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Profit and Revenue from Coal to Accelerate Energy Transition

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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.

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