Warta Ekonomi | IESR Estimates That 5 GW of Coal-Fired Power Plants Will Not Be Able to Recieve Funding from China

Indonesia needs to anticipate the changing times in the coal industry, which is showing a global declining trend. In a seminar titled “Sunset of Coal-Fired Power Plants and the Coal Industry,” Fabby Tumiwa, Executive Director of the Institute for Essential Services Reform (IESR), conveyed that coal is currently experiencing a significant decline.

Read more on Warta Ekonomi.

Indonesia’s Commitment to Energy Transition is Impacting Financing Opportunities

press release

Jakarta, September 18, 2023 – An energy transition in the electricity sector that prioritizes equitable principles and is affordable for society requires a combination of strategic factors, long-term commitment, and policies that lead to investment opportunities for the development of renewable energy and technological innovation. This was stated by Deon Arinaldo, Program Manager of Energy Transformation, Institute for Essential Services Reform (IESR).

“All forms of investment, especially for energy infrastructure with a lifespan exceeding 20 years, it is essential to have long-term policies and legal certainty in place to ensure success. This is important for project developers and financial institutions to calculate the project risks. Moreover, renewable energy projects require relatively large initial investments compared to other energy sources. By committing to long-term targets and synergies from various existing policies and regulations, the level of investment risk can be reduced so that renewable energy projects remain bankable with low-interest funding,” explained Deon.

Febrio Nathan Kacaribu, Head of the Fiscal Policy Agency, Ministry of Finance of the Republic of Indonesia in the 2023 Indonesia Energy Transition Dialogue (IETD), said that energy transition carried out by a developing country like Indonesia must take place in just and affordably. He assessed that to achieve an Updated Nationally Determined Contribution (NDC) of 29% unconditionally (with its own efforts) in 2030 in the energy sector, it would reach IDR 3,900 trillion.  However, the financial requirements of an Enhanced NDC (ENDC) with an unconditional emission reduction target of 31.89% are still being estimated.

Febrio explained that his party had made several breakthroughs in efforts to finance the energy transition in Indonesia, including expanding investment through green sukuk, with the total investment mobilization from the issuance of green sukuk reaching USD 6.54 billion from the 2018-2022 period as well as implementing several regulatory frameworks in Energy Transition Mechanism (ETM) has been carried out. Febrio emphasized that collaboration for blended finance with the private sector has increasingly great opportunities.

“One of the obstacles for the private sector (to invest in the energy transition, ed) is the lack of a common understanding or taxonomy. This year, with Indonesia as chairman of ASEAN, one of the things agreed was that transition activities would also include the early termination of coal-fired power plant operations, which are included in the transition finance taxonomy. There are green provisions with certain limits that can be financed by the private sector; for example, if early retirement of coal fired power plants (CFPP) before 2040, then the private sector will join in (financing-ed),” said Febrio.

Dadan Kusdiana, Secretary General of the Ministry of Energy and Mineral Resources (MEMR) mentioned that the trend in the cost of renewable energy tends to decrease while fossil energy, such as coal, is increasing. Dadan mentioned, although the investment needs for the energy transition are very large, Indonesia has the potential for renewable energy and various forms of financing, which also come from various international organizations.

“Large investment (for the energy transition, red) is an opportunity to transition the energy sector. Indeed, there will be an increase in costs, but we will feel the benefits of reducing the costs of renewable energy in the long term,” explained Dadan.

Jonathan Habjan, Economic Counselor at the United States Embassy in Indonesia, said that the energy transition is a challenging process and involves many people over a long period, so it needs to be done correctly and efficiently.

“Of course, this will cost a lot of money, require a lot of effort, and change how business is done in many ways,” he said.

 

Jonathan added that to ensure that the energy transition somewhat takes place, it is necessary to involve people classified as vulnerable, including those who still work in the coal industry.

The Indonesia Clean Energy Forum (ICEF) and the Institute for Essential Services Reform (IESR), in collaboration with the Ministry of Energy and Mineral Resources (MEMR), held the 2023 Indonesia Energy Transition Dialogue (IETD) on 18-20 September 2023.

Defining Just and Ensuring JETP Commitment

Jakarta, 18 April 2023 – Addressing the climate change issue needs not only commitment but it requires a huge amount of resources. Financing has become one of the biggest challenges for countries like Indonesia which rely on coal plants and need to transform them into renewable-based power generation to cut emissions from the power sector. This definitely needs huge financing.

International Partnership has committed to distributing funding to several countries to accelerate the energy transition. The funding is called the Just Energy Transition Partnership. Until April 2023, two countries i.e., South Africa and Indonesia, received the funding commitment. 

Vietnam, one of the Asian countries that rapidly developed renewable energy in the past few years, is in intensive communication to receive the funding. Minh Ha Duong, chairman of the Member Council VIETSE, during the webinar “Between Vision and Reality: Navigating JETP in South Africa, Indonesia, and Vietnam” said that the JETP will “reheat” the development of renewables in Vietnam.

“For several years, we can say that the renewable development in Vietnam is booming until we can have several gigawatts of renewable energy online, but it’s frozen lately. Therefore, this JETP will reheat the development so that we can have more renewables online,” he said.

South Africa, which became the first country to receive JETP, noted points worth considering for other countries and the IPG members in replicating the project in other countries.

“The JETP financing acts more like a catalyst during the energy transition process. Sure, it is not enough to cover the whole fund needed to transform the power sector and its social, and economic impact but it still can accelerate the transition,” Tracy Ledger, energy transition program lead at Public Affairs Research Institute (PARI) said. Tracy highlighted that public participation during the JETP negotiations was very limited. 

Securing the JETP commitment of USD 20 billion during the G20 meeting last November, Indonesia has established a dedicated task force for JETP under the Ministry of Energy and Mineral Resources. 

Institute for Essential Services Reform (IESR), which is actively involved in and reviews the energy sector in Indonesia and continuously gives input to definite policy makers, points out that the USD 20 billion is what is committed, but the disbursement can be dependent on many things. Therefore, Indonesia needs to prepare the ecosystem to welcome the funding.

The Indonesian government at least needs to work on the following issues: availability of bankable projects, a definite auction schedule for renewable plants, and an enabling environment for developers kicking their projects in Indonesia.

“We also need to define what is meant by ‘just’ in the JETP term. Our (IESR) context of ‘just’ involves labor and economic transition especially those who are in coal production provinces,” Fabby Tumiwa, executive director of IESR explained.

Indonesia’s JETP deals target emission reduction of 290 million tons of CO2 and a renewable mix of 34% by 2030. This target requires coal phase-out as a prerequisite for cutting down emissions from the power sector. As one of the impacts, coal production will drastically decrease and it will impact the coal-producing regions such as East Kalimantan, and South Sumatra.

Local economic activity will definitely shift as the mentioned provinces rely heavily on coal production for their gross domestic product. The quality of energy access that differs from one place to other challenges Indonesia’s JETP implementation. 

“The 34% target of renewables is not enough to decarbonize Indonesia’s energy system but it’s a good start to accelerate renewable energy utilization, nor the USD 20 billion. Yet, it can unlock more opportunities for energy transition,” Fabby said.

Fabby added that the establishment of renewable energy industries like battery and solar panel manufacturing become one of the keys to the success of the energy transition.

The Launching of “Indonesia Sustainable Finance Outlook 2023”

Jakarta, October 17, 2022 – Institute for Essential Services Reform (IESR) launched its latest flagship report titled Indonesia Sustainable Finance Outlook (ISFO) 2023. This report is part of the Indonesia Energy Transition Outlook (IETO) which will be launched in December 2022. ISFO 2023 specifically discusses the development of energy transition financing in Indonesia. In his opening remarks, IESR Executive Director, Fabby Tumiwa stated that Indonesia needs massive and drastic transformation steps to ensure that we are in line with the Paris Agreement target, which is to limit the earth’s temperature to 1.5 degrees.

“In 2030 we have to cut 45% of emissions at 2010 level. For that, massive and drastic transformation efforts must be made. Especially by the G20 countries which are responsible for 85% of the world’s total GHG emissions. Indonesia is ranked 7th as an emitting country originating from the forest and land sector, and energy,” explained Fabby.

A study by IESR and the University of Maryland shows that in order to comply with the 1.5-degree temperature increase limit, the entire capacity of PLTU in Indonesia, totaling 44 GW, must be terminated by 2045. In the period 2022 – 2030, 9.2 GW of PLTU must be retired. The remaining capacity will be phased out until 2045.

IESR estimates the cost to close 9.2 GW of the coal-fired power plant during 2022-2030 at $4.6 billion. Early retirement of all coal-fired power plants in 2045 with an average age of 20 years requires $28 billion, this cost for stranded asset compensation and decommissioning costs.

Farah Vianda, IESR’s Green Economy Program Officer and one of the authors of ISFO 2023 explained that the financing situation for the energy transition in Indonesia is still very low.

“We still lack funding to achieve our renewable energy targets by 2025, to halt coal operations, and to mitigate transition risks,” he said.

Farah added that technically the limited availability of public funding (APBN) and the existence of government policies that support the use of fossil energy sources make financial and investment mobilization for the energy transition quite difficult, in terms of financial institutions themselves there are still few policies that support financial institutions to support transition financing energy.

Ichsan Hafiz Loeksmanto, Lead Author of ISFO 2023, highlighted one of the sustainable financing instruments, namely the carbon tax. According to Ichsan, although he has planned to implement a carbon tax, and a cap & trade mechanism on 92 coal-fired power plants in 2022, the carbon tax revenue is not earmarked. This means that the use of carbon tax revenues has not been devoted to financing climate change mitigation and adaptation efforts.

“The government needs to ensure the allocation of carbon tax revenues for climate mitigation & adaptation, and social safety nets. In addition, there is also a need for public transparency regarding payment of carbon taxes and carbon transactions,” explained Ichsan.

Fransiska Oei, Head of Legal & Regulatory Study Development at Perbanas, said that local financial institutions need at least two supports. First, for financing risk management and capacity building support for risk analysis for renewable energy projects.

“The bank’s ability to analyze the feasibility of the renewable energy project is still lacking, we are trying to work with other organizations (ex: USAID) to understand the risks and their mitigation, besides that maybe we also need regulatory support to ease the prudential banking regulation for this renewable project,” said Fransiska.

Lutfyana Larasati, Senior Analyst of Climate Policy Initiatives, stated that in the future there should be more eligible projects to be included in green bonds or green sukuk. PBI 24 of 2022 has provided greater space for banks and financial institutions to contribute to green financing, especially in projects funded by green bonds and green sukuk.

“We need to synchronize the indicator criteria for the green taxonomy so that there are more (green) projects that are eligible to receive public funding, either through green bonds or green sukuk,” said Lutfyana.

Radian Nurcahyo, Assistant Deputy for Maritime Law and Agreements, Ministry of Maritime Affairs and Investment emphasized that energy is the driving force of the economy. Therefore, the investment for this energy transition must continue to be mobilized.

“The Ministry of Finance has issued blended finance schemes such as the energy transition mechanism and country platform for funding sources for phasing down coal power plants, the SDG Indonesia one platform as green energy development to achieve NZE 2060,” explained Radian.