In 2022, Indonesia allocated over USD 3 billion in expansion and renovation of its transmission and distribution systems, one-quarter less than the average in the previous 2017‑2021 period. The current investment level is expected to double to reach an average of USD 7 billion per year in 2030‑2035 in STEPS. However, the Announced Pledges Scenario (APS) is more challenging and would require Indonesia to maintain an average yearly growth of 8% to reach the grid spending requirements by 2030. The growth would need to be even higher in order to reach the Net Zero Emissions by 2050 (NZE) Scenario. Indonesia, which unveiled its net zero target in 2022, is striving for carbon neutrality by 2060. As outlined in the 2021 RUPTL (the country’s ten-year business plan for power projects), the strategy includes an ambitious extension of transmission and distribution lines by more than 47 000 km from 2021 to 2030 in order to reach the targets.

PLN (Perusahaan Listrik Negara) is the government-owned corporation which holds the monopoly on the ownership and operation of transmission and distribution assets in Indonesia. Despite the legal provision allowing the private sector to operate grids, there is no robust regulation concerning technical procedures and financial charges for network access, and this model has been applied only for generation projects in Indonesia. In the 2021‑2030 RUPTL, there is a larger share of IPPs in generation capacity compared with the 2019‑2028 RUPTL, which was more reliant on PLN. This market structure and level of sector participation is similar to many other countries in Southeast Asia and Africa.

Being a state-owned entity, PLN funds the extension and renovation of the grid through its balance sheets and consequently, the financing capacity and costs are tied to the financial health of the corporation, rather than the project itself, which currently poses a challenge. PLN unveiled a net debt of around USD 30 billion on its financial statements, and it anticipates a gradual increase of the debt-to-equity ratio in the foreseeable future. The return on equity hovers around 1.1% and although PLN generates ample cash flows to meet debt service obligations, maintaining financial well-being in a sustainable way still depends heavily on government subsidies – which represented over 20% of revenues last year.

The tariffs that are set by the Ministry of Energy and Mining Resources have consistently been below operating costs and rely on government subsidies. However, this could change as the JETP Comprehensive Investment and Policy Plan proposes updating PLN's revenue model to adopt a forward-looking methodology, considering annual return requirements for new investments.

Additionally, there is a lack of transparent and clear accountability regarding the tariffs and associated costs for generation, transmission and distribution, which complicates the assessment of the profitability of each component separately.

The capital structure of the transmission and distribution project development would typically rely on PLN balance sheet (equity and state support in the form of direct loans and government guarantees) and concessional funding coming from development finance institutions (DFI) and multilateral banks, often at minimal or zero interest rates, contributing to an overall low cost of capital for these initiatives.

The uncertainty around project development in Indonesia is a challenge, frequently resulting in projects that deviate from the initial design. The investment for the Sumatra Electricity ­­­Grid Strengthening project, for instance, turned out to be only 39% of the original programme expenditure. While 10% of the variation was attributed to lower project costs, the majority resulted from reduced economic growth during the programme implementation period, which reduced in turn the justification for further grid strengthening. In another example, the West Kalimantan project incurred a 17% increase in costs. This escalation was primarily driven by a surplus in loans, a consequence of a substantial appreciation of the United States dollar against the Indonesian rupiah during project implementation. The uncertainties in these projects directly impact the perception of project risk.

The Sumatra Electricity Grid project adopted results-based lending, a first of its kind for grid projects, chosen for its suitability due to numerous small-scale activities and expenditures. This approach prioritises delivering specific, measurable results, streamlining co‑ordination and ultimately attracting additional financing. Government regulations in 2015 enabled PLN to borrow directly with a sovereign-backed guarantee, aligning with the results-based lending approach's principles. This strategy not only reduced transaction costs for PLN but also encouraged performance improvements and heightened accountability. This approach has been extended to the more recent Eastern Indonesian Program, which has also incorporated a grant support for specific incremental costs, contributing to overall risk mitigation.

Overall, improving the planning and assessment process for future infrastructure needs, the transparency of projects, and the evaluation of PLN's costs and revenue requirements offer ways to enhance the efficiency of investment. The Ministry of Energy and Mining Resources has issued regulations that establish a set of quality standards that are accounted as compensation from PLN, as an ex-post mechanism.

Indonesia has made significant progress in advancing development of its transmission and distribution system, primarily through DFI financing support and public finance. However, reliance on PLN balance sheet and government subsidies, coupled with the lack of clear regulation for private sector participation, is a challenge for the sustainability of the system. PLN’s financial health underscores the need for a more diversified and resilient funding structure. Indonesia is in need of a clearer regulation that involves private capital, adequate tariffs and strong planning. Additionally, the transparency issues surrounding tariff regulation and project development uncertainties highlight the importance of realistic planning and risk mitigation strategies, such as a results-based approach that improves accountability of the projects.