Fiscal Risks and Impacts Assessment on the Renewable Energy Policies in Indonesia

This thesis tries to assess the Indonesia fiscal risk because of government guarantees for renewable energy development, particularly the development of geothermal power plants. These plants in Indonesia can be developed either by the PLN (a state-owned enterprise) or by private investors. When the plants are developed by private investors, they have to sell the electricity to PLN as it is the only electricity retailer in Indonesia. If PLN build power plants, it needs loans from financial institutions, but due to its financial condition, those financial institutions need government guarantees which ensure PLN’s ability to service the debts. Meanwhile, when the power plants are developed by private investors, the investors need to be guaranteed that PLN will be able to pay for the purchased power. These guarantees might create a fiscal risk for the government. The government has been stating fiscal risks in its national budget, but it only focuses on the risk exposures without estimating their probabilities. Therefore, this study tries to complete the current budget statement which provides both exposures and probabilities of fiscal risks from government guarantees for renewable energy projects. Furthermore, the government has been applying a simulation model to assess the fiscal risks but it is in a definite number which does not incorporate uncertainties. Whereas uncertainties can alter the government policy. Moreover, the government model to assess fiscal risk on the power sector incorporates general power plants which may not suitable for the renewable energy power, particularly geothermal power. It is then forecasted that it is likely there will be no government guarantee for geothermal projects for 2018 and 2019. However, with less than 10% probabilities of an exposure of up to IDR 18.8 trillion and IDR 25.2 trillion for 2018 and 2019 respectively. Under 90% certainty, the maximum guarantee exposure will be up to IDR 1.9 trillion and IDR 4.1 trillion. As results, these exposures are categorised as low risk because they are below the threshold value of 0.5% of GDP but the government will have a sufficient cash to pay the maximum possible guarantee amounts. These forecasted figured are based on a Monte Carlo simulation model, a stochastic simulation model, for renewable energy power plants. In practical, this model can act as a tool for analysing guarantee proposals, to estimate fiscal risk and economic impacts of the guarantees, to design fiscal risk control policies. Therefore, this study can be applied for decision making regarding government guarantee in Indonesia. In academic point of view, this study explains the transmission of fiscal risk from government guarantees on geothermal projects in Indonesia to the fiscal risk. It also enrich academic perspective on fiscal risk management which is differ from other literatures as it explains fiscal risk from the Indonesian government guarantees, adds knowledge on the relationship between government expenditure, government guarantees on renewable energy development and fiscal sustainability in Indonesia, and provides knowledge through a practical and applicable fiscal risk assessment approach on government guarantees. It is concluded that there will be no government guarantee exposure for geothermal projects in 2018 and 2019, so the government need not to allocate the guarantee expenditures in the national budget for the years.