This report proposes a renewable energy (RE) subsidy mechanism to close the gap between the costs

of renewable power and conventional power generation, taking into account the additional economic

benefits of renewable power for Indonesia. The subsidy should be calculated as the difference between

the cost of supply from a given renewable power project and the financial cost that the Perusahaan Listrik Negara

(PLN, State Electricity Company) would have otherwise incurred for generation on that system in the absence of

the renewable project, i.e., PLN’s “avoided cost.” To ensure that the Government of Indonesia does not overpay

for renewable subsidies, the cost of renewable supply would be capped at its economic value, which is calculated

as the economic avoided cost plus the social benefits of externalities.