The Indonesian government has announced it will offer tax incentives on renewable energy projects to help cut the country’s dependency on fossil fuels.

Finance minister Sri Mulyani Indrawati signed a decree earlier this year that will reduce the net tax base by 5% annually for the next six years on the total investment in renewable energy initiatives. Foreign investors will also receive a lower tax rate on all dividend payments.

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Companies involved in construction will not be charged value-added tax or import duty on machinery and equipment used for such projects.

According to fDi Markets, Indonesia has seen renewables investments plummet in the last few years, from a high of $4.25bn in 2007 to just $950m last year, with all investors coming from neighbouring Asian countries, including investments from Malaysia’s Petronas ($375m) and Korean Electric Power ($100m). Despite the new tax incentives, there have been no new investments so far in 2010.

While the Asian archipelago has long stated its desire to become more reliant on green energy, it has been criticised for not offering compelling tax incentives. Now Indonesia has announced that by 2025 it aims to produce 30% of its energy from gas, 20% from oil-based fuels, 30% from coal and the rest from a combination of solar power and geothermal renewable sources.

With hundreds of active and extinct volcanoes in Indonesia, the country has the potential to produce up to 27,000 megawatts of electricity from geothermal sources.

Despite the fact that companies such as Chevron, the state oil firm Pertamina and a Jakarta-based energy firm, Medco Energi Internasional, have all invested in the industry, Indonesia’s geothermal potential remains relatively untapped because the price of electricity generated from geothermal sources is expensive.

The country has also begun offering new financial incentives and exploration rights for oil and gas investors in an attempt to end the steady decline in production, which therefore has increased the need to import.

Ginanne Brownell