Download - #11 Indonesia
2Contents
Executive summary 4
Introduction 5
Research methods 5
Background 8
The project approach 11
Project challenges 14
Project benefits 20
Policy lessons 24
Conclusions 26
Appendix 28
References 29
Acknowledgements 32
About the authors 33
3
A Solar Home System unit in Jangari Village, West Java
4
This report analyzes the World Bank’s Indonesia Solar
Home System (SHS) Project, which ran from 1997 to 2003.
The project aimed to catalyze rapid commercial penetra-
tion of solar photovoltaic (PV) technology in Indonesia
in order to provide electricity services to approximately
one million rural villagers. This target was to be mainly
achieved through the sales and installation of 200,000
SHS units in remote and isolated locations in the prov-
inces of West Java, Lampung, and South Sulawesi.
Despite notable achievements in the areas of capacity
building for some stakeholders and introducing the con-
cept of commercial value for SHSs in select markets, the
project only managed to install less than five percent of
its original targeted sales, or 8,054 systems, by its end
in 2003.
We find that many factors explain the difficulties fac-
ing the project. While the repercussions of the Asian
Financial Crisis that swept the region in 1997 certainly
played a major role, at a more fundamental level, the
project failed to overcome first cost barriers, secure
sufficient government involvement, and engender long-
term sustainability. More specifically, with an inexperi-
enced World Bank promoting its own ideas on how to
shift from investing in larger, centralized power projects
to smaller scale SHS projects, the report finds that an
improperly designed financial model calculated risks and
incentives poorly, capacity building for local stakeholders
was limited, and little effort was made to inquire about
what Indonesian end-users desired or needed – merely
seen as passive energy consumers. The Indonesian
government was almost totally uncoordinated in the
implementation of the project, suggesting the project’s
low priority and indicating that it lacked a combination
of interest and competency in promoting SHS. Private
sector players and financial institutions lacked knowl-
edge about solar energy and were risk averse, and many
users remained uninformed about SHS or uninterested
in electricity altogether. In essence, the Indonesia SHS
Project failed because it did not adapt or adjust to local
circumstances and needs.
As one of the first SHS projects implemented by the World
Bank, the Indonesia SHS Project uncovers some of the
very tractable barriers facing attempts to transition to a
market-based approach to renewable energy in an emerg-
ing economy. These include the importance of creating a
properly responsive financial infrastructure, establishing
a sustainable SHS supply chain which provides quality
products and services, and ensuring strong government
support for project development. This report goes further
to suggest that many of the challenges that had arisen
throughout the project could have been addressed with
the establishment of a coordinating and regulatory agency
with a strong mandate from the government to oversee it,
manage the implementation process, and prepare a more
sustainable market for solar PV technology.
5
The Indonesia Solar Home System (SHS) Project, which
ran from 1997 to 2003, was a pilot project initiated by
the World Bank to promote the diffusion of solar photo-
voltaic (PV) technology in Indonesia through a market-
based approach. Initially estimated to cost US$118.1 mil-
lion equivalent,1 the project aimed to rapidly penetrate
the solar PV market in the country, to reach roughly one
million rural Indonesians living in remote and isolated
locations, primarily through the sales and installation
of 200,000 SHS units in the provinces of West Java,
Lampung, and South Sulawesi.2 Unfortunately, it came
into effect only months after the infamous 1997 Asian
Financial Crisis swept into the region. Despite major revi-
sions made to its design, the project never managed to
regain momentum, and by project closing in 2003, less
than five percent of the original sales target, or only
8,054 SHS units, had been installed, reaching a mere
35,000 villagers.3
While documentation from the World Bank and others
were quick to highlight the financial crisis as the main
reason for the project’s shortcomings, a closer exami-
nation reveals several other circumstances, which are
equally as pertinent to investigate. In laying out these
surreptitious factors, the report begins with an explana-
tion of its research methods, which consists of a series
of qualitative, semi-structured interviews with key stake-
holders, supplemented by extensive literature review,
and field research to remote villages in West Java and
Lampung. Subsequently, a short overview of Indonesia’s
energy landscape is provided, followed by a summary
of the Indonesia SHS Project. The report then highlights
the key challenges that the project had faced concurrent
to the financial crisis. After an explanation of some of
the benefits the project was able to achieve, the report
delves into key policy lessons. It concludes with an out-
look regarding the development of renewable energy
development in Indonesia going forward.
The Indonesia SHS Project is an interesting case study for
several reasons. Indonesia is the largest country in
Southeast Asia both in terms of population and size, and
is blessed with an abundance of natural resources. It is an
important energy player in the region and has a wealth of
untapped potential for renewable energy development
as seen in Table 1. The archipelagic nature of the coun-
try’s terrain makes decentralized solar PV technology an
attractive option for rural electrification, considering the
increasingly high cost of serving isolated and remote
islands and villages. Moreover, as one of the first SHS
projects initiated by the World Bank, the Indonesia SHS
Project is an important foundation of knowledge regard-
ing the market-based approach to renewable energy.
Understanding the reasons for the project’s failure would
provide invaluable information for policymakers and
practioners that continue to face challenges in address-
ing the issue of energy access through the development
of the renewable energy sector.
The findings in the report mainly arise from a series
of in-depth, semi-structured interviews undertaken
with 36 stakeholders involved in the project from 22
Type of energy Potential MW Installed capacity MW Utilization ratio
Large Hydro 75,674 3,854 5.0
Small Hydro 459 54 11.76
Geothermal 19,658 589.50 3
Biomass 49,807 177.80 0.36
Solar 4-6.5 kWh/m2/day 5 N/A
Wind 3-6 m/sec 0.5 N/A
Table 1: Potential and installed capacity of renewable energy in IndonesiaSource: Prastawa 2000
6
institutions in Indonesia over the course of June 2011,
to corroborate existing literature related to solar energy
and renewable energy development in Indonesia (the
full list of institutions visited is summarized in the
Appendix). We relied on a purposive sampling strategy
to select respondents that could represent the various
aspects of the case study and a critical stakeholder
analysis framework to ensure that a broad spectrum of
key stakeholders from government, international donor
organizations, civil society, the private sector, academia
and think tanks, and local communities were repre-
sented. Where and when necessary, simultaneous,
real-time translation into local languages and dialects
was employed. We made sure to specifically include
respondents from:
• Government agencies including the Agency for the
Development and Implementation of Technology, the
Ministry of Energy and Mineral Resources, the Ministry
of Finance, the Ministry of Research and Technology,
the National Development Planning Agency, and the
State Electricity Company;
• The international donor community including the
Asian Development Bank, the Japan International
Cooperation Agency, the International Finance
Corporation, and the World Bank;
• Civil society organizations including the Indonesian
Renewable Energy Society, Transparency International,
Yayasan Bina Usaha Lingkungan, and Yayasan Pelangi
Indonesia;
• Private sector companies including PT. Gerbang
Multindo Nusantara, PT. Mambruk Indonesia, and
PT. Trimbasolar;
• FinancialInstitutions including CIMB Niaga Bank and
Bank Rakyat Indonesia.
• Local universities, research institutions and think
tanks including the Indonesian Institute for Energy
Economics, the Indonesian Institute of Sciences, and
the University of New South Wales (Australia).
• Localcommunities.We undertook field visits where
we spoke with more than 40 community members
and end-users of SHS in Jangari Village and Lake
Cirata, West Java Province and Serdang Village,
Lampung Province, pictured in Figures 1 and 2.
Figure 1: Researcher on her way to Jangari Village, West Java
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Figure 2: Researcher interviewing SHS users in Serdang Village, Lampung
Figure 3: Interview overcoming some communication barriers
8
Our method of “intensive interviewing” or “responsive
interviewing” involves asking respondents a set of stan-
dard questions but then allowing for the conversation
to build and/or deviate to new directions and areas.4
We chose it as our primary method of data collection
because we anticipated that many of the variables of
interest, such as, ongoing energy and development
challenges in Indonesia and key lessons emerging from
the project, would be complex in nature and therefore
difficult to measure and describe with quantitative
methods without amounting to “conceptual stretch-
ing”.5 Moreover, as the Indonesia SHS Project had ended
almost a decade ago, we were interested in the changes
in perceptions that could have arisen from our respon-
dents in the intervening period, which would have also
been difficult to explain quantitatively. Importantly, we
relied on the visual elements of the interviews, par-
ticularly non-verbal cues, to decide whether the respon-
dents understood the question posed, or to encourage
them to further expand on points of interest. This was
especially useful in the case of communication or lan-
guage barriers as we experienced during some of our
interviews as depicted in Figure 3.
In all interviews, we asked respondents to (a) Identify the
most serious energy-related concerns facing Indonesia
to also substantiate the significance of the Indonesia
SHS Project; (b) summarize what they saw as the most
remarkable features of the project; and (c) explicate
expected costs and benefits for those efforts. Due to
Institutional Review Board guidelines at the National
University of Singapore (NUS) as well as the request of
some participants, we present such data in our report
as anonymous, though information from the interviews
was often recorded and always carefully coded.
Indonesia is a vast, sprawling archipelago of more than
13,600 islands covering an area of roughly two million
square kilometers or a little less than three times the size
of Texas (the second largest state in the United States). In
1995, the country was still riding a wave of high eco-
nomic growth resulting from the dramatic increase in oil
export revenues in the 1970s.6 Moreover, the abundant
oil and gas sectors were supplying over 85 percent of the
country’s commercial net energy consumption.7
However, a Gross Domestic Product (GDP) per capita of
US$1,014 placed Indonesia sixth out of 10 countries in
Southeast Asia.8 Approximately 17.6 percent of its 199
million population (roughly 35 million people) lived
below the national poverty line9 and more alarmingly, 60
percent of all Indonesians still had no access to basic
electricity services.10 The 1993 Outlines of State Policy
(GBHN) highlighted the importance of an adequate, reli-
able, and reasonably priced electricity supply to serve
the country’s productive sectors, improve the living stan-
dards of Indonesians, and ultimately sustain Indonesia’s
economic and social development.11 Thus, with 70 per-
cent of the population still living in rural areas, expand-
ing rural electrification was integral to the government’s
development strategy.
Throughout the 1980s and the 1990s, the power sector
in Indonesia experienced rapid expansion, in particular,
in the main islands of Java and Bali. The State Electricity
Corporation (PLN) increased their installed capacity
five-fold, from 3,032 megawatts (MW) in 1981 to over
15,000 MW by 1995.12 The company was connecting
over 1.5 million new customers a year and carried out
an investment program of about US$3.5 billion annu-
ally.13 Through grid expansion, and where necessary,
the deployment of isolated diesel generators, electricity
access was reaching 39,000 villages, a ten-fold increase
from 3,400 villages in 1980.14
Despite all these achievements, however, rural electri-
fication coverage in Indonesia was still at 40 percent in
1996 – well below the regional average.15 As an illustra-
tion, neighboring Thailand and Malaysia were reporting
rural electrification coverage averaging at 80 and 98 per-
cent respectively.16 Grid expansion was particularly chal-
lenging outside of Java and Bali where 39,000 out of the
62,000 villages and hamlets known to exist at the time
were sparsely scattered across thousands of islands,
crisscrossing 5,100 kilometers from East to West and
1,800 kilometers from North to South.17 Full grid-based
electrification was estimated to cost as much as US$5
to 6 billion per year18 – a financial commitment that the
government was not prepared to make; and in any case
would be paying toward an endeavor that could take as
long as 30 years to complete.19 Nonetheless, the political
and socio-economic implications of depriving 115 mil-
lion Indonesians of the most basic electricity services at
the dawn of a new century could not be easily ignored.
Owing to the abundance of sunlight in most parts of the
country,20 solar photovoltaic PV technology, particularly
in its application in SHSs, had long been recognized as
a viable alternative to conventional grid electricity,
especially in areas where households were dispersed
and energy demand was still quite low. Following the
9
positive outcomes of several demonstration projects
– including those in the villages of Sukatani and Cileles
in West Java – the Indonesian government initiated
the Solar Power for Rural Electrification scheme (Listrik
Tenaga Surya Masuk Desa) in 1991, in which 3,545 SHS
units were successfully deployed in thirteen provinces.
By the mid-1990s, approximately 20,000 SHS units had
been installed throughout the country, mainly through
government-funded programs. An evaluation of these
efforts indicated that users were generally satisfied with
the performance of their SHSs and did not experience
major problems with critical components such as bat-
teries, panels, and controllers.21 During our field visits
in West Java and Lampung, we had the opportunity to
interview some of the users who had benefited from
the government largesse – many of whom had been
using their SHSs for the past ten to twenty years. Some
examples of the SHS units can be seen in Figures 4 and 5.
In 1995, however, a local entrepreneur in West Java
managed to sell 4,000 SHS units on credit in the first
year of operation,22 despite such ongoing government-
funded programs for SHSs. This encouraging develop-
ment was consistent with the success of pioneering SHS
companies in rural Kenya in the early 1990s as well as
experiences in the Dominican Republic, Sri Lanka, and
Zimbabwe.23 Seemingly, technological innovations cou-
pled with the increasing availability of compatible and
energy-efficient devices had made the SHS market more
competitive. Thus, in the absence of grid connection, the
lesson appeared to be that rural households were willing
to pay market prices for a reliable alternative.
The Indonesia SHS Project came about in 1996 as part
of a larger endeavor by the World Bank to promote
the commercial diffusion of SHS as a cost-effective
alternative to grid expansion in developing countries.
Specifically, it would be feeding into the implementa-
tion of the government’s “50 MWp One Million Roof
Program” – an initiative to install one million SHS in
rural households by 2005.24 Although the proposal
for a new SHS project hinged on the credibility of the
World Bank as the largest financial lender in the power
sector, its experience had actually been predominantly
one of lending for large centralized plants or grid exten-
sion projects. In fact, the only relevant experience that
the World Bank had at the time was the ongoing India
Renewable Resources Development Project launched
in 1994, and already experiencing some major difficul-
ties including the risk-averseness of lending banks in
Figure 4: SHS units from a government-funded program on Lake Cirata, West Java
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Figure 5: SHS units from government-funded program in Serdang Village, Lampung
Year Name of initiative LocationSources of
funding(Targeted) SHS units deployed
1988-1989 Sukatani Solar Project Sukatani, West Java GOI and R&S Eindhoven
102
1988-1992 Solar Power for Rural Electrification Scheme (Listrik Tenaga Surya Masuk Desa)
Thirteen provinces Presidential Aid Program (BANPRES)
3,545
1997-2005 50 MWp One Million Roof Program
• AUSAID Project (1997-1999)
• e7 Project
• Indonesia SHS Project (1997-2002)
• French Government Project
• Bavarian-Indonesian Government Solar Project (1997)
Multiple provinces
• Nine provinces in Eastern Indonesia
• n/a
• Lampung, • West Java and
South Sulawesi
• n/a
• East Java
Multiple sources
• GOI and AusAID
• GOI and e7
• GOI and World • Bank/GEF
• GOI and France
• GOI and Bavarian government
1,000,000
• 36,400
• 1000
• 200,000
• 1,300
• 35,000 (and 300 solar village centres)
Table 2: SHS deployment in Indonesia 1988–1997
11
financing rural credit, a lack of a market infrastructure,
and inadequate support for the private sector.25 The
Indonesia SHS Project nevertheless set an ambitious
target of selling and installing 200,000 SHS (10 MWp) to
supply electricity to approximately one million rural vil-
lagers. Table 2 documents the main historical milestones
of SHS deployment in Indonesia prior or concurrent to
the launch of the project.
The Indonesia SHS Project ran from 1997 to 2003 and
was valued at US$118.1 million equivalent, with seed
money of US$44.3 million equivalent or 38 percent of
the project costs to be provided by the World Bank and
the Global Environment Facility (GEF).26 It was to be a
massive undertaking, requiring serious investments to
be made into developing Indonesia’s solar PV market as
well as formulating energy access policy to integrate
renewable energy technologies. However, rather than
relying on government funding, the bulk of the project’s
costs of US$67.3 million, was to be financed, mainly on
credit from sub-borrowers (SHS dealers) and end-users
(rural customers) as summarized in Table 3. The idea was
to target only those villagers willing and able to pay for
electricity services in order to nurture and develop a self-
sustaining solar PV sector.
Credit component
The main part of the project was the credit component,
estimated to cost US$111.8 million equivalent which
sought to extend electricity services to about one mil-
lion people through the sale and installation of 200,000
StakeholderProject
Cost US$% of Total
World Bank (IBRD Loan) 20 17
GEF Grant 24.3 21
GOI 1.5 1
PB 5 4
Sub-borrowers/End-users 67.3 57
Total 118.1 100
Table 3: Sharing of project costsSource: GEF 1996
Figure 6: A small commercial establishment powered by lights from an SHS
12
50 Watt peak (Wp) SHS units to rural households and
small commercial establishments like the one depicted
in Figure 6. A US$20 million equivalent International
Bank for Reconstruction and Development (IBRD) loan
channeled through four commercial participating banks
(PBs) provided a credit facility to address the high cost
of SHS units and the financial constraints of dealers and
potential customers.
Rural areas that could not expect grid connection from
PLN in the next three years or more were identified in the
provinces of West Java, Lampung, and South Sulawesi as
potential regional markets, with the view of including
North Sumatera at a later stage. All these provinces had
rural communities with strong purchasing power due to
cash crops such as coffee, cacao, and palm oil.27 West
Java was additionally selected due to the initial success
of the local entrepreneur mentioned previously and also
because of the proximity of the province with the capital,
Jakarta. A population of 38 million also made it easily the
most populous province in Indonesia at the time, with
19 million people still waiting for electricity and other
critical infrastructure.28
As PBs lacked the rural networks to deal directly with
customers, a dealer-sales model was employed, whereby
six Jakarta-based dealers were tasked to establish rural
outlets and would take responsibility for the procure-
ment, sales, installation and maintenance of SHS units;
and for offering term credit to make the systems more
affordable to prospective customers. The eligibility cri-
teria for dealers included proven business competence,
the existence of sales or services infrastructure in the
targeted markets, and a credit agreement with a PB.29
Functions of PSG/stakeholders
World Bank/GEFGovernment
(MEMR, BPPT, BAPPENAS)
Private sector (PBs, dealers)
Customers (End-users)
Coordination • Liaise between the World Bank and the government agencies
• Provide project reporting
• Work with BPPT to coordinate project implementation and interactions with all stakeholders
• Undertake project level reporting
• Recruit and select dealers
• Provide a communication platform between actual customers and prospective customers
Capacity Building • Limited training for selected staff from BPPT, Ministry and other relevant government agencies
• Limited training for selected staff of SHS dealers
• Provide services for business development
• Provide information and technical assistance regarding SHS
• Provide information regarding relevant government policies (e.g. the future availability of PLN services)
Monitoring and Evaluation
• Commission studies and assessments to monitor and evaluate progress of project
• Verify compliance of dealers
• Record financial transactions
• Monitor proper utilization of GEF grant
• Channel feedback from dealers
• Channel feedback from customers
Table 4: Interface between PSG and other stakeholders
13
A project-approved 50 Wp SHS unit with the neces-
sary components, the only one eligible under the pro-
gram initially, would cost between US$550 to US$800,
depending on the sales location.30 Dealers would typi-
cally offer credit to prospective customers based on a
first cost buy-down in the range of US$75 to US$125.
This would bring down the unit cost balance to a level
that could be paid in monthly installments over a period
of four to five years, in amounts roughly comparable
to conventional monthly energy expenditures for such
households. Customers would in turn be responsible for
servicing their own systems, although dealers may pro-
vide service contracts or guarantees for a limited period.
The project appraisal document estimated that credit
installments and the interest generated would provide
approximately US$66.8 million equivalent of the project
costs. In addition, a GEF grant of US$20 million equiva-
lent, translating into a first-cost subsidy ranging from
US$75 to US$125 for every SHS unit sold, would be
awarded to the dealer upon extending credit to custom-
ers. This benefit could either be passed on to customers
to make the SHS units even more affordable or be used
to further develop the business (e.g. recruit new staff,
establish new rural outlets, expand the inventory, etc.).
Technical assistance component
Approximately US$4.1 million equivalent was dedicated
toward establishing a Project Support Group (PSG)
under the authority of the government’s Agency for the Assessment and Application of Technology (BPPT), to further support the implementation of the project. Although the PSG did not directly manage the project’s
financing, it functioned as the coordinating body for
most project activities as well as the main interface for
stakeholders as summarized in Table 4. It worked with
the BPPT to handle the recruitment and selection pro-
cess for dealers; verify dealers’ compliance regarding
installment of equipment; monitor proper utilization of
the GEF grant; provide information regarding technical
and financial benefits and of SHS risks; protect prospec-
tive and actual customers; and conduct training for
stakeholders in the form of conferences, workshops,
seminars, and study tours.
In view of the project’s longer-term objectives “to
strengthen Indonesia’s institutional capacity to support
and sustain decentralized rural electrification using solar
photovoltaics,”31 around US$1.2 million equivalent was
allocated for policy support and around US$1 million
equivalent was allocated for institutional development.
This involved providing assistance to the government’s
Rural Electrification Steering Committee to develop
the “Decentralized Rural Electrification Study and SHS
Implementation Plan”.32 The funds were also to be used
to strengthen the BPPT’s and the Ministry of Energy and
Mineral Resources (MEMR)’s capacity to develop techni-
cal specifications, and carry out type and product testing,
DescriptionProject
cost US$% of total
Demand side barrier(s) to be addressed
Supply side barrier(s) to be addressed
Credit Component
111.8 95 • High transaction costs
• Lack of credit facilities
• Lack of dealers and strong supply chains
Implementation Support
4.1 3 • Lack of information regarding benefits and risk of the technology
• Unfamiliarity with the type of investment/financial model
• Lack of in-country experience in organization and financing
Policy Support 1.2 1 • Lack of policy framework to support penetration of solar PV technology in the long term
Institutional Development
1 1 • Lack of institutional and capacity to disseminate solar PV technology in both the short and long term
Table 5: Project components addressing different barriers
14
certification, and monitoring of SHSs. Table 5 summarizes
the allocation of project funds to the different project
components and the barriers that were expected to be
overcome both on the demand and supply sides.
As surmised above, the Indonesia SHS Project seemed
to be ready to tackle challenges directly related to the
project through the implementation of its credit and
implementation support components, as well as provide
indirect and long-term assistance to the solar PV industry
through its institutional development support compo-
nent. However, soon after the project became effective
in October 1997, it became clear that the project design
needed major adjustments owing to the rapidly deterio-
rating economic and political situation in Indonesia fol-
lowing the Asian Financial Crisis. The devaluation of the
Indonesian Rupiah (IDR) against the United States (US)
Dollar had resulted in a severe credit crunch in the bank-
ing sector, “the worst since the 1970s,” according to one
respondent. Two of the four PBs closed down; whereas
the other two were barred by Bank Indonesia from offer-
ing credit until 2000.33 Concomitantly, the high import
content in the SHS units had increased their price more
than three-fold, hampering the ability of both dealers and
potential customers to sell or buy SHS units respectively.
Starting from 1998, significant changes were made
including revising sales targets from 200,000 to 70,000
SHS units; reducing the standard size of the SHS units
sold from 50 Wp to a minimum of 10 Wp; adjusting
the GEF grant to a US$2 per Wp subsidy instead of a
per system subsidy; closing the IBRD loan due to lack
of demand for credit; and canceling the “Decentralized
Rural Electrification Study and SHS Implementation
Plan”.34 Unfortunately, these measures proved ineffec-
tive. Disappointing outcomes such as “The slow progress
of the SHS sales, weak investment in rural distribution
networks, and inability of the banks to make loans to
SHS dealers”35 cited in the Implementation Completion
Report and other project documents further point to the
circumstances of the Asian Financial Crisis as unique and
unprecedented. Interestingly, however, they mirrored
almost exactly the difficulties that the World Bank was
already facing in the ongoing 1994 India Renewable
Resources Development Project. Our interviews with
key stakeholders reflecting on the project almost fif-
teen years onwards, also suggest that the reasons for
project failure may have been more fundamental, and
that perhaps the financial crisis became an excuse rather
than an impetus.
We found that the project’s credit component was ill
equipped from the beginning to help the fledging solar
PV industry overcome first cost hurdles. This was mainly
due to a poorly conceived credit facility that failed to
provide the suitable financial infrastructure and bank-
ing products for a rural clientele and support struggling
SHS dealers. In fact, it seemed that not much was done
to systematically consider the various circumstances
hampering market development. In this context, the
project design also did not anticipate the importance of
greater government involvement in the implementation
process. Finally, despite claims of sustainability, it is clear
that the perspective of the project remained limited and
short-term, with little scope to truly contribute toward
the development of Indonesia’s PV industry.
Failure to overcome the first cost hurdle
At the start of the project, Indonesia’s solar PV market
was what the World Bank characterized as a “high price
low volume” equilibrium.36 As SHSs are self-contained
generation and distribution systems, the initial capital
cost is very high in proportion to the total life-cycle
operating and maintenance costs – in many cases, rep-
resenting almost one year of income in low- and middle-
income rural households.37 Moreover, under current
Indonesian banking practices, commercial banks were
only allowed to offer credit over a period of one or two
years, which was considered as hardly an affordable cost
amortization period for such households. Despite the
various measures that had been put into place, how-
ever, “A lack of established high-volume supplier-dealer
chains, high prices, and a lack of term credit,” continued
to be identified as the interlocking factors of a first cost
barrier hampering market development.38
A poorly designed credit facility
As mentioned above, a US$20 million equivalent IBRD
loan was channeled through Bank Indonesia to four
PBs to provide SHS dealers with access to capital invest-
ment and to allow them to offer credit lines to pro-
spective customers. Due to repercussions of the Asian
Financial Crisis, however, two of the selected PBs were
not able to participate because of their dire financial
situation; whereas the other two remained wary of
Bank Indonesia’s increasingly strict regulations on non-
performing loans (NPLs) even after their recapitalization
was completed in mid-2000.39 In the end, only one PB
was prepared to offer any credit, and despite keen inter-
est from SHS dealers, only US$0.1 million of the loan was
15
utilized before the World Bank decided to close it down
at the end of 2000, fifteen months ahead of schedule.40
Subsequently, five out of the six dealers that had com-
mitted to the project went out of business.
It can be said here that the design of the credit facil-
ity focused too much on mobilizing SHS dealers and
too little on aligning to the priorities and concerns of
PBs and building their capacity as the managers of the
funds. Apart from the financial crisis, the risk-averseness
of the PBs was also due to their lack of familiarity with
the rural market and solar PV technology. Serving rural
customers with limited income and assets would have
required experience in rural banking products such as
microfinance as well as a strong presence on the ground,
which is rather the collective domain of the thousands
of government cooperatives and microfinance institu-
tions, one of which is pictured in Figure 7. In addition,
PBs would have to experiment with a business model
they did not understand. “Renewable energy projects
are very risky compared to coal projects,” claimed one
respondent, “We do not have the know-how to finance
them.” Another admitted, “We would not know what to
do with reacquired SHSs in the case of defaulting cus-
tomers, unlike with motorcycles,” referring to the popu-
larity of credit lines for motorcycles.
At the same time, it appears that the supposed benefits
of the credit facility were not understood well by poten-
tial customers, at least in some target communities.
Among the SHS users we interviewed during our field
visit, indeed some had made use of the available credit
to pay for their systems, but an equal number of respon-
dents had paid cash, as they were unfamiliar with bank-
ing practices in general. These respondents generally
represented households that were in the upper-income
bracket of the rural population. With more disposable
income, they typically had larger SHS units and used
the electricity for some productive uses such as lighting
fishponds or small convenience shops. They were also
often former owners of diesel-powered generators, glad
to be using more economical systems. However, we also
encountered those respondents from lower-income
households that had little or no source of lighting prior
to their SHS units and had benefitted from either free
government-funded SHS programs and/or the cheaper
second hand SHS market, rather than from participating
directly in the project. One of these respondents com-
mented that had it not been for the free SHS, he would
have not minded to continue living in darkness.
Many respondents were of the opinion that based on
their existing financial expertise, PBs were in a good
Figure 7: A small cooperative on Lake Cirata, West Java
16
position to build their capacity in rural credit and could
have been incentivized to take charge of the lending
process and develop suitable products had there been
a greater commitment from the government or the
World Bank to impart knowledge and share the invest-
ment risks. As one respondent put it, “If the govern-
ment cannot absorb the losses, there is no point for
a bank to invest in such a risky venture. Private banks
need to answer to their shareholders. Debtors have to
be trustworthy.” When combined with what PBs viewed
as excessive bureaucratic borrowing requirements
imposed by the World Bank, it is understandable why
PBs considered the project “doable, but not bankable”
and therefore impractical to warrant involvement.
Instead, the project placed the burden almost entirely
on inexperienced SHS dealers through the dealer-sales
model. The project’s credit component as it stood
made dealers and customers responsible for financ-
ing US$66.8 million equivalent or almost 60 percent of
project costs, mainly through the payment of monthly
credit installments. It seemingly distributed the invest-
ment risks of the credit facility among the different
stakeholders involved, with the PBs bearing the dealer
credit risk and the dealer bearing the consumer credit
risk. However, because it was the dealers rather than
the PBs, the World Bank, or the government that
were responsible for the complex and arduous task
of administering the loans to customers and monitor-
ing compliance, it was also ultimately the dealers that
were responsible for bearing the financial burden of
loan defaults. “It would have been far preferable for us
that banks be in charge of the loans,” mentioned one
respondent. “When banks are responsible for collect-
ing payments, companies can focus on providing the
SHS and related services.”
Inadequate support for dealers to maintain SHS
supply chain
SHS dealers were mainly small and inexperienced
enterprises in a nascent market, peddling an unfamil-
iar product and a novel concept of electricity services.
Deprived of their main source of investment capital from
the very beginning due to the reluctance of PBs to offer
credit, dealers were further constrained in their ability
to finance and develop their businesses as the price of
SHSs jumped three-fold following the drastic deprecia-
tion of the IDR. This was especially true after the IBRD
loan was terminated and dealers only had the option of
using their own financing to continue their businesses.
Figure 8: Kerosene lamps continued to be preferred until kerosene subsidies were stopped in 2000
17
“Without credit from the banks, we had to provide
financing from our own pockets,” explained one respon-
dent “This was very tough for small businesses like ours.”
Even when sales targets were reduced from 200,000 to
70,000 units in 2001, dealers were still not able maintain
sufficient inventories and establish the necessary rural
outlets. As described by another respondent, “I had to
cover three whole regencies with only one motorbike. It
was an impossible job.”
However, rather than being allowed to focus on building
a proper SHS supply chain and a rural service infrastruc-
ture, dealers also had to build their rural credit delivery
and collection infrastructure – both requiring very differ-
ent sets of skills and expertise. In this context, respon-
dents felt strongly that “The magnitude of the installa-
tion targets was not comparable with the efforts to build
capacity.” Apart from a few workshops that were limited
to only some staff, there was very little support for deal-
ers to upgrade their skills and expertise, develop their
businesses, approach banks for financing, learn about
rural credit, and address problems on the ground. The
grants provided by GEF also did little to improve their
“unsatisfactory” performance as the project required
that dealers offer credit to their customers as a condition
of eligibility to receive these grants. This caused problems
for dealers who did not feel secure enough to borrow or
extend credit. Moreover, as a respondent lamented, “A
US$100 for every SHS sold is not enough. They should
have increased the grant amount after the crisis.”
High prices impeding market development
Lacking a workable credit facility to make systems more
affordable and a proper supply chain to reduce trans-
action costs, the development of the solar PV market
was further impeded by several factors that the project
design was not able to rectify. Certainly, the financial
crisis affected the purchasing power of many potential
customers that saw slumps in the value of their cash
crops. However, most respondents we interviewed criti-
cized the continued prevalence of free SHSs provided
through government-funded programs in parallel to the
project. Some villagers we talked to in Lampung men-
tioned that they had preferred to wait for these free
SHSs, even though stocks were limited and the waiting
lists were long, rather than purchasing their own units.
Other villagers had continued to use kerosene lamps
like the ones depicted in Figure 8, benefiting from highly
politicized government subsidies that were eventually
stopped in 2000.
Figure 9: A fisherman who bought his SHS unit from the second-hand market
18
A lack of coordination with PLN was also a problem as
former customers living in target areas that were even-
tually abandoned by dealers due to the availability of
grid electricity, flooded the market with cheaper and
less-regulated second-hand SHSs. Many villagers we
interviewed during our field visits like the one in Figure
9 admitted that they had gotten their systems from the
second-hand market. These respondents stated that
they preferred to receive inferior goods rather than pay
the premium of a new system. Considering the well-
known fact of inadequate after-sales services – which at
some point became practically non-existent after all but
one dealer remained in business during the project – it
was perhaps not a bad tradeoff to make.
Most damaging, however, was that the project expected
to bear foreign exchange costs of imported SHS compo-
nents amounting to approximately US$85 million equiv-
alent or more than 70 percent of project costs.41 Solar
panels, the most expensive component, were imported
from Japan, Korea, and Germany. Some SHS parts such
as charge controllers, batteries, and energy-efficient
bulbs were already being produced domestically at the
time. However, they too contained a significant amount
of parts that had to be imported.
Unsurprisingly, dealers used the opportunity of the
financial crisis to venture into foreign solar PV mar-
kets and benefit from the much stronger US Dollar.
The Implementation Completion Report cites the suc-
cess of certain dealers in exporting balance of system
components to Sri Lanka as part of the World Bank’s
Energy Services Delivery program as well as for com-
mercial sales in Kenya.42 Respondents felt that instead
of subsidizing foreign PV markets, the project could
have invested some of this funding into developing the
domestic solar PV assembling and manufacturing indus-
try, which would have gradually brought down the high
SHS costs. Although the BPPT did make some inroads
in this direction, the industry is still underdeveloped
till today, very much dependent on imported content,
and is so far unable to reap the benefits of economies
of scale, despite the fact that the country has recovered
remarkably from the financial crisis.
Insufficient involvement from the government
From the analysis above so far, it is clear that although
the main objective of the project was to catalyze
Indonesia’s solar PV market, the private sector was not
ready to take a lead role in project implementation. The
four PBs that had been selected were still unfamiliar
with investments in the renewable energy sector and
none of the six appointed SHS dealers had developed
an effective supply chain and financial mechanism to
deploy SHSs on the scale intended by the project. The
solar PV market was still very much in its infancy and the
project therefore needed greater government involve-
ment to guarantee the appropriate institutional and
regulatory environment.
The World Bank selected the BPPT under the
Ministry of Research and Technology (MENRISTEK);
the Directorate-General of Electricity and Energy
Development (DGEED) under the MEMR; the National
Planning Agency (BAPPENAS); the Ministry of Finance
(MENKEU); and the Ministry of Cooperatives and SMEs
(KKP), as government stakeholders to guide the imple-
mentation of the project. In particular, the BPPT played
the important role of main executing partner. However,
despite what could be perceived as strong government
support, the project was seriously hampered by a lack
of coordinated involvement among the different agen-
cies and their relevant counterparts. In fact, no govern-
ment institution took on the role of oversight, overall
coordination, and regulator.
Project documents cite BPPT’s performance as “satisfac-
tory” and even exceeding expectations,43 when in real-
ity, as a government research and development agency,
BPPT focused only on technology development and stan-
dards and did not concern itself with other aspects of the
project such as profitability, investment opportunities,
stakeholder coordination, or marketing and supply chain
logistics. The PSG’s “highly satisfactory” performance in
managing project activities was also limited to only the
technical assistance component of the project.
In fact, it is rather surprising considering the lack of
experience on part of both the World Bank and the
Indonesian government in developing a solar PV mar-
ket, that the project only set aside five percent of proj-
ect costs for technical assistance purposes as reflected
in Table 6. As a comparison, between 2000 to 2008,
the World Bank was spending in aggregate, about one-
quarter of investments or US$1 billion in supportive
investments in energy access, much of which went to
the development of public sector capability such as
rural electrification master plans, policy frameworks,
and energy strategies.44 The government’s own in-kind
commitment toward the project through BPPT only
represented a total of one percent of project costs
and was significantly reduced with the cancelation of
the “Decentralized Rural Electrification Study and SHS
Implementation Plan” (it in itself, a lost opportunity to
19
create a solid policy framework for the solar PV com-
mercialization). Respondents we interviewed suggested
that many of the project’s shortcomings could have
been addressed if there had been a more serious com-
mitment from the government to oversee the imple-
mentation process.
Lack of project sustainability
Considering the longer-term objective of the Indonesia
SHS Project to advance renewable energy commercial-
ization and create a niche market for solar PV technol-
ogy, the project did not provide many building blocks to
sustain the market after it closed. For example, BPPT’s
success in building capacity in the area of testing and
certification of SHSs did not translate into better capac-
ity building opportunities for other stakeholders. “BPPT
was in a very privileged position. As the focal point of the
project, it benefited from all capacity building efforts.
But it did not encourage other elements of the market
to grow,” criticized one respondent. The premature clos-
ing of the IBRD loan, which resulted in all but one dealer
going out of business, also indicates that dealers were
not successful in developing the capacity to enter the
market without project support let alone being able to
independently catalyze commercial demand for solar PV
technology. “There was a large vacuum in the solar PV
market until 2005,” described another respondent.
In addition, while the PSG undertook several studies
and surveys as part of project preparations and during
implementation, monitoring and evaluation of project
impacts have been criticized to be insufficient. For exam-
ple, there was no study carried out to properly measure
how the financial crisis really affected the credit compo-
nent of the project. Very little information has also been
provided regarding the current state of SHSs installed
through the program. “We estimate that most of the
SHSs installed have not been in operation for a long
time. However, there is no data to back this up,” stated
another respondent. There has also not been a study
to assess whether the technology has been understood
and accepted in the wider population.
In fact, many questioned the choice of solar PV tech-
nology, which is perceived as an unfamiliar technology
imposed from the World Bank rather than a need stem-
ming from an expressed interest of the rural population.
Doubts were raised whether the technology was even
suitable for sufficient solar irradiation considering fre-
quent cloud cover (see Figure 10), high levels of humidity
in the tropics, and the fact that many of the remote areas
targeted are in dense forest areas. In this regard, it was
suggested that perhaps concentrated solar power (CSP)
or other renewable energy sources such as geothermal,
hydro, or biogas, could have been more appropriate
Description Project cost US$ % of total
Credit Component
World Bank (IBRD Loan)GEF GrantParticipating BanksDealers/end-users
111.8
20205
66.8
95
17174
57
Implementation Support
GEF GrantGovernmentDealers/end-users
4.1
3.10.50.5
3
3less than 1less than 1
Policy Support
GEF GrantGovernment
1.2
0.70.5
1
1less than 1
Institutional Development
GEF GrantGovernment
1
0.50.5
1
less than 1less than 1
Table 6: Allocation of funds to the different project components
20
solutions for rural electrification. But more importantly,
the general sentiment was that the Indonesia SHS
Project did little to empower local communities, rather
seeing them as passive energy consumers
Some respondents question the sole emphasis on elec-
trification, which in their opinion emphasized consump-
tive and leisure rather than productive uses of energy.
It was suggested that the project would have been
more impactful had it also considered investing in other
important rural energy needs such as cooking, transpor-
tation, and telecommunications that do not necessarily
depend on better electricity services. As an illustration,
72 percent of the population or 156 million Indonesians
currently still rely on biomass for cooking and heating.45
Investing in better cooking stoves would have had imme-
diate and significant impacts on household welfare in
terms of improving health and reducing the hours spent
on firewood-related drudgery that could be better used
for more productive activities.
The provinces chosen for potential target markets were
also in question considering not many dealers had
already developed experiences and networks in Lampung
and South Sulawesi at the beginning of the project. As
a result, many were excluded from taking part. Some
respondents were of the opinion that the selection of the
target areas was too ambitious, whereas others thought
that the project could have included more provinces and
did not do enough to leverage on the natural strongholds
of many other competent SHS dealers.
The analysis above shows that the Indonesia SHS Project
faced many challenges in both design and implementa-
tion and its shortcomings have indeed inspired much
criticism. However, the project has yielded some bene-
fits, importantly, raised awareness regarding solar PV
technology; delivered minor but measurable amounts of
clean, modern, and affordable electricity services; and
improved the capacity of some stakeholders.
Raised awareness regarding Solar PV technology
Although rural Indonesians had been exposed to solar PV
technology through government-funded SHS programs
since the late 1980s, the Indonesia SHS Project intro-
duced the concept of the commercial value of a SHS.
Figure 10: A SHS unit on a cloudy day
21
Due to limited funds, dealers were not able to afford TV
or radio commercials or even brochures. Thus, in order
to reach as many people as possible, usually a technician
would make make a presentation in each village com-
munity center similar to the one in Figure 11, followed
by a technical demonstration. “It is always a very formal
affair,” explained one respondent. “It is very important
to ensure that the village chief is present in this presen-
tation, to give him respect. If you are able to convince
him regarding the importance of the SHS and the legiti-
macy of your business, it is easier to approach and edu-
cate other villagers.” These marketing campaigns, scarce
as they were, were not only opportunities for villagers
lacking electricity services to the learn more about solar
PV technology and SHSs; they also empowered them to
firstly, assess and prioritize their energy needs and sec-
ondly, decide on an option for a reliable, autonomous,
and environmentally-friendly source of electricity.
At the institutional and policy level, the project also
served as a reference point for policymakers working on
rural electrification projects involving solar PV technol-
ogy. Over the past three years, the government has spent
an average of around US$100 million per year to further
diffuse the technology in the country and attract private
sector participation through programs in various minis-
tries including the MEMR, the KKP, the KPDT and provin-
cial and local governments, despite some resistance in
the past.46 For example, in 2003, the local government
in Bengkulu procured around 200 SHS units on the basis
of a US$150 subsidy per system, whereas consumers
purchasing the units would pay the balance.47 PLN is also
currently undertaking a major solar mapping exercise for
the government and implementing the “One Hundred
Islands” project aiming to electrify 100 remote islands
using communal grid-connected solar power plants by
2011 (with plans for a 1,000 islands ramp up by 2012).48
Delivery of clean, modern, and affordable
electricity services
The project appraisal in 1996 estimated that as many as
62,000 households – out of which 39,000 located out-
side Java and Bali – did not have access to basic elec-
tricity services.49 After a slow start, the gradual reduc-
tion of kerosene subsidies from 2000 as seen in Table
7 increased the competitiveness of SHSs leading to a
significant sale spike. This was followed by an increase in
value of the main cash crops relative to the price of one
SHS unit starting in 2001.50 By the close of the project in
2003, approximately 8,500 households, or about 30,000
Figure 11: Researcher participating in a SHS presentation at a village community center
22
customers were benefiting from the delivery of clean,
modern, and affordable electricity services provided
through SHSs.
Though far less than initial targets, the project did suc-
ceed in bringing services such as radio (Figure 12) and
television (Figure 13) to rural communities. Put another
way, though the SHS program was limited in the num-
ber of villages it reached, those it did were pleased with
their systems. The villagers we interviewed during our
field visits in West Java and Lampung all confirmed their
satisfaction. Among the most cited benefits are the rela-
tive affordability of SHSs compared to having to pay for
monthly purchases of kerosene or diesel; the ease in
which the systems can be maintained and operated; and
the entertainment and communication value derived
from being able to use radios, TVs, and mobile phones
(see Figure 14). During our field visit to Lake Cirata, we
were also able to observe the usage of SHSs for income-
generating activities in the fish-farming industry and
other small commercial establishments.
Built capacity among some stakeholders
During the course of the project, BPPT, as the main exe-
cution partner of the project, was able to expand their
know-how of solar technology and become the focal
point for solar technology development in the country.
Their achievement to develop strict technical criteria
and procedures to test and certify SHS units has been
adapted in other developing countries such as Sri Lanka,
China, and Uganda.51 In addition, BPPT’s PV testing labo-
ratory successfully obtained ISO 17025 accreditation for
testing and certifying balance of system components.52
Junior engineers, in particular, benefited immensely
from the training that was provided by the project. The
PSG that was contracted by the BPPT to manage the
project activities was also able to build capacity in tech-
nical assistance, capacity building, and project monitor-
ing and evaluation.
Although Indonesia’s solar PV industry remains relatively
underdeveloped in comparison to other developing
countries, the project did manage to include more than
479 technicians working for SHS dealers in trainings in
market development provided by the PSG and coach-
ing and business implementation frameworks pro-
vided by the World Bank. The project also successfully
established a market supply chain of over 100 dealer
outlets by 2003.53 There was also a reactivation of the
Association of Indonesian SHS Dealers in 2000, which
worked on establishing an accreditation system and
setting minimum quality standards for SHS dealers.54
Toward the end of the project, dealers were assisted in
establishing contact with potential investors and funding
sources, including the Solar Development Fund, which
is currently in discussions to develop a partnership
Table 7: Overall SHS salesSource: World Bank 2004
Description/year 1997 1998 1999 2000 2001 2002 2003
Exchange rate (US$1 to IDR) 3,116 9,501 7,782 8,470 10,411 9,549 8,577
SHS cost (IDR) 1 million
3 million
3.1 million
3.2 million
3.3 million
3.4 million
3.5 million
SHS sales (unit) 0 0 92 1,299 1,552 972 4,139
Kerosene price per litre (IDR) 250 250 250 350 400 600 900
Palm oil (Kgs/1 SHS) 8,930 10,158 8,497 13,770 11,443 9,127 8,122
Coffee (Kgs/1 SHS) 423 220 393 1,018 1,160 1,262 901
Cacao (Kg/1 SHS) 493 281 392 545 499 462 357
23
Figure 12: A radio powered by SHS
Figure 13: Black-and-white TVs powered by SHS
24
with Bank Rakyat Indonesia (BRI) to fund SHS dealers.55
Essentially, project documents cite an “enabling policy
environment” and “business enterprise support” as the
main positive outcomes.56
As one of the first SHS projects undertaken by the World
Bank, the Indonesia SHS Project certainly provides many
insights and valuable lessons that have informed subse-
quent projects in Indonesia and other developing coun-
tries. This section summarizes key findings and corrobo-
rates them with several documents written by World
Bank experts on best practices in sustainable PV market
development.57 These are the importance of overcoming
first cost barriers by creating a properly responsive finan-
cial infrastructure, establishing a sustainable SHS supply
chain which provides quality products and services, and
ensuring strong government support for project devel-
opment. By measuring the project’s outcomes against
the World Bank’s own standards, it becomes clear that
although the most important factors for project success
have been identified time and again by various experts,
in practice, they are either too difficult to apply, forgot-
ten, or perhaps replaced too easily in a seemingly inno-
vative project design; when in fact, it may not necessarily
be appropriate for the reality on the ground.
Create a responsive financial infrastructure
The credit component of the project was designed to
provide access to a credit facility to overcome the first
cost barrier, found to be critical in the uptake of capital-
intensive technologies such as SHSs in rural areas.58
However, the premature closing of the IBRD loan indi-
cates that this particular approach only addressed the
symptom rather than the root-cause of the problem,
namely that no stakeholder was willing to fully shoulder
the investment risks of an unchartered rural market for
solar PV technology. What was needed was therefore to
design a responsive financial infrastructure that provides
several mechanisms to reduce the risk of investing in a
new market and/or allow for greater flexibility to adapt
business models to changing market signals. There are
several options that could be considered, and if neces-
sary, in parallel.
Firstly, PBs are in a better position to handle project
financing than SHS dealers and they could have possibly
Figure 14: Mobile phone powered by SHS
25
been enticed to do so had there been a bona fide guar-
antee from the government or the World Bank to pro-
tect them against loan defaults. This guarantee need not
have been provided indefinitely. Rather, an introductory
period agreed upon based on consultations with all
stakeholders could have sufficed to push PBs to more
confidently undertake risk assessment and learn about
the potential of the solar PV market in rural areas. This
is a form of support that could have also encouraged
PBs to offer favorable interest rates to dealers and solar
investment companies.
Alternatively, rather than placing the burden of risk
entirely on SHS dealers to obtain financing from the PBs
as well as offer credit lines to customers, a new financing
model could have distributed the investment risks more
evenly amongst all stakeholders, namely, the World Bank/
GEF, the government, the PBs, the dealers, and the users.
This would have incentivized all stakeholders to share the
responsibility of administering the loans and monitoring
compliance, and provided for more secure loans.
Thirdly, flexibility in the project design to be able to
accommodate other compatible business models such
as the energy services companies (ESCO) and leasing
models could have anticipated the development of a
second-hand SHS market. This would have allowed PBs
to be more relaxed in their risk assessment, knowing
that SHSs reacquired from defaulting customers still had
market value that could be exploited.
Fourthly, although the use of grants or subsidies to cover
operating costs could be harmful for long-term sustain-
ability, in light of the financial crisis, small-scale dealers
operating in a nascent solar PV market could have ben-
efited from additional soft loans or grants for upfront
financing of the highly priced SHSs. A higher grant pro-
portion in the loan would have helped dealers to rein-
vest profits, expand operations more rapidly, and offer
better prices and credit rates to potential customers
with limited purchasing power. To make the outcomes
more sustainable, a grace period for the grants could be
built in.
A completely different approach would have been to
include investors that are less risk-averse and not so
dependent on high returns on investment (ROI). Indeed,
as the ROI from selling small-scale SHSs in long-term
installments are relatively low, government banks or
financial institutions with more experience in microfi-
nance and rural customers such as BRI could have been
suitable PB candidates.59 Including more PBs in the
project would also build more capacity and encourage
more competitive loans.
Establish a sustainable SHS supply chain
If the choice of solar PV technology were to be based on
consumer needs, economic viability, technical and insti-
tutional capabilities, and consumers’ willingness,60 then
the project seems to have performed poorly. However,
it is difficult to say conclusively whether it was indeed
the wrong choice of technology to introduce at the time.
Rather, as with any attempt to penetrate a market with
a new product, it may simply have been that the project
should have placed a greater emphasis on gaining prod-
uct recognition and customer trust. A sustainable SHS
supply chain would have been able to provide quality
products and services covering everything from market-
ing, inventory, sales, installation, to post-sales. For that,
the project design should be flexible enough to better
integrate those objectives in the credit facility, increase
funding for more capacity building activities for dealers,
and perhaps designate loan-administering functions to
a more relevant stakeholder, such as a PB or a project
coordinating agency.
While the small sample of villagers we have interviewed
for this report seem to have no major misgivings with
their systems, the project’s overall dismal sales figures
is an indication that the initial decision to specify a mini-
mum size of 50 Wp systems to be installed was perhaps
also rather rigid. Competition from systems provided
by other government programs and the second-hand
markets demonstrated that customers did benefit
from a range of system sizes, component options, and
service levels. Moreover, rather than seeing customers
as passive users of energy, the project could have done
more to encourage and demonstrate more productive
uses of the SHSs. In this regard, the project could have
benefited from a better assessment of the energy needs
of the rural population during project preparations and
involve them in the consultation process at all stages of
the project.
Both public and private sector stakeholder respondents
we interviewed also agree that Indonesia’s underde-
veloped domestic solar PV manufacturing industry was
overlooked as an integral stakeholder in the SHS project
when it could have served to further lower the cost of
SHS diffusion and improve the service chain for SHS com-
ponents. Shifting from producing lower-value parts (e.g.
batteries, controllers, inverters) to solar panels and cells
would also increase the importance, size, and visibility of
Indonesia’s solar PV market.
26
Government to support project development
The implementation of the Indonesia SHS Project suf-
fered due to a lack of coordination amongst the govern-
ment agencies involved. From this experience, it can be
seen that a key role for the government in any develop-
ment project is to guarantee an appropriate institutional
and regulatory environment. Certainly, at the initial
period, the project would have benefited from changes
in some laws, the integration or harmonization some
policies, the creation or alteration some institutions, and
the development of well-targeted subsidies or tax struc-
tures that incentivize rather than hinder businesses.
Ultimately, however, the gap in the project design could
have been addressed by designating a proper coordi-
nating or regulatory agency with a strong mandate and
well-defined responsibilities to provide a clear oversight
of all project components and stakeholders, coordinate
overall project implementation, and prepare better proj-
ect sustainability.
At the policy level, the agency should coordinate and
undertake studies, assessments, and stakeholder con-
sultations throughout the project; address conflicting
policies such as tariff and subsidy structures; and secure
proper commitments from donors and government
agencies. The agency also has the responsibility to inform
discussions on Indonesia’s renewable energy policies.
In terms of project implementation, its main responsi-
bility would be to act as the focal point, administering
the loans, enforcing rules, monitoring compliance for
all stakeholders, and providing relevant information.
It should provide a platform for dialogue between
stakeholders to share experiences and best practices,
discuss project developments, common challenges, and
opportunities for closer cooperation. This includes serv-
ing as a facilitator in project negotiations and decision-
making, especially when new developments call for a
change in project design (e.g. the consequences of a
financial crisis).
The Indonesia SHS Project provides incredibly salient
insights and lessons for policymakers and practioners
dealing with energy access issues and the development
of the renewable energy sector. To be sure, the out-
comes of this project leave much to be desired and cer-
tainly, the Asian Financial Crisis did prove to be a major
hindrance to the project. However, this report shows
that the project design also had many fundamental flaws
that could have been anticipated better.
Considering the indispensible role of a properly func-
tioning credit facility to overcome the first cost barrier
of SHSs, the most important lesson by far is that a proj-
ect should anticipate to make as many adjustments as
necessary to the financial model in order to be able to
adequately accommodate the constraints and concerns
of multiple stakeholders and if necessary, operate sev-
eral financial models in parallel. Establishing an effective
SHS supply chain that produces high quality products
and services is a crucial complementary step to achieve
product recognition, gain customer trust, and reduce
transaction costs. One important lesson that the failure
of this project revealed is the need for a commitment
from the government to create the appropriate enabling
environment, at least in the initial stages. This report
goes further to suggest that many of the challenges that
arisen throughout the project could have been addressed
with the establishment of a coordinating and regulatory
agency with a strong mandate from the government to
oversee the entire project, manage the implementation
process, and prepare the building blocks for renewable
energy development beyond the project.
Looking ahead, several legislations already provide bet-
ter support for renewable energy development, includ-
ing the recent Presidential Decree No. 5/2006, which
commits Indonesia to ambitious targets of increasing
the share of renewable energy in the primary energy
portfolio from the current 4.5 percent to over 17 percent
by 2025.61 Another breakthrough seems to be the recent
establishment of the National Energy Council (DEN) in
2007, which is responsible for formulating national
energy policy (to be endorsed by the parliament); imple-
menting national energy general plans; determining
action plans in the event of energy emergencies and cri-
ses; and most importantly, monitoring the implementa-
tion of energy policy across sectors.62 Consisting of inde-
pendent energy experts and stakeholders from various
sectors and armed with a potentially strong mandate,
DEN could be in a position to provide a clear direction for
Indonesia’s energy policy in the future. Specifically for
renewable energy projects, the presence of DEN could
certainly play a role in harmonizing inconsistent policies
such as tariff and subsidy structures, and recommend-
ing specific courses of actions for challenges faced at the
policy level.
Technological improvements, cost reductions, and
environmental concerns have also contributed towards
27
renewed interest in renewable energy investments.
With current national electrification rates at 65 percent
and 90 million Indonesians still living without electric-
ity,63 there is a real opportunity for solar PV and other
renewable energy projects to learn from the Indonesia
SHS Project experience and successfully deliver com-
mercial energy services to isolated and rural communi-
ties in Indonesia.
Figure 14: The future of solar power in Indonesia
28
List of interview questions at site visits
1. How many people live in your household?
2. What type of energy do you use:
a. for cooking?
b. for electricity?
3. What kind of household appliances (or other
activities) to you use electricity for?
4. How do you pay for your electricity?
a. To whom do you pay?
b. How much do you pay?
c. What kind of financing scheme, if any,
have you agreed to?
d. Do you consider the price affordable?
5. Are you satisfied with your source of
electricity?
6. What type of electricity system do you have?
a. What brand is the system?
b. Whom did you buy it from?
c. What is the capacity of the system?
d. Did you purchase it new or second-hand?
7. How long have you had the system? Why did
you purchase it?
8. Have you had any difficulty using it and/or
operating the system?
9. Given the choice, would you prefer grid elec-
tricity or any other source of electricity?
Organizations interviewed
• Agency for the Development and
Implementation of Technology (BPPT)
• Asian Development Bank
• Bank Rakyat Indonesia (BRI)
• CIMB Niaga Bank
• Indonesian Institute for Energy Economics
• Indonesian Renewable Energy Society
• Japan International Cooperation Agency
• Indonesian Institute of Sciences (LIPI)
• International Finance Corporation
• Ministry of Energy and Mineral Resources
(MEMR)
• Ministry of Finance (MENKEU)
• Ministry of Research and Technology
(MENRISTEK)
• National Development Planning Agency
(BAPPENAS)
• State Electricity Company (PLN)
• PT. Gerbang Multindo Nusantara
• PT. Mambruk Indonesia
• PT. Trimbasolar
• Transparency International
• University of New South Wales (Australia)
• World Bank
• Yayasan Bina Usaha Lingkungan
• Yayasan Pelangi Indonesia
Sites visited
• Jangari Village, Lake Cirata, West Java
• Serdang Village, Lampung
29
1. The World Bank 2001, ‘Solar Home Systems’, Imple-
mentationCompletionReport,The World Bank, East
Asia and Pacific Region.
2. The World Bank 2004, ‘Solar Home Systems’, Imple-
mentationCompletionReport, The World Bank, East
Asian and Pacific Region.
3. Ibid.
4. O’Sullivan, R., & Berner 2010, ResearchMethodsfor
PublicAdministrators. Longman, New York.
5. George, A. L. and A. Bennett 2004. CaseStudiesand
TheoryDevelopmentintheSocialSciences. Harvard
University Press, Cambridge.
6. World Bank, ‘Interregional Resource Transfer
and Economic Growth in Indonesia, Volume 1’,
PovertyandInequality,Viewed15 August 2011,
<http://econ.worldbank.org/external/default/
main?pagePK=64165259&theSitePK=477894
&piPK=64165421&menuPK=64166093&entity
ID=000009265_3980429111107>.
7. The World Bank 1996, ‘Republic of Indonesia Solar
Home Systems Project’, ProjectDocument, The
World Bank, Washington.
8. The World Bank, Data, Viewed July 2, 2011, <http://
data.worldbank.org/indicator/NY.GDP.PCAP.
CD?page=3>
9. Ibid.
10. The World Bank 1996, ‘Republic of Indonesia Solar
Home Systems Project’, ProjectDocument, The
World Bank, Washington.
11. Ibid.
12. Ibid.
13. Ibid.
14. Ibid.
15. Ibid.
16. Ibid.
17. Ibid.
18. Ibid.
19. Ibid.
20. An average irradiation of 4.3 kWh/m2 (Prastawa
2000).
21. The World Bank 1996, ‘Republic of Indonesia Solar
Home Systems Project’, ProjectDocument, The
World Bank, Washington.
22. Miller, D. and C. Hope 2000, ‘Learning to Lend for
Off-grid Solar Power: Policy Lessons from World
Bank Loans to India, Indonesia, and Sri Lanka’, in
EnergyPolicy 28 (2000), Elsevier Science Ltd.
23. Ibid.
24. Retnanestri, M. et. al. 2003, ‘Off-grid Photovoltaic
Application in Indonesia: A Framework for Analysis’,
DestinationRenewables,University of New South
Wales, Sydney.
25. Although the Project Performance Assessment
Report (PPAR) rated the overall project outcome as
“satisfactory”, it was acknowledged that in the end,
the project did not fully succeed in reaching the ru-
ral market or in developing marketing and financing
mechanisms based on cost recovery principles.
26. The World Bank 2004, ‘Solar Home Systems’, Imple-
mentationCompletionReport, The World Bank, East
Asian and Pacific Region.
27. Ibid.
28. Retnanestri, M. 2007, TheI3AFramework:Enhanc-
ingtheSustainabilityofOff-GridPhotovoltaicEnergy
ServiceDeliveryinIndonesia,University of New
South Wales, Sydney.
29. Martinot, E. A. Cabraal and S. Mathur, ‘World Bank/
GEF Solar Home System Projects: Experiences and
Lessons Learned 1993-2000’, RenewableandSus-
30
tainableEnergyReviews5(2001), Elsevier Science
Ltd.
30. The World Bank 2004, ‘Solar Home Systems’, Imple-
mentationCompletionReport, The World Bank, East
Asian and Pacific Region.
31. The World Bank 1996, ‘Republic of Indonesia Solar
Home Systems Project’, ProjectDocument, The
World Bank, Washington.
32. A strategy and a 10 year-action plan to meet the
modern energy needs of the rural population in
Indonesia through renewables, where solar PV
technology represents a least cost option.
33. The World Bank 2004, ‘Solar Home Systems’, Imple-
mentationCompletionReport, The World Bank, East
Asian and Pacific Region.
34. Ibid.
35. Ibid.
36. Ibid.
37. Cabraal, A. et. al. 1997, AcceleratingSustainablePV
MarketDevelopment,The World Bank.
38. The World Bank 2004, ‘Solar Home Systems’, Imple-
mentationCompletionReport, The World Bank, East
Asian and Pacific Region.
39. Ibid.
40. Ibid.
41. The World Bank 1996, ‘Republic of Indonesia Solar
Home Systems Project’, ProjectDocument, The
World Bank, Washington.
42. The World Bank 2004, ‘Solar Home Systems’, Imple-
mentationCompletionReport, The World Bank, East
Asian and Pacific Region.
43. Ibid.
44. Barnes, D., B. Singh and X. Shi 2010, ‘Modernizing
Energy Services for the Poor: A World Bank Invest-
ment Review – Fiscal 2000-2008’, WorldBank
EnergySectorManagementAssistanceProgram,
The World Bank, Washington.
45. Ibid.
46. Respati, J. 2010, ‘The Dilemma of Solar PV Utiliza-
tion in Indonesia’, Respect, Respect, Jakarta.
47. GEF 2004, ‘Indonesia Solar Home Systems: Terminal
Evaluation Review Form’, GEF, GEF.
48. The Jakarta Post 2011, PLN to Install Solar Panels
for 340,000 Customers, TheJakartaPost, Jakarta,
Viewed 14 August 2011, <http://www.thejakar-
tapost.com/news/2011/04/09/pln-install-solar-
panels-340000-customers.html>.
49. The World Bank 1996, ‘Republic of Indonesia Solar
Home Systems Project’, ProjectDocument, The
World Bank, Washington.
50. Except for coffee prices which actually plunged to
their lowest since 1973 (Retnarestri 2003).
51. The World Bank 1996, ‘Republic of Indonesia Solar
Home Systems Project’, ProjectDocument, The
World Bank, Washington.
52. Ibid.
53. Retnanestri, M. et. al. 2003, ‘Off-grid Photovoltaic
Application in Indonesia: A Framework for Analysis’,
DestinationRenewables,University of New South
Wales, Sydney.
54. GEF 2004, ‘Indonesia Solar Home Systems: Terminal
Evaluation Review Form’, GEF, GEF.
55. Ibid.
56. The World Bank 2004, ‘Solar Home Systems’, Imple-
mentationCompletionReport, The World Bank, East
Asian and Pacific Region.
57. Cabraal, A. M. Cosgrove-Davies and L Schaeffer,
AcceleratingSustainablePVMarketDevelopment.
31
58. Miller, D. and C. Hope 2000, ‘Learning to Lend for
Off-grid Solar Power: Policy Lessons from World
Bank Loans to India, Indonesia, and Sri Lanka’, in
EnergyPolicy 28 (2000), Elsevier Science Ltd.
59. In fact, BRI has been involved in the solar PV
market since 2004, after signing a memorandum of
understanding (MoU) with the Solar Development
Fund (SDF) to target potential markets in Sumatera,
Riau, and South Sulawesi provinces (The World Bank
2004).
60. Cabraal, A. et. al. 1997, AcceleratingSustainablePV
MarketDevelopment,The World Bank.
61. USAID 2007, ‘From Ideas to Action: Clean Energy
Solutions for Asia to Address Climate Change’,
IndonesiaCountryReport, USAID, Bangkok.
62. Dewan Nasional Energi, DewanNasionalEnergi,
Viewed 14 August 2011, <http://www.den.go.id/
index.php/page/readPage/1>.
63. The World Bank, ‘Indonesia’, AsiaSustainableand
AlternativeEnergyProgram, The World Bank,
Viewed 26 August 2011 <http://web.worldbank.
org/WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACI-
FICEXT/EXTEAPASTAE/0,,contentMDK:21042053~me
nuPK:2900515~pagePK:64168445~piPK:64168309~t
heSitePK:2822888,00.html>.
32
The authors are appreciative to the Centre on Asia and Globalisation and
the Lee Kuan Yew School of Public Policy for some of the financial assistance
needed to conduct the research interviews, field research, and travel for this
project. The authors are also extremely grateful to the National University
of Singapore for Faculty Start-up Grant 09-273 as well as the MacArthur
Foundation for Asia Security Initiative Grant 08-92777-000-GSS, which
have supported elements of the work reported here. Any opinions, find-
ings, and conclusions or recommendations expressed in this material are
those of the authors and do not necessarily reflect the views of the Centre
on Asia and Globalisation, Lee Kuan Yew School of Public Policy, National
University of Singapore, or MacArthur Foundation. Also, the views of the
author(s) expressed in this study do not necessarily reflect the views of the
United States Agency for International Development or the United States
Government.
33
Ira Martina Drupady is currently a Research Associate at
the Lee Kuan Yew School of Public Policy, where she also
graduated with a Masters in Public Policy in 2010. She cur-
rently researches energy security, rural electrification, and
energy development and poverty. Before joining the LKY
School, she worked as a Project Executive with the Asia-
Europe Foundation. She can be reached at [email protected]
Martin Stavenhagen is a Project Coordinator at the
Physikalisch-TechnischeBundesanstalt, or PTB, Germany’s
National Metrology Institute, where he works towards
strengthening quality infrastructure in South Asia. Prior
to that, he worked for the Institute of Water Policy, where
he researched water and sanitation projects in Asia. He
assisted in teaching courses on Leadership and Teamwork at the Lee Kuan
Yew School of Public Policy where he obtained his Master in Public Policy
degree in 2010. Martin has also completed a post-graduate program at the
German Development Institute. His current interests are renewable energy,
sustainable natural resource management, and standardization issues. He can
be reached at [email protected]
Dr. Benjamin K. Sovacool is currently a Visiting Associate
Professor at Vermont Law School, where he manages the
Energy Security and Justice Program at their Institute for
Energy & the Environment. His research interests include
the barriers to alternative sources of energy supply such as
renewable electricity generators and distributed genera-
tion, the politics of large-scale energy infrastructure, designing public policy
to improve energy security and access to electricity, and building adaptive
capacity and resilience to climate change in least developed Asian countries.
He is the author or editor of eight books and more than 140 peer reviewed
academic articles on various aspects of energy and climate change, and he
has presented research at more than 70 international conferences and sym-
posia in the past few years. He is a frequent contributor to EnergyPolicy,
Energy&Environment, ElectricityJournal, Energy, and EnergyforSustainable
Development.
34
Researcher inspecting the fish farms on Lake Cirata of West Java
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