Linking NDC-related renewable energy targets with local development

Helping Indonesia and Thailand in linking NDC-related renewable energy targets with local industrial development to raise their climate ambition

Did you know that Indonesia is the only country in Southeast Asia that has a mandatory local content requirement (LCR) policy for solar PV projects? Other countries of the region like Thailand are also interested in promoting local industries and services for renewable energy, but seek policy advice on how.

Keep reading to find out more!

The deployment of renewable energy (RE) technologies can bring a wide range of climate, environmental, economic, and social benefits (co-benefits) including job creation and promotion of local industrial and service sectors. However, apart from the greenhouse gas (GHG) emission reduction potential the co-benefits of RE deployment in such key countries of Southeast Asia as Indonesia and Thailand have not been closely analysed yet.

Against this backdrop, the Netherlands Organisation for Applied Scientific Research (TNO)  has engaged South Pole earlier this year to help explore the co-benefits of achieving RE targets in Indonesia and Thailand and make a stronger case for the national governments on how a wider uptake of renewables can not only contribute to the countries’ Nationally Determined Contributions (NDCs) to global climate change goals, but also can strengthen local production and services in the RE sector. These activities in Indonesia and Thailand have been implemented under a broader  project called ‘Advancing from Mitigation Ambition to Action’ (A2A), funded by the German government’s International Climate Initiative. (A2A was also implemented in Argentina and Kenya).

Jakarta-based Penguins, Aryanie Amellina and Umdatul Mujahidah, led the Indonesian work which focused on the solar PV sector and the already existing local content requirement policy (LCR policy). The team has looked into the design of the LCR policy for the solar PV projects, assessed the effectiveness of its  implementation, talked to stakeholders to get their perception of how the LCR policy impacts local solar PV value chain.

For Thailand where the topic of industrial development and local content requirement for the RE sector is still new, our Bangkok team – Yulia Dobrolyubova, Erick Ratajczak and Chirapon “Pete” Wangwongwiroj together with a local partner the Creagy –  was tasked to build an evidence base for the Thai Government to explore the issue of co-benefits of reaching NDC-related RE targets in more detail. In the earlier phase of the work, this included a comprehensive data collection exercise on investment costs across all key RE technologies – it is much more difficult than you think, requiring intense engagement with the private sector and checking all small data details. More recently, the work in Thailand has focused on investigating the current status of local content across RE technology supply chain,  and understanding where there is potential to increase local content and how to do it by providing policy recommendations to the Thai Government.

Overall, the objective of this A2A project in Indonesia and Thailand was to demonstrate that domestic deployment of key RE technologies can support valuable industrial development through the development of domestic supply chains and industrial capabilities, and eventually help the countries to reach their NDC and SDG targets.

The work on both projects is (almost) done. Both teams in Thailand and Indonesia have organised closing workshops for the key governmental representatives to present the final results and raise stakeholders’ awareness on the subject (and hopefully creating more interesting advisory work for our team going forward). Remarkably, these two workshops in Thailand and Indonesia happened back-to-back, on 13 November and 14 November. And the feedback and the level of engagement of the key pubic stakeholders have been very promising. 

So what did our work uncover?

Indonesia

As of 2019, Indonesia has 100 MW of solar PV installed nationwide or only 0.05% of its total potential installed capacity. This figure is remarkably low compared to its neighbouring countries. In 2017, the Ministry of Industry issued a regulation on solar PV LCR policy to help spur local solar modules industry growth. The LCR policy was established following the expectation that solar capacity will increase by 1 gigawatt (GW) annually according to the National Energy Plan 2014 The LCR policy stipulates that solar modules used in solar PV power plants must have 40% local content. The LCR policy also includes a plan to increase the minimum LCR for solar modules from 40% (2017) to 50% (2018) and to 60% in 2019. However, such a plan could not be realised since the local industry’s capacity is limited. In reality, the expected growth was never realised which in turn limits the market uptake and  thus, further hinders local solar module industry growth.

The team discovered that local products only have 40% local content on average, many of which have not yet internationally certified, hindering developers to utilise local products. Another finding from this project is that both public and private stakeholders agree that LCR policy can benefit local industry growth. However, to be successful, enforcement LCR policy must go hand-in-hand with strong RE deployment policy and incentives, which is proven by case-studies from other countries that have introduced LCR for their RE sector. It was also interesting to find out that developers would rather pay a penalty to maintain quality than using substandard local products. The team has also discovered that to achieve the minimum 60% of LCR for solar modules, Indonesia must produce solar cells locally. The good news is several state-owned solar PV modules manufacturers have joined forces with foreign and local investors to establish a new solar cell factory in Indonesia which is expected to start operation in 2020. Fingers crossed!

We did not keep all this learning to ourselves! On 14 November 2019, the South Pole Indonesia team co-organised a workshop with TNO, Global Green Growth Institute and Ministry of National Planning Indonesia to disseminate the results of A2A project to stakeholders. The workshop was attended by more than 30 participants from both public and private stakeholders. The workshop went very well and the participants have been very engaged throughout the sessions. We guess it was not only because of the free flow of five-star food served during the workshop! 🙂

For those of you who are interested in more details of our research findings on solar PV LCR policy in Indonesia, you can check our final deliverable in English.

Thailand

On the other hand, Thailand does not apply LCR for RE projects (beyond certain public sector funded initiatives which account for a very small portion of overall deployment). This does not, however, mean that local content is not used in projects. In fact our assessment has highlighted that there are already locally sourced components/services across the value chain for all RE technologies but with a large variance in the local share. Thus, main high-technology components – such as PV modules, inverters, turbines – are mostly imported; whereas lower-tech segments, such as the balance of system (BOS) and cables along with professional services, have a local share of 75–100%. In order to understand the supply chain in Thailand, our Bangkok team went out to the market to draw first-hand data and insight from the project developers, manufacturers, service providers,  research and development (R&D) and academic institutions, through interviews, online questionnaires, phone calls, emails, and a validation workshop with RE technology-specific break-out sessions.

Penguins facilitating discussions during private sector dialogue organised in Bangkok in September 2019.

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Some of the recommendations drawn from our work include:

• the need to promote more Thai brand recognition in both domestic and international markets. Product quality, price competitiveness and domestic market size are the most commonly cited challenges faced by Thai manufacturers;
• increasing the level of coordination between climate, energy and industrial policies, as well as innovation programmes to support industrial development of RE – taking advantage of potential spill-over effects;
• providing consistent funding for R&D and promoting collaboration between industry, research and innovation centres to support localisation of innovative technologies, components and services for the RE sector; and
• incentivising the utilisation of local materials and components through policies and incentives (e.g. tax benefits when local content is higher than 75%), while also building the capacity of local industries to compete in the global market.

These results – and many others – were shared with key public sector stakeholders in Bangkok on 13 November 2019. The event brought together various Thai ministries, departments and other public sector stakeholder related to industrial development and RE in Thailand.

If you want to learn more about about the linkages between industry and RE in Thailand you can find our Scoping Study which was published earlier this year here. Our final report for Thailand with policy recommendations and case studies is  forthcoming and will be available in both English and Thai in December.