Embarking on the Decarbonization Journey of the Steel Industry

Jakarta, 20 March 2024 – The industrial sector is one of the important sectors for reducing emissions. The large energy consumption and its significant contribution to the economy in 2022 amounting to 16.48 percent of Gross Domestic Product (GDP), are strong reasons to make this sector more sustainable. Industries with high energy needs, such as the iron and steel industry, require strategic preparation to carry out decarbonization.

Indonesia is one of the largest steel producing countries in Southeast Asia, and ranks number 15 steel producers in the world. In 2023, Indonesia’s steel production capacity will reach 16 million tonnes and is estimated to reach 33-35 million tonnes in 2030.

Fabby Tumiwa, Executive Director of the Institute for Essential Services Reform (IESR), in the webinar “Accelerating the Transformation of the Steel Industry in Southeast Asia: Indonesia Chapter” stated that Indonesian steel production still has high emissions.

“Indonesia’s projected steel demand is predicted to increase. If we don’t take serious decarbonization steps, emissions from the steel industry will also continue to increase,” said Fabby.

We also face international market demands to produce lower carbon steel. For example, the European Union has implemented the Carbon Border Adjustment Mechanism (CBAM), which, effective in 2026, will have a negative effect on the exports of the Indonesian steel industry. For this reason, the steel industry needs to undergo transformation.

Farid Wijaya, Senior Analyst at IESR, explained that decarbonization for the steel industry will bring prospects for economic growth, although currently there are still quite a lot of challenges.

“Green industrial standards can be one way to encourage environmentally friendly industries. Green standards for steel have only recently been established and are still limited to sheet steel per layer. “Currently there is no steel industry that has received a green certificate due to implementation limitations,” said Farid.

Kajol, Program Manager for Climate Neutral Industry Southeast Asia, Agora Industry, added that currently almost 80% of steel production is carried out through blast furnace technology.

“We have to start thinking about better and modern technology to replace blast furnaces. “When the blast furnace facilities currently operating start to become less efficient in 2030-2040, we must replace them with more modern technology and no longer invest in blast furnaces,” she explained.

One of the technologies Kajol refers to is Direct Reduced Iron (DRI) which can produce primary steel using natural gas or clean hydrogen. Iron ore is reduced to produce DRI, which can then be melted in an electric arc furnace (EAF) to produce primary steel.

Viable strategies for decarbonizing the steel industry include direct and indirect use of renewable energy, resource efficiency and circular economy, and closing the carbon cycle.

Helenna Ariesty, Sustainability Manager of PT Gunung Raja Paksi (GRP) as an industry player emphasized the importance of regulatory certainty in encouraging industrial decarbonization.

“We face several challenges to navigate the inconsistent policy direction. Apart from that, access to funding is affordable considering the initial investment required is significant,” Helenna said.

Joseph Cordonnier, Industrial Policy Analyst, OECD agrees that policy and access to funding will be key framework components for building a supporting ecosystem for industrial decarbonization.

“As part of this framework we also have to really look at how to maximize the utilization of existing assets based on engineering variables, energy efficiency and emission reduction of these assets,” said Joseph.

Fausan Arif Darmaji, Infrastructure Development Analyst, Green Industry Center, Ministry of Industry said the government is aware of the need to reduce emissions from Indonesian steel production.

“The steel sector is also our current focus. “While we are waiting for the policy regulations that are currently being made, we are providing training on GHG calculations for the steel sector, as well as calculating the economic value of carbon,” said Fausan.

Deon Arinaldo, IESR Energy Transformation Program Manager closed this webinar by underlining the need for industrial decarbonization as an effort to remain relevant to the demands of industrial development.

“Currently decarbonization in the industrial sector is still considered a challenge. Not only in Indonesia, but also a global phenomenon. “We must anticipate this trend because decarbonization is inevitable,” said Deon.

COP28 – Policy Barriers in World’s Biggest Economies Block Tripling of Renewable Electricity, New Report Finds

press release

London, December 4, 2023 – As world leaders at COP28 are expected to commit to tripling global renewable electricity capacity by 2030, common policy barriers are hampering the rollout of those renewables in some of the world’s biggest economies. This is according to a new report Financing the Energy Transition: How Governments Can Maximise Corporate Investment, by international non-profit Climate Group.

Climate Group’s RE100 initiative works with over 400 companies with a combined electricity demand larger than France, committed to using 100% renewable electricity across their global operations. They are investing billions of dollars to achieve that, but policy and regulatory barriers are stopping corporates from investing in renewable electricity in many markets. This has knock-on effects on the phase out of fossil fuels, Climate Group said.

The report, launched today at COP28, highlights common policy gaps that are holding back eight G20 economies, presenting them as examples of challenges faced by many countries around the world. The report, which focuses on Argentina, China, Japan, Indonesia, India, Mexico, South Korea and South Africa, provides recommendations that would break down barriers, enabling countries to seize the economic opportunities of the energy transition and speed up the race to net zero.

In South Korea for example, 129 of the country’s 226 local governments (57%) have ordinances requiring solar facilities to be located at a minimum distance of anywhere between 100 to 1,000 meters from residential areas and roads – marking vast areas of the country off-limits to solar development. 

“Renewables are the gold rush of the 21st century, but many businesses, states, regions, and countries are still missing out. The age of cheap fossil fuels is over, and it’s time for governments to take simple steps to open their markets to billions of dollars in corporate investment in cheap, clean renewable electricity. It’s great that countries are actively discussing tripling their renewable electricity capacity, but they’re going to have to break down barriers in their own countries to actually deliver on that promise”, said Sam Kimmins, Director of Energy at Climate Group.

The barriers identified in the report fall under three common themes. Firstly, the availability of renewable electricity in a country or region. Secondly, the accessibility of this electricity for corporate use. Finally, the affordability of renewable electricity in some markets, which is often out of step with the vastly lower cost of renewable electricity elsewhere in the world. The challenges posed by restrictive regulatory environments and market barriers are also explored. 

In the run up to COP28, calls for more action on the phase out of fossil fuels and stronger leadership from the world’s biggest economies have been increasing. Positive signs came earlier this year when G20 nations committed to pursue a tripling of renewable energy capacity globally by 2030 through existing targets and policies. To do this, it’s vital that governments remove the most common policy barriers that are locking in fossil fuels and slowing the global transition to net zero. 

“With the renewable energy market expected to hit USD $2.15 trillion by 2025 and sustainable investment surpassing $35 trillion in 2020, market opportunities are huge for countries that work with businesses to prioritise sustainability and drive towards net zero. Continuing to promote fossil fuels, at the expense of renewables, or by not adequately supporting renewables through policies and market structures, is a dead-end road,” continued Kimmins. 

The series of policy recommendations laid out in the report that countries can use to unlock the huge economic potential of renewables are:

  • Establish an enabling regulatory environment for corporate sourcing and accessibility of renewables. 
    • Increase the transparency and additionality of renewable energy certificates (RECs).
    • Ease complicated PPA processes, including addressing the lack of transparency and incentives.
    • Understand and amend the geographic and regional disparities in the availability of PPAs and harmonise PPA rules and contract processes. 

  • Create a level playing field to ensure the affordability of renewables.
    • Create a level playing field on which renewable electricity competes fairly with fossil fuel and reflects the cost-competitiveness of renewable electricity production. 
    • Remove fossil fuel subsidies to stop unfair competition with renewables and reduce the subsidy burden on taxpayers. 

  • Incentivise and increase supply to ensure sufficient availability of renewables. 
    • Work with utilities or electricity suppliers to provide and improve options for corporate renewable electricity sourcing.
    • Address permitting and siting issues that are unduly limiting opportunities for installation of new renewable electricity infrastructure. 
    • Promote direct investments in on-site and off-site renewable electricity projects.

 

Besides South Korea, the report includes other examples where policies have a direct impact on private investment in a country’s energy infrastructure. In 2018, the year President Andrés Manuel López Obrador came to power, Mexico attracted $5 billion in foreign direct investment in its energy sector. By 2021 this was just $600 million – a fall attributed to investors being deterred by pro fossil-fuel rhetoric. 

On the other side of the equation, South Africa’s Renewable Independent Power Producer Programme (REIPPP) has stimulated more investment in renewables development, with 256 billion South African Rand (USD$17.32 billion) being committed through the programme. South Africa’s grid however is struggling to incorporate it, showing the need to invest in infrastructure as well. 

By adopting the recommendations in the report, countries could unlock billions of dollars in investment, with the overall goal of combating climate change and helping countries reach their net zero targets. 

RE100 in Indonesia

Energy transition in Indonesia needs acceleration given the commitment to peak power sector emission in 2030 (based on JETP Indonesia’s comprehensive investment and policy plan) and to achieve net zero emission by 2060 or sooner. Institute for Essential Services Reform (IESR) believes that private sectors contribution is one of the key factors, through sustainable business practices – including advancement of renewable energy use for their operational activities. 

Starting late 2023, IESR and RE100 works collaboratively to boost decarbonization efforts of Indonesian headquartered companies and global companies with operations in Indonesia towards renewable electricity procurement, whilst simultaneously promoting better policy framework and support for renewable energy use by corporates and fostering concerted work with strategic stakeholders in Indonesia.

Fabby Tumiwa, Executive Director of IESR responds, “This report emphasizes the importance of corporate demand for renewables as a critical strategy for accelerating climate mitigation actions. It is consistent with the global call to triple renewable energy capacity by 2030. This demand could spur more renewable energy investment by the private sector without putting a strain on utilities or government finances. The government should facilitate these investments by removing barriers to renewable energy procurement and improving the enabling environment.”

Rachmat Kaimuddin, Deputy Minister for Infrastructure and Transport, Ministry of Maritime and Investment Affairs, states, “The report pulls out examples from specific countries where the barrier is particularly pertinent, whilst encouraging all governments to consider the full set of recommendations to ensure they address the key common concerns of corporates across all themes. For Indonesia, the report highlights accessibility issues for renewables due to a high share of fossil fuels on the grid and a lack of clear procurement frameworks for power wheeling and Power Purchase Agreements (PPAs). The report urges Indonesia to prioritise opening up the market to private investment while concurrently developing its grid infrastructure and flexibility to keep pace with project development in order to unlock untapped renewables potential and associated investment.”

The report can be downloaded here.

Indonesian media contact:

Kurniawati Hasjanah (kurniawati@iesr.or.id

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Notes to editors: 

For more information, please contact:

Nick Ringrow

Senior Communications Manager, Energy

nringrow@climategroup.org

Methodology: 

The report focuses on countries where the key barriers and challenges are most acute. The research was based on data collected from over 400 RE100 member companies together with consultation from members, key local partners across many of the markets assessed, and government stakeholders. This was backed up with publicly available international and local data sources.

About Climate Group 

Climate Group drives climate action. Fast. Our goal is a world of net zero carbon emissions by 2050, with greater prosperity for all. We focus on systems with the highest emissions and where our networks have the greatest opportunity to drive change. We do this by building large and influential networks and holding organisations accountable, turning their commitments into action. We share what we achieve together to show more organisations what they could do. We are an international non-profit organisation, founded in 2004, with offices in London, Amsterdam, Beijing, New Delhi and New York. We are proud to be part of the We Mean Business coalition. Follow us on Twitter @ClimateGroup

About RE100

RE100 is a global initiative bringing together the world’s most influential businesses committed to 100% renewable electricity. Led by Climate Group, our mission is to drive change towards 100% renewable grids, both through the direct investments of our members, and by working with policymakers to accelerate the transition to a clean economy. The initiative has over 400 members, ranging from household brands to critical infrastructure and heavy industry suppliers. With a total revenue of over US$6.6 trillion, our members represent 1.5% of global electricity consumption, an annual electricity demand higher than that of the UK. RE100 was established in partnership with CDP. 

Indonesia’s Effort in Greening the Chemical Industry

Jakarta, 21 November 2023 – Chemical industry is considered as one that is heavy on emission. In Indonesia, various industries, including iron & steel, pulp & paper, cement, and textile interconnect with the chemical industry. The integration of the Indonesian chemical industry, especially ammonia, into the fertilizers industry, contributes to Indonesia’s position as the fifth largest ammonia producer in the world. Indonesia’s proactive measures to green its ammonia industry significantly impact the global ammonia landscape.

Faricha Hidayati, the project coordinator for industry decarbonization at the Institute for Essential Services Reform (IESR) during the webinar titled “Greening the Chemical Industry: International Perspective and Insights” highlights the amount of emission released for every ton of ammonia produced. 

“For every ton of ammonia produced, its average direct emissions are 2.4 tons of CO2. It is two times higher than crude steel and four times that of cement,” Faricha said. 

Given that huge number of emissions, the ammonia industry accounts for 2% of global energy usage. Therefore, decarbonizing the industry is evidently crucial. Faricha further explained that IESR is currently proposing four pillars to decarbonize the ammonia industry in Indonesia: material efficiency, energy efficiency, green ammonia, and the utilization of CCS during the process. 

Faricha added that there is an opportunity to propel the ammonia industry in Indonesia as they are already aware of their emission and have the willingness to figure out a way to limit the emission.

“Another opportunity is Indonesia’s vast potential for green hydrogen projects, coupled with variable renewable energy up to 3,686 GW,” she said.

After assessing the current status quo, IESR urges the government to set a clear emission reduction target for the industrial sector. Though currently Indonesia already has a grand vision on achieving net zero emissions in 2060 or sooner, there is still no clear target and roadmap for the industry sector in contributing to the NZE goal.

Implementing the energy efficiency measures in the ammonia industry is considered as the low- hanging fruit to decarbonize the industry sector. This approach requires least initial investment and technology adoption, while advocating for the long-term strategies.

The full version of the webinar “Greening the Chemical Industry: International Perspective and Insights” can be watched here.

Navigating Indonesia’s Carbon Market: Challenges, Opportunities, and the Road Ahead

The rapid progress of carbon pricing in Indonesia has reached important milestones. Presidential Regulation (Perpres) 98/2021 on the Carbon Economic Value, or Nilai Ekonomi Karbon (NEK), has served as the cornerstone for building the infrastructure and framework for its implementation. The birth of the NEK regulation is a response to the Article 6 Paris Agreement, which allows parties to trade carbon in order to lower emissions. Some instruments are offered under the regulation, consisting of carbon trading, result-based payment, and carbon tax, which was twice delayed and is expected to be launched in 2025. Among all the instruments, carbon trading is identified as a mature instrument with a cap-and-trade mechanism that enables institutions to claim their high-intensive emission by buying credits from other activities that provide carbon stocks.

To strengthen the implementation of carbon trading under Law 4/2023 on the Development and Strengthening of the Financial Sector, the Financial Services Authority (OJK) is tasked with establishing and overseeing carbon trading in the carbon market. In just 7 months, the OJK issued regulations on carbon trading through carbon exchanges and officially launched the carbon market on September 26, 2023. This means that financing is one of the solutions to bridge the gap in achieving climate targets and plays a crucial role in raising awareness of the devastation of climate change, especially for the business sector.

Prior to this, Indonesia has been familiar with the Voluntary Carbon Market (VCM) since the past few decades before deciding to establish a mandatory carbon market to meet Nationally Determined Contribution (NDC) targets for specific sectors. For example, the Sumatera Merang Peatland projects has successfully sold 3 million carbon credits to big companies and the Indonesia Climate Exchange (ICX), a trading platform, was created to build an ecosystem for the private sector with the voluntary scheme.

Earlier this year, power generation was chosen as the first subsector to implement mandatory carbon trading due to its easily identifiable emissions calculations, based on and strengthened by the Ministry of Energy and Mineral Resources Regulation 16/2022 on Procedures for Implementing Carbon Economic Value in the Power Generation Subsector. This was initiated in a pilot program in 2021 before being launched in February 2023.

In the first compliance carbon trading phase, 99 CFPP which covers 86% of coal power plants in Indonesia participating in cap and trade schemes. Each CFPP has a maximum allowance or emission quota that is set based on the previous performance and unit criteria. For those who emit less than the allowance, they are able to trade the remaining quota to other companies that exceed the maximum cap. When the CFPP emission is above the given quota, they must reduce the emission by buying quota from other CFPP or purchase carbon credits.

The success of this pilot program, while requiring some improvements, has encouraged other sectors to consider carbon trading and expand its implementation beyond the energy sector, pending the release of the carbon trading roadmap currently under discussion at the Coordinating Ministry of Investment and Maritime Affairs.

With the establishment of the carbon market, the trading products to be sold and traded are carbon quotas from the compliant sector, called PTBAE-PU, and carbon credits, or SPE-GRK. PTBAE-PU could only be sold and bought by the mandatory sector that has the maximum cap on emitting emissions, while credits may be supplied from various projects, for instance peat restoration and renewable energy projects, where all participants are able to purchase the credits to avoid the emission.

To participate in the carbon exchange, all entities, whether producers of emissions or not, must obtain a permit from the National Standard Registry (SRN), a platform managed by the Ministry of Environment and Forestry as a national database for emissions and validate credibility of products and participants involved in the carbon exchange. With high hopes, careful emission monitoring and evaluation could be easily integrated across sectors in one platform and increase accountability and data transparency that is being shown to the public.

The launch of the carbon exchange just one month after the OJK issued its regulations has raised several questions, one of which is whether Indonesia is adequately prepared to manage it. In the absence of a comprehensive market ecosystem, careful planning and implementation by the government, particularly the regulator and relevant ministries, is needed. Although enthusiasm has been shown by 13 transactions with a total volume of 459,914 metric tons of CO2 equivalent at a unit price of around USD 4.51, dominated by state-owned enterprises on the first day of the launch, lessons from several emissions trading systems (ETS), such as China’s, show that it takes a considerable amount of time, almost a decade, to build a strong and mature market ecosystem. Validation, credibility, and data transparency are fundamental aspects that should be carefully monitored by various stakeholders, including the OJK, the Ministry of Environment and Forestry, the Ministry of Energy and Mineral Resources, and others. Market integration between power sector carbon trading and the upcoming compliance sector with the recently released carbon market must be implemented to achieve one common system and pricing mechanism, since voluntary parties dominate the current market.

The existence of a carbon market provides an opportunity for companies to raise finance through carbon trading within the market. However, this should be closely scrutinized in terms of the requirements for companies to enter the market, such as taking action to reduce emissions, maintaining comprehensive emissions inventories, and having strategies for future emissions reductions. It is important to avoid the interpretation that the carbon market is simply a strategy to reduce emissions by buying as many carbon credits as possible. There should be an institution capable of conducting accurate and comprehensive checks and verifications of the PTBAE and SPE-GRK being traded, as well as verifying valid and internationally recognized calculation methodologies to avoid double counting and ensure accountability for projects generating PTBAE and SPE-GRK. In addition, there should be a careful monitoring system of the use of carbon market funds. The government has mentioned that the funds will be managed by the Environmental Funds Agency (BPDLH), but it is not clearly stated how the mechanism works yet.

Renowned for its tropical forests and abundant renewable energy potential, most of Indonesia’s carbon credits come from natural resources. Indonesia’s FOLU sector could potentially absorb 25.18 billion tons of carbon from rainforests, mangrove conservation could absorb around 33 billion tons of carbon, and peatland could absorb almost 55 billion tons of carbon. With the advent of the carbon market, significant forest, mangrove, and renewable energy projects are expected to grow rapidly. It is crucial to assess and verify each project holistically and monitor its implementation to avoid ‘greenwashing’ practices that claim significant carbon sequestration and reduction without following established procedures.

It is also important to maintain a balance between supply and demand in the market in order to maintain market enthusiasm and ensure smooth transactions. Given the early experience of the European Union Emissions Trading Scheme (EU ETS), where an oversupply led to carbon prices approaching zero in 2007, precautions should be taken to prevent carbon prices from becoming uncompetitive. In addition, the carbon market will soon allow companies outside Indonesia to participate in carbon trading, which could lead to carbon leakage if prices are not competitive and domestic companies do not benefit from the incentives provided by the carbon market.

The Ministry of Energy and Mineral Resources (ESDM), which regulates quotas and allowances in the electricity sector, must limit the emissions allowed by each company that owns power plants. With a planned maximum quota of 85% in 2024, it is expected to encourage each operator to develop emission reduction strategies. At present, quotas are still based on emission intensity and the average emissions of the previous year, which can lead to higher allocations in the following year. Regular monitoring is therefore required to reduce the emission quotas for each power plant.

Carbon markets also open the opportunity to widely inform the green taxonomy principles, especially to financial institutions, investors, and project owners. It could enable the identification of whether a project can be traded in the carbon market and falls within the green taxonomy classification. This can enhance transparency in assessments and trust while assisting investors and financial institutions in mobilizing funding for sustainable projects. However, further institutional coordination and agreements are also necessary for this.

Although the carbon market in Indonesia is still relatively new, its effective implementation is expected to drive changes in industrial behavior, particularly in the power generation sub-sector and the energy sector as a whole. Information dissemination to a wider audience is important to attract more buyers and traders to participate in carbon exchange beyond energy sectors. In this nascent stage, an incentive from the government is required since to pass the ‘green’ criteria, extra processes are needed which creates additional cost and potentially becomes a burden, making the carbon market unattractive. The market also creates opportunities for Indonesia to fulfill the need of climate financing, while pushing the launch of carbon tax is important as the complement tool. Regular monitoring and evaluation is necessary to keep all the activities on the right track while further enhancements and developments are necessary to make the market eligible at the international level.