‘Carrots, sticks, and hugs’: Scrutinising Indonesia’s US$20 billion just transition challenge

The populous coal-rich powerhouse has six months to tell investors how it plans to spend G7 money to decarbonise equitably. We ask experts about the risks, strategy, and opportunities.

Earlier this month, Indonesia started its detailed planning into closing more coal plants and scaling up renewable energy capacity, with the launch of the secretariat for its Just Energy Transition Partnership, or JET-P, the landmark tie-up with wealthy countries and large private investors.

The stakes are high. If done well, the US$20 billion of loans and grants pledged to the country could help it shave 20 per cent off peak power industry emissions in 2030, and get the coal-reliant sector to net-zero by 2050.

But at the same time, Indonesia is one of the world’s largest miners, exporters and users of coal. The fossil fuel is pollutive, but also cheap. It has been key to helping millions of people escape poverty over the past few decades – a wrong move could mean energy insecurity, unaffordable bills and job losses.

So how can Indonesia continue to grow and help its people secure better livelihoods while meeting its green targets? What should be included in its JET-P implementation plan, which is due in half a year? What exactly is “just” in the Indonesian context?

Eco-Business discusses these issues with Dr Siwage Negara, a senior fellow at the ISEAS-Yusof Ishak Institute in Singapore, who keeps a keen eye on economic and development issues in Indonesia, and Peter Godfrey, Asia Pacific Managing Director at the Energy Institute, a think tank.

This is Episode 1 of a new podcast series on the energy transition in Southeast Asia. Read more stories in our coverage of the topic here.

Edited transcript:

Siwage, how would you define what is “just” in the just energy transition in Indonesia? 

Negara: The JET-P could be a great opportunity for Indonesia, which has been relying so much on coal to provide affordable electricity to its people, to improve its quality of growth. 

I think the term “just” needs to be defined, or adjusted, to the situation in Indonesia. There is inequality in electricity access between Java and the outer islands. Infrastructure is at varying quality, and so is the affordability of electricity.

So the “just” needs to encompass affordability, sustainability and access to electricity.

I’m open to further discussion on what more needs to be included, beyond electricity provision.

What do you think Peter, and also, are all these grounds covered in the JET-P deal as it stands? 

Godfrey: I think number one on the list within Asia, not just Indonesia, is energy security, not just affordability and sustainability. 

This is where Indonesia continues to have an inbuilt advantage – clearly there is a vast amount of energy resources that could be used, including massive geothermal capabilities. 

But the issue of justness is terribly important. The fundamental issue around the energy transition is electrification and in a country like Indonesia, unlike America or Europe, electricity demand is forecast to double by 2050, whereas if you look at the Western countries, energy demand doesn’t go up very much because of energy efficiency and newer technology.

So to me the justness is very much recognising that countries like Indonesia have a much bigger problem in terms of creating the energy systems of the future, with that vast amount of additional energy that is required to power economic growth in the future.

Now as we move to electrification, there are loads of questions on whether the regulatory frameworks that are currently set up in Indonesia, which today are based around the oil and gas industry, can be fit for purpose in tomorrow.

To stay on the social aspect, Siwage, how should the consideration of which parts of the Indonesian society pay, or not pay, for the energy transition reflect in national policies, perhaps even beyond the purview of the JET-P deal?

Negara: There will be parts of the community that will be adversely affected if Indonesia decides to embark on green energy programmes. For example, those relying on coal – like the mining and electricity sector, may face significant impacts.

What I see is that policymaking involves picking the winners for certain sectors, through what they incentivise. The other sectors will get disadvantaged. So it is also about how the affected sectors can be compensated – including communities that are affected, and how to push them towards greener businesses.

For those leaving coal, what can they do? When you force them to use other types of energy it would affect their profitability.

There are people struggling to get electricity in the remote islands outside Java too. How do you help these people get access to electricity through the green programmes, who should pay for the infrastructure, should it all be borned by the government, or can there be partnerships with the private sector?

I am still thinking about how Indonesia can shoulder the cost of this passive programme in a fair manner.

At the same time, how do we make sure that the word “just” does not become an euphemism for a slower energy transition?

Negara: Well, that’s a very difficult question. I think there is scepticism among analysts on whether Indonesia will be able to quickly transition towards green energy and achieve its net-zero target as fast as 2060, based on current plans.

Also given the lobbying from the fossil fuel industry, like coal miners and other industries, there will be huge challenges.

We need the political will from the government in terms of regulating these areas. Regulation is important in providing business certainty, to give assurances that Indonesia is really serious about pushing this green energy transition.

Peter mentioned that regulations today are mainly relevant to the oil and gas sector. We need to see if the government can quickly come up with new regulations for renewable energy.

But like I said, I don’t know how fast the Indonesia government can pass such laws given the strong lobby from the coal industry, and other oil and gas players.

Godfrey: The lobby groups from coal oil and gas clearly see the whole transition as a threat. In order to make the transition a success, we need to see the energy transition not as a threat, but as an opportunity. 

Liang you mentioned the concept of externalities and the question of who should pay. We should all pay, but what does that mean?

I talk about carrots, sticks and hugs.

We need to dangle carrots – we need to create the opportunities that communities and industries can see. 

We need some sticks, which predominantly will go for those that are holding back the transition, such as the coal, oil and gas lobbies. They need to feel the pain if they want to continue business as usual.

Today, Indonesia still subsidises its oil and gas, and its coal industries. The problem here is that the subsidies are going very much to the wrong places. The carrots are not being directed at where they really can make a difference, and that is part of the regulatory changes needed.

And then there are hugs. Hugs are all about embracing change, about making people feel good about what they do, so that is about communications and social interactions around these issues. 

So a whole range of policies are needed, and the issue also is that, at the moment, a lot of the energy transition issues in Indonesia and Southeast Asia are managed by the Ministry of Mine and Energy Resources or the Ministry of Environment. If we really believe in carrots, sticks and hugs, the issues need to be resolved at the level of the finance ministry, or higher.

This is a fundamental change in the way the economy needs to be managed today. If you go to the ministry of finance, whether it is in Indonesia or Malaysia or Vietnam, and you talk about the energy transition, they’ll say, “That’s not our problem. It’s a problem for the Ministry of Mines and Energy”.

Negara: I think current subsidies are actually the biggest challenge in pushing for renewable energy development in Indonesia. Those benefiting from the subsidies are not the poor, yet it is politically difficult to remove them.

In a national survey that we did in Indonesia, over 80 per cent of respondents agreed that Indonesia should continue the subsidies. At the same time, 70 per cent of the same respondents also agreed that Indonesia has to move towards greener energy, like solar, wind or hydropower.

This is a dilemma and leaders will have to explain why Indonesia cannot afford to continue fossil fuel subsidies. Still, when we say we have to move faster, who should get the stick and carrot, that is the challenge.

How does the JET-P deal come in to solve the dilemma of people wanting both a green transition and a continuation of the current fossil fuel subsidies, as Siwage mentioned? Is it about the US$20 billion that is to come, or the policies that need to change? Could there be any conflicts between these two, since there is private money coming in?

Godfrey: A large chunk of JET-P is geared towards electrification and creating renewable electricity. But I’ll also say that if we were to change the regulations tomorrow, there would be a revolution on our hands in Indonesia because too many people would be affected by too much change, too quickly.

The key question here is how do we change regulations in a large country like Indonesia. Do you change everything overnight? Probably not. What is now beginning to be looked at quite seriously in places like Europe and the US is this concept of regulatory sandboxes.

Don’t change everything overnight, but recognise that you could take, for example in Indonesia, a group of islands or a region, and do something completely different with a new set of regulations to act as an experiment, so that the country learns, people hopefully see the opportunities and threats, and that I think should be where discussions should be for the JET-P.

What I’ll also say is that gone are the times where infrastructure was managed entirely by national money, by a state-controlled budget. We are in a world where private-public partnerships (PPPs) are going to take over and there has to be private capital as well as public capital put into those investments. So you do need to create a framework for the types of investments we are talking about today.

With infrastructure, the only way to keep the rate of return to private investors low, is to give them regulatory certainty for a reasonably long period of time.

That’s another reason why regulatory sandboxes may be the way forward, in a way where people see, maybe this works, maybe this is an opportunity, it was not as bad as we thought. 

And that’s the kind of attitude we need to see adopted in a country like Indonesia. 

Negara: I agree. There is no guarantee that certain models will be successful whenever we try them. We may have to deal with several trials before we come up with a good model for the JET-P. Some sectors may see more progress. In fact different plans for different sectors and communities are important.

What do you think are some of the sectors or industries that Indonesia should focus on in its JET-P implementation plan? For example, South Africa, the first country to ink a JET-P deal, chose to focus on the energy sector, electric vehicles and green hydrogen. 

Godfrey: Electrification is one major part, but the technology required to create a more effective energy system of the future boils down to an in into a number of areas. 

There is also a massive opportunity in Indonesia to reduce energy demand. Limiting wasted energy is a quick and easy win that Indonesia should be looking at.

The third area, in addition to renewables, is low carbon solutions. Not everything can be achieved by just moving to renewables, because even with a fast-paced renewables buildout, including geothermal energy, we will still be burning oil and gas. We will still need the high-emitting industries. We will still be emitting methane from farming et cetera.

In this context, there is hydrogen.

And then the two final areas are carbon abatement, for example carbon capture, utilisation and storage, or possibly even other forms of engineering carbon solutions. Those are technologies that are now developing rapidly in Europe and the United States. They need to very quickly start developing in this part of the world. 

So Indonesia needs to create a vision and say, okay look, carbon capture – what are we going to do about it? How do we scale these things up? There are big opportunities.

Negara: In terms of electrification, we need to focus more on the eastern part of Indonesia which has a lower electrification ratio. 

But we know that carbon emissions do not only come from electricity generation. There are also transport and household sources.

In Indonesia we know that a lot of people rely on motorcycles to get anywhere, be it in cities or rual areas. Perhaps we should be thinking of electrifying the motorcycle fleet as part of JET-P.

Another aspect is that a lot of people are still not quite aware of the importance of the energy transition. It is important that we educate the people, communicate what the benefits are for the whole country when we transition to clean energy.

There is a greater chance that JET-P will be more successful with support from the people. Indonesia is still developing, and it is not like the UK or Europe, where people are already aware about the importance of taking care of the environment and ecosystems.

Godfrey: Liang you mentioned South Africa as the first JET-P country, now we also have Vietnam as well, which is another interesting parallel. I think what is important is to recognise that all JET-Ps basically consist of a mix of concessional loans, market-based locals, grants and guarantees from public and private entities.

By definition, the money is not free, and I think the barrier to the JET-P now is actually creating the space for the money to be effectively used. It requires clear and transparent returns on the capital that satisfies the owners of the money.

Again, are we going to turn around and say, in five years all motorbikes need to be electric? That’s pretty challenging. We need to go back to the idea of sandboxes.

That’s the challenge for Indonesia. It is very good at saying, “we’re so big and complex that we can’t do anything”, and then nothing happens. We need to break the problem up. 

I’ve heard from other experts that private investors in Indonesia’s JET-P programme could be interested in a bigger stake in the country’s nickel and battery production aspirations. Should these sectors feature as part of the JET-P deal, in your opinion? What are the risks and benefits? 

Negara: Ideally this sector needs to be included because they contribute significantly to carbon emissions. We should get these players, who are considered the dirty industry, to be willing to change their way of doing business.

The challenge will be the types of compensation that the government can offer to this industry in order to change. The production relies heavily on coal, and if we force them to change to renewables it will significantly affect their productivity and economic viability.

So again, whether investors that have committed to develop smelters in Indonesia will be happy to change their energy source from coal to clean energy, it will reply on government support and the other partners.

We need to discuss this with the industry, and transparently so.

Godfrey: I have a slightly different view. I’m not saying we should exclude it, but when it comes to mining, decarbonisation is important, but so is the move to a more circular use of the resources.

So I think JET-P needs to provide support to make sure that the nickel, when mined, is used appropriately, returned and recycled appropriately, and that miners take responsibility for their own value chain.

These two elements, I think, should be covered within the JET-P as absolutely fundamental. Not giving money to mine nickel with the “yes, buts”, but with the carrots and sticks built in.

Overall, what should be the key considerations as Indonesia’s JET-P secretariat develops its implementation plan for the next few years? 

Godfrey: I will put them into three basic buckets.

The first one is regulatory. Indonesia needs to create regulatory inertia, in not just talking but actually doing things to set the right sort of direction.

The second bucket is really about technological inertia. Indonesia needs to play to its strength both in terms of resources and supply chains. There needs to be capacity building as well.

The last one is obviously investment and financing – people need to recognise the PPP model, and are willing to give it a try.

These three buckets all need inertia, and as I say, there needs to be less talk and more action.

Negara: I agree regulation is important. If Indonesia can come up with the new law on renewable energy, then that will provide the legal basis for this program. Of course after that, the journey is still quite long because the law itself is not operational without the ministerial regulation and the operational regulation.

Often in Indonesia the derivative rules are not in line with the other regulations. So coordination is important, and so is harmonisation across the different agencies.

Secondly, better communication to the public is also needed, it is relatively poor at the moment. In recent years, when Indonesia was preparing its omnibus law, the lack of wide stakeholder consultation meant that there had been a lot of public opposition. We don’t want that to happen with JET-P.

The ideal way is to include the stakeholders that will be affected by the programme, both local communities and industry. We need strong partnerships from the industry, without which, it will be very difficult to push this forward.

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