Emission Reduction Target in the Indonesia Updated NDC Failed to Reflect the Urgency of Climate Crisis

Jakarta, 30 July 2021 – Despite targeting carbon neutrality by 2060 or earlier in the Nationally Determined Contribution (Updated NDC) and Long-term Strategy on Low Carbon and Climate Resilience (LTS-LCCR 2050) documents submitted to the UNFCCC, the Institute for Essential Services Reform (IESR) views that the emission reduction target is still not in line with the objectives of the Paris Agreement.

The Indonesian government has just released the NDC (Updated NDC) and LTS-LCCR 2050 update documents, which will be presented at the COP26 meeting in Glasgow on 31 October – 12 November 2021. The government, through the Ministry of Environment and Forestry, said that these two documents were prepared based on the conditions of the slumping economic reality due to the Covid-19 pandemic. It made the government focus more on economic recovery efforts to achieve Indonesia’s Vision 2045 to become an advanced economy country.

However, according to IESR, post-COVID-19 economic recovery can be carried out together with building strong climate resilience.

“To become a developed country, Indonesia must be able to have rapid economic growth and must be supported by solid climate resilience. The climate crisis needs serious attention because it can harm human development, economic progress, and social equity,” said Lisa Wijayani, Program Manager for the Green Economy.

Disasters due to the climate crisis are increasingly widespread throughout the world, including Indonesia. One of them is the increasing frequency and intensity of hydrometeorological disasters. BNPB analysis shows that 90-95% of disasters that have occurred since early 2021 are hydrometeorological disasters. These various disasters bring loss of life, social, and economic. The central government spent between US$90 million and US$500 million per year on disaster response and recovery from 2014 to 2018. Local governments are estimated to have spent US$250 million over the same period. This number is predicted to increase in line with the high intensity of natural disaster events. 3 The Ministry of Environment and Forestry also stated that the impact of climate change on the food, energy, water, and health sectors will decrease Indonesia’s GDP by 0.66% – 3.54% in 2030.

Furthermore, judging from the LTS-LCCR 2050 document, the government is still sticking with coal as a source of electricity. This can be seen from the still large portion of coal-fired power plants (CFPP), and relying on CCS/CCUS technology to reduce emissions. Particularly, this technology is still expensive with a capital expenditure greater than $4200/kW. Moreover, there are technical and economic factors so that its feasibility is questioned compared to renewable energy generation options. In addition, the use of CCS/CCUS technology in CFPP will make investment costs in CFPP increase by 74% which affects the increase in electricity generation costs.

The study of Deep decarbonization of Indonesia’s energy system: A pathway to zero emissions by IESR found that Indonesia could even achieve zero emissions in the electricity system by 2045 and the energy system by 2050 by utilizing 100 percent renewable energy.

“This decade is a critical phase to kickstart energy transformation and ensure the Paris Agreement targets are met. In the next 10 years, we must massively increase renewable energy, limit the addition of coal-fired power plants and reduce thermal generation, and promote energy efficiency. Unfortunately, Indonesia’s NDC, on the other hand, failed to adopt the vision of transforming the energy system so that the emission reduction target remains at the level of 29%-41%, lower than it should be” said IESR Executive Director, Fabby Tumiwa.

Coal power plants are also no longer competitive compared to renewable energy power plants. Some countries, such as South Korea and Japan, and more than 100 financial institutions in the world have decided to stop providing CFPP project funding. The IEA (International Energy Agency) projection in the World Energy Outlook 2020 study shows, in 2040 alone, the Levelized Cost Of Electricity (LCOE) of CFPP in the world will be 5.5 – 22.5 Cent/kWh, much larger than solar PV, which is only 1.3 – 3 Cent/kWh. This trend indicates a high risk for CFPPs to become stranded assets and high electricity prices.

Besides the power sector, the transportation sector is also important to decarbonize. Emissions from the transportation sector reached 157 million tons of CO2 in 2019, the second largest after the industrial sector. In the NDC document, the government encourages the implementation of biofuels (46%) and 30% electrification in the transportation sector. The IESR study shows there is a greater opportunity for decarbonizing the transportation sector by conducting more massive electrification of road passenger transport while rapidly increasing the renewable energy mix in the electricity sector to reduce emission intensity on the grid. For this reason, the development of clean fuels, namely hydrogen and synthetic fuels, needs to start soon.

Based on the results of IESR modeling in the Deep Decarbonization study with the best scenario, at least 49% of the transportation sector must have been electrified by 2050, said Deon Arinaldo, Program Manager of IESR Energy Transformation.

IESR appreciates the government’s inclusion of elements of a just energy transition by including issues of gender, equitable energy, and vulnerable groups. The updated NDC has also begun to

show the government’s awareness of the potential for stranded assets and migration to green jobs as a result of the energy transition.

“We urge the government to prepare a coal transition roadmap to anticipate the social and economic impacts that occur from declining coal demand in the future. The strategy of economic diversification in coal-producing areas must be immediately compiled and included in the national development plan,” said Fabby Tumiwa.**

1. World Bank, “Strengthening Indonesia’s Fiscal Resilience to Natural Disasters and Health-Related

2. Shocks”. KLHK (2020). Roadmap NDC Adaptasi Perubahan Iklim, Kementerian LHK, Jakarta.

Renewables give Indonesia an edge in climate quest

Indonesia can tap its potential in renewable energy to fulfill the country’s commitment to the Paris climate accord and reduce its dependence on coal-based power, according to analysts.

Southeast Asia’s biggest economy aims to slash emissions by 29 percent by 2030. State-owned utility Perusahaan Listrik Negara said in May that it will stop building coal-fired power plants after 2023 to meet Indonesia’s carbon-neutrality goals.

Original article

 

Solar PV Can Be The Mainstay Of Renewables, But There Must Be Certainty Of Tariffs

Jakarta, CNBC Indonesia – The unfinished of Presidential Regulation on renewable energy has lowered investor confidence.

Independent Power Producers (IPP) are of the view that the Presidential Regulation on renewable energy can replace the renewables electricity price regulation which was previously regulated in the MEMR Ministerial Regulation.

Local Government Has a Great Potential to Develop Regional Bonds for Green Development

Apart from the APBN (National Income and Expenditure Budget) and APBD (Regional Income and Expenditure Budget), local governments can now innovate to finance its infrastructure spending, especially those related to Sustainable Development Goals (SDGs), by issuing regional bonds and/or regional sukuk as a source of sustainable finance.

Istiana Maftuchah, Representative of the OJK (Financial Services Authority) in the online workshop Introduction to Sustainable Finance and Regional Bonds held by the Institute for Essential Services Reform (IESR), supported by the British Embassy Jakarta (9/3), explained in detail.

“The global push has been felt until now as we are facing the Covid-19 pandemic. The direction of the financial services industry has been aimed towards sustainability, and now there has been a paradigm shift: People, Profits, Planet,” said Istiana.

In her opinion, this development is connected to Indonesia’s commitment to the SDGs and also the Paris Agreement, which has been ratified in Law no. 16/2016. She emphasized that investors’ interest in green products is getting bigger and is not only focused on profit.

Istiana explained that there is an opportunity for green investment to become a global trend in emerging countries, up to USD 23 trillion, for renewable energy, transportation, waste processing, and green building sectors.

“We need around IDR 67 trillion to fulfill the investment and financing needs of Indonesia’s SDGs (2020-2030), consisting of 62% from the government and 38% from non-government,” said Isti.

To achieve this target, OJK issued a road map for sustainable finance, including the issuance of OJK Regulation (POJK) 51/03/2017 about the Implementation of Sustainable Finance for Financial Service Institutions, Issuers, and Public Companies and POJK 60/04/2017 concerning Issuance and Securities Requirements Environmental Friendly Debt (Green Bond).

“POJK 60 is securities and debt, the results of which will fund environmentally friendly activities. There are 11 categories of environmentally friendly activities, we add one sector, i.e MSMEs, so a total of 12 environmentally friendly activities, “added Istiana.

On the same occasion, Ferike Indah Arika, Young Expert Policy Analyst, Center for Climate Change and Multilateral Policy (PKPPIM), Fiscal Policy Agency, Ministry of Finance discussed the need for innovative funding for green development.

Ferike said that since 2016, the Ministry of Finance has identified government budgets aimed at controlling climate change, as well as to measure and evaluate the budgeting. The average spending of ministries and agencies on climate change reached up to IDR 86.7 trillion.

“That is a large number, which is equivalent to 34% of the financing needs for climate change mitigation in the Second Biennial Update Report (Rp. 266.2 trillion per year),” she said.

Given the very limited state budget for Indonesia, and to attract green investment flows to Indonesia, the Ministry of Finance has issued a fiscal policy to control climate change. It includes 3 (three) policies; the state income policy, state spending policy, and financing policy.

Ferike explained that in the state income policy, the most significant change was the tax holiday facility in which previously the percentage of tax reduction was 10-100%, now it is 100%. Besides, the period of the tax holiday has been shifted from originally 5-15 years to become 20 years depending on the investment value.

From the aspect of financing policy, the Ministry of Finance issued a Sovereign Green Sukuk to finance the government’s climate change mitigation and adaptation projects.

“In early 2018, we issued the 1st Global Green Sukuk worth USD 2.25 billion. Meanwhile, in November 2020, the issuance of Green Sukuk reached the value of Rp. 5.42 trillion,” said Ferike.

Furthermore, the Ministry of Finance is considering the application of Carbon Pricing, among others, to promote sustainable growth and encourage Green Investment.

“Regulations related to Carbon Pricing are currently under discussion coordinated by the Coordinating Ministry for Maritime Affairs, and the regulation will be in the form of a Presidential Decree,” she said.

 

Local Government Opportunities to Use Regional Bonds for Green Development

 

Simon Saimima, Head of Sub-Directorate for Special Allocation Funds (DAK), Directorate of Regional Balancing Funds and Regional Loan Facilitation, Directorate General of Regional Financial Development, Ministry of Internal Affairs, explained about Green Bonds or Regional Bonds.

Following the regional bond issuance policy, Simon explained that it is a regional right to provide regional loans in synchronization with the Regional Medium Term Development Plan (RPJMD) and related regulations. Furthermore, regional loans will be repaid from the local government in the form of bonds on the capital market. Green Bonds or bonds are included in the long-term loan category.

Simon explained that the capital market issues the bonds. However, the guarantor is the local government in the form of assets and activities in certain provinces carrying out. The regions are responsible for all risks resulting from the issuance of these bonds.

To follow the procedures, the regional head and the Regional House of Representatives (DPRD) must approve the issuance of bonds. The Regional Representative Council (DPD) was also involved in the process.

“There are 9 (nine) required documents for regional bonds, and these must be fulfilled to meet the requirements of the Ministry of Internal Affairs,” he said.

Bonds that have been issued are the obligation of the local government to pay the loan principal and coupons by the agreement. If the local government fails to pay, they will also receive administrative sanctions.

Russell Marsh, Green Finance Lead, ASEAN Low Carbon Energy Program Ernst and Young, in his presentation, explained that although the need for sustainable funding is increasing, there are many identified challenges found in its development.

First, the lack of awareness and understanding of Environmental, Social, and Governance (ESG) risks and the importance of sustainable finance both from the demand and supply side. Second, there is a lack of constant definitions, measurements, standards, and disclosures so that financial services institutions can evaluate potential sustainable projects and so that project owners can prepare supporting documents. Third, there is a lack of coordination between stakeholders in implementing regulations. Fourth, green bonds may not create “additionality”, for example, the projects that are financed to support environmentally friendly purposes but these projects were not previously financed. 

There are several solutions that Russell offers, i.e providing incentives for sustainable finance, developing transitional finance, and increasing understanding and building the capacity of financial service institutions and project owners.

 

Constraints of Local Government and Financial Institutions in Issuing of Bonds to Support Green Development

 

Present as speakers at the workshop on the second day (10/3) were Darwin Trisna Djajawinata, Operations & Finance Director of PT Sarana Multi Infrastruktur (SMI); and Rahul Sheth, Executive Director, Head of Sustainable Bonds at Standard Chartered Bank.

In his presentation, Darwin shared valuable information on the criteria for projects that were eligible to get financial support from financial institutions. The feasibility of a project to be financed depends on several things, for example, whether an infrastructure project is included in the Regional Medium Term Development Plan (RPJMD).

“For projects aimed to fulfill the rights and empower the poor, much more mature planning is needed because this financing is a loan, and it is impossible to impose this loan on the poor, so the regional government must repay the loan. Well, these schemes need to be planned carefully, “said Darwin

The ability of the regions to see potential sectors for development, compile proposals and manage debt will determine the confidence of financial institutions. Especially regarding the issuance procedure of municipal bonds which are very dependent on the track record of the region in managing debt.

“The issuance of municipal bonds depends on the ability of the regions to manage their debts well, and currently there are not many regions that can manage their debts properly,” added Darwin.

Rahul Sheth, Executive Director, Head of Sustainability from Standard Chartered Bank added that the readiness of the regions to issue these bonds varies. Regions that will issue bonds for the first time need more careful preparation. Financial Institutions usually have 2 types of bonds that are commonly issued to finance projects with specific issues, i.e green bonds to finance projects related to the environment and climate, and social bonds to finance social community projects such as infrastructure, access to finance for MSMEs.

“The social bond market is one of the largest,” said Rahul. This shows great potential for local governments to develop regional bonds. At the end of his presentation, Rahul answered questions from the participant, Yugo from Bank South Kalimantan, about the challenges that often arise when issuing bonds.

“Data and data automation are challenges that often come. When the data is complete, various things can be done and monitored automatically, such as taxes, balances, and other financial reports. Data collection and data management are critical processes in this industry,” concluded Rahul.

Participants shared some of the obstacles in issuing regional bonds regarding regulations such as the sovereign guarantee that is given only to State-Owned Enterprises (BUMN), not Regional-Owned Enterprises (BUMD), which automatically makes it harder for local governments to plan bond issuance for strategic projects.

Indonesia Needs Specific Strategy to Develop Hydrogen For Decarbonization

Several countries and large companies today have committed to becoming carbon neutral (net-zero emission) by 2050. The declining cost of solar and wind, the two sectors predicted to become the backbone for decarbonization, opens the opportunity for the realization of this commitment. Moreover, the electrification of the transportation system and hydrogen development, also become important tools to achieve carbon neutrality.

On the first day of the Berlin Energy Transition Dialogue 2021, which was held virtual on (18/3), several international think-tanks gave their views and opinions on decarbonization efforts towards net-zero emissions 2050 and specifically on hydrogen development strategies. Compared to other renewable energy sources such as solar and wind, hydrogen is more recently developed. Representing Indonesia in the forum, the Executive Director of the Institute for Essential Services Reform (IESR ), Fabby Tumiwa, explained the status of Indonesia’s decarbonization development and the role of hydrogen in it.

“Indonesia still does not have a long-term strategy towards net-zero by 2050 yet. Even in 2050, it is projected that fossil energy will still dominate the national energy mix by 70%. Indonesia’s current energy fulfilment strategy has not yet reflected an energy transition approach,” said Fabby.

Fabby also added that hydrogen development in Indonesia is still very far away because energy policymakers are still not familiar with this new technology.

Challenges in the widespread use of hydrogen in Indonesia, namely in developing significant storage or battery technology. IESR has conducted a study, and it showed that in an optimal decarbonization scenario where hydrogen will receive a larger portion of Indonesia’s energy system, the demand for power storage will increase significantly, which means that the supporting infrastructure must also be prepared. A full version of this study will be launched by IESR soon.

Facing this energy transition era, the Indonesian government as the policymaker must understand the role of green hydrogen in the decarbonization process. Furthermore, an integrated strategy must be created and implemented for the development of hydrogen from both the research and policy development point of view.

Globally, hydrogen is targeted to enter several sectors, i.e: industry, electricity, transportation, buildings, and exports. The stability of hydrogen power during the storage period can be a solution for generating power in remote areas.

Also attending the discussion were Pil Seok Kwon, director of the Green Energy Strategy Institute of South Korea, Yuko Nishida, Senior Manager of Renewable Energy Institute Japan, and Bruce Raw Chief Strategy Officer of Green Cape, South Africa. Each of them conveyed the status of hydrogen development in their country and submitted input for future development. All parties agreed that a specific international strategy is needed for hydrogen development globally.

CASE Indonesia Encourages Synergy of Multi Stakeholders for Energy Transition in Indonesia

CASE (Clean, Affordable, and Secure Energy) project embraces many parties to encourage the energy transition in Indonesia by conducting online discussions within operational planning workshop for 3 days (February, 22-24 2021). Stakeholders from various government agencies, financial institutions, academia, and civil society organizations, shared their opinion and ideas about the activities they have undertaken to contribute to the energy transition.

This meeting was crucial to ensure that CASE activities would later remain aligned and complementing activities that are currently or have been planned by other relevant agencies regarding the energy transition, as well as reflect the inclusiveness of the CASE project.

Currently, the energy transition is deemed as an exclusive topic or only discussed by certain groups. On the other hand, the topic of the energy transition arose because of scientific concerns about the climate crisis that is experiencing and will impact human nature and our ecosystem, so it is important to introduce this process to form collective awareness of measures to avoid the more extreme impacts of the climate crisis through the energy transition, especially in the power sector.

Input and opinion from various parties are also important to see the various constraints and situations experienced by each party and how the project can play a role in CASE in these situations.

From the financial sector, for example, there are still difficulties in providing funding for renewable energy projects because they are hampered by several things, one of which is the risk assessment of renewable energy projects.

“We need to understand the risk of investing in renewable energy, and how to mitigate it, so that this renewable energy project is more bankable,” explained by an executive from one of the banking institutions in Indonesia who was involved in this discussion.

He continued, “In addition, there should be a body that can become a kind of consultant to provide an objective assessment of supply and demand in this sector, especially to answer the question, is this project in line with the government’s development plan? More importantly, how about government support for this particular project? “

The government has not responded to these questions. Several institutions have taken the initiative to find solutions to these questions, but a definite answer from the government in the form of official policies or regulations is still considered important and crucial as a positive signal of government support.

“Institutionally, we already have a target and work plan for 2021 that can be collaborated with the CASE program. Some of them are campaigns to raise awareness from financial institutions and investors about the potential of renewable energy projects, as well as inter-institutional meetings to discuss green recovery and green. jobs, “explained one ministerial official in Indonesia.

“As academics, we are open to being involved in making studies and developing pilot projects of the activities for the CASE project. We also have study groups focused on developing clean energy, so we look forward to having discussions about the activities we can do together,” said a lecturer of Technical University in Indonesia.

All parties agree that synergy is needed from all parties to respond to the issue of providing clean energy that is affordable and sustainable. However, the government still needs to be the initiator who first moves these parties.

“As the title of this project is CASE, Clean and Affordable, if we talk about affordable, it must be related to price and business model. So PLN must find the right business model to provide affordable clean energy for the community, ”said an official from a state-owned company in Indonesia.

This activity was closed by agreeing on a joint commitment from all parties present to make the program agenda for the provision of clean, affordable, and sustainable energy a success. The moderator at the plenary session emphasized that the Ministry of National Development Planning/BAPPENAS really hopes for the cooperation and synergy from each stakeholder invited to the workshop so that the achievement of the project will be good even better, as stated in the tagline “To Mobilize Stakeholders, to Make the Output Better.”

The CASE project is an initiative of the German government, funded by the German Federal Ministry for the Environment, Nature Conservation, and Nuclear Safety (BMU). In general, this program aims to encourage an increase in public understanding of the energy transition issues in Southeast Asia.

The CASE program covers regional working areas in 4 Southeast Asian countries, namely Indonesia, the Philippines, Vietnam, and Thailand. In Indonesia, the CASE program is run by GIZ Indonesia in collaboration with the Institute for Essential Services Reform and the Ministry of National Development Planning / BAPPENAS as government representatives to partner with CASE. Globally, this program is also supported by international consortium partners Agora Energiewende and the New Climate Institute.