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Energizing Renewables in Indonesia: Optimizing Public Finance Levers to Drive Private Investment

Climate Policy Initiative

Blended finance instruments, which make use of public and/or philanthropic funds to mobilize multiples of additional private capital, offer promising finance structuring solutions to address the risks and barriers to clean energy investment. Around the world, blended finance offers more than USD 1 trillion in investment opportunities for clean energy.

This report presents the findings from the first study in a series of reports by Climate Policy Initiative Indonesia in partnership with the Indonesian Ministry of Finance that look at national opportunities for blended finance. In particular, this study aims to understand the role of public finance instruments for clean energy and identify opportunities to optimize them to spur private investment in Indonesia. The ultimate objective is to inform Indonesia’s public resource allocation strategy so that it will address the most critical barriers to clean energy investment and improve public capital efficiency.

Recommendations include:

Direct public finance to address critical early-stage project development risks:

Public finance is more effective when directed to address the most critical risks throughout the project life cycle. The risk profile of each phase of a clean energy project varies and risks typically decrease as projects move towards operation phase. Our analysis indicates that de-risking commercial risks have more impact to reducing project costs than de-risking political risks. While the importance of instruments in mitigating political and public-sector performance risks should not be underestimated, our outreach suggests that investors have become more comfortable in dealing with these risks. For example, the need for Business Viability Guarantee Letter is not as crucial as it was in the past as investors have become more accustomed to dealing with the state-owned off-taker and, in consequence, their perception of the risk has also improved.

Expand guarantee coverage and increase focus on climate-related projects:

Expanding the coverage of guarantee instruments could help increase their visibility and reach a wider range of investors. Increasing the supply of guarantees is useful for investors as they can choose the products most suited to their needs. This means investors do not have to pay for coverage of risks they are already comfortable with.

Furthermore, increased supply of guarantee products would be more effective if underpinned by specific objectives. A mandate to increase the use of guarantee for climate-related projects could also help align the interests between policy makers and guarantee providers, and hence, improve utilization. Having specific objectives and increasing the transparency of guarantee instruments in many instances proves to have positive impacts on utilization.

    Date
    01 Dec 18
    Type
    Policy and Research Reports
    Region Focus
    Southeast Asia, East Asia and Pacific
    Sector Focus
    Energy
    Sub-Sector Focus
    Renewable Energy