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coal indonesia

The Chaos of Electricity Financing To Get Rid Of Coal Dependence

Indonesia wants to phase out coal by 2040. However, financing this transition is not easy.
Indonesia wants to phase out coal by 2040. However, financing this transition is not easy.

Indonesia has taken big steps related to energy policies in the midst of the UN Climate Summit (COP26). As one of the 20 largest coal producing countries in the world, Indonesia has decided to reduce the use of coal.

The Minister of Energy and Mineral Resources (ESDM), Arifin Tasrif, signed the COP26 Global Coal to Clean Power Transition Statement on November 4, 2021 at the high-level conference, as can be seen on the official COP26 website.

According to the statement, Indonesia agreed to accelerate the phase-out of the use of coal until around 2040, subject to international financial and technical assistance. The production of energy generated by coal is recognized as the biggest cause of global temperature increase and the transition to clean energy is urgent. Minister Arifin confirmed to Tirto and Kompas in Glasgow, Scotland, that there would be no more new Steam Power Plants (PLTU) in Indonesia.

“There will be no new PLTU. We must use renewable PLT ,” said Arifin. “If not, how can we can achieve clean emissions?” According to the United Nations Framework Convention on Climate Change (UNFCCC), Indonesia is the 7th largest producer of coal in the world, behind South Korea (5th) and bigger than Vietnam (9th), Poland (13th) and Ukraine (19th).

Coal now dominates the energy source for electricity generation in Indonesia. Its contribution increased from zero in 1971 to touch 64 percent of the total national electricity generation in the first half of 2020, based on data from the World Bank and the Ministry of Energy and Mineral Resources (ESDM) processed by the Institute of Essential Services Reform (IESR).

Apart from Indonesia’s commitment at COP26, the current transition to renewable energy is still slow. This is reflected in the low portion of new and renewable energy (EBT) in the national primary energy mix in mid 2014-2020. The Ministry of Energy and Mineral Resources noted that the portion of NRE in the national energy mix in 2020 only reached 11.2 percent, while the remaining energy mix in 2020 was still dominated by coal (38.04 percent).

However, the termination of the PLTU construction will at least pave the way to encourage the EBT transition in order to reduce greenhouse gas emissions from the energy sector. This is because Indonesia has committed to reducing emissions by 29 percent by 2030 with its own efforts and 41 percent with international assistance, according to the latest Nationally Determined Contributions (NDC) document.

Indonesia also has a target of achieving net zero emissions by 2060 or earlier.

Net zero emissions generally refer to the absorption of all human-produced emissions, so that nothing evaporates into the atmosphere. This is important to keep the global temperature rise below 1.5 degrees Celsius. However, funding for this transition is certainly not easy.

What is the funding need for the clean energy transition in Indonesia and how is international support for it? How can the latest financing schemes help with this cost issue? Then how can Indonesia’s financing be sustainable to release dependence on coal?

Billions of dollars needed?

Finance Minister Sri Mulyani at a press conference on September 30, 2021 said Indonesia would need US$5.7 billion annually to fund its energy transition. He revealed that Indonesia’s shift to net zero emissions needs to involve the private sector for its financing. Indonesia does have tax incentives, subsidies and green bonds to encourage the clean energy transition.

However, Sri Mulyani emphasized that Indonesia needed more resources. “If you only rely on the government budget, it will not be enough,” said Sri Mulyani. Similarly, the Ministry of Energy and Mineral Resources’ Work and Budget Plan shows that the ministry’s budget has been decreasing during 2020-2022, with a note that the 2022 budget is an indicative ceiling. The budget for the Directorate General of New, Renewable Energy and Energy Conservation 2022 even experienced a cut of more than half of the 2021 budget.

In general, the government has allocated an average of IDR 86.7 trillion per year for the last 5 years for programs related to climate change, according to a presentation from the Fiscal Policy Agency (BKF) received by Tirto on July 26, 2021. The majority (88.1 percent) of the budget involves spending on green infrastructure. However, the realization of government spending on climate change of IDR 86.7 trillion is only about a quarter of the funding requirement of IDR 343.6 trillion per year. The estimated total demand until 2030 is IDR 3,779 trillion, citing figures from the Ministry of Finance article .

In the midst of having limited funds, the Executive Director of the Institute for Essential Services Reform (IESR) Fabby Tumiwa told Tirto at COP26 that Indonesia must ensure the availability of funding if it wants to retire the power plant early in order to achieve the ambitions of the Paris Agreement.

The Paris Agreement is an international agreement on climate change adopted by 196 parties on December 12, 2015 in Paris, France and has been in force since November 4, 2016. This agreement aims to limit global warming to below 2 degrees Celsius, ideally to 1.5 degrees Celsius, compared to pre-industrial levels.

“The biggest risk is that without adequate funding, we will not be compatible with pathways on the road to 1.5 degrees, as the noted goal in the Paris Agreement,” said Fabby.

International Support?

Mention should also be made of the promise developed countries made at COP15 in 2009, in Copenhagen, Denmark.

At that time, developed countries committed to spend 100 billion US dollars per year by 2020 to address the needs of developing countries. However, a study by the Organization for Economic Co-operation and Development (OECD) or the World Economic Cooperation Organization found that developed countries did not meet this target at least during the 2013-2019 period, although the number tends to increase every year.

President Joko Widodo (Jokowi) also hopes that developed countries can provide financial support to developing countries in dealing with global climate change. He conveyed this at the CEOs Forum meeting with several large British investors in Glasgow, Scotland, on November 1, 2021.

“All of us, including developed countries, must show more concrete steps in terms of climate control, especially in terms of funding support for developing countries in making energy transitions from fossil fuels to renewable energy,” said Jokowi.

Agus Pratama Sari, Chief Executive Officer of Landscape Indonesia who is one of the government consultants at COP26, told the media on Tuesday (9/11/2021) that the promise of developed countries to fund 100 billion US dollars per year is still not “visible”.

However, this former negotiator at the previous climate summit said that this deadline might be moved to 2023. This means that developed countries can only reach the target of 100 billion US dollars starting in 2023. This fund is then partly used to achieve the emission reduction target of as much as 41 percent with international assistance and 29 percent with own efforts.

The urge for international assistance was also expressed by the Director General of Electricity at the Ministry of Energy and Mineral Resources, Rida Mulyana, to Tirtoand Kompas , on November 4, 2021, at COP26. He claimed that the government already had programs and plans that were ready to be executed but could not do it on its own.

“Yes, if there is a funder, that’s why we are here, what is the issue here, we hear every day, ‘ Billion US Dollar ‘, ‘ Billion Pound Sterling ‘. For us, ‘ show me the money, show me the money ‘. That’s it, where’s the money?” said Rida.

ETM: New Hope or Trouble?

In response to this financing problem, the Asian Development Bank (ADB) launched a financing scheme called the Energy Transition Mechanism ( ETM ) on November 3, 2021 in collaboration with Indonesia and the Philippines, one of which aims to replace PLTU in Indonesia with clean energy. This scheme is also likely to target Vietnam.

Under partnership with Indonesia and the Philippines, ADB will work with the government to pilot ETM. The intention is to jointly conduct a thorough feasibility study that focuses on the optimal business model for each pilot country, combine donor and philanthropic resources, and leverage a large number of commercial capital. The ETM consists of two financings. The first financing is aimed at accelerating the transfer of functions of coal-fired power plants.

Meanwhile, the second financing focuses on investing in generation, storage and upgrading of the electricity grid for new clean energy. Also on November 3rd, the Japanese government announced a grant worth US$25 million for ETM financing.

“ETM is an ambitious plan that will renew Indonesia’s energy infrastructure and accelerate the clean energy transition to clean net-zero emissions in a fair and affordable way,” explained Minister Sri Mulyani during COP26.

Regarding this plan, Minister of Energy and Mineral Resources Arifin Tasrif also said that Indonesia plans to prematurely stop several PLTUs totaling 9.2 GigaWatt (GW) before 2030. This “early retirement” is estimated to cost 22 billion US dollars, i.e. 8 billion US dollars on the termination of the power plant and 14 billion US dollars for the development of renewable energy.

This was conveyed when he initiated the Friends of Indonesia-Renewable Energy (FIRE) program in Glasgow, Scotland on December 4, 2021. The FIRE program itself is a platform to coordinate international support in accelerating the energy transition process in Indonesia. Furthermore, the Director General of Electricity at the Ministry of Energy and Mineral Resources, Rida Mulyana, told Tirto and Kompas on November 4 that the 9.2 GW figure consisted of 3.7 GW which would require substitution of clean energy and the remaining 5.5 GW did not require substitution because the PLTU area was already oversupplied.

He said, Indonesia will phase out the PLTU that is still operating and choose from 6 potential locations, including 4 PLTUs in Java, Madura, and Bali (Jamali), 1 in Sumatra and 1 in Sulawesi. The average age is already “12 years,” said Rida. The feasibility study, which is scheduled to be completed in March 2022, will determine which PLTU should be accelerated.

A study by the Ministry of Energy and Mineral Resources on one PLTU on the island of Java calculates that on average it takes IDR 2 billion per Megawatt per year to accelerate coal closure 10 years earlier. However, he stressed that this calculation still has a lot of assumptions, so it could be right or wrong. However, some parties are still skeptical about ETM. In a press release, the Coalition of Civilian Organizations, consisting of 60 organizations almost entirely from Asia, assessed that this 15-year duration will enable people to use more coal-fired electricity for years to come.

The coalition also considers that there is no guarantee that the capacity lost due to premature termination of the power plant will be replaced by renewable energy sources. In addition, there is still uncertainty about how ETMs will avoid overpaying or create incentives for older coal-fired power plants to extend their life. “As a climate-vulnerable and economically burdened people, we cannot allow ADB to gamble with premature coal removal plans, which to us are nothing less than a matter of life and death,” Center for Energy, Ecology and Development Executive Director Gerry Arances in the Philippines.

Sustainable Financing Solutions

On November 2, 2021, Fabby from IESR told Tirto that ETM is a fairly good initiative because it can address two issues, namely reducing the capacity of PLTU in the electricity system and encouraging investment in renewable energy. He also mentioned on November 4, 2021 that the planned coal removal and the signing of this new statement was a “big leap” for Indonesia.

“What must be ensured in Indonesia later is that the capacity of the PLTU which is retired is quite significant, so that it can provide a large enough space for renewable energy,” said Fabby.

He cited an IESR study which stated that Indonesia’s renewable energy mix in 2030 must reach 45 percent in order to adjust to the 1.5 degree target in the Paris Agreement. There needs to be at least 10-12 GW of retired steam power plants with an estimated budget of 16 billion to 24 billion US dollars to accommodate such large renewable energy capacity in the national electricity system. In the future, he encourages the government to clarify targets and policies to provide certainty for investors who want to fund EBT projects. In addition, the government needs to anticipate regulatory, licensing and land acquisition barriers that hinder the implementation of EBT projects.

The government should also actively carry out the pipeline prior to a feasibility study that can be used for NRE project auctions. Fabby also encourages PLN to conduct frequent and periodic auctions to provide a “signal” to investors that investment in NRE is attractive.

Fair Transition?

In addition to funding, Sri Mulyani also said at a press conference on September 30, 2021 that Indonesia’s transition to net zero must be fair and affordable.

If the transition increases people’s cost of living, public support for the measure could erode. “If the cost of living is too high to bear, you will not see social acceptance,” said Sri Mulyani. Similarly, IESR in its report urged the government to ensure a just transition, among others, by conducting public consultations and social dialogue, establishing policies related to social protection and skills development, and diversifying the economy. These recommendations are based on lessons learned from four countries in the world in the report.

This is because the energy transition has the potential to reduce Gross Regional Domestic Product (GDP) in coal-producing areas, cause a deficit in the trade balance, and increase the number of unemployed people who have lost their jobs from the coal industry, citing a separate article on October 22, 2020. “That’s what the energy transition approach is for, justice (just energy transition) is needed to ensure that workers and communities affected by the transition from coal are taken seriously,” said Fabby in the same article.


This story was originally published on tirto.id, with the support of Climate Tracker.

Made Anthony Iswara
Made is a data journalist who strives to integrate research, communication and development economics to advocate policies. He has won 5 journalism awards and is among the five winners that won Best Article for the 2020 EU4Wartawan Competition organized by the European Union.