Diesel Lock-In by Design: Indonesia’s Regulatory Architecture Produces Unbankable PV-BESS Microgrids on Isolated Grids

Indonesia has committed to displacing diesel generation with solar PV and battery energy storage (PV-BESS) microgrids on its isolated island grids. However, no PV-BESS project on an isolated grid has reached financial close through the independent power producer procurement channel to date. Existing studies attribute this gap to implementation failure. This study proposes and tests an alternative hypothesis that the failure originates in the regulatory architecture itself. An Intent–Mechanism–Outcome analytical framework integrates directed qualitative content analysis of 30 regulatory instruments with discounted cash flow modeling of two island case studies (Sapudi, East Java, and Sabu, East Nusa Tenggara) under the actual tariff, procurement, and fiscal parameters governing private developers. The analysis identifies four interlocking regulatory mechanisms that collectively reproduce diesel dependence through tariff circularity, procurement asymmetry, fiscal channel asymmetry, and a BESS tariff penalty. Financial modeling produces debt service coverage ratios below the 1.30× lender covenant for PV-BESS with a 50% renewable energy share. Equity net present value is negative at the 12% required return, confirming that the projects cannot meet bankability thresholds on either a debt or equity basis. Only the smallest configuration (36–40% renewable share) clears bankability thresholds on either island, revealing a perverse regulatory selection mechanism that rewards minimal diesel displacement. The binding constraint is the tariff ceiling architecture, not technology cost or financing terms.