Indonesia rebalances energy policy as Iran war spurs new projects
As oil prices surge, Indonesia aims to reduce its reliance on fossil fuels and intensify the use of crude palm oil for diesel blending
03/04/2026 (South China Morning Post) - Indonesia is accelerating the transition to clean and renewable energy while pushing for more investments in oil and gas projects, critical minerals and rare earth mining, amid the global energy crisis triggered by the Middle East conflict.
In the past week, Jakarta signed a raft of deals with international partners to develop renewable and fossil fuel projects, aimed at achieving energy security as an insurance against the impact of heightened geopolitical tensions.
Green energy could also reduce the burden on the state budget, as the Iran war has pushed Brent crude oil prices past US$100 per barrel, beyond the US$70 per barrel Indonesia used for this year’s budget assumption.
“In the next three years, we want to [have] 100 gigawatts of solar energy. For us, this is more urgent because of the situation we are seeing now,” President Prabowo Subianto told the Indonesia–Japan Business Forum in Tokyo on Monday.
During a meeting with Japanese Prime Minister Sanae Takaichi on Tuesday, Prabowo invited Japan to develop Indonesia’s nuclear and renewable energy, as well as to support its downstreaming policy, which bans raw critical mineral exports such as nickel and bauxite in favour of domestic processing.
Both leaders said the collaboration on critical minerals would accelerate the realisation of the Asia Zero Emission Community Initiative, proposed by Japan in 2022 to support climate policy development in Southeast Asia.
Prabowo also offered oil and gas projects to Japanese firms. On Monday, Japanese and Indonesian companies signed 10 agreements worth US$23.63 billion to build the long-delayed Abadi liquefied natural gas project in the Masela Block, geothermal plants in Sumatra and other developments.
On his visit to Seoul on Wednesday, Prabowo witnessed the signing of 17 memorandums of understanding between South Korean and Indonesian companies, worth US$10.2 billion, covering projects such as solar power, carbon capture and storage, and renewable energy.
Fossil fuel dependency
Fabby Tumiwa, chief executive officer at the Institute for Essential Services Reform, said Indonesia was recalibrating its energy policy due to the Iran war.
“The government anticipates uncertainty about energy supplies following the Iran war. The worst-case scenario, if Iran retaliates by attacking energy facilities in the Gulf states, would result in a longer-term energy crisis even after the war is over,” Fabby said.
“Indonesia responded to the crisis with the overarching theme of reducing dependence on fossil fuels, our Achilles’ heel, as 85 per cent of our energy supply comes from fossil fuels. This makes us vulnerable.”
The partnership in green energy and fossil fuel projects with Japan shows that “investment in fossil fuels will still be needed during the transition process, because we won’t be able to eliminate them in five to 10 years,” according to Fabby.
“Oil and gas, they’re not just for fuel; they’re needed as raw materials for petrochemicals. Gas is also used for fertiliser. We can’t avoid that. So, even though we want to develop renewable energy and achieve net-zero emissions by 2060 or earlier, that doesn’t mean we’ll abandon fossil fuels in the short and medium term,” he said.
However, he cautioned that renewable energy “should not be a secondary priority” if Indonesia wanted to achieve energy independence.
B50 policy
To curtail diesel imports, Indonesia has announced it would implement a B50 policy, which is the blending of 50 per cent biofuels derived from crude palm oil (CPO) into diesel fuel, in July.
Airlangga Hartarto, coordinating minister for economic affairs, said the B50 programme would reduce fossil fuel consumption by 4 million kilolitres in a year and help Jakarta save 48 trillion rupiah (US$2.8 billion) in fuel subsidies.
Blending just 40 per cent CPO into diesel reduced 3.3 million kilolitres of diesel imports, valued at 130.21 trillion rupiah, and reduced emissions by 38.88 million tonnes of CO2 equivalent in 2025, according to officials.
Mohammad Faisal, executive director at the Centre of Reform on Economics Indonesia, said B50 could help reduce fuel imports and the burden on the state budget, but the policy’s success would depend on the “readiness” of palm oil suppliers, state energy firm Pertamina and consumers, including the automotive industry.
“The palm oil supply is actually enough for domestic biofuel demand and food needs, such as cooking oil. The problem is that CPO distribution isn’t necessarily [sufficient]. When CPO prices are high, businesses will try to increase CPO allocations for exports rather than domestic consumption,” he said.
Tungkot Sipayung, executive director of the Palm Oil Agribusiness Strategic Policy Institute, said in a statement on Wednesday that Indonesia would need up to 18 million tonnes of CPO to fulfil B50 demand, while national CPO production last year was recorded at 57 million tonnes.
“There may be a slight reduction in exports if domestic CPO production does not increase significantly,” Tungkot told state media.
‘Not entirely clean’
The transition towards green energy is not without environmental concerns. The downstreaming policy, for example, requires large-scale extraction of nickel, a main element in electric vehicle batteries, which often leads to environmental destruction at mining sites.
The sustainability of biodiesel was also “debatable”, Muhammad said. CPO sourced from plantations that implement intensification, or boosting output without expanding lands, could be classified as “clean”, while CPO from producers that “clear new land and cut down forests are naturally dirtier”, he said.
Expansion of palm oil plantations on peatlands would also release significant carbon emissions, Fabby said.
Environmental group Auriga Nusantara said on Tuesday that the government’s bioenergy push saw 37,910 hectares (146 square miles) of trees cleared at palm oil concessions countrywide last year, mainly in Kalimantan and Papua.
“For the biofuel programme, the government should require that eligible palm oil come from plantations that meet ISPO [Indonesian sustainable palm oil] standards,” Fabby said.
“If they comply with the emission standards, our biofuel should be more sustainable. It still will not be completely green, though.”