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.

Exploring Early Termination of Coal Power Plant Operations

press release

Jakarta, November 15, 2023 – The government is taking steps on Presidential Regulation (Perpres) No. 112/2022 concerning the Acceleration of Renewable Energy Development for Electricity Supply by drafting a road map for the operational termination of coal-fired power plants. The Institute for Essential Services Reform (IESR) views preparing a road map for the early termination of coal power plant operations as a first step to encourage renewable energy development. Furthermore, after the road map is determined,  the government should prepare a regulatory framework that can support the implementation of a financing structure or scheme for the operational termination of coal-fired power plants in Indonesia.

Deon Arinaldo, Program Manager of Energy Transformation at IESR, mentioned that there have been several proposed structures for terminating coal-fired power plants (CFPP) operations, such as write-offs or deletion of CFPP assets from company records because they are considered no longer economical or for example, spin-offs, namely the sale of assets to a new company to manage these assets with a shorter operating period. In addition, according to him, the government needs to make several pilot projects for the termination of the ongoing CFPP operations, such as the Cirebon CFPP, as a proof of concept and provide certainty to PLN and Independent Power Producers (IPP) as CFPP asset owners.

“Apart from a clear scheme or structure in the early termination of coal-fired power plant operations, a mechanism is also needed to allocate the funding obtained from the early termination of the power plant to renewable energy plants. The current regulations in Indonesia do not allow this. Therefore, it is necessary to conduct a thorough study and propose changes to allow the use of renewable energy funding, which is cost-effective, for retiring CFPP assets,” Deon said at the Enlit Asia panel discussion entitled “Leapfrogging to NZE: Accessing ASEAN readiness to retrofit or early retire coal fleets” (15/11).

Deon sees that a significant amount of work still needs to be done concerning the early retirement of CFPP. Some of the tasks include ensuring a legal framework that explicitly states that the early termination of CFPP operations is part of the country’s energy transition policy aimed at reducing emissions. Additionally, there needs to be regulations that permit modification of the power purchase agreement (PJBL) and other related tasks.

“It is even better if the strategy at the CFPP is part of an energy transition effort that wants to integrate renewable energy on a large scale to reduce GHG emissions. If the goal is like that, CFPP assets will be optimized to ensure renewable energy can enter the electricity mix quickly and cheaply. For example, instead of waiting to be retired, CFPP can be operated flexibly to help maintain system stability and reliability as the mix of intermittent solar and wind power increases,” Deon added.

Message to Global Leaders for COP 28

Jakarta, 3 November 2023 – The Conference of the Parties (COP 28) will soon be held in Dubai, United Arab Emirates. One of the agendas for this annual meeting is to see the progress of global actions to deal with the climate crisis. In a public discussion held by the Foreign Policy Community Indonesia (FPCI) on Friday 3 November 2023, Marlistya Citraningrum, Sustainable Energy Access Program Manager, Institute for Essential Services Reform (IESR), explained that in anticipation of this annual meeting of world leaders, the new Indonesian Government just released the Comprehensive Investment and Policy Plan (CIPP) document and plan to announce the investment plan officially at the COP 28.

“Bluntly speaking, this document is quite disappointing because even though it promises a list of renewable energy projects, it is still very focused on large-scale renewable energy (base-load renewables) such as hydro and geothermal. Variable Renewable Energy (VRE) such as solar and wind is considered a high-risk project,” explained Citra.

Apart from the lack of support for VRE, Citra also highlighted the low commitment to early retirement of coal power plants. In the CIPP document, which is currently in the public consultation process, IPG countries are only willing to facilitate early retirement of 1.7 GW coal. In a draft document last year, the United States and Japan were initially willing to finance 5 GW of early retirement coal-fired power plants.

“In fact, to achieve the net zero emission target, Indonesia needs to retire around 8 GW of coal,” emphasized Citra.

The Director of the Environment at the Ministry of National Development Planning/Bappenas, agreed on the importance of increasing climate commitment and action, not only as climate action but also as part of development.

“In the draft RPJPN which is currently progressing, we are targeting our emission reduction target to increase to 55.5% in 2030 and 80% in 2045. This is a necessity to increase climate targets and ambitions,” said Medril.

How Important is it to Allocate State Funds to Early Retirement of Coal-Fired Power Plants?

Jakarta, October 24, 2023 – Accelerating the early retirement of coal-fired power plants (CFPPs) and establishing renewable energy-based power plants is crucial to achieving our energy transition targets. The government has released financing guidelines outlined in the Regulation of the Minister of Finance (PMK) Number 103 of 2023 to facilitate this process. This regulation aims to provide fiscal support for the energy transition in the electricity sector. It was put into effect on October 13, 2023. According to this regulation, the energy transition platform’s funding can come from the State Budget (APBN) and other legally recognized sources.

The Executive Director of the Institute for Essential Services Reform (IESR), Fabby Tumiwa, has expressed appreciation for a recent regulation. However, the issuance of the regulation was not unexpected, as the Energy Transition Mechanism (ETM) was established last year, with PT SMI appointed as the ETM Country Platform Manager by the Indonesian government. Additionally, the ETM framework stipulated that the state budget would provide the funding for the early retirement of coal-fired power plants.

“I think the PMK confirms it legally. Legally, this is possible, so it must be budgeted in the APBN. Referring to the PMK, there is also a clause stating that it is following the ability of the APBN. Matters regarding budget priorities and funding sources and others,” said Fabby Tumiwa at the “Energy Corner” event on CNBC Indonesia on Tuesday (24/10/2023).

Furthermore, Fabby Tumiwa emphasized the significance of early retirement of coal-fired power plants due to the threat of climate change. Indonesia is the seventh largest emitter in the world, releasing 1.24 Gt CO2e in 2022. Therefore, Indonesia needs to participate in reducing emissions. The energy sector is one of Indonesia’s significant emissions sources, with the majority coming from CFPP. Fabby hopes that by phasing out CFPP, Indonesia can contribute to the commitment to reduce emissions.

“Funding from APBN sources is required to make the termination of CFPP operation financially feasible. We aim to minimize debt, and using APBN funds can help keep the debt low and make the transaction more visible. However, funding for the retirement of a single CFPP is not limited to just APBN; other options are available depending on the transaction type. The inclusion of APBN funds can help reduce the cost of early retirement of coal-fired power plants,” said Fabby Tumiwa.

According to Fabby Tumiwa, terminating the operations of CFPP is a process that requires proper planning. The guidelines for the early retirement of coal power plants have been outlined in Presidential Regulation (Perpres) 112 of 2022. Fabby emphasized that not all CFPPs will be retired early, as some will end their contract period or economic lifespan.

“When deciding which CFPPs to retire early, several factors should be considered. These include high emissions, low efficiency levels, and an age of over 15 years. If a plant is younger than 15, it may take a long time to see a return on investment, and negotiations may be necessary. It is also important to note that retiring CFPP requires blended finance from various funding sources, not just the state budget. This funding should be structured to make the CFPP financially and technically feasible to stop its operation early,” said Fabby.

Besides the state budget, said Fabby, Indonesia still has funding commitments from developed countries, such as the G7, through the Just Energy Transition Partnership (JETP) framework. However, it is unclear how these commitments will be realized. One obstacle discussed in the JETP is the difference between the market value and book value of PT Perusahaan Listrik Negara (PLN) assets. This issue involves many things, and regulatory changes will be necessary to address it. Moreover, G7 countries are currently focusing on renewable energy funding. Fabby assessed that these two things can be combined to increase renewable energy generation capacity and investment. For instance, if CFPP’s economic age is reduced from 30 to 20 years, 10 years can be dedicated to renewable energy generation. Unfortunately, there is no such regulation in Indonesia. If the government regulates this, Indonesia can benefit from lower costs due to early retirement and increased renewable energy generation capacity.