As blackouts loom, Indonesia’s energy crisis underscores its addiction to coal

Coal miners in Indonesia have been shirking their obligation to allocate 25 per cent of their output for the domestic market, leading to a critical shortage of the fossil fuel for power generation.

coal barge in kalimantan
Coal barge in Central Kalimantan, Indonesia, a top producer and exporter of coal. Image: Andrew Taylor, CC BY 2.0

An abrupt ban on coal exports by the Indonesian government for the whole month of January, on fears of a domestic supply shortage, should be a wake-up call to hasten the country’s transition away from the fossil fuel, experts say.

In announcing the ban on Jan. 1, the Ministry of Energy and Mineral Resources said it was a necessary move to avoid power outages for 10 million households.

“If the export ban is not imposed, then nearly 20 coal-fired power plants with [total] capacity of 10,850 megawatt will go out,” Ridwan Jamaludin, the ministry’s director-general for coal, said as quoted by local media.

Coal miners are required to sell 25 per cent of their output on the domestic market, under the “domestic market obligation” (DMO) policy that’s been in place since 2009. Much of this is earmarked for state-owned power utility PLN, which buys the coal at a capped price that, currently, is less than half the international market price.

With greater profits to be had from exporting coal, many miners have fallen short of their DMO, leaving PLN’s network of coal-fired power plants, as of Jan. 1, with less than 1 per cent of the fuel they need this month.

“This amount is not enough to meet the need of each coal-fired power plants,” Ridwan said. “If strategic actions are not taken immediately, there’ll be sweeping blackouts.”

‘Crisis of our own making’

While the ban has had an immediate effect on boosting the stockpile, according to the energy minister, policy experts say the crisis highlights the need to wean Indonesia off its coal dependence and onto renewable sources of energy.

“This crisis is of our own making, not because we’re lacking in potential energy sources, but because our policies keep steering us toward burning coal continuously so that our stock is depleting,” Mahawira Singh Dillon, a senior policy researcher at clean energy nonprofit Yayasan Indonesia Cerah, said during a recent discussion on Twitter.

He said the government has for years been issuing policies that favor mining companies instead of renewable energy investors. For instance, coal-fired power plants receive hefty subsidies.

In 2020, lawmakers passed a controversial mining bill despite widespread popular criticism. Critics say the law undermines environmental protections to the advantage of mining companies, including by granting them bigger concessions and longer contracts, while at the same time reducing their environmental obligations. In practical terms, this effectively guarantees the continued operations of seven major coal miners, whose contracts would have otherwise expired between 2020 and 2025.

And while the government announced a plan to retire 9.2 gigawatts of coal-fired power plants by 2030 at the COP26 climate summit in Glasgow last November, it still plans to build 13.8 GW of new coal plants during this same period.

Even the DMO policy was a concession to the coal companies, yet has now backfired, Mahawira said. The companies had lobbied the government for the DMO so that they’d have a guaranteed buyer in PLN, at a time when coal exports fetched around $55 a ton. With the DMO capped at $70 per ton, that meant they were making a premium off PLN.

Then the market turned. Last October, global coal prices jumped to a record high of $270 per ton; today they stand at around $152 a ton, amid demand for coal hitting a record in 2021 and supply remaining tight.

“They [miners] didn’t expect that global coal prices could reach more than $200 per ton,” Mahawira said. “So they’re being naughty now [and exporting their coal instead].”

The Indonesian Coal Mining Association (ICMA) has called on the government to lift the ban, saying the policy will harm the mining industry and cost the country $3 billion in lost revenue from coal exports.

Pattern of supply crunches

This isn’t the first time Indonesia has faced an energy crunch due to coal miners preferring to export rather than sell their product domestically. According to Sarah Agustio, a researcher at Trend Asia, an NGO that focuses on clean energy transition, Indonesia experienced severe shortages on four previous occasions in the past 15 years: in 200720082018, and mid-2021.

In July 2021, PLN’s power plants had less than 10 days’ worth of coal. This prompted the government to issue a coal export ban for 34 companies in August.

As long as Indonesia keeps relying on coal to power the country, it will continue to face more episodes of energy shortages, Sarah said.

“The export ban indicates that Indonesia is not learning from previous experiences in the past 15 years,” she said. “This is a sign that we have to transition to renewable energy.”

But the pace of change is glacial, she said. The government has set a target to increase the portion of renewable energy in the country to 23 per cent by 2025. By the end of 2021 it was supposed to have hit 15 per cent; as of October, however, the share of renewable in the energy mix was only 10.9 per cent.

“There’s no seriousness in moving to renewables,” Sarah said, “even though we know that we have lots of renewable sources, such as wind and water.”

To reduce the incentive for coal miners to export, experts have called on the government to remove the price cap under the DMO.

“The DMO [price] should be made to be dynamic, below the international price but not fixed,” said Fabby Tumiwa, executive director of policy think tank the Institute for Essential Services Reform (IESR).

This will inevitably see an increase in electricity prices, but that’s not necessarily a bad thing if the end result is for the country to transition from fossil fuels to renewables, he said.

The only reason for the increase is because current prices are kept artificially low due to hefty subsidies. If PLN were compelled to buy coal at market rates, the electricity produced would be less competitive than that generated from renewables, Fabby said.

By removing the DMO price cap, the price of electricity from coal would reflect the true cost of the country’s addiction to burning coal, he added.

“If the prices are increased, PLN will be forced to use renewables,” he said.

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