Willy Halim, founder of a green nickel startup, has spent the last half-decade diving deep into battery chemistries for electric vehicle and battery storage companies. The experiences “showed me how everything in our world’s green transition depends on nickel,” says Halim, a chemical engineer by trade. That realization inspired him to launch Baniql, a climate technology startup based in Jakarta and San Francisco that aims to cleanly and efficiently tap into Indonesia’s abundant supplies of low-grade nickel ore deposits.

Climate technology startups that focus on curbing greenhouse gas emissions are capital-intensive investments that require longer profit yield times. Private market funding for climate tech — in the form of venture capital (VC) and private equity investment — has been steadily climbing since the mid-2010s, but the last few years have been rocked by record highs and steep drops. In 2021, global VC investment across all sectors soared to a record-breaking $671 billion, with investment in climate tech accelerating to $37 billion. But by 2023, VC funding for climate tech plunged as a combination of rising inflation and interest rates and intensifying geopolitical conflict made investors more risk-averse. The drop set back climate tech startup funding by five years.

The recent VC winter dented the momentum for Indonesian climate tech. But in recent months, investments have been slowly, yet steadily, trickling back, with investors and entrepreneurs noting that despite a tough couple of years, Indonesia’s urgent need for tangible climate solutions is reinvigorating the sector.

Retreat and record highs

In 2022, funding for Southeast Asia’s (SEA) climate tech startups hit $10.4 billion, the third-strongest year on record. Indonesia stood out as a bright spot in the region: funding for the country’s climate tech surpassed $1 billion that year. “Indonesia trailing only behind Singapore [in funding] and its growing population and middle class … underscores its potential as a significant climate tech player both regionally and globally,” says Nicolo Castiglione, managing partner at Bali Investment Club, a climate-focused angel investor network.

Commuters wear masks while crossing a roadway in Jakarta, Indonesia, on Nov. 7, 2023. Aji Styawan / Climate Visuals (CC BY-NC-ND 4.0)

Indonesia’s position as one of the world’s most climate-vulnerable countries and as a top CO2 emitter reinforces its need for new climate solutions: “If we’re talking about how to decarbonize SEA, Indonesia is a market we can’t ignore,” says Zachary Lee, senior investment principal at the Radical Fund, which invests in early-stage climate tech startups in the region. With coal accounting for two-thirds of Indonesia’s electricity generation, the government is targeting a lofty 2060 net-zero goal through scaling up renewables and early decommissioning of coal-fired power plants.

But after 2021, investors in Indonesia’s climate tech sector became “much more selective,” says Aswin Rahadi, assistant professor at the Institut Teknologi Bandung and partner who works in venture incubation at financial advisory firm Jawara Partners. Some “investors aren’t putting in more capital until they see more exits,” an issue that has plagued SEA’s climate tech sector, Lee says. Indonesian VCs are now “investing 80 per cent less than before. There has been a noticeable retreat from climate-focused ventures,” Castiglione says.

New ‘shoots’ of growth

Yet, in recent months, Indonesia’s climate tech sector has started to resuscitate with investors starting to channel funds back into the space. The number of startups and the funding they have generated is “still low” compared to sophisticated markets like the U.S. and Europe, “but it’s a hot industry that is capturing investor attention again. The shoots are beginning to grow,” Rahadi says. Indonesia’s climate tech landscape has “yet to rebound fully to previous levels of activity … [but is experiencing] a slow movement to recovery,” Castiglione says.

Private #market funding for #climate #tech has been steadily climbing, but the last few years have been rocked by record highs and steep drops. #Indonesia

Investors looking at Indonesian climate tech have grappled “with a lack of specific focus, gravitating mostly towards the already saturated market of carbon credits,” according to Castiglione. But by late 2023, investors pumped tens of millions into early-stage Indonesian startups focused on areas like carbon capture, waste management, and battery energy storage. Halim founded Baniql in late 2021, a company that he hopes will produce nickel using 50 per cent less water than traditional methods and turn waste from that process into reusable materials for fertilizer and bricks. He bootstrapped the company until a more opportune time, raising $1.5 million from international investors from Singapore, South Korea and Thailand late last year.

There have been other encouraging signs from investors. Investible, an early-stage VC firm headquartered in Sydney and Singapore, announced last October that it is partnering with Mandiri Capital Indonesia — the venture arm of Indonesia’s largest bank — to launch an early-stage climate tech fund in Indonesia. Bali Investment Club is aiming to launch a $25-million climate-focused fund, which Castiglione calls Indonesia’s “first-early stage impact VC fund.” Jakarta’s Ecoxyztem, a climate-focused venture builder, has seen a recent uptick in foreign investor interest from Singapore, Malaysia, and Hong Kong, says Andreas Pandu Wirawan, the fund’s chief commercial officer.

A light rail transit train as smog shrouds Jakarta on Nov. 28, 2023. Aji Styawan / Climate Visuals (CC BY-NC-ND 4.0)

Now, Indonesia’s climate tech startups are navigating growth hurdles that include a lack of investor and public buy-in for clean technology and the need for regulations that will create a fairer playing field for such companies.

Xurya Daya Indonesia, a solar panel rental company that has raised $33 million from a consortium of global investors, including France’s Schneider Electric and Japan’s Mitsui & Co., now provides solar energy for over 160 clients, including shopping malls, factories and warehouses. In the next five years, Xurya looks to expand nationwide and carve a first-mover advantage: “We are lagging behind Singapore and Thailand in renewable energy — markets that are already crowded,” says Adhi Laksmanaputra, Xurya’s vice president.

The government aims to increase Indonesia’s renewable energy share from 12 to 40 per cent by 2030. But today, the Indonesian clean tech market is still underpenetrated. “Indonesia provides an opportunity for investors and companies like us,” Laksmanaputra says. Laksmanaputra sees public education and awareness of climate change as Xurya’s greatest challenge: “The clean energy sector in Indonesia is still new. Not everyone understands the benefits of renewable energy. There’s much to be done … to engage policymakers, financiers, and potential customers.”

Investors like Lee agree that Indonesia’s clean energy startups lag because state utilities still dominate the country’s fossil fuel-dependent energy sector that has access to billions in government subsidies. For climate tech startups to succeed, “we need to see fairer policies that wipe out the underpricing of pollution in Indonesia,” such as carbon taxes and abolishing subsidies for fossil fuel companies, he says.

Arfan Arlanda, the 43-year-old founder of Jejakin, a Jakarta-based carbon management platform that calculates, monitors, and analyzes the carbon footprints of businesses and individuals, says the last half-decade laid the groundwork for Indonesian climate tech to grow. “When we launched in 2018, it was difficult to even pitch our idea to investors. We couldn’t find any company in Indonesia that could act as our benchmark.”

Arfan Arlanda, founder of Jejakin, in Jakarta's Bintaro district in October 2023. Photo by: Yvonne Lau for Canada's National Observer

Jejakin, now helps 20 firms — including Indonesia’s top conglomerates and state-linked companies like Sinarmas, Bank Mandiri and Telkomsel — measure, manage, and offset their carbon emissions. Arlanda sees the company’s carbon trading platform, which is its fastest-growing service, as the main driver of its future business. He sees carbon trading as an integral, yet temporary, pillar of Indonesia’s green shift: “This is a transition model [for Indonesia] as a coal-based economy. Not all countries can jump from [fossil fuels] to renewable energy immediately due to the cost.”

But the success of such businesses depends on Indonesia’s new carbon market regulations, which are expected in 2025, and on the global $2-billion carbon offsets market that has been plagued by allegations of accounting flaws and greenwashing. Investors and entrepreneurs are also looking toward recently-elected president Prabowo Subianto and his new administration’s climate policies and climate tech support. “Our expectations are tempered by Indonesia’s past unpredictability,” Castiglione says.

More than venture capital

As Indonesia’s climate vulnerabilities grow more stark — wildfires exacerbated by a warming climate destroyed one million hectares of land last year for its worst fire season since 2019 — investors and entrepreneurs say that relying on venture capital won’t be enough.

Radical Ventures’ Lee says: “We need trillions to move the needle. We need foundations, endowments and government grants to play a role … to invest financial and human capital in entrepreneurship beyond fintech and consumer companies to solve climate pain points.”

As Wirawan says: “Local and foreign investors are playing a wait-and-see game … to see if such startups become more profitable. The interest is already there to put money [in the sector]. We just need to activate it.”

This story was reported with support from the Asia Pacific Foundation of Canada.

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