1. Introduction and recent trends in clean energy finance and investment

The OECD Clean Energy Finance and Investment Policy Review of Indonesia provides a comprehensive assessment of Indonesia’s clean energy finance and investment regulations and policies, progress and opportunities for improvements, in a range of key policy areas discussed across its seven chapters. The Review’s analysis builds on the OECD’s extensive experience undertaking similar reviews such as the Green Growth Policy Review of Indonesia 2019 (OECD, 2019[1]) the Investment Policy Review of Indonesia 2020 (OECD, 2020[2]) and the Economic Surveys 2021 (OECD, 2021[3]), as well as a rich corpus of OECD work on green finance and investment (see Box 1.1). The report reflects latest developments that occurred before 16 April 2021.

Building on strong stakeholder engagement, the OECD undertook numerous consultations and interviews with a range of relevant stakeholders (e.g. government institutions, commercial banks, clean energy businesses and international organisations) in 2019-20 in order to inform the development of the Review’s Assessment and Recommendations. Most notably, an extended virtual Review mission was organised throughout October-November 2020, consisting of five focused group discussions in important areas (Corporate Sourcing; Skills and Capacity Development; Renewable Energy Investment in Indonesia’s Eastern Islands; Energy efficiency Financing; and Green Finance Facility) and three consultation meetings with OECD local delegations, financial institutions and clean energy businesses.

The virtual format benefited from input from around 20 international experts and mobilised a significant number of government officials, project developers, financial institutions, ambassadors and local delegations of OECD member countries, involving over 650 participants. In addition to consultations, a comprehensive Policy Questionnaire was completed and returned by 10 government institutions and the Indonesian national power utility to inform the Review.

Indonesia’s macroeconomic environment has been robust over the last decade and half. Despite a slowdown since the end of the 2003-11 commodity cycle, real Gross Domestic Product (GDP) has grown at a sustained 5.5% per annum on average over 2005-19 – a rate on par with the Philippines and higher than Malaysia and Thailand. This helped nearly double Indonesia’s GDP per capita over the period and place it in the middle range of regional peers (e.g. Malaysia, the Philippines, Thailand and Viet Nam). At 33% of GDP, investment level has been a key driver of GDP growth over the last few decades and has been high by comparison with regional peers (see Figure 1.1).

Ambitious infrastructure plans under the current administration, efforts to improve the business environment and growing (albeit fluctuating) global commodity prices have been key drivers of investment growth in the country.

Nevertheless, Indonesia’s economy was hit hard by the global COVID-19 pandemic causing the economy to enter into recession (-2.43% per annum based on OECD data) in 2020, the first time since the Asian financial crisis. The pandemic has had deep effects, causing a spike in unemployment and poverty rates as well as depressing investment and domestic consumption amid growing uncertainties. While the economy is slowly recovering, as domestic and global economies gradually re-open and the Indonesian government rolls out its COVID stimulus packages, socio-economic consequences are likely to be long lasting. By end of 2021, the OECD projects that GDP would be 10% below where it should have been under a business-as-usual scenario (OECD, 2021[3]).

Inwards foreign direct investment (FDI) has historically contributed little to overall investment in Indonesia, but has a great potential to support Indonesia’s economic recovery. Most notably, FDI can bring much-needed financing, modern technologies and organisational practices, access to global markets, and improved working and environmental conditions (OECD, 2021[3]). Yet, in spite of an increase over much of the last two decades, FDI inflows have been declining since 2016 (both in absolute and relative terms) against the backdrop of rising trade tensions and protectionism, China’s economic slowdown, as well as a tightening US monetary policy that caused significant capital outflows throughout 2018. Strengthening the enabling conditions will thus be key to scale up FDI (see (OECD, 2020[2]) for more detailed information on FDI trends; see Chapter 4).

Indonesia has set a high level of ambition for its economic development. After falling short of the 7% GDP annual growth target over 2015-19, Indonesia renewed its economic development goals through defining a new GDP growth target range of 5.2-6.2% per annum over 2020-24. While more realistic, the current COVID pandemic could make this target hard to attain. Looking forward, the country has defined the “Vision of Indonesia 2045”, which, most notably, sets the goal to rank Indonesia among the world’s top five largest economies by 2045 (from 16th position in 2019).

Indonesia has made remarkable progress in improving its citizens’ livelihoods and access to electricity. Helped by a near doubling of GDP per capita, Indonesia has slashed poverty rates two-fold since the start of the millennium and has seen the emergence of a dynamic middle class now totalling around 50 million people (out of 264 million inhabitants in total). These improvements have been accompanied by a considerable increase in access to electricity, with the electrification rate sharply increasing from a mere 53% in 2000 to 99.20% in 2020, helped by the provision of rooftop solar lamps, the rural electrification programme as well as other national fast-track programmes for power infrastructure (see Chapter 2). However, this ratio remains unequal across islands and around 10 million people continue to lack access to electricity (OECD, 2019[1]). Power outages also remain frequent throughout the archipelago (see Figure 1.2).

Despite this progress, there remains significant discrepancies across and within the country’s islands. The island of Java alone concentrates around half of Indonesia’s population, 70% of its manufacturing base, and generates close to 60% of the country’s GDP. Levels of electricity access as well as infrastructure development on the island are also among the highest in the country. By contrast, the country’s eastern islands (e.g. East Nusa Tenggara, Moluccas or Papua) are far less populated and economically developed. These present far lower levels of access to electricity than other islands and have tremendous infrastructure needs, in turn, adding to logistical costs (Oxford Business Group, 2018[4]).

Indonesia‘s economy overall is dominated by low-energy intensity sectors. The low-energy intense services sector accounts for around two thirds of value added and has been growing steadily (BPS, 2021[5]). In 2017, tourism accounted for around 4% of GDP and, while it has been among the hardest hit sectors by the COVID-19 crisis, is expected to expand further over the longer term, as Indonesia aims to create “10 new Balis1”. This could open up market opportunities for clean energy, especially in the hospitality sector (OECD, 2020[6]). Equally, the country’s manufacturing sector, which accounts for roughly 20% of GDP (down from around 30% in the early 2000s), remains overall dominated by low-energy intensive sub-sectors – e.g. machinery and transport equipment, food, beverage and tobacco (BPS, 2021[5]). Partly as a result, Indonesia’s energy intensity (in terms of energy consumption and supply on both a GDP and per-capita basis) is much lower than that of Thailand and Viet Nam, as well as ASEAN countries as a whole.

Nevertheless, Indonesia’s energy demand (in terms of total final consumption, TFC) still represents a third of the region’s total and has been growing fast over the last two decades, driven by fast urbanisation, and population and economic growth. In particular, electricity demand has been a key driver of energy demand growth. Over 2005-18, it has more than doubled and could further double by 2030 under a business-as-usual (BaU) scenario; under such a scenario, electricity would even overtake oil as the largest source of TFC by 2050 (DEN, 2019[7]). To satisfy growing electricity demand until 2030, the General National Energy Plan (the RUEN) projects that around 7.5 GW of additional capacity will be needed annually (a third of which would be sourced from renewables), although this number could be an over-estimate (see Chapter 2) (MEMR, 2017[8]).

Improving energy efficiency will thus be critical to rationalise fast-increasing energy consumption and hence, power generation capacity expansion plans. Energy efficiency measures will be particularly important in the building sector (covering residential and commercial end-uses) given this sector accounts for two-thirds of electricity consumption (see Chapter 3). Energy efficiency will also be important in order to reduce greenhouse gas (GHG) emissions, which have been on the rise throughout much of the last decade. This is of particular importance given that energy use became the largest emitter in 2017 (in large part stemming from fossil fuel-dominated power generation and industry) and has doubled since 2000 (OECD, 2019[1]; Ministry of Environment and Forestry, 2019[9]).

In 2018, energy use from the residential sector was the largest source of TFC, although this is skewed by the inclusion of traditional biomass (mainly biomass for cooking) (see Figure 1.3 & Figure 1.4). Yet, between 2005-18, residential energy use decreased by roughly 37%, thanks partly to significant energy efficiency gains from government-led programmes to transition from traditional use of biomass and kerosene to LPG for cooking – as 77% of the residential energy consumption is used for that purpose (IEA, 2017[10]; DEN, 2019[7]). Shifts to electricity from other fuel types (driven by a rising rate of electrification) have also contributed to efficiency gains, as have government-led initiatives to shift to more efficient equipment, such as compact fluorescent lamps and LEDs.

Electricity demand from the residential sector has been on the rise, led by population growth, a rising number of dwellings, growing floor area and increasing ownership of household appliances. At the same time, end-use electrification and growing demand for appliances and other electrical equipment, such as air conditioners, will increasingly influence electricity load curves (e.g. during evening hours), as is the case in other countries. This is particularly likely in Indonesia’s thriving urban centres, where household purchasing power and energy consumption is typically higher but where on-site or local electricity generation is less common.

Energy use in the industry sector has grown at a lower rate than GDP resulting in an improvement (i.e. decrease) of the sector’s energy intensity. Energy demand growth from the industry sector has been driven by non-ferrous metals, pulp and paper, chemical and petrochemical, iron and steel and cement (non-metallic minerals) subsectors. Despite their relatively lower contributions to the manufacturing sector’s value added, these subsectors accounted for three quarters of industry’s total energy use (see Figure 1.3). Given plans to revive Indonesia’s manufacturing base, the industry sector’s energy consumption is projected to continue increasing and even exceed that of the transport sector by 2030 (DEN, 2019[7]).

National data show that energy intensity decreased (i.e. improved) over 2015-17, exceeding Indonesia’s 1% annual reduction target to 2025 (with 2015 a reference year). However, the trend has reversed over 2017-19, in part led by an increase in the transportation sector, largely falling short of reduction targets (IESR, 2021[11]). Hence, Indonesia should continue strengthening energy efficiency measures in all end uses to remain on track to reach targets. In this endeavour, tapping the energy reduction potential of cities will be determinant, as they concentrate more than half of the population and a significant share of economic activity, with the 20 largest cities alone generating close to half of the country’s GDP (IEA, 2016[12]). Some cities are already leading the way, the city of Jakarta being a case in point, as the city is committed to reducing energy consumption by 30% by 2030 compared to BaU (OECD, 2019[1]).

Indonesia’s power system remains dominated by fossil fuels, and more particularly, coal – unsurprising as the country boasts some of the world’s largest coal reserves (see Figure 1.5). In 2019, most of Indonesia’s power capacity (around 67 GW) was sourced from coal (50%), gas (roughly 30%) and diesel (roughly 7%). Fossil fuel power capacity addition increased fast over 2005-19, with coal power capacity more than tripling, that of gas doubling while that of diesel increased by roughly 50%. If coal and gas represented the largest share of installed capacity at the national level (and most of western Indonesia) in 2019, diesel represented the largest share of power capacity in the eastern part of the country as well as the island of Kalimantan (see Figure 1.6). This is mostly explained by the pervasiveness of diesel generators on these islands to make up for a still limited access to the grid.

More fossil fuel-based capacity is likely to come on board in the coming years, to satisfy growing electricity demand. Of the 56.6 GW of additional capacity planned for development between 2019-28, most would be sourced from coal (around half) and gas (22%) while only a third would either come from large hydro power plants (17%) or non-large hydro renewables (13%) (PLN, 2019[13]). Were all planned coal plants to be operational by 2028, their emission trajectory would completely deviate off a 2°C pathway as early as 2022 and their emissions’ level would double by 2028 (IESR, 2021[11]).

Given plans to continue expanding fossil fuel capacity, Indonesia faces high risks of locking in emissions and stranding assets. Despite some efforts to modernise the existing (albeit relatively young) fleet, most coal-fired power plants continue to use and invest in inefficient sub-critical technology. Carbon capture, use and storage (CCUS) also remains at a very early phase of adoption with no commercial CCUS project developed to date (Oxford Business Group, 2018[4]; IEA, 2020[14]). As a result, Indonesia’s power generation system is one of the world’s most carbon intensive and accounts for a large share of the energy sector’s GHG emissions. Coal-fired power plants are also a major source of air pollution in the country and considered a direct cause of numerous non-communicable diseases (Sanchez and Luan, 2018[15]; OECD, 2019[1]). In the face of these issues, Indonesia urgently needs to limit coal capacity to the absolute minimum, ratchet up standards for existing coal plants and accelerate the decommissioning of such plants (well before a 30-year lifetime) in order to attain emission reduction targets under the Paris Agreements and improve air quality (IESR, 2021[11]). Revising plans to add coal capacity is also important to reduce the risk of stranding assets; indeed, under a Paris Agreement compliant scenario, Indonesia’s coal power owners risk losing close to USD 35 billion in stranded coal assets (Carbon Tracker, 2018[16]).

Despite a timid increase over the last decade and a half, Indonesia’s renewable power potential remains largely untapped (see Figure 1.7). Indonesia boasts remarkable renewable energy power potential – from 18 GW for tidal energy to 208 GW for solar, and its geothermal and hydropower potential ranks among the largest in the world. While this potential is technical in nature and not all of it might be economically viable, Indonesia has hitherto only exploited a negligible share of it. Indeed, as of 2019, Indonesia has utilised less than 2% of its total renewable energy potential, resulting in non-large hydro renewable power representing 3.5% of total installed capacity and less than 5% of total 2018 electricity generation. Power storage solutions are also at an early phase of deployment, despite the role they can play in supporting increased variable renewable integration as well as Indonesia’s considerable storage potential (e.g. through pumped-storage hydro or green hydrogen).

As mentioned before, renewable power capacity increased since 2005, but at a relatively slow pace. There has been roughly 2 GW of (non-hydro) renewable capacity added in 2005-19 (see Figure 1.5), which compares with 8 GW in Thailand or 5.5 GW in Viet Nam over the same period (IRENA, 2021[17]). Geothermal capacity largely led this increase (nearly 1 GW), driven by the development (or extension) of large-scale projects, among the largest in the world, mostly on Sumatra and Java islands. Mini and micro hydro (i.e. less than 10 MW) installed capacity remains relatively small (around 326 MW) but increased exponentially (although from a low level) since 2005, with numerous projects springing up across Indonesia (mainly in Java, Sumatra and Sulawesi). More recently, variable renewable energy deployment has started to pick up, albeit marginally. In 2018, two utility-scale on-shore wind projects started operation (72 MW Tolo power and 75 MW Sidrap wind farms in the South Sulawesi province). Similarly, four 7 MW utility-scale solar projects in Lombok and Sulawesi started operation in 2018. The country is also developing a 145 MW floating solar project (the largest in Southeast Asia) in West Java, whose construction phase began in early 2021 (IEEFA, 2020[18]). While these are encouraging developments, more efforts will be required to attain targets defined in the RUEN by 2025 (Figure 1.8; see Chapter 2).

Fossil fuels dominate Indonesia’s power investment, which has been on the rise over the last years. Power generation has led the increase in power investment although, in 2019, 80% of power generation spending went to coal power plants; in other words, for every dollar spent on renewables, more than three were spent on coal. Public and State-owned Enterprise (SOE) finance has been a considerable source of funding for fossil fuels, much more so than for renewables over 2016-19. Private finance, by contrast, provided around half of renewable power plant funding over the same period (see Chapter 6). These trends are not in line with Indonesia’s ambitions under the Paris Agreement. They also greatly contrast with global trends in renewable power generation investment, which has largely outpaced trends in fossil fuel in numerous countries over the last few years (IEA, 2020[19]). Equally, while a handful of traditional fossil fuel corporations are increasingly showing interest in developing renewable projects (some having already started), most are yet to commit to carbon neutrality, here again, contrasting with global trends (Financial Times, 2020[20]; IESR, 2021[11]).

Network investment has been on the rise over the last decade, albeit at a slower rate than for power generation. SOE finance represented the main source of funding for such investment, as private actors are limited to investing in that segment of the power market. Despite the increase, around 50% more spending on networks would be needed over the medium term under the International Energy Agency (IEA)’s Sustainable Development Scenario to connect the expanding power fleet, particularly renewables as these are usually faster to build out than network infrastructure (IEA, 2020[19]). Hence, allowing more private investment will be key to develop Indonesia’s power network infrastructure (see Chapter 7).

Based on official data, renewable energy investment has been sluggish over the last decade. To achieve the renewable power target by 2025 (excluding large hydro), around USD 44.2 billion2 of cumulated power generation investment would be needed (IESR, 2019[21]). Yet, levels of investment in renewable energy (excluding large hydro) achieved over the last years have been far below that level (see Figure 1.9), largely due to an unconducive and fast-changing regulatory framework for renewable energy investment (see Chapters 3 and 5).

Geothermal dominates the market for dispatchable renewable technology, with a market potential estimated at USD 21 billion over 2020-25 (UK Foreign & Commonwealth Office, 2018[22]). Over the last two decades, the sector has successfully attracted a significant number of large foreign developers as well as engineering, procurement and construction contractors (in large part from Japan and Southeast Asia) thanks to some regulatory improvements (CPI, 2015[23]). Alongside well-established and large local independent power producers (IPPs), these foreign investors have participated in the development and acquisition of some of the world’s largest geothermal projects (e.g. 330 MW Sarulla project in South Sumatra and 227 MW Wayang Windu project in West Java). By contrast, investment in mini-micro hydro as well as biomass projects have largely been driven by small local IPPs, which, however, have suffered from low creditworthiness and capacity issues (see Chapter 4).

In comparison, Indonesia’s utility-scale solar and wind sectors remain at an earlier phase of development. Current market size for utility-scale solar and wind is relatively small and still dominated by a few large foreign IPPs (mostly from Southeast Asia and Australia). Over 2020-25, both technologies have a market potential estimated at USD 769.3 million for solar PV (of which USD 675.5 million was for utility scale solar PV) and USD 1.5 billion for on-shore wind (UK Foreign & Commonwealth Office, 2018[22]). To service the small but increasing variable renewables market, Indonesia has started to develop a small local manufacturing base mainly focused on assembling imported components for solar and wind technologies. In the case of solar, however, panels assembled locally are relatively more expensive than those sold by leading Chinese manufacturers, in part due to local content rules (see Chapter 4; (IEEFA, 2019[24]; IESR, 2019[25])).

Most renewable technologies can already be developed and operated at lower costs than gas, diesel and even coal technologies, as shown in (IESR, 2019[26]). This is also shored up by tariffs in power purchase agreement (PPA) contracts signed in 2018-21, as shown in Table 1.2. While this is encouraging, investment costs3 of some of these technologies remain high by international comparison. For instance, investment costs for utility-scale solar (1158 USD/kW in 2019) and on-shore wind (1400-2000 USD/kW in 2018) are higher than in leading Asian markets such as India (618 USD/kW for solar PV in 2019) or China (1170 USD/kW for on-shore wind in 2018). Persisting regulatory bottlenecks prevent Indonesia from achieving the outstanding investment cost reductions observed globally for solar PV (between 66-85% in major markets over 2010-19) and on-shore wind (between 25-66% in major markets over the last three decades) (IRENA, 2019[27]; IRENA, 2020[28]). This, in turn, constrains renewable technologies’ competitiveness compared to fossil fuel technologies. According to IESR, achieving a 20% reduction in investment costs of utility-scale solar, on-shore wind and geothermal could lower their Levelised Cost of Electricity (LCOE) by 15.3%, 16.5% and 19.2% respectively (IESR, 2019[25]).

Investment in energy efficiency projects has not yet taken off and remains much lower than that of renewables. For instance, investment grade audits (IGAs) conducted in a small sample of manufacturers and buildings in 2016-18, indicated an energy efficiency investment potential for those end-users at around IDR 290 billion (USD 20 million). However, only a tenth of that was actually invested over the same period (MEMR, 2020[29]). The industry and commercial building sectors are the largest recipients of energy efficiency spending; in 2020, according to official data, these represented 80% and 19.5% of total energy efficiency spending respectively while public building accounted for the remainder.

Indonesia’s energy efficiency businesses continue to face significant challenges. The majority of energy efficiency project developers (including energy services companies or ESCOs) in Indonesia are small engineering firms providing energy audits and other services (APEC, 2017[30]). Few have the capacity to undertake IGAs, resulting in a limited number of IGAs being conducted annually, with some of them being hardly bankable due to considerable quality issues (e.g. in projecting cash flows from energy savings) (MEMR, 2020[29]). The few existing ESCOs in the market also face significant hurdles in accessing debt finance, with stringent collateral requirements from commercial banks (which do not accept cash flows from energy savings as collateral) being a key barrier (see Chapter 6). Overall, subsidised electricity tariffs and low compliance levels with energy management regulation (see Chapter 3) tend to constrain demand for energy efficiency and limit market expansion opportunities. Indeed, in the commercial building sector, electricity makes up to 15% of operation costs meaning that savings in the range of 10-35% are generally perceived as insignificant to implement projects (APEC, 2017[30]).


[30] APEC (2017), Energy Efficiency Finance in Indonesia Current State Barriers and Potential Next Steps, https://apec.org/Publications/2017/10/Energy-Efficiency-Finance-in-Indonesia-Current-State-Barriers-and-Potential-Next-Steps (accessed on 8 April 2020).

[5] BPS (2021), Economic and trade, Badan Pusat Statistik (National Statistics Agency), https://www.bps.go.id/ (accessed on 2 March 2021).

[16] Carbon Tracker (2018), Economic and financial risks of coal power in Indonesia, https://carbontracker.org/reports/economic-and-financial-risks-of-coal-power-in-indonesia-vietnam-and-the-philippines/ (accessed on 15 April 2020).

[23] CPI (2015), Using Private Finance to Accelerate Geothermal Deployment: Sarulla Geothermal Power Plant, Indonesia, http://www.climatepolicyinitiative.org (accessed on 16 April 2020).

[7] DEN (2019), Indonesia Energy Outlook 2019.

[20] Financial Times (2020), US oil producers begin to follow Europe with emissions pledges, https://www.ft.com/content/612e7440-2cc9-425f-8759-631a8194e2d1 (accessed on 3 March 2021).

[19] IEA (2020), Attracting private investment to fund sustainable recoveries: The case of Indonesia’s power sector, IEA, Paris, https://www.iea.org/reports/attracting-private-investment-to-fund-sustainable-recoveries-the-case-of-indonesias-power-sector (accessed on 19 January 2021).

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[10] IEA (2017), Energy Efficiency 2017, International Energy Agency, Paris, https://dx.doi.org/10.1787/9789264284234-en.

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[18] IEEFA (2020), Indonesia begins construction of 145MW Cirata floating solar project, Institute for Energy Economics & Financial Analysis, https://ieefa.org/indonesia-begins-construction-of-145mw-cirata-floating-solar-project/ (accessed on 16 April 2021).

[24] IEEFA (2019), Indonesia’s solar policies – designed to fail?, http://ieefa.org/ieefa-report-indonesias-solar-policies-designed-to-fail/ (accessed on 6 March 2019).

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[33] OECD (2015), Policy Guidance for Investment in Clean Energy Infrastructure: Expanding Access to Clean Energy for Green Growth and Development, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264212664-en.

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[13] PLN (2019), Rencana Usaha Penyediaan Tenaga Listrik (RUPTL) PT. PLN 2019 - 2028 (PT PLN Power Supply Business Plan 2019-2028), PT Perusahaan Listrik Negara (Persero) , Jakarta, https://gatrik.esdm.go.id//assets/uploads/download_index/files/5b16d-kepmen-esdm-no.-39-k-20-mem-2019-tentang-pengesahan-ruptl-pt-pln-2019-2028.pdf (accessed on 16 December 2020).

[15] Sanchez, L. and B. Luan (2018), The Health Cost of Coal in Indonesia, IISD, http://www.iisd.org/gsi (accessed on 11 February 2021).

[22] UK Foreign & Commonwealth Office (2018), “Indonesia Renewable Energy Business Opportunities”.


← 1. The “10 New Balis” refers to government plans to promote 10 new tourist destinations in Indonesia includes: Borobudur Temple (Central Java); Belitung (Sumatra); Mount Bromo (East Java); Labuan Bajo (East Nusa Tenggara); Lake Toba (North Sumatra); Thousand Islands (Jakarta); Mandalika (West Nusa Tenggara); Wakatobi (Southeast Sulawesi); Tanjung Lesung (Banten); and Morotai (North Maluku).

← 2. Including large hydro, total investment needs stand at USD 72.5 billion (or USD 7.25 billion per year).

← 3. Investment costs are typically made up of equipment cost (usually above 50%), installation and logistic cost as well as pre-development cost (e.g. cost related to permitting process, land acquisition).

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