Opinion at the Jakarta Post

Institutional credibility at the core of sustainable energy transition

Michael Putra, PhD candidate at Rotterdam School of Management, Erasmus University

If future historians were to look back at how civilizations went through the energy transition in the 21st century, Indonesia should feature as one of the very lucky few who are endowed with natural resources that befit both sides of the transition.

The oil and gas bounty has fueled the country’s real GDP growth from a meagre 2% in the 1960s to beyond 7% in 1980. Coal-powered electricity grew rapidly from the 1990s until 2010s by around a factor of five. The era of fossil energy improved the lives of many. It has not all been rosy of course – corruption in the sector was rampant, rent-seeking practices prevented healthy competition, social and environmental issues emerged, and resource-based wealth was unequally distributed. Despite the abundance of resources and decades of business developments, not many Indonesian companies in the resource management sector can genuinely claim to be internationally competitive today. Plenty of lessons should had been learned.

As the world is transitioning towards renewable energy, Indonesia possesses plenty of indigenous renewable energy sources for its own consumption (if it so choses), and the critical minerals the rest of the world also needs to harness renewable energy elsewhere. Last Tuesday, the International Energy Agency released its inaugural Critical Minerals Market Review as part of its effort to remind the global community that the infrastructure to build a greener energy system requires much more investments in mining and production of minerals.

Indonesia features prominently in the report as “the world’s largest nickel mining and refining center”, which is a key component in batteries. The demand for critical minerals, like nickel, is set to almost quadruple over the period to 2030, driven by the global energy transition agenda. Once again, the country’s natural resources are in high demand to deliver energy beyond its borders. This is quite a bargaining power. We see it playing out in the row over mineral export ban and the government’s insistence for investors to build midstream industries. Amidst the furor, we should be clear that the goal is for bona fide investors to (eventually) want to invest more in the country because they can build attractive shared value instead of being forced to, or because of unfair advantage owed to proximity to decision makers. A litmus test to the predicament is to imagine if there were no bans, how many credible companies really see a healthy investment case and would compete to build the mineral’s downstream industries and a more sustainable energy system in the country?

The energy transition will indeed be ultimately delivered by a critical mass of public and private investors making sustainable investment decisions. Progress in renewable energy has been astounding, but far from suffice to meet the climate target. The investment gaps to limit global warming is by far the largest in the energy sector and in developing countries – to the factor of seven, which presents an unprecedented global business challenge. The United Nations Conference on Trade and Development, in its energy-focused World Investment Report 2023 released last week, echoed the increasing investment gap to meet Sustainable Development Goals including energy transition. It calls for “de-risking” of energy transition investments in developing countries to come close to attract investments that are needed in the range of 1.5 times of today’s global GDP between now and 2050. It feels like we have reached the basecamp at an amazing pace, but the clock is ticking for us to reach the summit at an even much faster pace.

In the vastly growing body of management and policy research on energy transition investment, a large proportion of them point out to the critical role of institutions to enable and accelerate investments – domestic and foreign – and to control those investments to abide to the broader sustainability standards.

Resource-rich countries need to attract businesses with transformational ambitions who recognize they cannot thrive in a society that fails and are keen to play their part in the joint for systems change — and not (un)intentionally attract those whose interests are best served through murky rent-seeking practices that deprive healthy competition. In turn, companies need to play their part too by infusing metrics beyond mere financial merits in their investment decisions responsibly and engage meaningfully with policymakers on the kinds of policies that would make the investment case attractive – as uncomfortable those conversations may be.

Meanwhile, civil societies and the press must continue their vigilance and be critical of these actors – scrutinize what is being said, and equally important, diligently try to understand what is not. This becomes especially important as Indonesia’s electorates cast their vote next year to determine the political leaders who will inevitably shape the quality of the country’s institutions, define the kind of signals sent to the investor’s community, and set the tone of the conversations with the civil society.

Indonesia’s fossil resources have helped brought it becoming a middle-income country. What got us here, won’t take us where we need to be. Whether or not the global energy transition will also propel Indonesia out of the middle-income trap heavily depends on the quality of its institutions. Carbon-intensive development can be leapfrogged, institutional credibility cannot.

This article was published in the Jakarta Post on 14 July 2023:


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  • Byline

    Michael is a professional leader in the fields of energy investments, complex commercial deals, and sustainability with extensive international experience. His personal interests span from socio-political issues, history, and culture.

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