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Subsidizing solar energy in Indonesia: Evaluating the fossil fuel depletion premium as a revenue-neutral policy tool

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  • Hutabarat, Simon Poltak Hamonangan

Abstract

Amid Indonesia's push to expand renewable energy, this study evaluates the long-term impact of the depletion premium—a revenue-neutral policy that reallocates 25 % of fossil fuel tax revenue to support solar photovoltaic (PV) development—using 15 years of national data. An optimization model, calibrated with World Bank (2017) parameters, compares two strategies: raising subsidies and improving PV efficiency. Results indicate that a 5 % subsidy increase enhances capital efficiency and solar generation but dampens new investment. By contrast, a 5 % improvement in PV efficiency delivers greater overall economic returns. The findings suggest that combining targeted early subsidies with efficiency improvements can accelerate solar expansion, reduce dependence on fossil fuels, and advance Indonesia's renewable energy goals while maintaining fiscal sustainability.

Suggested Citation

  • Hutabarat, Simon Poltak Hamonangan, 2025. "Subsidizing solar energy in Indonesia: Evaluating the fossil fuel depletion premium as a revenue-neutral policy tool," Utilities Policy, Elsevier, vol. 97(C).
    • Handle: RePEc:eee:juipol:v:97:y:2025:i:c:s0957178725001791
    DOI: 10.1016/j.jup.2025.102064
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    Keywords

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    JEL classification:

    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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