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Jakarta, 18 October 2022- Under the Paris Agreement, Indonesia needs significant financing to achieve its zero emissions target by 2050. The Institute for Essential Services Reform (IESR), through its latest report, Indonesia Sustainable Finance 2023, examines that to optimise public financing, the Indonesian government needs to immediately mobilize non-government investment by establishing policies, regulations, and an attractive investment ecosystem.

Fabby Tumiwa, Executive Director of IESR, said that the Indonesian government needs to make a transformative and massive effort to completely decarbonize the energy system by raising around USD 1 .2 trillion by 2050. Based on a study by IESR & the University of Maryland, the cost of ending 9.2 GW of coal-fired power plants (CFPP) in 2022-2030 requires around USD 4.6 billion. Furthermore, early retirement of all CFPPs in 2045 with an average age of 20 years requires USD 28 billion to compensate for stranded assets and the cost of decommissioning coal power plants.

Fabby explained that some efforts to end the CFPP operational period should be accompanied by an increase in the addition of renewable energy plants, strengthening of transmission and distribution networks, and massive energy efficiency.

“We need USD 135 billion for CFPP retirement in the 2022-2023 period, the increase of renewable energy, development of transmission and distribution, energy storage, and energy efficiency,” he said.

On the other hand, the government’s budget portion will only be able to allocate 0.83% of the total financing needed to achieve the target of 23% of the renewable energy mix by 2025 based on ISFO 2023. It refers to the average budget allocation for climate change mitigation of the Directorate General of New Renewable Energy and Energy Conservation of the Ministry of Energy and Mineral Resources in 2018-2020, amounting to USD 67 million per year.

Farah Vianda, one of the authors of ISFO 2023, revealed that the same trend is also taking place at the provincial level. She gave an example of Central Java as one of the provinces that supports the development of renewable energy the most. Still, fiscal constraints make Central Java allocate less than 0.1% of the total available Regional Revenues and Expenditures Budget (APBD).

“This encourages local governments to seek financing outside the Regional Revenues and Expenditures Budget. The Indonesian government also needs to make the same effort by expanding funding sources to attract investment in the renewable energy sector,” she stated.

In addition, she also explained that so far, the Regional Revenues and Expenditures Budget allocation is still dominantly targeting the fossil energy sector, including spending 5% of the Regional Revenues and Expenditures Budget throughout 2021 for fossil energy subsidies and 20.8% subsidies from the Regional Revenues and Expenditures Budget when the projections of the Ministry of Finance are related to the need for energy subsidies. There will be Rp649 trillion in 2022 realized. Not only that, Indonesia’s dependence on coal will be one of the challenges in implementing blended finance instruments (Energy Transition Mechanism).

“Currently, Indonesia is experiencing an excess electricity supply which makes PLN reluctant to build renewable energy plants. While on the other hand, investors in the ETM platform want to encourage renewable energy development,” Farah said.

Meanwhile, Ichsan Hafiz Loeksmanto, the Lead Author of ISFO 2023, explained that implementing a carbon tax, the cap, and the trade mechanism (limit and business) on 92 coal-fired power plants in 2022, the carbon tax revenue was non-taxable. It was not earmarked. Carbon tax revenues have 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, public transparency regarding payment of carbon taxes and carbon transactions is also necessary,” said Ichsan.

Talking about international support, based on IESR’s calculation in ISFO 2023, there is a potential for international funding of USD 13.1 billion or 35.4% of the total projected financing needs of USD 36.95 billion in 2025.

“The promises voiced by nine countries to support the energy transition in Indonesia through various financing instruments and technical support are quite a positive signal from the international community regarding the energy transition in Indonesia,” explained Ichsan.

One financing encouraged by the private sector is Indonesian financial institutions, increasing public pressure to shift financing to clean energy. However, until 2021, financial institutions, especially domestic commercial banks in Indonesia, will only finance limited renewable energy projects. ISFO 2023 noted that renewable energy financing only contributed 0.9%-5.5% of the total sustainable portfolio of four domestic and commercial banks with the highest total asset value in 2021, namely Bank Mandiri, BNI, BRI, and BCA.

“To increase the allocation of renewable energy credit from the banking sector, the government must prepare comprehensive guidelines to encourage credit allocation for renewable energy. They also need to increase business credit opportunities from banks (bankability) for renewable energy projects and increase awareness and confidence of domestic investors to invest in renewable energy,” he explained.

In addition to the carbon tax mechanism, support from financial institutions in Indonesia, and international financing, ISFO 2023 also discusses green taxonomy, green bonds, and green sukuk as part of the opportunity to attract funding for the energy transition in Indonesia.

The Indonesia Sustainable Finance 2023 report is IESR’s main report, first launched in 2022. Since 2018, IESR has consistently reported on the development of the energy transition in Indonesia through the Indonesia Clean Energy Outlook report from 2017 to 2019, which was later transformed into the Indonesia Energy Transition Outlook in 2020. The ISFO 2023 report can be downloaded at s.id/ISFO2023.

Recording Playback

The latest IPCC WG1 report stated that the earth’s average temperature increase had reached 1.1 0C. The carbon budget to limit temperature rise to below 1.5 0C is only 500 Gt CO2 (50% probability), which will be exhausted in the next decade if current GHG emission levels (around 48.9 Gt CO2 per year) are maintained. The increase in the earth’s average temperature will impact Indonesia’s economic growth in the future and can reduce Indonesia’s GDP by 17-40% in 2048 (if the increase in the earth’s average temperature reaches 2.00 C and 3.20C). Therefore, decarbonization efforts to limit the increase in the earth’s average temperature below 1.50C are the only option for the world and Indonesia to ensure sustainable economic growth.

Funding is one of the issues faced by many developing countries, where they must continue to develop but on the other hand, they are asked to reduce their emissions, and Indonesia is no exception. Indonesia needs at least IDR 3,779 trillion cumulatively from 2020-2030 or IDR 343.6 trillion annually for mitigation actions in achieving the NDC target in 2030. Meanwhile, the government only allocates around 4.1% of the State Revenue and Expenditure Budget (APBN) or around Rp. 112.74 trillion to address climate change, both mitigation, and adaptation. The existence of financial constraints from the government is a challenge for Indonesia to find other innovative funding sources to encourage a green transition.

In line with this, Indonesia’s financial, banking, and business sectors have begun to consider sustainability aspects in their business processes. In support of a comprehensive sustainable finance policy, the Financial Services Authority (OJK) has issued a Phase II Sustainable Finance Roadmap by guiding the financial services industry under the authority of OJK and referrals to Ministries/Agencies to develop financing initiatives in green and sustainability projects. In addition, the increasing tendency of foreign investors to invest in the green sector is an opportunity for Indonesia to develop a green economy.

The involvement of the financial sector, private sector, philanthropy, and multilateral institutions in meeting climate finance targets is critical in achieving climate finance targets, for example, by developing blended finance mechanisms like the Indonesia Energy Transition Mechanism (ETM) Country Platform as well as existing blended finance mechanisms like the SDG Indonesia One platform. Indonesia has issued several green financing instruments, including green bonds and green sukuk. In addition, the determination of a carbon pricing policy consists of the carbon tax and carbon trading as a mechanism to obtain funding sources that can be channeled to encourage efforts in the field of climate change, as well as to help shape the awareness of business actors about the emissions they produce.

Indonesia received a mandate for the first time as the G20 presidency, a group of several countries that contribute to 80% of the global economy and are responsible for 70% of greenhouse gas emissions. Sustainable finance has become the priority issue in tackling climate change and addressing the risk of a low-carbon transition under the Sustainable Finance Working Group (SFWG) through the finance track. As the holder of the presidential mandate, Indonesia has the opportunity to improve and encourage sustainable finance practices through the SFWG to support the achievement of the Paris Agreement.

This year the Institute for Essential Services Reform (IESR) will launch a study, Indonesia Sustainable Finance Outlook (ISFO) 2023, through a discussion aimed to gain views and perceptions from policymakers and business actors on trends that will occur in the coming year in green projects. This event will focus on Indonesia’s sustainable finance framework and lessons learned in 2022 to address the challenges driving the energy transition in 2023.

Introduction of Indonesia Sustainable Finance Outlook

Indonesia Sustainable Finance Outlook (ISFO) is the new series as part of IESR flagship report since 2018, Indonesia Energy Transition Outlook (IETO), previously Indonesia Clean Energy Outlook (ICEO), which discusses in detail comprehensive sustainable financial status. The first edition of ISFO collects various perspectives from stakeholders and curates them with in-depth studies to deliver strategic analysis of how the energy transition to a green economy in the country through the support of sustainable funding. ISFO also includes a report on the development of sustainable finance issues at the G20 as one of the momentums for Indonesia’s current presidency.

Objective

To inform and introduce one of the latest IESR flagship reports, Indonesia Sustainable Finance Outlook (ISFO);
Reviewing the evaluation and readiness of sustainable finance in Indonesia, particularly in the energy and climate sector, with policymakers and stakeholders;
Conduct a review and evaluation of the development of sustainable policies in Indonesia during 2022 in the context of the impact of government policies and regulations issued on relevant stakeholders, as well as their views for 2023;
Obtain information related to developments in sustainable finance at the G20 and global levels related to funding in the clean energy sector and climate.