How Important is it to Allocate State Funds to Early Retirement of Coal-Fired Power Plants?

Jakarta, October 24, 2023 – Accelerating the early retirement of coal-fired power plants (CFPPs) and establishing renewable energy-based power plants is crucial to achieving our energy transition targets. The government has released financing guidelines outlined in the Regulation of the Minister of Finance (PMK) Number 103 of 2023 to facilitate this process. This regulation aims to provide fiscal support for the energy transition in the electricity sector. It was put into effect on October 13, 2023. According to this regulation, the energy transition platform’s funding can come from the State Budget (APBN) and other legally recognized sources.

The Executive Director of the Institute for Essential Services Reform (IESR), Fabby Tumiwa, has expressed appreciation for a recent regulation. However, the issuance of the regulation was not unexpected, as the Energy Transition Mechanism (ETM) was established last year, with PT SMI appointed as the ETM Country Platform Manager by the Indonesian government. Additionally, the ETM framework stipulated that the state budget would provide the funding for the early retirement of coal-fired power plants.

“I think the PMK confirms it legally. Legally, this is possible, so it must be budgeted in the APBN. Referring to the PMK, there is also a clause stating that it is following the ability of the APBN. Matters regarding budget priorities and funding sources and others,” said Fabby Tumiwa at the “Energy Corner” event on CNBC Indonesia on Tuesday (24/10/2023).

Furthermore, Fabby Tumiwa emphasized the significance of early retirement of coal-fired power plants due to the threat of climate change. Indonesia is the seventh largest emitter in the world, releasing 1.24 Gt CO2e in 2022. Therefore, Indonesia needs to participate in reducing emissions. The energy sector is one of Indonesia’s significant emissions sources, with the majority coming from CFPP. Fabby hopes that by phasing out CFPP, Indonesia can contribute to the commitment to reduce emissions.

“Funding from APBN sources is required to make the termination of CFPP operation financially feasible. We aim to minimize debt, and using APBN funds can help keep the debt low and make the transaction more visible. However, funding for the retirement of a single CFPP is not limited to just APBN; other options are available depending on the transaction type. The inclusion of APBN funds can help reduce the cost of early retirement of coal-fired power plants,” said Fabby Tumiwa.

According to Fabby Tumiwa, terminating the operations of CFPP is a process that requires proper planning. The guidelines for the early retirement of coal power plants have been outlined in Presidential Regulation (Perpres) 112 of 2022. Fabby emphasized that not all CFPPs will be retired early, as some will end their contract period or economic lifespan.

“When deciding which CFPPs to retire early, several factors should be considered. These include high emissions, low efficiency levels, and an age of over 15 years. If a plant is younger than 15, it may take a long time to see a return on investment, and negotiations may be necessary. It is also important to note that retiring CFPP requires blended finance from various funding sources, not just the state budget. This funding should be structured to make the CFPP financially and technically feasible to stop its operation early,” said Fabby.

Besides the state budget, said Fabby, Indonesia still has funding commitments from developed countries, such as the G7, through the Just Energy Transition Partnership (JETP) framework. However, it is unclear how these commitments will be realized. One obstacle discussed in the JETP is the difference between the market value and book value of PT Perusahaan Listrik Negara (PLN) assets. This issue involves many things, and regulatory changes will be necessary to address it. Moreover, G7 countries are currently focusing on renewable energy funding. Fabby assessed that these two things can be combined to increase renewable energy generation capacity and investment. For instance, if CFPP’s economic age is reduced from 30 to 20 years, 10 years can be dedicated to renewable energy generation. Unfortunately, there is no such regulation in Indonesia. If the government regulates this, Indonesia can benefit from lower costs due to early retirement and increased renewable energy generation capacity.

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