This Climate Policy Initiative (CPI) study is part of a research program which explores the potential of developing a green investment bank model in Indonesia. More specifically, it is focused on the potential of developing a guarantee instrument to help catalyze renewable energy investments in Indonesia.
A guarantee instrument is one of the many potential de-risking instruments to help accelerate renewable energy development in Indonesia. Though a guarantee is not the only solution to address the range of investment barriers renewable energy projects face, it may address the security gap, improve the risk-return profile of a project and increase access to long-term funding from local banks.
As the perception of political risk and public sector performance in Indonesia has improved in recent years, the demand for guarantee instruments to cover these risks have gradually subsided among financial institutions. In addition, the Indonesia Infrastructure Guarantee Fund (IIGF) also partially covers these risks. The development of a credit guarantee for renewable energy in Indonesia offers the most potential to help rejuvenate the market while also catalyzing private investments. If developed by a local financial institution, it can also help increase the guarantee’s visibility and accessibility to local stakeholders.
However, there are potential challenges to effectively implement a guarantee instrument in Indonesia, namely: Competition with shareholder/corporate guarantee, which tends to have a lower cost; “first demand” feature, often required by financial institutions; limited involvement in recovery proceedings in case of default; and limited awareness about a guarantee instrument among financial institutions.