Is Fossil Fuel Really Cheap?

Without Subsidies, Which is Cheaper, Coal-fired Power Plants or Renewable Energy?

There’s a Perception:
“Renewable energy is expensive and its energy quality isn’t entirely reliable, while coal-fired power plants are still reliable and affordable, so they don’t need to be retired early.”

However:
The price of electricity from coal-fired power plants (PLTUs) appears low because the coal is subsidized through the Domestic Market Obligation (DMO) mechanism, which sets the coal price at USD 70/ton. However, if market prices are used, the cost of electricity from PLTUs can exceed USD 0.09/kWh, which is actually higher than the price of electricity from renewable energy sources such as geothermal and hydroelectric power plants. In fact, renewable energy technologies such as solar power plants (PLTS) combined with Battery Energy Storage Systems (BESS) are already capable of providing electricity at competitive prices of around USD 0.08-0.09/kWh.

Explanation:

The price of electricity from coal-fired power plants (PLTU) is low due to the Domestic Market Obligation (DMO) policy. This policy allows PLTUs to have relatively low and stable generation costs. Without the DMO policy, electricity prices from coal-fired power plants (PLTUs) could triple when global coal prices rise. The price of coal for power generation in Indonesia is currently set at USD 70/ton through the Domestic Market Obligation (DMO) policy. This makes PLTU electricity prices appear lower.

  1. According to the IETO 2024 study, the transformation of Indonesia’s energy sector, which is a source of emissions, with fossil fuels dominating the domestic energy supply at around 90.4 percent, requires a shift to renewable energy as a crucial effort to reduce emissions (IESR, 2023).
  2. The price of electricity from coal-fired power plants (PLTU) is currently lower because the coal used is subsidized through the Domestic Market Obligation (DMO) mechanism at USD 70 per ton (CNBC, 2024). Using market prices, the cost of electricity from coal-fired power plants (PLTU) can reach more than USD 0.09 per kWh (SIEJ, 2021), significantly higher than renewable energy sources such as geothermal and hydroelectric power plants (PLTA). Furthermore, the Ministry of Energy and Mineral Resources (ESDM) has issued a policy regulating the reference coal price (HBA) for December 2023, setting the HBA at a calorific value equivalent of 6,322 kcal/kg GAR, approximately USD 117.38 per ton (Ministry of Energy and Mineral Resources, 2023).
  3. In 2023, the Indonesian government’s energy subsidies reached IDR 159.6 trillion, including subsidies for fuel and LPG (95.6%) and electricity subsidies (64%) (Katadata, 2024).
  4. Meanwhile, renewable energy received no support; instead, its prices were consistently challenged to compete with those from coal-fired power plants (PLTU) and gas-fired power plants (PLTG) (Simanjuntak, Uliyasi, 2023).
  5. On the other hand, electricity prices from renewable energy continue to decline. The 2021 Scaling Up Solar Potential study by IESR and BNEF showed that solar electricity prices in Indonesia have fallen by 76% since 2015 (Bloomberg NEF, 2021). With policy support that favors renewable energy development, prices can be further reduced, and electricity from renewable energy will become more economical and competitive.
  6. Early retirement of coal-fired power plants from their natural retirement years is considered to be less costly than extending the life of coal-fired power plants by adding carbon capture and storage (CCS) technology (Simanjuntak, Uliyasi, Kurniawati H. 2023).

IESR Words

  • “The cost of electricity from coal-fired power plants in Indonesia is indeed cheaper than the global average, ranging from 4 to 6 cents per kWh. However, this cost is made possible by policies and regulations that support low domestic coal purchases (DMO price cap of USD 70 per ton), government guarantees for coal-fired power plants (PLTUs), and less stringent emission and environmental pollution standards.”

    – Deon Arinaldo, Energy System Transformation Program Manager, IESR

2. Energy infrastructure, such as power plants, is more than three decades old. Therefore, when discussing costs, we must also consider technological developments, costs, and long-term investment trends.

3. Renewable energy investment costs are becoming increasingly affordable. Between 2010 and 2020, solar PV investment costs fell by 90%, wind turbines by 60%, and batteries by 90% (BNEF, 2020). This cost decline is due to increasingly massive manufacturing scales and ongoing technological innovation. Therefore, these costs are expected to continue to decline in the coming decade.

4. Conversely, thermal power generation technologies such as coal-fired power plants (PLTU), gas-fired power plants (PLTG), and even nuclear power plants (TNTN) are experiencing an upward trend in costs. These costs can rise due to the need to reduce pollution and other externalities (CCS) as well as the increasingly limited availability of funding for fossil fuel power plants. NPP costs are rising due to the increasing complexity of the technology, as well as the unproven nature of the technology at scale, resulting in numerous unidentified development risks (which increase investment costs).

5. It is clear that generating electricity from renewable energy, especially solar, wind, and even battery-assisted energy, will be cheaper in the coming years. Therefore, the electricity system needs to be designed to accommodate renewable energy and its intermittency to remain competitive.

6. This requires a paradigm shift and perspective in electricity system planning and operation to maintain or even improve system reliability and lower costs.

Description for

Children (14-18 years):

  1. When we buy something, the price we pay may not be the market price. Many factors can influence this, one of which is when another party is willing to pay part of the price. In government parlance, this is called a subsidy. This occurs when the government, in some way, pays for a portion of an item used by the public. Examples of subsidies include fuel for vehicles, LPG (green gas) cylinders, and electricity.
  2. These price subsidies aim to help underprivileged communities afford fuel, LPG, and access electricity. However, the price after these subsidies makes the market price appear low. However, when calculated at the original price (minus the subsidy), fossil fuels are expensive.
  3. Indonesia’s dependence on fossil fuels, including coal, poses significant risks: threatened energy security, impacted by fluctuating fossil fuel prices, and threatened by declining national income due to the loss of the global fossil fuel market. You can also watch an animated video to understand the world’s condition if fossil fuels were stopped and replaced by renewable energy on YouTube Kok Bisa, entitled “What Would Happen If We Eliminated All Fossil Fuels?” (CASE Indonesia, 2023)”.

Description for

Adults (19 years and over):

  1. The price of electricity from coal-fired power plants (PLTU) is low due to the Domestic Market Obligation (DMO) policy. This policy allows coal-fired power plants to have relatively low and stable generation costs. Without the DMO policy, electricity prices from coal-fired power plants can triple when global coal prices rise.
  2. The current cost of electricity from coal-fired power plants in Indonesia is around 4-6 cents/kWh (lower than the global average).
  3. This cost is possible due to policies and regulations that support the purchase of low-priced domestic coal (DMO price cap of USD 70/ton), government guarantees for coal-fired power plants (PLTU) and less stringent emission and environmental pollution standards.
  4. BNEF and IESR calculate the current LCOE of solar and battery power in Indonesia at $113-251/MWh (2020 real values). This value is already competitive with diesel power plants, which can reach $200/MWh in remote areas due to high fuel costs.
  5. Solar power plants are likely to become cost-competitive with new coal-fired and gas-fired power plants within this decade. The LCOE of solar energy is expected to fall to $63-155/MWh in 2025 and to $49-119/MWh in 2030. One factor in the price decline is the decline in the price of lithium-ion batteries.