Renewable Energy for Southeast Asia: A Market Ready for TakeoffPublished in Knowledge@Wharton
Although it runs on domestic and imported fossil fuels, Southeast Asia is waking up to the potential of renewable energy and energy efficiency, though its situation is complicated by the role traditional fuel exports--as well as homegrown palm oil, whose value as a renewable is heatedly debated -- play in its own regional economy. The ASEAN countries (Brunei, Indonesia, Thailand, Vietnam, Cambodia, Laos, Malaysia, Myanmar, the Philippines and Singapore) have rich potential in geothermal, wind and solar energy. Renewable development remains embryonic, but government policies throughout the region are increasingly favoring it.
In June, Wharton held a Global Alumni Forum event in Jakarta, entitled "Indonesia, ASEAN and the World: Concentric Circles of Growth." A special panel organized by Wharton's Initiative for Global Environmental Leadership (IGEL), "Growing Greener: Indonesia and the World," looked closely at the region's existing energy base, and its potential for a more energy-efficient future. With Southeast Asian energy demand growing rapidly (up 7% a year in the last decade, with coal being the primary source), it's a vitally important subject.
Can Indonesia take a sustainable path while also continuing its pace of economic growth? That's the route chosen by President Susilo Bambang Yudhoyono, who in 2009 said that Indonesia would achieve a 26% greenhouse gas emission reduction by 2020 (41% with international assistance) while simultaneously growing the economy by 7% per year.
At the forum, Paul Wolfowitz, a former ambassador to Indonesia and World Bank president, pointed out that Indonesia has the potential to be a renewable energy powerhouse, with 40% of the world's known geothermal resources. "But there's a difficulty in committing to long-term pricing," he said, "and without some assurance investments can't be made. Geothermal energy development is well within the range of commercial viability, provided the right economic policies are in place."
In fact, reports the Jakarta Globe, only 5% of Indonesia's vast geothermal reserves (estimated at 28 gigawatts) have been developed. The country does have renewable energy goals, and hopes to install 6.7 gigawatts of wind, solar, biomass and hydroelectric power by 2025, raising its percentage of total energy production from 7% to 15%.
A Palm Oil Power
If Indonesia is not yet a power in renewable energy, it is the world leader (with Malaysia) in the production of palm oil, which is used in the making of everything from potato chips to soaps and cosmetics. It is also used to make biodiesel, which can be burned in the world's truck fleet and many passenger cars as well.
Is palm oil production sustainable? Yes, says Franky Oesman Widjaja, chairman and CEO of Golden Agri-Resources, the largest domestic palm oil producer in Indonesia and the second largest in the world. The company produced 2.64 million tons of palm oil last year, a significant share of the 45-million-ton annual global yield. Widjaja said at the Wharton forum that palm oil production is a very efficient use of land, and employs 4.5 million people in Indonesia and Malaysia. He added that more than six million acres of farmland in Indonesia is low-yield, and would benefit from conversion to palm oil production. "Food security and economic opportunity can co-exist," Widjaja said.
A palm oil certification organization, the Roundtable on Sustainable Palm Oil (RSPO), was set up in 2003 to address environmental concerns about palm oil production, and claims 40% of the world's producers as members. In a recent report, the group said it certifies 29 grower companies with 135 mills in six countries. In Malaysia, 14% of production is RSPO-certified. Indonesia has had 9% of production under certification, but as Wolfowitz pointed out at the forum, the Indonesian Palm Oil Association pulled out of RSPO in 2011. Other Indonesian palm oil producers remain as members. "That could be a big issue with environmental groups," he said.
Indeed, palm oil production is controversial, in part because its ongoing rapid expansion has resulted in substantial tropical forest deforestation in Southeast Asia. According to Eric Orts, who chaired the Wharton panel as IGEL's director and is professor of legal studies and business ethics and management at Wharton, "The palm oil production problem is a good example of well-intentioned legislation having detrimental unintended consequences. For example, when the European Union mandated targets to reduce greenhouse gas emissions, it had the unwanted effect of accelerating the clearance of Indonesian rainforests for palm oil production, which contributes to greenhouse gas emissions. Pressure needs to build for all the palm oil producers to get serious and address the problem to international standards. "
Wahjudi Wardojo, a former government forester who is now senior advisor for international forest carbon policy at The Nature Conservancy (TNC), said at the Wharton forum that Indonesia suffers from "one of the most degraded ecosystems in the world," which TNC is attempting to address with a major program of forest conservation, working with the campaign against deforestation and forest degradation known as REDD+. Indonesia has 23 million acres of land in palm oil production (mostly through state-mediated leases), with planned expansion of as much as 49 million acres.
Sarene Marshall, managing director for TNC's global climate change team and a past speaker at Wharton conferences, said that a primary issue with palm oil production is where the plantations are sited. "Oil palm is permitted on habitat- and species-rich primary forests in Indonesia," she said. "At the same time the country has 40 million hectares [98 million acres] of degraded land, an area the size of Germany, which was cleared for other purposes. It's smarter, we think, to site palm oil on those lands."
The environmental impact of palm oil production has been identified by critics as biodiversity loss (including threats to critically endangered orangutans in Indonesia), an increase in greenhouse gas emissions, depletion of soil nutrients, water pollution and desertification. Advocates for indigenous groups also say that the development of large monocrop palm estates has led to land conflicts and human rights abuses. Oil palm producers counter that palm cultivation is more efficient (in terms of yield per care and energy inputs) than oils made from soybeans, sunflowers, rapeseed and others. When palm oil is blended with conventional diesel, it produces an affordable biodiesel at the pump that is cheaper than several alternatives.
European Commission data, however, shows that biodiesel from palm oil has a carbon footprint larger than all three of those alternatives, though it bests oil from tar sands. In January, the U.S. Environmental Protection Agency issued a finding that palm oil biodiesel fails to meet the standards of the agency's 2007 renewable fuels mandate. A coalition of environmental groups, including the National Wildlife Federation, the World Wildlife Fund (WWF), the Union of Concerned Scientists and the Natural Resources Defense Council, agreed with the finding, but concluded that the EPA had actually underestimated the climate emissions from palm oil biodiesel.
Analysis that examined the entire palm oil biodiesel lifecycle, including the draining and burning of peatland and the clearing of rainforest for planting, plus widespread use of chemical fertilizer to grow the palms, changed what had been an optimistic picture of the fuel. Robbie Blake, a bio-fuels campaigner at Friends of the Earth Europe, told the Guardian newspaper, "It's getting quite indisputable that the use of soy or palm oil to fuel our cars is even dirtier than conventional fossil fuels."
Ironically, as Orts notes, it was well-intended green initiatives that helped accelerate the growth of palm oil, in particular the European Union's goal of cutting greenhouse gas emissions 20% by 2020. That target was coupled with a mandate that 10% of vehicles run on bio-fuels -- and palm biodiesel meets that mandate.
Certified palm oil undoubtedly has a lower footprint. RSPO says it currently represents 11% of global production, in Brazil, Colombia, Indonesia, Malaysia, Papua New Guinea and the Solomon Islands. The group says its work is independently audited, and in compliance with international standards for social, environmental and economic good practice.
Beth Gingold, the Penn graduate who leads the World Resources Institute's program on palm oil, takes a balanced view. She points out that palm oil generated $12.4 billion in foreign exchange for Indonesia in 2009, and supports both millions of jobs and opportunities for rural farmers. "Our take is that when produced using good practices, such as according to the RSPO principles, avoiding deforestation, involving small landholders, and respecting local rights, palm oil production can have many benefits, including poverty reduction."
Gingold agrees with TNC's Marshall that Indonesia has enough degraded or deforested land to accommodate expected palm oil expansion. But she cautions, "Much of this land is not legally available and developing it requires sorting out both social and land rights issues."
The Geothermal Option
A study, "Market Potential in Energy Efficiency in Southeast Asia," from Roland Berger Strategy Consultants and EuroCham Indonesia, indicates that, by adopting energy-efficiency options, Southeast Asia could achieve efficiency gains of between 12% and 20%, which would translate into electricity savings of between 119 and 297 terawatt-hours (valued at $15 billion to $43 billion).
Renewables are another leg of energy reform, but there are hurdles. Currently, Indonesia pays massive subsidies to support fossil fuel electricity generation and reduce gasoline prices, totaling $17.7 billion annually, or 17% of total government expenditures.
Harry Surjadi, a Knight International Journalism Fellow and a founder of the Society of Indonesian Environmental Journalists, said that the federal government proposed a reduction in the gasoline subsidy, but the effort calling for immediate action met major opposition in Parliament. He said that Indonesia has publicly embraced renewable energy but could make a larger effort to support its development.
Between 1980 and 2002, primary energy demand in developing Asia more than doubled; in the latter year, more than 75% of consumption was from fossil fuels (69% from coal and oil), reports the U.S. Agency for International Development (USAID). Natural gas, hydropower, biomass (a primary source for the urban poor and rural households) and nuclear power accounted for the remaining 31%.
Through 2030, coal, oil and gas investments in developing regions of Asia are likely to reach $1.4 trillion ($56.7 billion annually). Investment in renewable energy is up, though it's not on the same scale. The Asian Development Bank said in 2006 that if renewables are to account for just 4% of energy consumption in the Asia Pacific region by 2016, investments of $10 billion annually will be needed.
USAID reported, "Asia's energy use is placing a severe strain on the local environment and increasingly contributing to global climate change, with its growing emissions criteria for air pollutants and greenhouse gases. This situation will be exacerbated as the contribution of Asia's developing economies to global carbon dioxide emissions rises from its current level of 23% to nearly 50% by 2030."
Renewables were only 2% of Indonesia's energy generation in 2002 (compared to 13% in the Philippines), but WWF says they could meet up to 35% of the country's energy needs by 2035.
Geothermal represents a particularly big renewable opportunity for Indonesia and for Southeast Asia as a whole. Pak Efransjah, CEO of WWF-Indonesia, says that the country "is not only rich with fossil fuels, but also possesses an abundance of renewable energy sources." Although only 1,196 megawatts of geothermal have been installed in Indonesia (4% of the estimated resource), he said that the country "currently has the biggest world potential" for developing the underground resource.
There are 276 geothermal sites in Indonesia, with at least 37 deemed capable of significant development. WWF estimates that Indonesia could increase its installed geothermal capacity 129% by 2020.
Current government planning calls for a rapid ramp-up of renewable energy, with the urgency perhaps supplied by Indonesia's recent change in status from oil exporter to net importer (with an attendant drop in export earnings). The new policy includes development of 4,000 megawatts of geothermal by 2018, although it's unclear if this is a "reach" government goal or a reasonable target. If the ramp-up succeeds, however, WWF says that geothermal could reduce Indonesia's greenhouse gas burden by 13.6 million tons annually. Achieving WWF's larger targets would result in an annual carbon dioxide reduction of 19.8 million tons by 2020, the group says.
Indonesia has set attractive feed-in tariffs (benchmark prices) for geothermal energy of U.S. 10 to 20 cents per kilowatt-hour. This special tariff pricing is a mechanism adopted by governments to encourage renewable production, usually promising developers guaranteed grid access, long-term contracts for generated electricity, and purchase prices pegged to generation costs.
A challenge in exploiting more of Indonesia's geothermal resources is that only 65% of the country is currently connected to grid electricity, though the government is trying to extend transmission lines with World Bank support.
A Recycling Opportunity: Food Waste
As noted, biomass is a popular energy source for heating and cooking in Asian households. But wood collection has also been a significant source of the deforestation that plagues the region and is a declining resource. Without significant reforestation and conservation efforts, woody biomass production is projected to decline in Southeast Asia from 815 million tons in 1990 to 359 million tons in 2020.
Alternatives could serve the dual purpose of leaving natural resources intact while diverting waste streams from landfills. Nate Morris, CEO of Rubicon Global, an innovative supplier of sustainable waste and recycling services, sees opportunity in Southeast Asia. "Food waste streams from breads, sugars and starches are a valuable asset," he said.
In North America, Rubicon Global has put its ideas in practice by partnering with one of America's leading pizza chains to produce E85 ethanol bio-fuel from waste pizza dough. "We're seeing a number of opportunities to develop food waste streams from restaurants and other sources," Morris said. "A third of the world's food is wasted, and it's a value that's currently going out the door to landfills. It's a tremendous environmental challenge, but also a major opportunity. Sugarcane waste is currently being converted to bio-fuels in Asia, and food waste can also be collected for that purpose--provided we can find sources with consistent quality. The rest of the world is looking to Asia for this kind of bio-fuel solution."
The International Energy Agency sees great opportunity in what it calls "second-generation bio-fuels." It estimates that if only 10% of global agricultural and forestry residues were available for that purpose by 2030, about half of forecasted bio-fuel demand (and 5% of total projected transport fuel demand) could be met with that resource alone.
Indonesia is studying the wider possibilities of bio-fuels. A 2009 report from the Indonesian Institute for Energy Economics envisions small-scale, localized production of biodiesel for power generation. The report listed sugar cane, cassava and the fast-growing jatropha plant as possible bio-fuels feedstocks, in addition to palm oil.
Embryonic Wind and Solar
Indonesia has until recently seen little development of wind and solar energy, despite good resources for both. In mid-2012, Hasul Azahari, the Indonesian ministry of energy's renewables director, said that the country planned soon to introduce new feed-in tariffs for wind and solar, with new targets, including 2,000 megawatts of solar photovoltaics by 2014 and 300 megawatts of wind.
The wind target, while not large by world standards, mirrors development elsewhere in the region. Vietnam is a regional leader, with the potential (according to a 2009 World Bank survey) to produce more coastal wind than Thailand, Cambodia or Laos. General Electric is a partner in major wind farm development in Vietnam's Mekong Delta, and GE's Peter Cowling says it has "one of the best wind resources in Southeast Asia." Vietnamese wind development received a substantial boost in 2011 with a $1 billion credit package from the Export-Import Bank.
Southeast Asia's first wind farm, totaling 33 megawatts, was developed in the Philippines. The country's renewable energy act, passed in 2008, has encouraged investment, but typhoon risk has slowed foreign investment. Clean tech fundraising has also been somewhat stymied by the lack of a track record in successful development projects in the region.
Indonesia could jump-start its wind industry with a planned $100 million investment in a wind farm on the south Java coast. In the summer of 2012, the energy ministry signed an agreement with UPC Renewables Indonesia for up to 33 turbines totaling 50 megawatts facing the Indian Ocean. Without construction or regulatory snags, the project could begin producing energy in late 2013.
Some Southeast Asian wind projects are being developed by foreign investors, but there are also regional powers, such as the Thai power generation group Ratchaburi Electricity Generating Holding (RATCH), which has a global portfolio. RATCH is increasing its wind power investments in Australia from 200 to 300 megawatts, with a $600 million investment.
Southeast Asia has abundant sunshine, and as governments in the region prepare favorable feed-in tariff structures (in concert with corporate tax abatements and duty exemptions), solar development is gathering steam. Thailand's energy ministry, which has prepared aggressive incentives, has received applications for more than three gigawatts of solar, which is six times the existing national target. The Philippines has targeted 50 to 100 megawatts of solar capacity, but its energy ministry has already fielded proposals for 537 megawatts.
Indonesia has its own approach to solar. The national utility, PT PLN, said in 2011 that it would set up communal solar power plants on 100 small islands as a pilot project, with as many as 1,000 islands to be added in later years. The 100 islands are in eastern Indonesia, only 69% of which currently have electric service, said PLN's construction director, Nasri Sebayang, who projected a completion date at the end of 2012.
Small-scale solar could become a cottage industry in Indonesia. The Kolomotu'a Women's Solar Project is supporting the training of "solar mothers" to install and maintain photovoltaic equipment in underdeveloped regions.
The Asian renewable picture is complex. Robert Giegengack, a professor in the department of earth and environmental science at Penn, points out that China is a wind and solar manufacturing powerhouse -- without yet fully making use of the technology on home ground. "The Chinese are underwriting wind and solar in Europe and North America; at the same time they're opening new coal plants every week," he said. "Installed solar, for instance, is expanding in China, but not nearly as quickly as coal, which is cheap and abundant."
China's Solar Over-capacity
The availability of inexpensive solar panels from China was a major factor in the bankruptcy of American solar producer Solyndra, which was the recipient of more than $500 million in Department of Energy loan guarantees. In fact, China has significant over-capacity in solar production, which recently led the Chinese government to increase incentives for solar use domestically. China could have 30 gigawatts cumulative of installed solar by 2015, up from four to five gigawatts in 2012, says GTM Research.
According to Roger Raufer, a consulting environmental engineer who has taught at the University of Pennsylvania, "The Chinese have built incredible amounts of solar on the production side and shipped nearly all of it to Europe because the feed-in tariffs there are so high. Now nearly everybody has surplus solar capacity, and the markets have shifted--that's why the industry in China is focusing more on selling its products domestically. China has no Kyoto constraints, which is why we've seen so much coal development there, but with the government setting carbon-intensity goals were seeing a move toward cleaner power plants."