ISLAMIC FINANCING FOR RENEWABLE ENERGY IN INDONESIA: UNLOCKING POTENTIAL DEMAND FROM GCC INVESTORS
Article Sidebar
Read Counter : 2822
Download : 1580
Main Article Content
Abstract
This study examines the interest of Gulf Cooperation Council (GCC) investors in financing renewable energy (RE) projects in Indonesia using Islamic financing schemes. It employs a multi-criteria decision-making (MCDM) method and Analytical Hierarchy Process (AHP) model with expert respondents representing institutional investors from the GCC states. To validate and enrich the analysis, it also conducted Focus Group Discussion and additional interviews with industry players and Indonesian regulators. The main finding indicates that the return on investment is the most crucial factor in selecting appropriate RE projects, followed by risk and impact of the projects. Furthermore, while the GCC investors do not have sufficient knowledge about the potential and sources of RE in Indonesia, they consider the solar panel project as most preferable. Next, the study finds investment return, Shariah compliance and liquidity as the main criteria in choosing Islamic financing instruments, where equity-based are the most preferred instrument, followed by asset-backed securities and blended financing instruments. In addition, tax incentives, cross subsidy and feed-in-tariffs are the most preferred incentives needed by the investors. The additional interviews that we conducted further affirm these findings. The results are expected to provide insights for the Indonesian policy makers, particularly fiscal and financial/monetary authorities, and the GCC investors to invest in Indonesia for financing RE projects using Islamic financing schemes.
Acknowledgment
We gratefully acknowledge the support provided by Universitas Indonesia Research Grant. The grant facilitated the research presented in this paper, allowing us to conduct data collection and analysis as well as disseminate our findings to a wider audience.
Downloads
Article Details
Issue
Section
Journal of Islamic Monetary Economics and Finance is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
How to Cite
References
Abolhosseini, S., & Heshmati, A. (2014). The main support mechanisms to finance renewable energy development. Renewable and Sustainable Energy Reviews, 40, 876–885.
Al-Zoubi, H. A., O’Sullivan, J. A., & Alwathnani, A. M. (2018). Business cycles, financial cycles and capital structure. Annals of Finance, 14, 105-123.
Ambec, S., & Lanoie, P. (2007). When and why does it pay to be green? GAEL Working Paper 2007–05. CIRANO, Quebec.
Ansari, Z., Tabash, M. I., Akhtar, A., Khan, S. H., & Al-Matari, E. M. (2019). Identifying and ranking the driving forces of social insurance by analytical hierarchy process: Evidence from India. Heliyon, 5(10), e02683.
Ari, I., & Koc, M. (2021). Towards sustainable financing models: A proof-of-concept for a waqf-based alternative financing model for renewable energy investments. Borsa Istanbul Review, 21, S46–S56.
Ascarya, A., & Tekdogan, O.F. (2022). Recommended Methodology for Research in Islamic Economics and Finance (Chapter 18). In Billah, M.M. (Ed). Teaching and Research Methods in Islamic Economics and Finance. Abingdon-on-Thames, England, UK: Routledge
Asian Development Bank (ADB). (2020). Renewable Energy Tariffs and Incentives in Indonesia Review and Recommendations. https://www.adb.org/sites/default/files/publication/635886/renewable-energy-tariffs-incentives-indonesia.pdf
Azhgaliyeva, D., Beirne, J., & Mishra, R. (2023). What matters for private investment in renewable energy? Climate Policy, 23(1), 71–87.
Babai, A., & Lacovara, L. (2017). FDI, Growth & the GCC. The Business Year. Retrieved from https://www.thebusinessyear.com/article/fdi-growth-the-gcc/
Broughel, A. E., & Hampl, N. (2018). Community financing of renewable energy projects in Austria and Switzerland: Profiles of potential investors. Energy Policy, 123, 722-736.
Brunnermeier, S. B., & Cohen, M. A. (2003). Determinants of environmental innovation in US manufacturing industries. Journal of Environmental Economics and Management, 45(2), 278-293.
Butu, H. M., Nsafon, B. E. K., Park, S. W., & Huh, J. S. (2021). Leveraging community-based organizations and fintech to improve small-scale renewable energy financing in sub-Saharan Africa. Energy Research & Social Science, 73, 101949.
Campisi, D., Gitto, S., & Morea, D. (2018). Shari’ah-compliant finance: A possible novel paradigm for green economy investments in Italy. Sustainability, 10(11), 3915.
Chang, Y., Fang, Z., & Li, Y. (2016). Renewable energy policies in promoting financing and investment among the East Asia Summit countries: Quantitative assessment and policy implications. Energy Policy, 95, 427–436.
Chirambo, D. (2016). Addressing the renewable energy financing gap in Africa to promote universal energy access: Integrated renewable energy financing in Malawi. Renewable and Sustainable Energy Reviews, 62, 793-803.
de Brauwer, C. P. S., & Cohen, J. J. (2020). Analysing the potential of citizen-financed community renewable energy to drive Europe's low-carbon energy transition. Renewable and Sustainable Energy Reviews, 133, 110300.
Directorate General of New, Renewable Energy and Energy Conservation (Ditjen EBTKE). (2022). Development of Renewable Energy in Indonesia.
Duqi, A., & Al-Tamimi, H. (2019). Factors affecting investors’ decision regarding investment in Islamic Sukuk. Qualitative Research in Financial Markets, 11(1), 60-72.
Elie, L., Granier, C., & Rigot, S. (2021). The different types of renewable energy finance: A Bibliometric analysis. Energy Economics, 93, 104997.
Emerson, R. M., Solomon, J., Lewandowski, M., Nair, S., Vega Montoto, L. J., & Burli, P. H. (2021). Bio-project “derisking” through development of systematic methodologies and frameworks for risk assessment (No. INL/CON-21-62395-Rev000). Idaho National Lab. (INL), Idaho Falls, ID (United States).
Engin, T. & Bensaid, S. (2023, May 11). As 2030 approaches, Gulf Nations to accelerate investment in renewable energy. Energy Connects. https://www.energyconnects.com/opinion/thought-leadership/2023/may/as-2030-approaches-gulf-nations-to-accelerate-investment-in-renewable-energy/
Esmaeili, S., Anvari-Moghaddam, A., & Jadid, S. (2019). Optimal operational scheduling of reconfigurable multi-microgrids considering energy storage systems. Energies, 12(9), 1766.
Eyraud, L., Clements, B. & Wane, A. (2013). Green investment: Trends and determinants. Energy Policy, 60, 852-865.
Ghazali, A. M., Ubaid, A., Wardhana, A. R., Masud, I., Mohammad, J., Ma’afi, M., Wahid, M., Budiarto, R. (2017). Fiqh energi terbarukan: Pandangan dan respons Islam atas pembangkit listrik tenaga surya (PLTS). Jakarta: Lembaga Kajian dan Pengembangan Sumber Daya Manusia Pengurus Besar Nahdlatul Ulama (LAKPESDAM-PBNU).
Hassan, Q., Al-Hitmi, M., Tabar, V. S., Sameen, A. Z., Salman, H. M., & Jaszczur, M. (2023). Middle East energy consumption and potential renewable sources: An overview. Cleaner Engineering and Technology, 12, 100599.
Indonesia (2014). Peraturan Pemerintah No. 79 Tahun 2014 Tentang Kebijakan Energi Nasional [Government Regulation no. 79 of 2014 concerning National Energy Policy].
Indonesia (2022). Peraturan Presiden No. 112 Tahun 2022 Tentang Percepatan Pengembangan Energi Terbarukan Untuk Penyediaan Tenaga Listrik. [Presidential Regulation no. 112 of 2022 concerning the Acceleration of Renewable Energy Development for the Supply of Electric Power].
Indonesian Ministry of Energy and Mineral Resources (ESDM). (2021). A Brief Summary of Good Practices and Challenges on Renewable Energy Development in Afghanistan, Indonesia, Nepal and Madagascar. https://www.esdm.go.id/assets/media/content/content-brief-summary-sstc-renewable-energy-1.pdf
International Energy Agency (IEA). (2021). Smart Grids. https://www.iea.org/energy-system/electricity/smart-grids
International Monetary Agency, https://www.imf.org/en/Publications/fandd/issues/2022/12/country-case-indonesia-solar-future-jacques
Iskandar, A., Usman, A. H., & Shaharuddin, S. A. (2021). Role of Islamic economic and finance in renewable energy: Some quotation from Quranic verses and Indonesia experiences. Al-Irsyad: Journal of Islamic and Contemporary Issues, 6(1), 583-595.
Iskandarova, M., Dembek, A., Fraaije, M., Matthews, W., Stasik, A., Wittmayer, J. M., & Sovacool, B. K. (2021). Who finances renewable energy in Europe? Examining temporality, authority and contestation in solar and wind subsidies in Poland, the Netherlands and the United Kingdom. Energy Strategy Reviews, 38, 100730.
Jaballah, J., Peillex, J., & Weill, L. (2018). Is being Sharia-compliant worth it? Economic Modelling, 72, 353–362.
Kilinc-Ata, N., & Dolmatov, I. (2023). The Russian Federation's renewable energy development determinants: Evidence from empirical research. International Journal of Energy Sector Management, 17(4), 779-800.
Kontot, K., Hamali, J., & Abdullah, F. (2016). Determining factors of customers' preferences: A case of deposit products in Islamic banking. Procedia-Social and Behavioral Sciences, 224, 167-175.
Lai, S. Y. (2022, July 2). Indonesia hopes to boost Middle East exports after new UAE trade pact. Arab News. https://www.arabnews.com/node/2115221/world
Lee, C. W., & Zhong, J. (2015). Financing and risk management of renewable energy projects with a hybrid bond. Renewable Energy, 75, 779–787.
Liao, C. H., Ou, H. H., Lo, S. L., Chiueh, P. Te, & Yu, Y. H. (2011). A challenging approach for renewable energy market development. Renewable and Sustainable Energy Reviews, 15(1), 787–793.
Makki, A. A., & Mosly, I. (2020). Factors affecting public willingness to adopt renewable energy technologies: An exploratory analysis. Sustainability, 12(3), 845.
Mansour, M. S., Hassan, K. H., & Bagheri, P. (2017). Shari’ah perspective on green jobs and environmental ethics. Ethics, Policy & Environment, 20(1), 59-77.
Martin, R., Muûls, M., & Wagner, U. (2011). Climate change, investment and carbon markets and prices–evidence from manager interviews. Climate Strategies, Carbon Pricing for Low-Carbon Investment Project, 2011, 1-51. San Francisco
Mason, R. (2023). The GCC States and Indonesia: Toward New Horizons. Retrieved from https://www.grc.net/single-commentary/119#:~:text=The%20UAE%2C%20in%20contrast%20to,Crown%20Prince%20Mohammed%20bin%20Zayed's
Menyeh, B. O. (2021). Financing electricity access in Africa: A choice experiment study of household investor preferences for renewable energy investments in Ghana. Renewable and Sustainable Energy Reviews, 146, 111132.
Miller, L., & Carriveau, R. (2018). A review of energy storage financing—Learning from and partnering with the renewable energy industry. Journal of Energy Storage, 19, 311–319.
Ministry of Finance (MoF). (2010). Regulation of The Minister of Finance Number 21/PMK.011/2010 about the Provision of Tax and Customs Facilities for Renewable Energy Sources Utilization Activities.
Ministry of Finance (MoF). (2022). PT SMI's Role in Supporting Renewable Energy Projects.
Ministry of Foreign Affairs. (2023). Gulf Cooperation Council (GCC). Retrieved from https://kemlu.go.id/portal/en/read/4748/halaman_list_lainnya/gulf-cooperation-council-gcc
Mulia, D., Usman, H., & Parwanto, N. B. (2021). The role of customer intimacy in increasing Islamic bank customer loyalty in using e-banking and m-banking. Journal of Islamic Marketing, 12(6), 1097–1123.
Narayanan, V., Baird, K., & Tay, R. (2021). Investment decisions: The trade-off between economic and environmental objectives. The British Accounting Review, 53(3), 100969.
National Board for Disaster Management (BNPB). (2019, April 5). Status Gunung Api di Indonesia. https://bnpb.go.id/berita/status-gunung-api-di-indonesia
National Development Planning Agency (Bappenas). (2023). Rencana Pembangunan Jangka Panjang Nasional 2025-2045. https://indonesia2045.go.id/aspirasi
Ng, T. H., & Tao, J. Y. (2016). Bond financing for renewable energy in Asia. Energy Policy, 95, 509–517.
Nie, P. Y., Chen, Y. H., Yang, Y. C, & Wang, X. H. (2016). Subsidies in carbon finance for promoting renewable energy development. Journal of Cleaner Production, 139, 677–684.
Organization for Economic Cooperation and Development (OECD). (2007). Tax Incentives for Investment – A Global Perspective: Experiences in MENA and non-MENA countries. https://www.oecd.org/mena/competitiveness//38758855.pdf
Qadir, S. A., Al-Motairi, H., Tahir, F., & Al-Fagih, L. (2021). Incentives and strategies for financing the renewable energy transition: A review. Energy Reports, 7, 3590-3606.
Rana, R. L., Lombardi, M., Giungato, P., & Tricase, C. (2020). Trends in scientific literature on energy return ratio of renewable energy sources for supporting policymakers. Administrative Sciences, 10(2), 21.
Saaty, T. L. (1977). A scaling method for priorities in hierarchical structures. Journal of Mathematical Psychology, 15(3), 234-281.
Saaty, T. L. (1980). The analytic hierarchy process (AHP). The Journal of the Operational Research Society, 41(11), 1073-1076.
Saaty, T. L. (2005). Theory and applications of the analytic network process, decision making with benefits, opportunities, costs and risks. Pittsburgh, PA: RWS Publications.
Scholz, A., Rochdi, K., & Schaefers, W. (2015). Does asset liquidity matter? Evidence from real estate stock markets. Journal of European Real Estate Research, 8(3), 220-242.
Stiglitz, J. E. (1998). More instruments and broader goals: Moving toward the post-washington consensus. Speech, The World Bank Group, Helsinki.
Stokey, N. L. (1998). Are there limits to growth? International Economic Review, 39(1), 1–31.
Tolliver, C., Keeley, A. R., & Managi, S. (2020). Policy targets behind green bonds for renewable energy: Do climate commitments matter? Technological Forecasting and Social Change, 157, 120051.
United Nations Conference on Trade and Development (UNCTAD). (2016). World Investment Report 2016. https://unctad.org/system/files/official-document/wir2016_en.pdf
Wall, R., Grafakos, S., Gianoli, A., & Stavropoulos, S. (2019). Which policy instruments attract foreign direct investments in renewable energy?. Climate Policy, 19(1), 59-72.
Yang, X. L., He, L. Y., Xia, Y. F., & Chen, Y. F. (2019). Effect of government subsidies on renewable energy investments: The threshold effect. Energy Policy, 132, 156–166.