Indonesia climbs the solar value chain

A $11.5bn plan by China’s Xinyi Glass to construct a quartz sand processing plant in Indonesia boosts the south-east Asian nation’s ambition to move beyond raw material production in the solar supply chain.

The deal, which was revealed on July 28, builds on president Joko Widodo’s so-called ‘commodity downstreaming’ policy by leveraging the country’s extensive reserves of raw materials to boost domestic manufacturing. 

The new facility, which will support glass and solar panel production, is expected to be built on the island of Rimpang. Data from fDi Markets shows it is Indonesia’s biggest FDI deal announced this year. It is Xinyi’s second venture in the country, following last year’s $700m investment in a glass production factory in East Java. 

Indonesia is home to roughly 25 billion tons of quartz sand reserves, vital for the production of glass and polysilicon cells in solar panels. “In terms of renewables and solar panels, the strategy for Indonesia is to capitalise on moving up the value chain by maximising its abundance of natural resources,” says Zhouchen Mao, head of research and advisory at Asia House. 

The Indonesian government has taken significant action to this end. In 2016, it introduced a 40% local content requirement for solar panel modules. Last year, it announced plans to develop a $4bn polysilicon industry, including plants in Batang and North Kalimantan with a combined annual capacity of 200,000 tons. 

In pursuit of developed country status by 2045, the country has also resorted to export bans for numerous raw materials, most prominently nickel. According to local press and consultants, the government is now considering a similar prohibition on unprocessed quartz sand. “Just like in the nickel, copper and bauxite industries, the government wants Indonesia to move up the ladder into the [quartz sand] value chain,” says Primadi Soerjosoemanto, principal of advisory firm Bright Indonesia. 

A government report from 2021 estimates that Indonesia needs $150bn to $200bn of annual investment by 2030 to reach its net-zero target by 2060. China is expected to play a large role in helping the country achieve its green transition. It is already Indonesia’s largest source of FDI, and has invested heavily in its nickel and bauxite industries. 

Xinyi Glass’s megaproject could mark the start of China’s foray into another Indonesian resource. Krishna Gupta, an associate researcher at the Center for Indonesian Policy Studies, believes a convergence of interests extends to the quartz sand and solar industries. “China has the capacity, the technology and the money that Indonesia doesn’t have, and [the Chinese] need to diversify too,” he says.

China dominates global solar photovoltaic (PV) supply chains and is the biggest importer of quartz sand in the world. Data from the Institute of Economic Complexity indicates that Indonesian exports of quartz sands to China have risen dramatically in recent years, from just $132 in 2019 to $53m in 2021. Indonesia is now China’s third-biggest supplier, after the US and Australia.  

Indonesia still faces major hurdles to moving up the solar value chain, however. Its recent solar power auctions revealed costs twice as high as those in comparable emerging markets, according to the International Energy Agency. Cheap electricity from coal – which generates 60% of the country’s power – is the main obstacle for all clean energy industries, notes Mr Gupta. The Asian Development Bank recently identified Indonesia’s transition away from coal as one of the key priorities for a $35m clean energy financing initiative. 

Meanwhile local rules limit the installation of rooftop solar PV to just 15% of installed power due to overcapacity in the electricity grid. “A lot of the national priorities, in this case downstream development, will hinge on infrastructure developments,” Mr Mao says.