Indonesia has become a key player in the global energy transition, positioned at the crossroads of economic growth, environmental commitments, and the intensifying geopolitical rivalry between the US and China. As Southeast Asia, with its rapidly growing population and industrial sector, seeks to reconcile its ambitions for economic development with the pressing need for a just energy transition, Indonesia's role in the clean energy revolution is both pivotal and complex.

Economic growth and the energy landscape

Southeast Asia is on track to account for a quarter of the world’s energy demand growth over the next decade, driven by the industrial expansion of nations like Indonesia. However, this growth is grounded in an energy system still heavily reliant on fossil fuels. The 2024 Southeast Asia Energy Outlook from the International Energy Agency (IAE) reveals that coal, which accounts for half of the region’s electricity generation, has seen its share of the energy mix increase from 9% in 2000 to 28% in 2023. Oil comprises over 30% of energy consumption, primarily in the transport sector, while natural gas, at 20%, is increasingly imported due to rising domestic consumption. Long-term contracts for coal power, escalating costs for natural gas, and infrastructure challenges further hinder efforts to shift toward cleaner energy sources.

Southeast Asia has prioritized environmentally sustainable economic growth, as reflected in the adoption of numerous regional declarations and blueprints by the Association of Southeast Asian Nations (ASEAN). Since the mid-2010s, ASEAN members have been developing green growth strategies, with all ten nations incorporating green growth objectives into their national development plans by 2023. The July 2024 ASEAN Foreign Ministers’ Meeting in Vientiane culminated in a 36-page Joint Communiqué that spotlighted “green growth” as essential to advancing sustainable development. Encouragingly, nine of the ten ASEAN members have set mid-century goals for achieving carbon neutrality or net-zero emissions.

Indonesia, home to the world’s fourth-largest population, exemplifies this challenge. Indonesia’s commitment to a net zero economy, formalized through the Paris Agreement and its Long-Term Strategy for Low Carbon and Climate Resilience 2050, envisions a 29% reduction in greenhouse gas emissions by 2030 and targets a low-carbon economy by 2060 or sooner. Speaking at the G20 forum in November, President Prabowo Subianto stated Indonesia could achieve net zero emissions by 2045, ahead of its earlier 2050 target. He also announced plans to retire fossil-fuel power plants by 2039, 17 years earlier than planned, and to add 75 gigawatts of renewable energy, reaffirming commitments shared at COP29.

Despite its substantial efforts to reduce greenhouse gas emissions, the country’s energy system continues to lean heavily on coal and oil. Indonesia, which produces nearly 90% of Southeast Asia’s coal and ranks as a global export leader, exemplifies the carbon-intensive development pathway prevalent across the region. As of 2023, coal continued to dominate Indonesia's energy mix, accounting for about 43% of total energy consumption, according to the Energy Institute’s Statistical Review of World Energy. Oil followed with a 31% share.

The nation’s dominance in global coal production and natural gas supply has positioned it as a key player in Southeast Asia’s energy landscape. As the largest economy in Southeast Asia, Indonesia’s energy transition will have a profound impact on emissions and could serve as a model for other fossil fuel-dependent countries. 

Indonesia’s nickel boom: An intersection of growth and sustainability

Indonesia’s zero-emission goal highlights the country’s broader efforts to reconcile industrial growth with decarbonization. Central to this transition is its strategic focus on leveraging its vast nickel reserves to support the clean energy value chain, particularly in electric vehicle (EV) battery production. 

As the world’s top producer of mined nickel, contributing 51% of global output, Indonesia implemented a “downstreaming” strategy under the Jokowi administration to maximize the economic value of its resources by processing them domestically, rather than exporting them in their raw form. A cornerstone of this strategy was the 2020 ban on raw nickel exports, which catalyzed a dramatic expansion in domestic processing capabilities. Over five years, Indonesia transformed into the leading global producer of refined nickel, now accounting for 40% of global output.

China’s investments have played a pivotal role in this transformation. China’s advanced processing technology and domestic demand for steel and EV batteries have positioned it as the primary investor in Indonesia’s nickel industry. The Belt and Road Initiative (BRI) has significantly accelerated Indonesia’s nickel industry, with financing provided by Chinese government-backed commercial banks. A select group of primarily Chinese companies, including Tsingshan Holding Group, Delong Nickel Industry Co Ltd, Huayou Cobalt Co Ltd, and Green Eco Manufacture (GEM) Co Ltd, have been instrumental in developing Indonesia’s nickel processing sector and its related industries. Since 2014, the Tsingshan Group — globally the largest producer of ferronickel and stainless steel — has emerged as the leading Chinese investor in Indonesia’s mineral processing sector.

In pursuing its downstreaming objectives, Indonesia has made a strategic tradeoff: while raw ore was previously exported primarily to China, much of the newly constructed smelting capacity within Indonesia is now Chinese-owned and operated. Chinese firms now control around 90% of the country’s smelting capacity, especially facilities designed to refine nickel to EV battery-grade quality. Yet, it is through Chinese-invested smelter parks that Indonesia has leveraged its substantial nickel reserves to become the world’s top producer of nickel and related products, including NPI, stainless steel, and, increasingly, EV batteries. 

Chinese involvement in this sector has continued apace. Chinese battery materials producer GEM Co., Ltd has partnered with Indonesia’s PT Vale to construct a high-pressure acid leaching (HPAL) plant in Central Sulawesi. Meanwhile, Zhejiang Huayou Cobalt Co. is seeking $2.7 billion in funding for its battery-nickel facility in Southeast Sulawesi. In November, China and Indonesia signed $10 billion in agreements at the Indonesia-China Business Forum in Beijing. The forum followed a meeting between Chinese President Xi Jinping and Indonesian President Prabowo Subianto, who chose China for his first official visit. In a joint statement, the two nations agreed to expand cooperation in new energy vehicles, lithium batteries, photovoltaics, and the digital economy, pledging joint efforts on global energy transition and secure supply chains for minerals and industrial sectors. 

However, the rapid expansion of nickel processing has come with significant environmental costs. The energy-intensive process of nickel refining has raised alarms about deforestation, water pollution, and increased greenhouse gas emissions. Ironically, while the EV transition aims to reduce the automobile industry’s carbon footprint, nickel smelting at Indonesia’s Weda Bay Industrial Park (IWIP) creates a significant carbon impact. A January 2024 report from Climate Rights International, a US environmental group, revealed that IWIP, located in Indonesia’s Maluku islands, has already built five coal-fired power plants and plans to add twelve more. Once operational, these plants will consume more coal annually than Spain or Brazil.

To mitigate such impacts, Indonesia has begun incorporating renewable energy sources, such as hydropower and solar PV, into its nickel production facilities. This move reflects a broader regional push for greener growth.

The role of international partnerships: global commitments and funding gaps

To support its transition to sustainable energy, Indonesia has forged significant international partnerships. Indonesia’s energy ambitions align with broader regional efforts to attract investment and accelerate the shift toward renewable energy. Central to this strategy is the Just Energy Transition Partnership (JETP) with the International Partners Group (IPG), which secured an initial $20 billion commitment in 2023. Half of this funding is earmarked to attract private investment via the Glasgow Financial Alliance for Net Zero (GFANZ). Embedded within the Comprehensive Investment and Policy Plan (CIPP), the JETP supports Indonesia’s Energy Sector Roadmap to Net Zero Emissions. 

Nevertheless, the road to a just energy transition remains fraught with challenges. Despite ambitious climate pledges, Southeast Asia struggles to secure sufficient funding for its energy transition. The region receives only 2% of global clean energy investment — disproportionate to its 6% share of global GDP and 9% share of the global population. Accelerating the transition will demand an estimated $12 billion in concessional financing by the early 2030s to meet its climate targets, according to the IEA.

This shortfall is reflected in Indonesia’s JETP, which faces significant funding gaps, with $97.3 billion needed by 2030 to achieve its renewable energy targets — almost five times the current pledged amount. Progress is further slowed by delayed disbursements; two years post-launch, financing has barely begun, with critical guarantees from the US and U.K. still under negotiation. While the JETP Secretariat has identified 19 programs with ongoing activities with a value of $144.6 million managed/implemented by the World Bank, United Nations Office for Project Services Energy Transition Partnership (UNOPS ETP), Organisation for Economic Co-operation and Development (OECD), International Energy Agency (IEA), and others, most of the $21.6 billion targeted remains in preliminary stages.

Despite these challenges, Indonesia continues to attract billions in investment, particularly in the electric vehicle and battery sectors. Hyundai and LG Energy’s new battery cell factory, a landmark project under the Indonesia Battery Corporation, aims to develop 140 GWh of battery capacity by 2030. This facility, part of a $9.8 billion investment, reflects Indonesia’s comprehensive support for EV adoption through policy measures such as subsidies and tax incentives. 

However, while this investment bolsters Indonesia’s green energy goals, the country’s reliance on coal-fired power plants for nickel smelting remains a significant hurdle to its net-zero aspirations. Indeed, JETP energy roadmap itself has notable gaps, particularly with its exemptions for captive, off-grid coal-fired power plants (CFPP), which are deemed “contributors to the low-carbon transition” for their role in nickel production. This could lead to emissions surpassing the power sector cap, potentially undermining the country’s net-zero ambitions. On an encouraging note, the Indonesia Investment Authority (INA), the country’s sovereign wealth, which was set up in 2021, is not only engaging potential investors in the country’s EV sector and geothermal energy, but is also providing financing for the early retirement of coal-fired power plants.

Geopolitical tensions and the US-China rivalry

Indonesia’s energy ambitions are further complicated by its strategic position in the ongoing geopolitical rivalry between the US and China. This geopolitical tension extends beyond traditional energy sectors, particularly to Indonesia's growing role in the global nickel market, which is critical for the electric vehicle (EV) supply chain.

The surge in Indonesian nickel exports has depressed prices, benefiting Chinese EV manufacturers but creating challenges for miners globally, including in Indonesia. Persistently low nickel prices are straining producers worldwide, potentially leading to widespread mine closures. In response, some US officials have labeled these developments as an “extreme threat” to supply chain security and environmental sustainability. At the same time, China’s control over Indonesia’s nickel processing industry presents further challenges for Western EV manufacturers, especially as US-China relations remain strained. This dynamic has added a layer of complexity to the strategic importance of Indonesia’s nickel sector, which was designated a critical mineral by the US in 2023, owing to its supply vulnerability and limited domestic production.

In an effort to navigate this delicate balance, Indonesia has proposed a US-Indonesia Critical Minerals Specific (CMS-FTA) aimed at supporting nickel exports for EV batteries. The deal, discussed at the 43rd ASEAN Summit, is tied to US Inflation Reduction Act (IRA) incentives, but it has sparked objections from nine US senators. These senators have raised concerns about labor practices, Chinese mining control, environmental risks, and community engagement.

Further complicating the situation, Indonesia’s nickel-export policies have led to tensions with the European Union (EU), which took Indonesia to the World Trade Organization (WTO) in 2021 over its nickel-export ban, claiming the policy violated trade rules and distorted ore prices. Indonesia defended the ban as a necessary tool for local industrialization, but the WTO ruled against the country. Indonesia is currently appealing the decision while maintaining the ban, a policy that remains central to its industrial development strategy.

In May 2024, Indonesian Minister for Investment Affairs Luhut Pandjaitan contended that a US-Indonesia free trade agreement for refined nickel exports — even from coal-fired smelters — would help support US manufacturers. He argued that US senators’ concerns about environmental impacts overlook the trade-offs necessary for advancing the green transition, as nickel is indispensable for battery production.

However, falling prices, coupled with fears over Chinese dominance, risk limiting Indonesia’s access to US markets and undermining tax incentives aimed at reducing reliance on China. As Europe also seeks to secure a supply of EV metals, Indonesia faces the possibility of becoming overly reliant on a single customer. To mitigate this risk and attract US tax benefits, Indonesia is working to limit Chinese involvement in its nickel projects by making Chinese firms minority shareholders.

Despite these efforts, negotiations for a limited free trade agreement with the US have stalled due to environmental concerns over China’s involvement in Indonesia’s nickel sector. The US has hesitated to offer full support for Indonesia’s nickel industry, despite its significance to the global clean energy transition. While the US seeks to reduce dependency on China for critical minerals, Indonesia’s growing economic ties with Beijing make this a difficult balancing act.

Indonesia’s role in a green future

As Indonesia continues its push toward a greener future, it remains a model of the complex balancing act faced by Southeast Asia as a whole. The country’s efforts to reconcile economic growth with environmental sustainability, while navigating the geopolitical rivalry between China and the US, underscore the region's broader challenges.

International collaboration will be key to Indonesia’s success, with initiatives like the JETP and Asia Zero Emissions Community (AZEC) providing critical financial and technical support. Ultimately, Indonesia’s approach to leveraging its natural resources, promoting industrial development, and integrating renewable energy sources could serve as a blueprint for other countries in Southeast Asia striving to meet their energy transition goals.

While challenges remain, Indonesia’s evolving role as both an economic powerhouse and a key player in the clean energy revolution illustrates the complex yet essential path forward for Southeast Asia. As the region continues to navigate its energy transition, Indonesia’s commitment to a sustainable future will not only shape its own trajectory but could also influence the global path toward a cleaner, more resilient energy landscape.