Is Indonesia’s Plan on Phasing Its Coal-based Generation Fleet Ambitious Enough?

In the early 90s, a blackout was a common phenomenon in Indonesia. Most of the time, it occurred without further notice from the utility company, PLN. It was even worse for those living outside Java and Sumatra islands. Having been born and bred in Kalimantan, I have witnessed this within the neighbourhood close to where I lived. Almost every household there has an electric generator as a backup for when a blackout is happening. However, the situation changed when the government began ramping up power generation installed capacity throughout the late 90s, spearheaded by the utilisation of coal-fired power plants (CFPPs).

The massive development of these power plants were driven by the abundance supply of inexpensive domestic coal. Consequently, the cost of generation became cheaper than other forms of electricity generation, including natural gas-fired power plants. The development was further propelled by the electricity law no 30/2009, replacing the old law no 15/1985, which allowed private participation in the sector. In Indonesia, the deployment of CFPPs were carried out through three government-backed programmes, namely 35,000 MW and Fast-Track Programme phase 1 & 2. To date, the generation from these power plants contributes to around 65% of Indonesia’s electricity supply. The aIt is not surprising then that one third of Indonesia’s CO2 emissions comes from the sector.

Compounded with the falling cost of renewable electricity generation, the CFPPs would eventually lose their economic competitiveness. This is a situation that is not exclusive within the global context, but also within the Indonesia context. Recent study by BNEF and IESR has projected the falling cost of generation from solar PV to even below the new CFPPs by 2023. By 2040, solar PV cost of generation would be lower than the short marginal running cost (SMRC) of existing CFPPs. Upon realising that, the government has recently published a plan on retiring 9.2 GW of its CFPP fleet by 2030. 5.5 GW of the fleet will be retired early, whilst the rest, i.e. 3.7 GW, will be replaced with renewables. The plan will indeed see the CFPPs off from Indonesia generation mix by 2060. Whilst the initiative is very much appreciated, the plan itself is still quite far from being compatible with the 1.5°C pathway as rectified in the Paris Agreement. The question arises on how to then make the plan more compatible with the pathway.

According to IESR analysis, by keeping what the government has planned, the retirement program could still be made compatible with the pathway. Considering all the economic and societal impacts, the 1.5°C-compatible retirement pathway will see around 21.7 GW of the CFPP fleet, owned by PLN and IPP, to be retired between 2031 – 2040. Between 2041 – 2045, around 12.5 GW of the CFPP fleet will be retired. The analysis also shows that the accelerated CFPP retirement is feasible and beneficial. With the rapid departure of the CFPP fleet from Indonesia generation mixture, the analysis found out that the avoided coal power subsidies and health costs are actually 2 – 3 times larger than the costs on stranded assets, decommissioning, employment transition and state coal revenue losses. It is anticipated that the retirement cost from the accelerated retirement is estimated to be 4.3 billion USD by 2030 and 28 billion USD by 2045. These seemingly large chunks of cost will certainly need significant international support, despite the larger benefits gained in the long run.

Profit and Revenue from Coal to Accelerate Energy Transition

Jakarta, 30 June 2022 –  As the largest contributor to greenhouse gas (GHG) emissions, coal-fired power plants (CFPP) need to be retired before 2050 and completely substituted with renewable energy. The dominance of CFPP in Indonesia in the electricity sector, amounting to 66% of the electricity mix, should be gradually reduced. Government can use the momentum of rising coal reference prices (HBA) to USD 342/ton in June 2022 by preparing an energy transition mechanism.

The Institute for Essential Services Reform (IESR) views the government and PLN’s plan to maintain CFPP by utilizing clean coal technology, such as supercritical and ultra-supercritical steam power plants, as unacceptable relative to other means to reduce global emissions, such as renewable energy technologies. The direct emission range of CFPP in Indonesia is 800-1200 kgCO2e/MWh, depending on the existing technology. Even the operation of the best CFPP ultra-supercritical technology still produces direct emissions of >700 kgCO2e/MWh, higher than other fossil generators such as gas. It also does not have a significant impact on reducing the national grid emission factor, which is already at ~900kgCO2e/MWh. A strategy using Carbon Capture and Storage/Carbon Capture, Utilization, and Storage (CCS/CCUS) technology will also not significantly reduce GHG emissions and instead have an expensive investment with a low success rate.

“PLN needs to calculate technology options in making the energy transition. CCS/CCUS technology to this day is still quite expensive. The IEA estimates this carbon capture technology to cost $120 per tonne of CO2 or $0.12/kg. The utilization of CCS/CCUS technology will significantly increase the cost of steam power generation, approximately $0.08 – 0.1/kWh. Considering this cost, it is more affordable to close the CFPP early and replace it with solar power plants plus utility-scale batteries. It has a more competitive economy than the CFPP with CCS/CCUS,” explained Fabby Tumiwa, Executive Director of IESR. 

Furthermore, highlighting the use of CCS in two steam power plants at PetraNova and the Boundary Dam in the US, which have not been able to reduce carbon emissions as originally designed, IESR believes that the reliability of using CCS in steam power plants has not been proven. In addition, the life cycle emissions of CFPP with CCS are still relatively large due to the increase in the use of coal to support CCS operations in CFPP. tested

To meet domestic needs only, the government often implements Domestic Market Obligations (DMO) that have dilemmatic consequences.

“Coal supply to the domestic market is limited to a maximum price of USD 70/ton. On the other hand, the renewable energy tariff policy still refers to the Minister of Energy and Mineral Resources Regulation 50/2017 which limits the buying and selling rate of renewable energy to 85% of the Basic Cost of Electricity Supply (BPP). Here, one of the obstacles in the energy transition is the forcing of renewable energy to be cheaper than BPP whose value is dominated by coal power plants with the support of the USD 70/ton DMO regulation,” said Deon Arinaldo, Program Manager of Energy Transformation at IESR.

The coal DMO policy has created an uneven playing field for renewable energy. If the government does not implement the DMO, the price of electricity generation from coal power plants can reach 14-16 cents/kWh if the coal price of 324 USD/ton is continued. This means that without the support of regulations, electricity generation from renewable energy is already cheaper than coal-fired power plants. DMO policies distort the economics of energy generation because they are not based on actual costs. Moreover, it provides a disincentive for companies to accelerate renewable energy that is cheaper and profitable in the long term.

Deon said that the economics of energy generation is calculated from the investment and operating costs that are averaged over the lifetime. When comparing fossil energy and renewable energy, the investment price of renewable energy is expensive at the beginning, but the investment costs will show a predictable downward trend and accelerate with the right policy support. In contrast to fossil energy, which is highly dependent on operational costs, the volatility is very high.

“It is necessary to watch the impact on the cost of electricity generation so that the DMO tariff cannot be revoked because CFPP is already dominant in the electricity system. Preferably, profits and non-tax revenue (PNBP) from the coal mining sector can be partially diverted to encourage the energy transition by gradually reducing the dependence of the electricity system on CFPP and fostering the development of renewable energy. An effective mechanism to take advantage of this will require coordination from the Ministry of Finance, MEMR, and the Ministry of SOEs as well as relevant stakeholders such as PLN and the coal industry,” explained Deon.