The Impact of Fiscal Incentives on the Feasibility of Solar Photovoltaic and Wind Electricity Generation Projects: The Case of Indonesia.

Abstract

Renewable energy still cannot compete with fossil-based electricity generation costs in most developing countries. Fiscal instruments can be considered the most promising tool in emerging economies compared to various measures to support renewable energy deployment. Fiscal instrument effectiveness in renewable energy development in developing countries is still underemphasised in the literature. Using the case of Indonesia, this study aims to simulate how different fiscal incentives can affect the economic price of renewable energy by employing six types of fiscal incentive scenarios. The scenarios include tax incentives (tax holiday, tax allowance, value-added tax reduction) and subsidy policies (interest rate subsidy, land acquisition support, and project development facility). Using a typical financial model for 66 projects of solar photovoltaic and wind technology provided in Indonesia's ten years national electricity plan, the findings generate two major outcomes. First, compared to other incentive policies, tax holidays and tax allowance are the most significant policies that would reduce the electricity price of renewables in Indonesia. Second, solar photovoltaics are more sensitive in response to fiscal intervention than wind technology. The findings would be of high value to support specific strategies toward energy transition in developing countries.