Fundamental Problems For Solar Sector

BMI View : The new solar plant proposed jointly by a Chinese state company and an Indonesian panel manufacturer reflects a growing interest in the sector. This interest is underpinned by the country's reliance on fuel imports as well as the establishment of a domestic manufacturing sector. That said, we refrain from forecasting growth in the sector as we believe that Indonesia could favour other more attractive sources of energy. We also note that solar operators and manufacturers could face a very tough operating environment.

A memorandum of understanding (MoU) for a new solar power plant was signed between Shanghai Aerospace Automobile Electromechanical (SAAE) and Indonesian solar panel manufacturer Basel Investindo on July 19 2012. The 200-megawatt (MW) photovoltaic (PV) plant will be built in Indonesia's eastern region at an estimated cost of US$600mn.

We believe this project signals interest from both the public and private sectors towards developing Indonesia's solar energy sector. Strong public -sector interest has been displayed in recent months. Early this month, state oil and gas firm PT Pertamina signed an MoU with PT Len to produce solar cells domestically, while in March 2012, the Indonesian Directorate General of Renewable Energy and Energy Conservation inked a deal with Japan's Sharp to develop a solar plant with up to 100MW.

In our opinion, this interest is underpinned by the country's reliance on costly fuel imports. Indonesia became a net importer of oil in 2004, and the volume of its oil imports has climbed steadily since then. To alleviate this growing dependence and cost of fuel imports, the government has set an aim of sourcing 25% of its total domestic energy consumed from renewable sources by 2025.

Oil Imports Trending Upwards
Indonesia - Oil Statistics, b/d (LHS); Oil Imports, US$mn (RHS)

Another reason for the public sector interest in developing Indonesia's solar sector could be the establishment of a local manufacturing sector. Solar panel manufacturing has taken off in China, and Indonesia could benefit from technological transfers from Chinese manufacturers entering the country. This could help create new jobs and opportunities while allowing Indonesia to avoid importing solar panels for projects.

Fundamental Problems For The Sector

That said, we are refraining from forecasting substantial growth in the solar sector. We believe that solar energy may not be the most viable energy source for Indonesia at this point of time. Generating costs are prohibitively high and may be equally or more expensive than conventional thermal generation. According to a SAAE representative, the proposed solar plant would have a much lower operating and maintenance cost than a conventional coal-fired plant, but a higher initial capital costs. However, we believe that this advantage could be eroded if Indonesia were to exploit its coal reserves more effectively. The country also has numerous geothermal resources that can be developed at a cheaper rate.

Solar: High Initial Costs
Overnight Capital Costs (2010 US$/kW) Fixed O&M Cost (2010 US$/kW) Variable O&M Cost (2010 US$/kW)
Source: EIA Annual Energy Outlook 2010
Coal (Single Unit) 3167 35.97 4.25
Coal (Dual Unit) 2844 29.67 4.25
Geothermal (Binary) 4141 84.27 9.64
Solar (Large PV) 4755 16.7 0

We also highlight that the weak governance and business environment in the country could hinder development of the sector. Solar PV projects have always been very dependent on government subsidies and regulations, and there is currently a lack of legislature in this respect. The state utility Perusahaan Listrik Negara also has a large say in the creation of power purchase agreements, and it may not want to purchase more expensive solar energy.

This article is tagged to:
Sector: Power, Renewables
Geography: Indonesia

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