Digging Deeper into the Impact of the Energy Transition on Coal Producing Regions

Jakarta, 21 November 2023 – Indonesia is one of the largest coal exporting countries in the world. Coal production in Indonesia is concentrated in four provinces, namely East Kalimantan, Central Kalimantan, North Kalimantan and South Sumatra. The coal or mining sector is a significant component of the local economy of these coal producing regions.

The global energy transition agenda means that every country has the potential to reduce coal demand. This will be the main threat to coal-producing provinces if it is not addressed strategically.

Fabby Tumiwa, Executive Director of the Institute for Essential Services Reform (IESR), in the Media Dialogue: Just Transition in Coal Producing Regions in Indonesia stated that the trend of decreasing coal production will be felt starting in 2025 based on IESR projections.

“Starting from this hypothesis, we try to look at four aspects of the energy transition in coal producing areas, namely the employment sector, local communities who are economically dependent on the mining industry, regional income and expenditure budget (APBD) revenues, and the regional economy as a whole,” said Fabby.

For this reason, Fabby emphasized the importance of preparing coal producing regions to make the transition because there will be a significant economic impact if the transition process is not prepared now.

Syahnaz Nur Firdausi, IESR climate and energy analyst, explained that one of the main findings of this study was the significant contribution of the mining sector to regional income.

“The mining sector’s contribution to GRDP is 50% in Muara Enim and 70% in Paser. However, this large contribution is not directly proportional to the added value to labor wages or other multiplier effects. In other words, the profits from the mining sector are mostly enjoyed by companies, not the surrounding community,” said Syahnaz.

Martha Jessica, social and economic analyst at IESR, added that there is a gap in understanding between the community, local government and mining companies. Mining companies are aware of the trend to switch to renewable energy, and they are indeed planning to transition.

“There needs to be communication between companies, local governments and communities regarding the company’s transition plans and new business models so that local governments and communities can prepare,” said Martha.

The findings of the IESR study were agreed by representatives of the Muara Enim and Paser regional governments. Head of Muara Enim Regional Planning Agencies, Mat Kasrun, stated that his regional economic growth was exclusive.

“Economic growth in Muara Enim is around 8.3% in 2023, but the extreme poverty rate is still at 2.9%. This means that high economic growth is only enjoyed by a handful of people,” he said.

Conditions in Paser district are more or less similar where the contribution of the mining sector to regional income is very huge. Rusdian Noor, Secretary of Regional Planning Agencies for Paser district, stated that his region needs special assistance to face this era of energy transition.

“75% of Paser district’s income in 2022 contributed by the mining and agricultural sectors, and much of the GRDP spending allocation is for infrastructure development. If we immediately switch to clean energy and the mine is no longer operating, we will no longer be able to carry out development. Thus, we need special assistance so that with this transition, we don’t lose (economic, ed) power,” said Rusdian.

Reynaldo G. Sembiring, Executive Director of the Indonesian Center for Environmental Law (ICEL), responded to this study by underlining the limited authority of regional governments in energy matters. For this reason, a comprehensive approach is needed to ensure the transition process runs fair and smooth.

“A just transition is a transition that supports ecosystem recovery and repair. This energy transition could be a momentum for policy harmonization between the national and sub-national government,” he said.

Nikasi Ginting, Secretary General of the DPP FPE Confederation of All Indonesian Trade Unions, highlighted the gap in the number of workers needed from this energy transition.

“An example of what happened in Sidrap in 2013, when the wind power plant construction process required up to 4,480 workers, but when it was completed and during the operational phase, only hundreds of workers were needed. The fate of those thousands of workers must be a common concern,” she concluded.

The complete report of “Just Transition in Coal Producing Regions in Indonesia” can be downloaded here.

Calculating the Costs of Early Termination of Coal Power Plant and Other Decarbonization Measures

Jakarta, 11 October 2023 – Early termination of coal-fired power plant (CFPP) operation from the natural CFPP retirement year is a more cost-effective approach than extending the life of coal CFPP with the addition of carbon capture and storage (CCS) technology. It was stated by Fadhil Ahmad Qamar, Program Staff for the Clean, Affordable, and Secure Energy (CASE) project for Southeast Asia (SEA), Institute for Essential Services Reform (IESR), at Indonesia Sustainable Energy Week (ISEW) 2023.

Fadhil mentioned that adding CCS technology to power plants tends to be expensive due to the high procurement costs and initial capital expenditure (Capex) and operating expenditure (Opex). Moreover, shutting down coal power plants can result in similar reductions in emissions as implementing CCS but at a lower cost.

“Appropriate carbon pricing must be applied alongside innovative financing to attach economic value to the advantages of reducing emissions through the early termination of coal power plant operations and utilization of CCS technology. This will prevent any burden on the state budget,” said Fadhil.

On the same occasion, Raditya Wiranegara, Senior Analyst, IESR, also emphasized again the social and economic impacts of the early termination of coal power plant operations are crucial, primarily when the local communities rely heavily on these operations for their economic activities. Therefore, policymakers must adopt an approach to formulating policies for the cessation of coal power plant operations based on reliable data on the plants’ generating assets and their external costs. These external costs include social costs associated with local pollution produced by coal power plants.

“It is crucial to include the plan for early termination of coal-fired power plants in the RPJPN. This will enable us to prepare a social safety network and estimate the required budget to minimize the impact of ending coal-fired power plant operations on the communities around the plant and producing areas. Additionally, we should consider taking anticipatory measures such as preparing to shift workers from coal-fired power plants to renewable energy-based power plants. All of these steps can be included in the RPJPN,” explained Raditya.

ASEAN Must Work Together for Energy Transition

Jakarta, 29 July 2022 – Southeast Asia is a strategic area with the second largest economic growth in Asia after China. Southeast Asia is predicted to continue to develop economically. Energy demand is also predicted to continue to rise. With the condition that fossil energy is still abundant in the Southeast Asian region, joint efforts between countries in Southeast Asia are needed to achieve decarbonization without compromising economic growth.

South Korea and China, which are investors in various fossil projects, especially coal-fired power plants in the Southeast Asia region, have committed to no longer finance PLTU projects abroad in 2021. This commitment is expected to be a signal that will lead to more massive renewable energy investment.

Dongjae Oh, program lead for climate finance, Solutions for Our Climate (SFOC) in a webinar entitled “The State of Southeast Asia Energy Transition” stated that South Korea’s commitment to no longer finance coal-fired power plants is indeed quite surprising but there are other things that should be wary of related South Korean investment preferences.

“Despite having withdrawn funding for coal-fired power plants, South Korea continues to invest in the oil and gas sector in Southeast Asia with a value of 10 times, namely $127 billion from coal investment of only $10 billion. Indonesia is the largest recipient of oil and gas investment from South Korea,” Dongjae explained.

Dongjae added that gas is considered by the Korean government as a clean alternative energy for the transition period.

China also announced that it would no longer finance overseas coal projects in September 2021. A number of Chinese foreign and domestic policies have changed since then. Isabella Suarez, a researcher at the Center for Research on Energy and Clean Air, explained that the Chinese government has begun to include a clause on the termination of coal financing in their law.

“A number of local Chinese banks are also starting to state that they will no longer finance coal projects,” Isabella added.

The withdrawal of South Korea and China in financing coal-fired power plants is expected to urge ASEAN countries to develop renewable energy more massively.

Meanwhile, the energy transition situation in several Southeast Asian countries still needs a lot of encouragement and incentives.

Handriyanti Diah Puspitarini, a senior researcher at the Institute for Essential Services Reform (IESR), said that the current state of the energy transition in Indonesia is quite slow and not enough to meet the climate mitigation target to limit global temperature rise to 1.5 degrees.

“If Indonesia doesn’t do something to accelerate the penetration of renewable energy, according to the IESR calculation in 2025 we will only reach 15% renewable energy in the energy mix and 23% in 2030,” explained Handriyanti.

Handriyanti emphasized the importance of the Indonesian government to seek funding models and have consistent political will in Indonesia’s energy transition process, considering that the transition process takes a long time and requires large amounts of funds.

Similar to the situation in Indonesia’s electricity sector, the Philippines is still dominated by fossil energy in its electricity sector. Albert Dalusung, energy transition advisor, Institute for Climate and Sustainable Cities (ICSC) said that the Philippine government is currently focusing on reducing the use of oil in the transportation sector and developing renewable energy.

“The president has stated that renewable energy is at the forefront of the climate agenda, the high price of fossil energy has also made the government change its energy policy,” explained Albert.

Indonesia’s neighboring country, Malaysia, has a target of 31% renewable energy by 2025 and achieves carbon neutral status by 2050. Antony Tan, executive officer (Sustainability & Finance), All Party Parliamentary Group Malaysia on Sustainable Development Goals (APPGM – SDG), stated that currently Malaysia is optimistic that it can achieve this target.

“However, there are things that need to be improved in energy policy in Malaysia, namely the need for a specific ministry of energy and a more holistic policy to design a more sustainable transportation system,” Antony explained.

Flexible Power Plant Operation to Enable High Renewable Energy Penetration

press release

Jakarta, 15 June 2022  The dominance of coal-fired power plants (CFPP) in Indonesia’s electricity system is one of the causes of the below optimal utilization of the abundant technical potential of renewable energy. Around 70% of electricity generation in Indonesia still comes from CFPP, where most of CFPP units are under 10 (ten) years old. Moreover, the growth in electricity demand is not as high as projected, thus causing more electricity supply. This condition closes the opportunity for massive integration of renewable energy generation in this decade which is even greater due to the transition of the electricity system towards net-zero emission.

The Institute for Essential Services Reform (IESR), in its study entitled The Flexible Thermal Power Plants analyzed that as a temporary measure, it is necessary to retrofit the coal power plant to be operated flexibly. This will shift the role of the CFPP, which originally functioned purely as a baseload, to be able to adjust the output according to the intermittent renewable energy, thereby helping the stability of the electricity network. This option can be implemented before the CFPP is permanently phased out. It means that flexible power plants will be discontinued after the supply of renewable energy can meet demand and the interruption can be overcome with other options, such as the interconnection of the electricity grid, management of electricity demand through market mechanisms, and alternative energy storage such as batteries, hydrogen gas turbines.

“Based on the IESR study, for Indonesia’s electricity system to be in line with the Paris Agreement targets, by 2030 around 47% of electrical energy in Indonesia must come from renewable energy plants. The challenge is that the over the capacity of PLN’s power plants which reaches 5 GW, makes the renewable energy mix in the system unable to be increased without reducing the capacity of the CFPP through early retirement or reducing the capacity factor of the CFPP by carrying out flexible operating modes. The government and PLN’s plans to retire 5 GW of CFPP and replace 3.7 GW with renewable energy generators give little hope. This step needs to be complemented by a more flexible CFPP operation to increase the use of renewable energy,” said Fabby Tumiwa, Executive Director of IESR.

IESR views the flexible operation of the CFPP as something that can be technically done by Indonesia. CFPP in Indonesia is dominated by sub-critical CFPP so that it can replicate the practice of flexible operation of CFPP in other countries, which is generally also applied in sub-critical CFPP.

In addition, CFPPs in Indonesia are generally young (0-22 years old), with an average age of 9 years. About 55% are outside Java-Madura-Bali (Jamali), and the island of Sumatra, and about 34% are in Jamali and Sumatra. Retrofitting a young CFPP to operate flexibly can be a better choice because it does not require an expensive investment, even without cost, compared to modifying an old CFPP. Thus, IESR encourages the government to map power plants by age group to prepare a flexible PLTU operation plan. The plan needs to be integrated with a larger renewable energy mix target.

Not only that, the current oversupply of electricity should be an opportunity to operate the CFPP flexibly. According to the latest PLN RUPTL, the ideal reserve margin for the Jamali system is around 35% (PLN, 2021). Meanwhile, the Jamali system’s reserve margin has even reached 46.8%.

“The excess reserve margin in some systems means that some of the power plants in the system do not need to be fully operated, so there is an opportunity for retrofitting which will require the power plant to stop operating for approximately 6 months to a year,” explained Raditya Wiranegara, Senior Researcher, IESR who is also is the author of the Study of Flexible Thermal Power Plants: An Analysis of Operating Coal-Fired Power Plants Flexibly to Enable the High-Level in Variable Renewables in Indonesia’s Power System

This IESR study shows that flexible CFPP operation retrofit can be focused on reducing the minimum load of CFPP, from 50% to 30%, increasing the CFPP’s ability to ramp rate of 2 times the usual load, and speeding up start-up time from 2-10 hours to 1.3-6 hours. The benefit of reducing the CFPP minimum load is to reduce costs due to the start-up/shutdown process, which will become more frequent if the electricity mix from renewable energy is higher. Another reason, apart from producing high emissions, is that if the CFPP frequently does start-up/shutdown, it will have implications for high operating costs because start-up/shutdown requires expensive diesel oil. Furthermore, the flexibility of the CFPP will reduce system costs because the flexible operating costs of the CFPP are cheaper than using power storage. In addition, the flexible operation of the CFPP can provide a wider role for other generators and energy storage, such as batteries and natural gas-fired power plants.

Reflecting on the experiences of Germany and India, which had earlier retrofitted steam power plants that were more flexible, IESR submitted recommendations to the Indonesian government covering the following 3 categories, namely policies and contracts, market, as well as technical and stakeholder involvement.

In terms of the regulatory framework, the government needs to restructure the terms of a flexible Power Purchasing Agreement (PPA) for CFPP. This includes revising the Electricity Purchase Agreement (PPA), which currently places the CFPP as the base load.

“For flexible operations to be implemented, a revision of the PPA, which still has a long tenor, 30 years, and requires generators to operate at a high capacity factor, 80 to 85%, needs to be done. On the other hand, the revised PPA should encourage generators to operate flexibly by negotiating clauses in the Take or Pay (ToP) scheme. This negotiation should consider reducing the ratio of 80% in the calculation of the ToP scheme, as well as encouraging generator operators to participate in the ancillary services and capacity market. By participating in these two markets, it is hoped that the losses from decreasing the ratio in the ToP scheme can be covered,” said Raditya.

Meanwhile, for a market mechanism that allows for greater development of renewable energy, the government needs to build a supply mechanism to determine the price of renewable energy that is more competitive. For this market to work, there must be an independent body set up to regulate the newly formed market and its supply mechanism.

Technically, the government must identify CFPP units for flexible CFPP pilot projects such as subcritical CFPPs that are less than 5 years old, with capacities between 100 MW and 600 MW. In addition, you can choose a CFPP located in the Sulawesi system for this pilot project.

“The power plant in this system is dominated by young units. In addition, the trend of using renewable energy in this system is quite optimistic. By 2030 it is estimated that half of the generation in this system will come from renewable energy based on the electricity system planning to model using PLEXOS that is being carried out by IESR. It is hoped that this project will assist in determining economic viability and identifying initial capital investment as well as operational and maintenance costs,” concluded Raditya.

IESR also encourages capacity building for policymakers, regulators, and electricity operators to run CFPP flexibly. It is useful to provide them with the knowledge they need to prepare market regulations and reform existing electric power markets.***

Indonesia Needs to Ramp Up Renewable Energy Installations up to 10 times to achieve Net Zero Emissions

Jakarta, 22 March 2022 – Indonesia through its LTS-LCCR (Long Term Strategy Low Carbon Climate Resilience) document states that it will achieve carbon neutral status in 2060 or sooner. The capacity of fossil energy in Indonesia’s energy system, especially electricity, is highlighted because with the aim of becoming carbon neutral, Indonesia must immediately retire most of its coal-fired power plants.

At the A Just Energy Transition: Matching Learning Curves from Germany and Indonesia Symposium held online on March 22, 2022, Ottmar Edenhofer, Director of the Potsdam Institute for Climate Impact Research, explained that in order to achieve the emission reduction target of the Paris Agreement, the Southeast Asia region must reduce coal capacity by 60% within this decade.

“Coal absorbs a large portion of our carbon budget, to maintain our carbon budget reserves, we have to significantly reduce the current coal capacity,” said Ottmar.

Holding the G20 Presidency, Indonesia has made a just energy transition one of its priority issues. Just like Indonesia in the G20-presidency, Germany, which holds the G7 presidency at this time, has also made the energy transition one of the main topics. The similarity of the main agenda of the two alliances of countries with the highest economic growth in the world must be an accelerator of the global energy transition in general, especially in Indonesia.

Patrick Graichen, State Secretary at the Federal Ministry for Economic Affairs and Climate Action, sees this common vision as a good thing, but also needs to be coupled with efforts to bring it down into action.

“We need strong leadership, a clear carbon-neutral vision in a country, and policy and financial support to quickly reach our carbon-neutral targets,” he explained.

The Executive Director of the Institute for Essential Services Reform (IESR), Fabby Tumiwa, on the same occasion said that currently Indonesia needs to reconsider its relationship with coal. Dominating Indonesia’s electricity sector for more than 60%, coal retirement is one of Indonesia’s key decarbonization strategies as well as the key to achieving the Paris Agreement targets for Indonesia.

“Indonesia’s emission reduction actions referring to the LTS-LCCR document are not sufficient to meet the Paris Agreement targets, we need even more ambitious efforts,” explained Fabby.

Fabby explained that currently one of the issues facing Indonesia is related to electricity infrastructure which is designed for coal-fired power plants. PLN itself still has an obligation to build a coal power plant which has entered the contract period as part of the 35 GW project launched by the government in 2015. One of the impacts of this mega-project is that several CFPP units are still relatively new, which results in higher retirement costs.

“The current situation for PLN itself is quite difficult, but we have to start anyway. With the support of the right policies, we can do it,” explained Fabby.

Energy transition is one of the main issues in global forums, one of which is the G20. If the G20 countries are serious about pushing for an energy transition, this must also be accompanied by policy support. It is important to provide a comprehensive energy transition package to ensure that the transition is fair and just and does not leave any party in trouble as a result of this transition. Stefan Schurig, Secretary General of F20, also highlighted the role of the G20 countries which is still not optimal in encouraging the energy transition.

“Keeping the temperature rise at 1.5 degrees is still an option for us right now, and we can still work on it together,” Stefan said.