2Contents

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

3

A Solar Home System unit in Jangari Village, West Java

4

This report analyzes the World Bank’s Indonesia Solar

Home System (SHS) Project, which ran from 1997 to 2003.

The project aimed to catalyze rapid commercial penetra-

tion 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 prov-

inces of West Java, Lampung, and South Sulawesi.

Despite notable achievements in the areas of capacity

building for some stakeholders and introducing the con-

cept 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 fac-

ing 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 long-

term sustainability. More specifically, with an inexperi-

enced 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 project’s

low priority and indicating that it lacked a combination

of interest and competency in promoting SHS. Private

sector players and financial institutions lacked knowl-

edge 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 emerg-

ing 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.

5

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 photo-

voltaic (PV) technology in Indonesia through a market-

based approach. Initially estimated to cost US$118.1 mil-

lion 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 revi-

sions 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 project’s shortcomings, a closer exami-

nation reveals several other circumstances, which are

equally as pertinent to investigate. In laying out these

surreptitious factors, the report begins with an explana-

tion of its research methods, which consists of a series

of qualitative, semi-structured interviews with key stake-

holders, supplemented by extensive literature review,

and field research to remote villages in West Java and

Lampung. Subsequently, a short overview of Indonesia’s

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 out-

look 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 coun-

try’s 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 regard-

ing the market-based approach to renewable energy.

Understanding the reasons for the project’s failure would

provide invaluable information for policymakers and

practioners that continue to face challenges in address-

ing 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 Potential MW Installed capacity MW Utilization ratio

Large Hydro 75,674 3,854 5.0

Small Hydro 459 54 11.76

Geothermal 19,658 589.50 3

Biomass 49,807 177.80 0.36

Solar 4-6.5 kWh/m2/day 5 N/A

Wind 3-6 m/sec 0.5 N/A

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

6

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 repre-

sented. 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;

• FinancialInstitutions 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).

• Localcommunities.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 1: Researcher on her way to Jangari Village, West Java

7

Figure 2: Researcher interviewing SHS users in Serdang Village, Lampung

Figure 3: Interview overcoming some communication barriers

8

Our method of “intensive interviewing” or “responsive

interviewing” involves asking respondents a set of stan-

dard 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 stretch-

ing”.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 respon-

dents in the intervening period, which would have also

been difficult to explain quantitatively. Importantly, we

relied on the visual elements of the interviews, par-

ticularly non-verbal cues, to decide whether the respon-

dents 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 lan-

guage 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.

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 eco-

nomic 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

country’s 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

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, reli-

able, and reasonably priced electricity supply to serve

the country’s productive sectors, improve the living stan-

dards of Indonesians, and ultimately sustain Indonesia’s

economic and social development.11 Thus, with 70 per-

cent of the population still living in rural areas, expand-

ing rural electrification was integral to the government’s

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 annu-

ally.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 electri-

fication coverage in Indonesia was still at 40 percent in

1996 – well below the regional average.15 As an illustra-

tion, neighboring Thailand and Malaysia were reporting

rural electrification coverage averaging at 80 and 98 per-

cent respectively.16 Grid expansion was particularly chal-

lenging 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 mil-

lion 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

9

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 bat-

teries, 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 government-

funded programs for SHSs. This encouraging develop-

ment 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 cou-

pled 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 implementa-

tion of the government’s “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 exten-

sion 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 difficul-

ties including the risk-averseness of lending banks in

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

10

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

Year Name of initiative LocationSources of

funding(Targeted) SHS units deployed

1988-1989 Sukatani Solar Project Sukatani, West Java GOI and R&S Eindhoven

102

1988-1992 Solar Power for Rural Electrification Scheme (Listrik Tenaga Surya Masuk Desa)

Thirteen provinces Presidential Aid Program (BANPRES)

3,545

1997-2005 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)

Multiple provinces

• Nine provinces in Eastern Indonesia

• n/a

• Lampung, • West Java and

South Sulawesi

• n/a

• East Java

Multiple sources

• GOI and AusAID

• GOI and e7

• GOI and World • Bank/GEF

• GOI and France

• GOI and Bavarian government

1,000,000

• 36,400

• 1000

• 200,000

• 1,300

• 35,000 (and 300 solar village centres)

Table 2: SHS deployment in Indonesia 1988–1997

11

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 vil-

lagers. Table 2 documents the main historical milestones

of SHS deployment in Indonesia prior or concurrent to

the launch of the project.

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 Indonesia’s 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 project’s

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

to target only those villagers willing and able to pay for

electricity services in order to nurture and develop a self-

sustaining 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 mil-

lion people through the sale and installation of 200,000

StakeholderProject

Cost US$% of Total

World Bank (IBRD Loan) 20 17

GEF Grant 24.3 21

GOI 1.5 1

PB 5 4

Sub-borrowers/End-users 67.3 57

Total 118.1 100

Table 3: Sharing of project costsSource: GEF 1996

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

12

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 procure-

ment, sales, installation and maintenance of SHS units;

and for offering term credit to make the systems more

affordable to prospective customers. The eligibility cri-

teria 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

Functions of PSG/stakeholders

World Bank/GEFGovernment

(MEMR, BPPT, BAPPENAS)

Private sector (PBs, dealers)

Customers (End-users)

Coordination • Liaise between the World Bank and the government agencies

• Provide project reporting

• Work with BPPT to coordinate project implementation and interactions with all stakeholders

• Undertake project level reporting

• Recruit and select dealers

• Provide a communication platform between actual customers and prospective customers

Capacity Building • Limited training for selected staff from BPPT, Ministry and other relevant government agencies

• 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)

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

• Channel feedback from customers

Table 4: Interface between PSG and other stakeholders

13

A project-approved 50 Wp SHS unit with the neces-

sary components, the only one eligible under the pro-

gram initially, would cost between US$550 to US$800,

depending on the sales location.30 Dealers would typi-

cally 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 pro-

vide 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 equiva-

lent, 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 custom-

ers. 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 government’s 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 project’s

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 pro-

cess 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 prospec-

tive and actual customers; and conduct training for

stakeholders in the form of conferences, workshops,

seminars, and study tours.

In view of the project’s longer-term objectives “to

strengthen Indonesia’s 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 government’s

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 BPPT’s and the Ministry of Energy and

Mineral Resources (MEMR)’s capacity to develop techni-

cal specifications, and carry out type and product testing,

DescriptionProject

cost US$% of total

Demand side barrier(s) to be addressed

Supply side barrier(s) to be addressed

Credit Component

111.8 95 • High transaction costs

• Lack of credit facilities

• Lack of dealers and strong supply chains

Implementation Support

4.1 3 • 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 1 • Lack of policy framework to support penetration of solar PV technology in the long term

Institutional Development

1 1 • Lack of institutional and capacity to disseminate solar PV technology in both the short and long term

Table 5: Project components addressing different barriers

14

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.

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 compo-

nent. However, soon after the project became effective

in October 1997, it became clear that the project design

needed major adjustments owing to the rapidly deterio-

rating economic and political situation in Indonesia fol-

lowing 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 bank-

ing 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 offer-

ing 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 ineffec-

tive. 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 dealers”35 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 fif-

teen years onwards, also suggest that the reasons for

project failure may have been more fundamental, and

that perhaps the financial crisis became an excuse rather

than an impetus.

We found that the project’s 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 bank-

ing 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 Indonesia’s PV industry.

Failure to overcome the first cost hurdle

At the start of the project, Indonesia’s 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, rep-

resenting almost one year of income in low- and middle-

income 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, how-

ever, “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 invest-

ment and to allow them to offer credit lines to pro-

spective 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 Indonesia’s increasingly strict regulations on non-

performing 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 inter-

est from SHS dealers, only US$0.1 million of the loan was

15

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 com-

mitted to the project went out of business.

It can be said here that the design of the credit facil-

ity 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 institu-

tions, 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 cus-

tomers, unlike with motorcycles,” referring to the popu-

larity of credit lines for motorcycles.

At the same time, it appears that the supposed benefits

of the credit facility were not understood well by poten-

tial 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 respon-

dents had paid cash, as they were unfamiliar with bank-

ing 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 com-

mented 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

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

16

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 invest-

ment risks. As one respondent put it, “If the govern-

ment 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 project’s credit component as it stood

made dealers and customers responsible for financ-

ing US$66.8 million equivalent or almost 60 percent of

project costs, mainly through the payment of monthly

credit installments. It seemingly distributed the invest-

ment 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 monitor-

ing 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 collect-

ing 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 unfamil-

iar 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 deprecia-

tion 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.

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

17

“Without credit from the banks, we had to provide

financing from our own pockets,” explained one respon-

dent “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 infrastruc-

ture, dealers also had to build their rural credit delivery

and collection infrastructure – both requiring very differ-

ent sets of skills and expertise. In this context, respon-

dents felt strongly that “The magnitude of the installa-

tion 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 deal-

ers 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 trans-

action 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 criti-

cized the continued prevalence of free SHSs provided

through government-funded programs in parallel to the

project. Some villagers we talked to in Lampung men-

tioned 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.

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

18

A lack of coordination with PLN was also a problem as

former customers living in target areas that were even-

tually 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 well-

known 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 compo-

nents amounting to approximately US$85 million equiv-

alent 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 mar-

kets and benefit from the much stronger US Dollar.

The Implementation Completion Report cites the suc-

cess of certain dealers in exporting balance of system

components to Sri Lanka as part of the World Bank’s

Energy Services Delivery program as well as for com-

mercial 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 indus-

try, 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

Indonesia’s 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 involve-

ment 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 imple-

mentation 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 agen-

cies and their relevant counterparts. In fact, no govern-

ment institution took on the role of oversight, overall

coordination, and regulator.

Project documents cite BPPT’s performance as “satisfac-

tory” and even exceeding expectations,43 when in real-

ity, as a government research and development agency,

BPPT focused only on technology development and stan-

dards 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 PSG’s “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 mar-

ket, that the project only set aside five percent of proj-

ect 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 one-

quarter 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 government’s 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

19

create a solid policy framework for the solar PV com-

mercialization). Respondents we interviewed suggested

that many of the project’s shortcomings could have

been addressed if there had been a more serious com-

mitment from the government to oversee the imple-

mentation process.

Lack of project sustainability

Considering the longer-term objective of the Indonesia

SHS Project to advance renewable energy commercial-

ization and create a niche market for solar PV technol-

ogy, the project did not provide many building blocks to

sustain the market after it closed. For example, BPPT’s

success in building capacity in the area of testing and

certification of SHSs did not translate into better capac-

ity 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 clos-

ing 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 exam-

ple, there was no study carried out to properly measure

how the financial crisis really affected the credit compo-

nent 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 tech-

nology, which is perceived as an unfamiliar technology

imposed from the World Bank rather than a need stem-

ming from an expressed interest of the rural population.

Doubts were raised whether the technology was even

suitable for sufficient solar irradiation considering fre-

quent 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

Description Project cost US$ % of total

Credit Component

World Bank (IBRD Loan)GEF GrantParticipating BanksDealers/end-users

111.8

20205

66.8

95

17174

57

Implementation Support

GEF GrantGovernmentDealers/end-users

4.1

3.10.50.5

3

3less than 1less than 1

Policy Support

GEF GrantGovernment

1.2

0.70.5

1

1less than 1

Institutional Development

GEF GrantGovernment

1

0.50.5

1

less than 1less than 1

Table 6: Allocation of funds to the different project components

20

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 elec-

trification, which in their opinion emphasized consump-

tive 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, transpor-

tation, 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 imme-

diate 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 implementa-

tion and its shortcomings have indeed inspired much

criticism. However, the project has yielded some bene-

fits, 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 intro-

duced the concept of the commercial value of a SHS.

Figure 10: A SHS unit on a cloudy day

21

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 com-

munity 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 presen-

tation, to give him respect. If you are able to convince

him regarding the importance of the SHS and the legiti-

macy of your business, it is easier to approach and edu-

cate 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 sec-

ondly, 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 technol-

ogy. 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 minis-

tries including the MEMR, the KKP, the KPDT and provin-

cial 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 out-

side Java and Bali – did not have access to basic elec-

tricity services.49 After a slow start, the gradual reduc-

tion 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

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

22

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 suc-

ceed 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 num-

ber 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 rela-

tive 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 income-

generating 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 exe-

cution 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, BPPT’s PV testing labo-

ratory 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 tech-

nical assistance, capacity building, and project monitor-

ing and evaluation.

Although Indonesia’s 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 coach-

ing and business implementation frameworks pro-

vided 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

Table 7: Overall SHS salesSource: World Bank 2004

Description/year 1997 1998 1999 2000 2001 2002 2003

Exchange rate (US$1 to IDR) 3,116 9,501 7,782 8,470 10,411 9,549 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) 0 0 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

23

Figure 12: A radio powered by SHS

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

24

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

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 subse-

quent projects in Indonesia and other developing coun-

tries. This section summarizes key findings and corrobo-

rates 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 finan-

cial infrastructure, establishing a sustainable SHS supply

chain which provides quality products and services, and

ensuring strong government support for project devel-

opment. By measuring the project’s outcomes against

the World Bank’s own standards, it becomes clear that

although the most important factors for project success

have been identified time and again by various experts,

in practice, they are either too difficult to apply, forgot-

ten, or perhaps replaced too easily in a seemingly inno-

vative 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 capital-

intensive technologies such as SHSs in rural areas.58

However, the premature closing of the IBRD loan indi-

cates 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 neces-

sary, in parallel.

Firstly, PBs are in a better position to handle project

financing than SHS dealers and they could have possibly

Figure 14: Mobile phone powered by SHS

25

been enticed to do so had there been a bona fide guar-

antee from the government or the World Bank to pro-

tect 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 sustain-

ability, in light of the financial crisis, small-scale dealers

operating in a nascent solar PV market could have ben-

efited from additional soft loans or grants for upfront

financing of the highly priced SHSs. A higher grant pro-

portion in the loan would have helped dealers to rein-

vest 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 microfi-

nance 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 insti-

tutional 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 prod-

uct recognition and customer trust. A sustainable SHS

supply chain would have been able to provide quality

products and services covering everything from market-

ing, 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 project’s overall dismal sales figures

is an indication that the initial decision to specify a mini-

mum 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 Indonesia’s underde-

veloped 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 com-

ponents. 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

Indonesia’s solar PV market.

26

Government to support project development

The implementation of the Indonesia SHS Project suf-

fered due to a lack of coordination amongst the govern-

ment agencies involved. From this experience, it can be

seen that a key role for the government in any develop-

ment 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 struc-

tures that incentivize rather than hinder businesses.

Ultimately, however, the gap in the project design could

have been addressed by designating a proper coordi-

nating 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 proj-

ect sustainability.

At the policy level, the agency should coordinate and

undertake studies, assessments, and stakeholder con-

sultations 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 Indonesia’s renewable energy policies.

In terms of project implementation, its main responsi-

bility 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 serv-

ing as a facilitator in project negotiations and decision-

making, especially when new developments call for a

change in project design (e.g. the consequences of a

financial crisis).

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 out-

comes of this project leave much to be desired and cer-

tainly, the Asian Financial Crisis did prove to be a major

hindrance to the project. However, this report shows

that the project design also had many fundamental flaws

that could have been anticipated better.

Considering the indispensible role of a properly func-

tioning credit facility to overcome the first cost barrier

of SHSs, the most important lesson by far is that a proj-

ect 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 sev-

eral 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 bet-

ter support for renewable energy development, includ-

ing 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); imple-

menting national energy general plans; determining

action plans in the event of energy emergencies and cri-

ses; and most importantly, monitoring the implementa-

tion of energy policy across sectors.62 Consisting of inde-

pendent 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

Indonesia’s 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 recommend-

ing specific courses of actions for challenges faced at the

policy level.

Technological improvements, cost reductions, and

environmental concerns have also contributed towards

27

renewed interest in renewable energy investments.

With current national electrification rates at 65 percent

and 90 million Indonesians still living without electric-

ity,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 com-

mercial energy services to isolated and rural communi-

ties in Indonesia.

Figure 14: The future of solar power in Indonesia

28

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. What brand is the system?

b. Whom did you buy it from?

c. What is the capacity of the system?

d. 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 elec-

tricity or any other source of electricity?

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

29

1. The World Bank 2001, ‘Solar Home Systems’, Imple-

mentationCompletionReport,The World Bank, East

Asia and Pacific Region.

2. The World Bank 2004, ‘Solar Home Systems’, Imple-

mentationCompletionReport, The World Bank, East

Asian and Pacific Region.

3. Ibid.

4. O’Sullivan, R., & Berner 2010, ResearchMethodsfor

PublicAdministrators. Longman, New York.

5. George, A. L. and A. Bennett 2004. CaseStudiesand

TheoryDevelopmentintheSocialSciences. Harvard

University Press, Cambridge.

6. World Bank, ‘Interregional Resource Transfer

and Economic Growth in Indonesia, Volume 1’,

PovertyandInequality,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’, ProjectDocument, 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’, ProjectDocument, 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’, ProjectDocument, 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

EnergyPolicy 28 (2000), Elsevier Science Ltd.

23. Ibid.

24. Retnanestri, M. et. al. 2003, ‘Off-grid Photovoltaic

Application in Indonesia: A Framework for Analysis’,

DestinationRenewables,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 ru-

ral market or in developing marketing and financing

mechanisms based on cost recovery principles.

26. The World Bank 2004, ‘Solar Home Systems’, Imple-

mentationCompletionReport, The World Bank, East

Asian and Pacific Region.

27. Ibid.

28. Retnanestri, M. 2007, TheI3AFramework:Enhanc-

ingtheSustainabilityofOff-GridPhotovoltaicEnergy

ServiceDeliveryinIndonesia,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’, RenewableandSus-

30

tainableEnergyReviews5(2001), Elsevier Science

Ltd.

30. The World Bank 2004, ‘Solar Home Systems’, Imple-

mentationCompletionReport, The World Bank, East

Asian and Pacific Region.

31. The World Bank 1996, ‘Republic of Indonesia Solar

Home Systems Project’, ProjectDocument, 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’, Imple-

mentationCompletionReport, The World Bank, East

Asian and Pacific Region.

34. Ibid.

35. Ibid.

36. Ibid.

37. Cabraal, A. et. al. 1997, AcceleratingSustainablePV

MarketDevelopment,The World Bank.

38. The World Bank 2004, ‘Solar Home Systems’, Imple-

mentationCompletionReport, The World Bank, East

Asian and Pacific Region.

39. Ibid.

40. Ibid.

41. The World Bank 1996, ‘Republic of Indonesia Solar

Home Systems Project’, ProjectDocument, The

World Bank, Washington.

42. The World Bank 2004, ‘Solar Home Systems’, Imple-

mentationCompletionReport, 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 Invest-

ment Review – Fiscal 2000-2008’, WorldBank

EnergySectorManagementAssistanceProgram,

The World Bank, Washington.

45. Ibid.

46. Respati, J. 2010, ‘The Dilemma of Solar PV Utiliza-

tion 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, TheJakartaPost, Jakarta,

Viewed 14 August 2011, <http://www.thejakar-

tapost.com/news/2011/04/09/pln-install-solar-

panels-340000-customers.html>.

49. The World Bank 1996, ‘Republic of Indonesia Solar

Home Systems Project’, ProjectDocument, 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’, ProjectDocument, The

World Bank, Washington.

52. Ibid.

53. Retnanestri, M. et. al. 2003, ‘Off-grid Photovoltaic

Application in Indonesia: A Framework for Analysis’,

DestinationRenewables,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’, Imple-

mentationCompletionReport, The World Bank, East

Asian and Pacific Region.

57. Cabraal, A. M. Cosgrove-Davies and L Schaeffer,

AcceleratingSustainablePVMarketDevelopment.

31

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

EnergyPolicy 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, AcceleratingSustainablePV

MarketDevelopment,The World Bank.

61. USAID 2007, ‘From Ideas to Action: Clean Energy

Solutions for Asia to Address Climate Change’,

IndonesiaCountryReport, USAID, Bangkok.

62. Dewan Nasional Energi, DewanNasionalEnergi,

Viewed 14 August 2011, <http://www.den.go.id/

index.php/page/readPage/1>.

63. The World Bank, ‘Indonesia’, AsiaSustainableand

AlternativeEnergyProgram, The World Bank,

Viewed 26 August 2011 <http://web.worldbank.

org/WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACI-

FICEXT/EXTEAPASTAE/0,,contentMDK:21042053~me

nuPK:2900515~pagePK:64168445~piPK:64168309~t

heSitePK:2822888,00.html>.

32

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, find-

ings, 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.

33

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 cur-

rently researches energy security, rural electrification, and

energy development and poverty. Before joining the LKY

School, she worked as a Project Executive with the Asia-

Europe Foundation. She can be reached at iramartina@nus.edu.sg

Martin Stavenhagen is a Project Coordinator at the

Physikalisch-TechnischeBundesanstalt, or PTB, Germany’s

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 genera-

tion, 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 sym-

posia in the past few years. He is a frequent contributor to EnergyPolicy,

Energy&Environment, ElectricityJournal, Energy, and EnergyforSustainable

Development.

34

Researcher inspecting the fish farms on Lake Cirata of West Java

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The Lee Kuan Yew School of Public Policy is an autonomous,

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