The global shift toward clean energy has become a central pillar of climate policy worldwide. For Indonesia, a fast-growing economy with rising energy demand and significant infrastructure needs. Success in the energy transition depends not only on domestic policy, but also on the country’s ability to attract both domestic and foreign investment. In this context, foreign direct investment (FDI) and green-financing instruments play a critical role in accelerating renewable power development, strengthening low-carbon transmission infrastructure, and supporting national climate targets, including the Net Zero Emission (NZE) goal for 2060.

However, the large-scale mobilisation of green capital requires a clear regulatory framework, robust financial infrastructure, well-designed incentives, and effective monitoring mechanisms. This article outlines how foreign investment and green-financing schemes operate in Indonesia, the regulatory foundations behind them, and the key challenges and policy directions necessary to enhance the effectiveness of green investment.

The Role of Foreign Investment in Financing Clean Energy Projects

Indonesia possesses vast renewable energy potential across multiple resources, such as solar, wind, hydro, biomass, and geothermal. According to the Ministry of Energy and Mineral Resources, the country’s total renewable energy potential exceeds 3,600 gigawatts (GW), with solar energy contributing the largest share at approximately 3,295 GW. This positions Indonesia as one of the most promising clean-energy investment markets in Southeast Asia.

Geothermal power is another major area of opportunity, with national potential estimated at around 24 GW, while current installed capacity stands at only 2.4 GW. Indonesia’s location along the Pacific “Ring of Fire” grants it some of the richest geothermal reserves in the world.

Beyond environmental benefits, renewable energy projects offer increasingly competitive long-term economic returns due to lower operating costs compared to fossil-fuel-based generation. Combined with the government’s commitment to accelerating the energy transition, the sector has become an investment magnet for both domestic and international funders.

Whether through loans, international grants, or bilateral and multilateral financing, foreign investment plays a vital role in closing Indonesia’s climate-finance gap, which cannot be met by state funding alone. In 2024, for instance, Indonesia’s energy company PT PLN and Germany’s Kreditanstalt für Wiederaufbau (KfW) signed a green-financing memorandum of understanding valued at €1.2 billion (approximately Rp 20.15 trillion). This collaboration illustrates how foreign capital can support clean-energy infrastructure, environmentally friendly power plants, and the strengthening of Indonesia’s sustainable-financing ecosystem.

FDI also accelerates the achievement of renewable energy targets. Over the next 15 years, Indonesia aims to ensure that 70% of new generating capacity (totalling 100 GW added capacity) comes from renewable sources. Foreign financing helps lower domestic debt burdens, expedites project implementation, particularly in geothermal and small-hydro developments, and provides access to advanced technology, technical expertise, and international standards.

How Domestic Green-Financing Schemes Support Indonesia’s Energy Transition

Indonesia’s domestic green-financing ecosystem integrates capital-market instruments, banking sector products, and public-private mechanisms that collectively support the energy transition.

In the capital market, key instruments include green bonds and green sukuk, whose proceeds must be allocated to sustainable and energy-transition projects. The regulatory framework for their issuance is set out in OJK Regulation No. 18/2023 on the Issuance and Requirements for Debt Securities and Sukuk Based on Sustainability (POJK 18/2023).

POJK 18/2023 broadens the scope of sustainable finance instruments beyond green bonds, incorporating green sukuk, sustainability bonds, and sustainability-linked bonds, thereby providing a clearer legal foundation for market-based green financing in Indonesia.

In the banking and financial-services sector, green financing includes green loans, project financing for green-labelled initiatives, funding for energy-efficiency technologies, and green investment products for retail investors. The Indonesian Sustainable Finance Taxonomy (TKBI) serves as a technical classification tool enabling banks and investors to determine whether an economic activity qualifies as “green” or “transition.” This standardisation enhances comparability and consistency in national green-financing flows.

These developments align with Indonesia’s binding commitment under Law No. 16 of 2016, which ratified the Paris Agreement, and obligates member states, Indonesia included, to contribute to greenhouse-gas reduction and sustainable development. The mandate is further reinforced by Article 42 paragraph 1 and 2 of Law No. 32/2009 on Environmental Protection and Management (UU PPLH), which compels the government to develop and implement environmental-economic instruments, including environmental funding mechanisms and incentive/disincentive schemes.

Accordingly, the expansion of green-financing structures is not merely an economic initiative but a legal obligation to support Indonesia’s Nationally Determined Contribution (NDC) commitments.

Also read: The Role of International Institutions in the Development of New and Renewable Energy in the Domestic

Challenges and Policy Directions to Strengthen the Effectiveness of Green Investment

Despite notable progress, Indonesia’s green-financing ecosystem still faces several structural and regulatory challenges that hinder the full effectiveness of green investment.

First, many renewable-energy projects, particularly solar and geothermal, require high upfront capital with long return-on-investment periods. Domestic financial institutions remain cautious due to the absence of strong risk-mitigation mechanisms such as credit guarantees or sustainable-project insurance. Land acquisition and regulatory complexity also continue to delay project implementation, exacerbated by overlapping policies between central and regional governments.

In the financial sector, capacity gaps remain significant. Although OJK has introduced the Sustainable Finance Taxonomy (TKBI), many banks and financial institutions still lack the expertise to assess environmentally driven projects. As a result, risk assessments often rely on conventional credit-analysis models that do not incorporate environmental, social, and governance (ESG) criteria. Inconsistent reporting standards further increase the risk of greenwashing, undermining transparency and eroding investor confidence.

From a policy perspective, the government has begun developing fiscal and non-fiscal incentives, including tax reductions, import relief for clean-energy technologies, and exemptions for low-carbon equipment. Moving forward, policy strengthening should prioritise:

Regulatory harmonisation across sectors to improve legal certainty and streamline licensing for green projects.
Capacity building within financial institutions to enhance ESG-aligned project assessment and sustainable-risk management.
Improved transparency and impact reporting to strengthen accountability and ensure that green funds are used effectively.

Indonesia should also deepen cooperation with international financing platforms such as the Just Energy Transition Partnership (JETP), which offers long-term, lower-cost capital for transition initiatives. With a comprehensive, results-oriented policy approach, green investment can accelerate Indonesia’s clean-energy transition while enhancing the country’s competitiveness in the global green economy.***

Also read: The Opportunities Behind Indonesia’s New Energy Regulations

Regulations:

Peraturan Otoritas Jasa Keuangan Nomor 18 Tahun 2023 tentang Penerbitan dan Persyaratan Efek Bersifat Utang dan Sukuk Berlandaskan Keberlanjutan (“POJK 18/2023”).
Undang-Undang Nomor 16 Tahun 2016 tentang Pengesahan Paris Agreement to the United Nations Framework Convention on Climate Change (“UU 16/2016”).
Undang-Undang Nomor 32 Tahun 2009 tentang Perlindungan dan Pengelolaan Lingkungan Hidup (“UU PPLH”).

References:

Percepat Transformasi Energi Bersih dengan Pendanaan Hijau. Indonesia.go.id. (Diakses pada 6 November 2025 pukul 11.02 WIB).
Bank Indonesia’s Role in Green Finance. Bank Indonesia. (Diakses pada 6 November 2025 pukul 11.15 WIB).
Buku Taksonomi untuk Keuangan Berkelanjutan Indonesia. OJK. (Diakses pada 6 November 2025 pukul 11.34 WIB).
Apa Itu Pembiayaan Hijau?. Lindungi Hutan. (Diakses pada 6 November 2025 pukul 11.47 WIB).
Perkuat Komitmen Percepatan Implementasi Just Energy Transition Partnership, Pemerintah Bentuk Satgas Transisi Energi dan Ekonomi Hijau. Kementerian Koordinator Bidang Perekonomian RI. (Diakses pada 6 November 2025 pukul 11.44 WIB).

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How Foreign Investment and Green Financing Are Powering Indonesia’s Clean Energy Transition