2

Contents
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

A Solar Home System unit in Jangari Village, West Java

This report analyzes the World Banks Indonesia Solar Home System (SHS) Project, which ran from 1997 to 2003. The project aimed to catalyze rapid commercial penetration 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 provinces of West Java, Lampung, and South Sulawesi. Despite notable achievements in the areas of capacity building for some stakeholders and introducing the concept 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 facing 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 longterm sustainability. More specifically, with an inexperienced 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 projects low priority and indicating that it lacked a combination of interest and competency in promoting SHS. Private sector players and financial institutions lacked knowledge 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 emerging 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.

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 photovoltaic (PV) technology in Indonesia through a marketbased approach. Initially estimated to cost US$118.1 million 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 revisions 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 projects shortcomings, a closer examination reveals several other circumstances, which are equally as pertinent to investigate. In laying out these surreptitious factors, the report begins with an explanation of its research methods, which consists of a series of qualitative, semi-structured interviews with key stakeholders, supplemented by extensive literature review, and field research to remote villages in West Java and Lampung. Subsequently, a short overview of Indonesias 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 outlook 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 countrys 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 regarding the market-based approach to renewable energy. Understanding the reasons for the projects failure would provide invaluable information for policymakers and practioners that continue to face challenges in addressing 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 Large Hydro Small Hydro Geothermal Biomass Solar Wind

Potential MW 75,674 459 19,658 49,807 4-6.5 kWh/m2/day 3-6 m/sec

Installed capacity MW 3,854 54 589.50 177.80 5 0.5

Utilization ratio 5.0 11.76 3 0.36 N/A N/A

Table 1: Potential and installed capacity of renewable energy in Indonesia Source: Prastawa 2000

Figure 1: Researcher on her way to Jangari Village, West Java

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 represented. 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; Financial Institutions 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). Local communities. 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 2: Researcher interviewing SHS users in Serdang Village, Lampung

Figure 3: Interview overcoming some communication barriers

Our method of intensive interviewing or responsive interviewing involves asking respondents a set of standard 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 stretching.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 respondents in the intervening period, which would have also been difficult to explain quantitatively. Importantly, we relied on the visual elements of the interviews, particularly non-verbal cues, to decide whether the respondents 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 language 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.

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, reliable, and reasonably priced electricity supply to serve the countrys productive sectors, improve the living standards of Indonesians, and ultimately sustain Indonesias economic and social development.11 Thus, with 70 percent of the population still living in rural areas, expanding rural electrification was integral to the governments 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 annually.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 electrification coverage in Indonesia was still at 40 percent in 1996 well below the regional average.15 As an illustration, neighboring Thailand and Malaysia were reporting rural electrification coverage averaging at 80 and 98 percent respectively.16 Grid expansion was particularly challenging 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 million 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

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 economic 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 countrys 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

Figure 4: SHS units from a government-funded program on Lake Cirata, West Java

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 batteries, 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 governmentfunded programs for SHSs. This encouraging development 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 coupled 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 implementation of the governments 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 extension 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 difficulties including the risk-averseness of lending banks in

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Figure 5: SHS units from government-funded program in Serdang Village, Lampung

Year 1988-1989 1988-1992

Name of initiative Sukatani Solar Project Solar Power for Rural Electrification Scheme (Listrik Tenaga Surya Masuk Desa) 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)

Location Sukatani, West Java Thirteen provinces

Sources of funding GOI and R&S Eindhoven Presidential Aid Program (BANPRES) Multiple sources GOI and AusAID GOI and e7 GOI and World Bank/GEF GOI and France GOI and Bavarian government

(Targeted) SHS units deployed 102 3,545

1997-2005

Multiple provinces Nine provinces in Eastern Indonesia n/a Lampung, West Java and South Sulawesi n/a East Java

1,000,000 36,400 1000 200,000

1,300 35,000 (and 300 solar village centres)

Table 2: SHS deployment in Indonesia 19881997

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 villagers. Table 2 documents the main historical milestones of SHS deployment in Indonesia prior or concurrent to the launch of the project.

Stakeholder World Bank (IBRD Loan) GEF Grant GOI PB Sub-borrowers/End-users Total

Project Cost US$ 20 24.3 1.5 5 67.3 118.1

% of Total 17 21 1 4 57 100

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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 Indonesias 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 projects 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

Table 3: Sharing of project costs Source: GEF 1996

to target only those villagers willing and able to pay for electricity services in order to nurture and develop a selfsustaining 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 million people through the sale and installation of 200,000

Figure 6: A small commercial establishment powered by lights from an SHS

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Functions of PSG/ stakeholders Coordination

World Bank/GEF

Government (MEMR, BPPT, BAPPENAS) Work with BPPT to coordinate project implementation and interactions with all stakeholders Undertake project level reporting Limited training for selected staff from BPPT, Ministry and other relevant government agencies

Private sector (PBs, dealers) Recruit and select dealers

Customers (End-users) Provide a communication platform between actual customers and prospective customers

Liaise between the World Bank and the government agencies Provide project reporting

Capacity Building

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) Channel feedback from customers

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

Table 4: Interface between PSG and other stakeholders 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 procurement, sales, installation and maintenance of SHS units; and for offering term credit to make the systems more affordable to prospective customers. The eligibility criteria 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

Description Credit Component

Project cost US$ 111.8

% of total 95

Demand side barrier(s) to be addressed High transaction costs Lack of credit facilities

Supply side barrier(s) to be addressed Lack of dealers and strong supply chains

13

Implementation Support

4.1

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

Lack of policy framework to support penetration of solar PV technology in the long term Lack of institutional and capacity to disseminate solar PV technology in both the short and long term

Institutional Development

Table 5: Project components addressing different barriers

A project-approved 50 Wp SHS unit with the necessary components, the only one eligible under the program initially, would cost between US$550 to US$800, depending on the sales location.30 Dealers would typically 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 provide 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 equivalent, 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 customers. 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 governments 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 projects 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 process 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 prospective and actual customers; and conduct training for stakeholders in the form of conferences, workshops, seminars, and study tours. In view of the projects longer-term objectives to strengthen Indonesias 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 governments 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 BPPTs and the Ministry of Energy and Mineral Resources (MEMR)s capacity to develop technical specifications, and carry out type and product testing,

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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.

that perhaps the financial crisis became an excuse rather than an impetus. We found that the projects 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 banking 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 Indonesias PV industry. Failure to overcome the first cost hurdle At the start of the project, Indonesias 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, representing almost one year of income in low- and middleincome 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, however, 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 investment and to allow them to offer credit lines to prospective 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 Indonesias increasingly strict regulations on nonperforming 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 interest from SHS dealers, only US$0.1 million of the loan was

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 component. However, soon after the project became effective in October 1997, it became clear that the project design needed major adjustments owing to the rapidly deteriorating economic and political situation in Indonesia following 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 banking 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 offering 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 ineffective. 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 dealers35 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 fifteen years onwards, also suggest that the reasons for project failure may have been more fundamental, and

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 committed to the project went out of business. It can be said here that the design of the credit facility 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 institutions, 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 customers, unlike with motorcycles, referring to the popularity of credit lines for motorcycles.

At the same time, it appears that the supposed benefits of the credit facility were not understood well by potential 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 respondents had paid cash, as they were unfamiliar with banking 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 commented 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

15

Figure 7: A small cooperative on Lake Cirata, West Java

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Figure 8: Kerosene lamps continued to be preferred until kerosene subsidies were stopped in 2000

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 investment risks. As one respondent put it, If the government 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 projects credit component as it stood made dealers and customers responsible for financing US$66.8 million equivalent or almost 60 percent of project costs, mainly through the payment of monthly credit installments. It seemingly distributed the investment 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 monitoring 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 collecting 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 unfamiliar 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 depreciation 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.

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Figure 9: A fisherman who bought his SHS unit from the second-hand market

Without credit from the banks, we had to provide financing from our own pockets, explained one respondent 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 infrastructure, dealers also had to build their rural credit delivery and collection infrastructure both requiring very different sets of skills and expertise. In this context, respondents felt strongly that The magnitude of the installation 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 dealers 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 transaction 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 criticized the continued prevalence of free SHSs provided through government-funded programs in parallel to the project. Some villagers we talked to in Lampung mentioned 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.

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A lack of coordination with PLN was also a problem as former customers living in target areas that were eventually 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 wellknown 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 components amounting to approximately US$85 million equivalent 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 markets and benefit from the much stronger US Dollar. The Implementation Completion Report cites the success of certain dealers in exporting balance of system components to Sri Lanka as part of the World Banks Energy Services Delivery program as well as for commercial 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 industry, 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 Indonesias 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 involvement 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 implementation 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 agencies and their relevant counterparts. In fact, no government institution took on the role of oversight, overall coordination, and regulator. Project documents cite BPPTs performance as satisfactory and even exceeding expectations,43 when in reality, as a government research and development agency, BPPT focused only on technology development and standards 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 PSGs 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 market, that the project only set aside five percent of project 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 onequarter 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 governments 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

Description Credit Component World Bank (IBRD Loan) GEF Grant Participating Banks Dealers/end-users Implementation Support GEF Grant Government Dealers/end-users Policy Support GEF Grant Government Institutional Development GEF Grant Government

Project cost US$ 111.8 20 20 5 66.8 4.1 3.1 0.5 0.5 1.2 0.7 0.5 1 0.5 0.5

% of total 95 17 17 4 57 3 3 less than 1 less than 1 1 1 less than 1 1 less than 1 less than 1

19

Table 6: Allocation of funds to the different project components

create a solid policy framework for the solar PV commercialization). Respondents we interviewed suggested that many of the projects shortcomings could have been addressed if there had been a more serious commitment from the government to oversee the implementation process. Lack of project sustainability Considering the longer-term objective of the Indonesia SHS Project to advance renewable energy commercialization and create a niche market for solar PV technology, the project did not provide many building blocks to sustain the market after it closed. For example, BPPTs success in building capacity in the area of testing and certification of SHSs did not translate into better capacity 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 closing 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 example, there was no study carried out to properly measure how the financial crisis really affected the credit component 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 technology, which is perceived as an unfamiliar technology imposed from the World Bank rather than a need stemming from an expressed interest of the rural population. Doubts were raised whether the technology was even suitable for sufficient solar irradiation considering frequent 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

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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 electrification, which in their opinion emphasized consumptive 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, transportation, 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 immediate 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 implementation and its shortcomings have indeed inspired much criticism. However, the project has yielded some benefits, 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 introduced the concept of the commercial value of a SHS.

Figure 10: A SHS unit on a cloudy day

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 community 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 presentation, to give him respect. If you are able to convince him regarding the importance of the SHS and the legitimacy of your business, it is easier to approach and educate 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 secondly, 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 technology. 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 ministries including the MEMR, the KKP, the KPDT and provincial 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 outside Java and Bali did not have access to basic electricity services.49 After a slow start, the gradual reduction 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

21

Figure 11: Researcher participating in a SHS presentation at a village community center

22

Description/year Exchange rate (US$1 to IDR)

1997 3,116

1998 9,501

1999 7,782

2000 8,470

2001 10,411

2002 9,549

2003 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)

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

Table 7: Overall SHS sales Source: World Bank 2004

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 succeed 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 number 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 relative 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 incomegenerating 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 execution 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, BPPTs PV testing laboratory 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 technical assistance, capacity building, and project monitoring and evaluation. Although Indonesias 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 coaching and business implementation frameworks provided 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

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Figure 12: A radio powered by SHS

Figure 13: Black-and-white TVs powered by SHS

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Figure 14: Mobile phone powered by SHS

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

in practice, they are either too difficult to apply, forgotten, or perhaps replaced too easily in a seemingly innovative 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 capitalintensive technologies such as SHSs in rural areas.58 However, the premature closing of the IBRD loan indicates 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 necessary, in parallel. Firstly, PBs are in a better position to handle project financing than SHS dealers and they could have possibly

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 subsequent projects in Indonesia and other developing countries. This section summarizes key findings and corroborates 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 financial infrastructure, establishing a sustainable SHS supply chain which provides quality products and services, and ensuring strong government support for project development. By measuring the projects outcomes against the World Banks own standards, it becomes clear that although the most important factors for project success have been identified time and again by various experts,

been enticed to do so had there been a bona fide guarantee from the government or the World Bank to protect 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 sustainability, in light of the financial crisis, small-scale dealers operating in a nascent solar PV market could have benefited from additional soft loans or grants for upfront financing of the highly priced SHSs. A higher grant proportion in the loan would have helped dealers to reinvest 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 microfinance 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 institutional 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 product recognition and customer trust. A sustainable SHS supply chain would have been able to provide quality products and services covering everything from marketing, 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 projects overall dismal sales figures is an indication that the initial decision to specify a minimum 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 Indonesias underdeveloped 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 components. 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 Indonesias solar PV market.

25

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Government to support project development The implementation of the Indonesia SHS Project suffered due to a lack of coordination amongst the government agencies involved. From this experience, it can be seen that a key role for the government in any development 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 structures that incentivize rather than hinder businesses. Ultimately, however, the gap in the project design could have been addressed by designating a proper coordinating 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 project sustainability. At the policy level, the agency should coordinate and undertake studies, assessments, and stakeholder consultations 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 Indonesias renewable energy policies. In terms of project implementation, its main responsibility 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 serving as a facilitator in project negotiations and decisionmaking, especially when new developments call for a change in project design (e.g. the consequences of a financial crisis).

that the project design also had many fundamental flaws that could have been anticipated better. Considering the indispensible role of a properly functioning credit facility to overcome the first cost barrier of SHSs, the most important lesson by far is that a project 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 several 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 better support for renewable energy development, including 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); implementing national energy general plans; determining action plans in the event of energy emergencies and crises; and most importantly, monitoring the implementation of energy policy across sectors.62 Consisting of independent 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 Indonesias 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 recommending specific courses of actions for challenges faced at the policy level. Technological improvements, cost reductions, and environmental concerns have also contributed towards

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 outcomes of this project leave much to be desired and certainly, the Asian Financial Crisis did prove to be a major hindrance to the project. However, this report shows

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Figure 14: The future of solar power in Indonesia

renewed interest in renewable energy investments. With current national electrification rates at 65 percent and 90 million Indonesians still living without electricity,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 commercial energy services to isolated and rural communities in Indonesia.

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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

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. b. c. d. What brand is the system? Whom did you buy it from? What is the capacity of the system? 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 electricity or any other source of electricity?

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1. The World Bank 2001, Solar Home Systems, Implementation Completion Report, The World Bank, East Asia and Pacific Region. 2. The World Bank 2004, Solar Home Systems, Implementation Completion Report, The World Bank, East Asian and Pacific Region. 3. Ibid. 4. OSullivan, R., & Berner 2010, Research Methods for Public Administrators. Longman, New York. 5. George, A. L. and A. Bennett 2004. Case Studies and Theory Development in the Social Sciences. Harvard University Press, Cambridge. 6. World Bank, Interregional Resource Transfer and Economic Growth in Indonesia, Volume 1, Poverty and Inequality, 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, Project Document, 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, Project Document, 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, Project Document, 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 Energy Policy 28 (2000), Elsevier Science Ltd. 23. Ibid. 24. Retnanestri, M. et. al. 2003, Off-grid Photovoltaic Application in Indonesia: A Framework for Analysis, Destination Renewables, 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 rural market or in developing marketing and financing mechanisms based on cost recovery principles. 26. The World Bank 2004, Solar Home Systems, Implementation Completion Report, The World Bank, East Asian and Pacific Region. 27. Ibid. 28. Retnanestri, M. 2007, The I3A Framework: Enhancing the Sustainability of Off-Grid Photovoltaic Energy Service Delivery in Indonesia, 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, Renewable and Sus-

30

tainable Energy Reviews 5(2001), Elsevier Science Ltd. 30. The World Bank 2004, Solar Home Systems, Implementation Completion Report, The World Bank, East Asian and Pacific Region. 31. The World Bank 1996, Republic of Indonesia Solar Home Systems Project, Project Document, 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, Implementation Completion Report, The World Bank, East Asian and Pacific Region. 34. Ibid. 35. Ibid. 36. Ibid. 37. Cabraal, A. et. al. 1997, Accelerating Sustainable PV Market Development, The World Bank. 38. The World Bank 2004, Solar Home Systems, Implementation Completion Report, The World Bank, East Asian and Pacific Region. 39. Ibid. 40. Ibid. 41. The World Bank 1996, Republic of Indonesia Solar Home Systems Project, Project Document, The World Bank, Washington. 42. The World Bank 2004, Solar Home Systems, Implementation Completion Report, 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 Investment Review Fiscal 2000-2008, World Bank Energy Sector Management Assistance Program, The World Bank, Washington. 45. Ibid. 46. Respati, J. 2010, The Dilemma of Solar PV Utilization 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, The Jakarta Post, Jakarta, Viewed 14 August 2011, <http://www.thejakartapost.com/news/2011/04/09/pln-install-solarpanels-340000-customers.html>. 49. The World Bank 1996, Republic of Indonesia Solar Home Systems Project, Project Document, 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, Project Document, The World Bank, Washington. 52. Ibid. 53. Retnanestri, M. et. al. 2003, Off-grid Photovoltaic Application in Indonesia: A Framework for Analysis, Destination Renewables, 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, Implementation Completion Report, The World Bank, East Asian and Pacific Region. 57. Cabraal, A. M. Cosgrove-Davies and L Schaeffer, Accelerating Sustainable PV Market Development.

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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 Energy Policy 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, Accelerating Sustainable PV Market Development, The World Bank. 61. USAID 2007, From Ideas to Action: Clean Energy Solutions for Asia to Address Climate Change, Indonesia Country Report, USAID, Bangkok. 62. Dewan Nasional Energi, Dewan Nasional Energi, Viewed 14 August 2011, <http://www.den.go.id/ index.php/page/readPage/1>. 63. The World Bank, Indonesia, Asia Sustainable and Alternative Energy Program, The World Bank, Viewed 26 August 2011 <http://web.worldbank. org/WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIFICEXT/EXTEAPASTAE/0,,contentMDK:21042053~me nuPK:2900515~pagePK:64168445~piPK:64168309~t heSitePK:2822888,00.html>.

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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, findings, 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.

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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 currently researches energy security, rural electrification, and energy development and poverty. Before joining the LKY School, she worked as a Project Executive with the AsiaEurope Foundation. She can be reached at iramartina@nus.edu.sg Martin Stavenhagen is a Project Coordinator at the Physikalisch-Technische Bundesanstalt, or PTB, Germanys 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 martin.stavenhagen@ptb.de 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 generation, 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 symposia in the past few years. He is a frequent contributor to Energy Policy, Energy & Environment, Electricity Journal, Energy, and Energy for Sustainable Development.

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Researcher inspecting the fish farms on Lake Cirata of West Java

Energy Governance Case Studies Series

1. Lighting Laos: The governance implications of the Laos rural electrification program 2. Gers just want to have fun: Evaluating the renewable energy and rural electricity access project (REAP) in Mongolia 3. Living up to energy governance benchmarks: The Xeketam hydropower project in Laos 4. Settling the score: The implications of the Sarawak Corridor of Renewable Energy (SCORE) in Malaysia 5. What went wrong? Examining the Teachers Solar Lighting Project in Papua New Guinea 6. Summoning the sun: Evaluating Chinas Renewable Energy Development Project (REDP) 7. Rural energy development on the Roof of the World: Lessons from microhydro village electrification in Nepal 8. The radiance of Soura Shakti: Installing two million solar home systems in Bangladesh 9. Untapped potential: The difficulties of the Small Renewable Energy Power (SREP) Programme in Malaysia 10. Harvesting the elements: The achievements of Sri Lankas Energy Services Delivery Project 11. Commercializing solar energy: Lessons from the Indonesia Solar Home Systems Project

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Strategic partners

The Lee Kuan Yew School of Public Policy is an autonomous, professional graduate school of the National University of Singapore. Its mission is to help educate and train the next generation of Asian policymakers and leaders, with the objective of raising the standards of governance throughout the region, improving the lives of its people and, in so doing, contribute to the transformation of Asia. For more details on the LKY School, please visit www.lkyspp.nus.edu.sg