Energy Transition and Security in Indonesia: A Regulatory Dilemma
Amid mounting global pressure for decarbonisation and a transition to clean energy, Indonesia faces a complex dilemma. On one hand, the country is committed to achieving a Net Zero Emission (NZE) target by 2060 or sooner. On the other, its dependence on coal remains enormous, both as a source for national electricity generation and as a pillar for the mineral downstreaming industry, a strategic government agenda. This paradox raises a crucial question: is Indonesia genuinely moving towards an energy transition, or is it still trapped in a logic of energy security based on fossil resources? This question is not only relevant from an environmental perspective but is also critically important in the context of business law and investment certainty. Regulatory inconsistency, overlapping energy policies, and political-economic tug-of-war have the potential to create uncertainty for businesses in the energy and mining sectors.
To date, coal remains the backbone of Indonesia’s electricity supply. Data from the Ministry of Energy and Mineral Resources shows that the majority of the national power supply still comes from coal-fired steam power plants. This condition is reinforced by Indonesia’s position as one of the world’s largest coal exporters. This dependence was born from pragmatic economic and energy policy considerations. Coal is considered cheap, abundantly available domestically, and capable of maintaining national electricity price stability. In the context of energy security, the government still views coal as a strategic instrument to safeguard domestic energy supply and industrial stability. However, the issue becomes more complex as Indonesia simultaneously commits to a green energy transition through various international forums, including the Paris Agreement and the Just Energy Transition Partnership (JETP) scheme. As of November 2025, the Indonesian government had mobilised USD 3.1 billion through the JETP scheme. The government even issued Presidential Regulation Number 112 of 2022 on the Acceleration of Renewable Energy Development for Electricity Supply as a legal basis for accelerating clean energy. Unfortunately, implementation on the ground has not yet shown a fully consistent direction.
One of the most controversial issues in Indonesia’s current energy transition is the increasing use of captive coal power to support the mineral downstreaming industry, particularly nickel. Indonesia is indeed enjoying a surge in large-scale investment in the nickel processing industry as part of its national downstreaming agenda and the global electric vehicle supply chain. Industrial estates in Sulawesi and Maluku are growing rapidly with the support of foreign investment, especially from China. Yet this development presents an irony. The electric vehicle industry, globally promoted as part of a green economy, is in Indonesia largely supported by coal-based captive power plants. A number of international reports even assess that the expansion of captive coal power could potentially hamper Indonesia’s decarbonisation targets.
From a business law perspective, this situation creates serious problems regarding state policy consistency. The government promotes green investment and energy transition, yet simultaneously still provides ample room for the construction of coal-fired power plants for strategic industrial interests. This condition has the potential to create regulatory ambiguity for investors. Renewable energy investors require long-term policy direction certainty, while mining and downstreaming industry players also need guarantees of a sustainable cheap energy supply to maintain business competitiveness. One of the biggest challenges for Indonesia’s energy sector is the issue of regulatory certainty. National energy policy frequently changes following political dynamics, fiscal conditions, and short-term economic needs. For example, the government implements a Domestic Market Obligation (DMO) policy for coal to safeguard domestic supply and electricity tariff stability. From a national interest perspective, this policy can be understood as a form of state intervention to protect national energy security. However, for mining businesses, the DMO policy is also seen as limiting market flexibility and potentially reducing export profitability.
On the other hand, the new and renewable energy sector still faces various regulatory and financing hurdles. The procurement process for renewable energy projects is considered not yet competitive, renewable energy tariffs remain unattractive to investors, and inter-agency coordination is often unsynchronised. This uncertainty ultimately affects the perception of Indonesia’s investment risk. Global investors currently consider not only economic profitability but also consistency in environmental policy, governance, and Environmental, Social, and Governance (ESG) principles. Meanwhile, global investment trends are moving very rapidly towards green financing and sustainable investment. International financing institutions are becoming increasingly selective towards fossil-based projects. A number of international banks have even begun to restrict financing for coal-fired power plants. If Indonesia cannot provide a consistent policy direction, there is a risk that the country will lose momentum to attract long-term green investment.
The Indonesian government is actually in a difficult position. The energy transition requires enormous costs. At the same time, national electricity demand continues to rise alongside industrialisation and economic growth. In this context, the government tends to maintain coal as a short-term pragmatic solution while gradually attempting to build a renewable energy framework.