy and contributing to long-term sustainable prosperity (e.g. GDP, tax revenue, employment, foreign direct investment, balance of trade and payment, political strengthening, regional leadership).
To capture this value, Indonesia can leverage on the supply-side, its significant storage capacity (depleted oil & gas reservoirs, saline aquifers); on the demand-side, the significant demand for CO2 storage across Asia, especially from countries with substantial carbon emissions, carbon pricing, and limited domestic storage solutions; internally, its existing E&P capabilities & infrastructure that offer a competitive advantage in injection, storage, and monitoring. What Indonesia now needs is a fully functioning CCS/CCUS value chain and ecosystem that leverages existing E&P capabilities to connect supply with demand.
The ambition of this CCS/CCUS vision can vary, however Wood Mackenzie and IPA recommend that in order to extract maximum value indonesia should take the most aggressive approach: capture CO2 from domestic & international third party sources and store it in dedicated domestic CO2 storage licenses (which can but do not have to be working petroleum areas).
In addition to the first steps already taken by Indonesia to kick start the development of CCS/CCUS (Ministerial Reg. No. 2/2022, baseline-and-credit scheme (planned), 16 pre-FID projects, MoUs, JCM). Wood Mackenzie and IPA propose five areas of action to lay the foundation of Indonesia’s CCS/CCUS industry:
- Develop a comprehensive set of CCS/CCUS laws and regulations encompassing the full value chain (domestic and international capture, transport, injection/storage, and monitoring):
° Legalisation of the CCS value chain (e.g. storage outside of petroleum working areas).
° Development of regulations to manage all processes (e.g. establishing operational standards, HSE, fiscal regime, licenses, monitoring requirements, and decommissioning requirements).
° Appointment of a dedicated ministry responsible for governing and overseeing the CCS sector to ensure effective management, coordination, and periodic reviews.
° Liability and financial mechanisms to address potential risks, including provisions for financial assurance, insurance requirements, and liability sharing arrangements among stakeholders.
° Establishment of advisory channels with experts/industry groups like indonesia Carbon Capture and Storage Centre (ICCSC), complementing existing initiatives by organisations like the Center of Excellence for CCS & CCUS at Institut Teknologi Bandung and Lemigas.
- Design and ratify cross-border CO2 emission management agreements: Engaging with key countries to enable the storage of CO2 from foreign emitters into O&G reservoirs or saline aquifers:
° Identification of countries that have a shared interest in cross-border CO2 transport and storage, considering factors such as proximity, existing infrastructure, and emission sources.
° Cross-border emission accounting agreement to recognise CO2 reduction in other countries.
° CO2 import and export agreement to enable the physical flows of CO2 between countries (e.g. regulatory framework within which private parties can operate and transact freely).
° Allocation of responsibilities among participating countries, including agreements on cost-sharing, funding arrangements for infrastructure development, and incentives.
° Establishment of MRV to track the cross-border transactions (e.g. data sharing protocols).
- Introduce a national carbon credit trading framework: Mechanism to govern the generation and trading of carbon credits which allows purchase of carbon Key requirements include:
° Designing carbon credit units (e.g. carbon allowances, offsets, and other recognised units). Clear criteria for the issuance to ensure credibility and adherence to international standards.
° Determining eligibility criteria for participation in the carbon credit trading. This may include requirements for MRV, project verification processes, and adherence to specific standards.
° Designing registry system to track and record the issuance, transfer, and retirement of carbon credits. The registry is a central database to manage credits and facilitate trading.
° Enhancing developers’ access to private climate finance to support decarbonisation projects.
- Offer fiscal incentives: Incentives provided to accelerate the development of full commercial- scale CCS projects are key factors contributing to the commerciality of the
° Designing grants/subsidies/loans to accelerate indonesia’s commercial scale CCS projects.
° Streamlining regulatory processes & permitting for projects by fast-tracking project approvals (e.g. simplification of the import of specialty goods & services needed for CCS projects, the inflows & outflows of capital, and the hiring of foreign talents with essential skills).
° Examples of fiscal incentives used in other regimes include tax credits offering a per ton basis credit for CCUS project (USD 45Q) and direct investments (Norway Longship project).
- Introduce a permanent & high carbon price (e.g. carbon tax, ETS): economic incentive and long-term revenue visibility (pricing will require inputs from Ministry of Finance and other stakeholders).
° Assessment of the potential impact including socio-economic implications and trade.
° Establishing emission reduction targets that align with national or international commitments.
° Developing a carbon pricing mechanism (e.g. carbon tax and “cap and trade” system).
° Determining the carbon price level, based on the desired decarbonisation trajectory.
° Establishing the compliance mechanisms for regulated entities including MRV and penalties.
Indonesia should initially prioritise providing CCS services to commercially ready foreign emitters in nearby countries with high carbon prices and limited storage capacity. As the domestic carbon price increases over time, indonesia can develop the domestic CCS value chain and benefit from the cost reductions and lessons learnt obtained through international activities. in the meanwhile, Indonesia needs to ensure that the public perception of CO2 trade remains favourable—rather than instilling an image of importing other countries’ “waste products,” policymakers need to emphasise the value in monetising the country’s resources and highlight the appeal of developing the industry for longer-term domestic gains.
Wood Mackenzie and iPA recommend adopting a phased approach to address our recommended action plans. The overarching vision and foundational frameworks must first be solidified and socialised across key stakeholders prior to full development and implementation. in the face of sometimes long lead times and imminent challenges, it is urgent for the government to start acting now in order to ensure the readiness and resilience of the country. Accordingly, Wood Mackenzie and IPA suggest adopting the following initiatives as part of the first phase of the process.
Fostering domestic O&G investments
- Design a long-term energy roadmap by building on DEN’s existing work, ensuring that it incorporates clearly delineated roles of domestic O&G and CCS in the future energy
- Engage with industry and stakeholders to finalise key building blocks of a new overarching legal framework for the E&P sector, to not only facilitate the permitting and licensing processes for E&P activities but also ensure compatibility with CCS development
- Identify and design enhanced fiscal terms that are fit for purpose (e.g. customising
incentives based on field-specific attributes), drawing from lessons learned from previous domestic developments and benchmarks of countries with comparable challenges and asset characteristics.
Developing the CCS/CCUS industry
- Design comprehensive regulations that outline the legal and technical requirements for implementing CCS/CCUS projects, not only creating a supportive environment for commercial arrangements and transactions but also ensuring environmental protection, safety, and
- Conduct at least one pilot project to demonstrate the feasibility and commerciality of CCS/ CCUS technologies, showcasing their potential in reducing emissions and achieving climate goals, while identifying potential hurdles to consider for future developments.
- Initiate discussions with other governments in the region to foster collaboration to not only engage in government to government (G2G) agreements covering partnerships and trade but also share knowledge, best practices, and resources to accelerate regional CCS
Throughout these initial processes, it will be crucial for the Indonesia policymakers to not only maintain close coordination among the internal constituents across the E&P and CCS value chains but also provide clarity in Indonesia’s revamped strategic objectives to domestic and foreign stakeholders alike, ensuring that their interests remain aligned with Indonesia’s long-term energy goals and development pathway.