Indonesia’s electricity sector is facing mounting structural challenges as its long-standing dependence on coal-fired power generation increases operating costs, weakens grid resilience and slows the transition to renewable energy.
Analysis from the Institute for Energy Economics and Financial Analysis (IEEFA) warns that the country’s coal-heavy power system is becoming less flexible, more expensive and increasingly vulnerable to global market volatility.
Coal has traditionally served as Indonesia’s primary baseload energy source, but rising fuel costs, exchange rate fluctuations and rigid long-term power purchase agreements are placing growing financial pressure on the national power sector. Independent power producer contracts based on take-or-pay arrangements require the national utility to pay for contracted capacity even when coal plants remain underutilized, creating persistent financial inefficiencies and increasing the cost of electricity generation.
The report highlights that coal procurement now represents a significant portion of operational expenditure. As coal prices remain linked to global markets and the Indonesian rupiah weakens against the US dollar, the cost of dollar-denominated coal purchases continues to rise, putting additional pressure on the utility’s balance sheet.
To shield consumers from higher electricity prices, Indonesia continues to rely on its Domestic Market Obligation (DMO) mechanism, which caps domestic coal prices below international market rates. While the policy helps maintain affordable electricity tariffs, it also reduces potential government revenue by forcing domestic coal sales below global benchmark prices. According to IEEFA, the mechanism protects consumers in the short term but distorts market signals, discourages efficiency improvements and delays investment in cleaner energy technologies.
Indonesia’s centralized coal-based electricity network is also creating reliability concerns. Large coal-fired power stations depend on extensive high-voltage transmission networks, making the system increasingly vulnerable to transmission failures, severe weather events and regional grid disruptions. Recent transmission incidents have demonstrated how failures can trigger localized outages, particularly in densely populated and industrial areas, highlighting growing infrastructure risks across the power system.
Despite abundant renewable energy resources, Indonesia continues to lag behind its clean energy ambitions due to insufficient investment in grid modernization. IEEFA notes that expanding solar and wind generation will require significant upgrades to transmission and distribution infrastructure, along with greater deployment of energy storage, grid flexibility technologies and stronger interconnections between islands. Without these investments, renewable energy integration will remain constrained, limiting long-term electricity price stability and economic benefits.
The report also raises concerns about the continued expansion of captive coal-fired power plants serving industrial users. Although these facilities provide dedicated electricity for manufacturing and processing industries, they risk locking Indonesia into decades of carbon-intensive infrastructure, increasing the likelihood of stranded assets as global markets increasingly favour low-carbon supply chains.
IEEFA identifies distributed renewable energy, particularly rooftop solar, as a practical solution for improving energy resilience. Decentralized generation can reduce transmission losses and ease pressure on centralized infrastructure. However, widespread adoption remains limited because high upfront installation costs remain unaffordable for many households and small businesses. The report recommends innovative financing models, including leasing arrangements, energy service companies and blended finance mechanisms, to accelerate rooftop solar deployment.
According to IEEFA, Indonesia has reached a critical point where continued reliance on coal is becoming incompatible with long-term energy security and economic competitiveness. Rising generation costs, fiscal exposure, grid vulnerabilities and inadequate investment in modern electricity infrastructure underline the need for accelerated coal transition planning, large-scale grid modernization and faster renewable energy deployment. Without these reforms, Indonesia risks remaining locked into a high-cost, high-emission electricity system that could undermine both economic growth and climate resilience over the coming decades.
SHAFANA FAZAL