Graft and government policy keep Indonesia burning coal while sidelining renewables

Anti-graft investigators arrested a member of parliament and a coal businessman, among others, in July in connection with a contract to build a $900 million power plant in Indonesia.

A far-reaching corruption scandal centered on a proposed power plant in Indonesia has cast a shadow over the country’s risky reliance on coal as a supposedly cheap source of energy.

Antigraft investigators arrested nine people in July, including a member of the national parliament, over allegations of bribery in connection with the awarding of contracts for the $900 million Riau-1 coal-fired plant, on the island of Sumatra.

Investigators have also charged the country’s social affairs minister, Idrus Marham, for his alleged involvement (the sting where the bribe was transacted in July took place at his home). They have questioned the head of state-owned utility PLN, Sofyan Basir, who is ultimately responsible for sanctioning the project. PLN has since suspended the 600-megawatt project.

Riau-1, though, is only one of dozens of coal-fired power plants planned for construction throughout Indonesia as part of the government’s ambitious push to add 35,000 megawatts of power generation to the national grid in the coming years. (The initial target date was 2019, but the government now says it may take until 2024 to get that full capacity online.)

There are at least 18 similar plants at various stages of development—from licensing and land acquisition to the procurement of technology—that are also suspected to have been tarnished by corruption, according to the NGO Association of Ecological Action and People’s Emancipation (PAEER). In particular, so-called mine-mouth plants like Riau-1, which are built close to the coal mines that supply their fuel and for which PLN awards contracts less transparently, are particularly prone to corruption, says a coalition of environmental NGOs.

“There are many similar irregularities that can be found in other power projects that are part of the 35,000-megawatt program,” Merah Johansyah, coordinator of the Mining Advocacy Network (Jatam), a member of the NGO coalition, said in a press release. “Starting from irrational planning, land acquisition process that involves violence [against local communities], permit issuance process that has been tampered with, to indications of bribery.”

In many ways, the circumstances surrounding Riau-1 are emblematic of Indonesia’s strategic challenges due to over-reliance on coal power plants backed by a revolving cast of coal producers who are highly motivated to push speculative projects that will benefit narrow interests.

Melissa Brown, an energy finance consultant, Institute for Energy Economics and Financial Analysis 

Low-grade coal

One of the defining characteristics of mine-mouth coal plants is that they typically burn lignite, also known as brown coal, the lowest quality available. Because there’s little economic value in transporting lignite long distances to power plants, they instead go to plants built near the mines, which then feed the electricity generated into the grid.

Mine-mouth plants need more lignite to produce the same amount of electricity than plants that burn higher grades of coal, since lignite has a lower calorific value.

“Lignite isn’t popular in the market because of its low quality, and the mine sites are usually located deep in remote areas,” PAEER coordinator Pius Ginting told Mongabay. “So to prevent this low-grade coal from just sitting there with no buyers, producers will try to lobby [for the government to promote their lignite].”

That’s what happened in Indonesia, where the government decided to promote the development of mine-mouth plants in a shift away from coastal coal plants. This was part of an effort to both boost domestic market demand for the country’s coal industry and meet growing electricity demand.

The government plans to develop 6,045 MW of mine-mouth power plants: two in Sumatra and eight in Kalimantan, the Indonesian portion of the island of Borneo. No more coastal power plants will be built on either island, says the minister for energy and mines, Ignasius Jonan.

“For islands that have coal mines, they have to build mine-mouth plants,” he said. “There’s no more negotiation. I don’t want to negotiate.”

Opaque appointments

It’s not just negotiations that have been cut; transparency has also disappeared when it comes to developing mine-mouth power plants.

PLN says it will not hold open tenders for these projects, and will instead directly appoint the developers it considers best prepared to handle them. It says this will speed up the whole process and help deliver much-needed electricity quickly.

Fabby Tumiwa, director of the Jakarta-based Institute for Essential Services Reform (IESR), says such a scheme, with no clear criteria for who can be awarded a contract, is prone to being abused, and cites the case of Riau-1.

Riau-1 was awarded without a transparent bidding process by PLN subsidiary Pembangkitan Jawa Bali (PJB) to a private consortium that includes a subsidiary of the energy firm BlackGold Natural Resources. One of BlackGold’s top shareholders, Johannes Budisutrisno Kotjo, was among those arrested in the antigraft bust in July. He has been charged with paying a 4.8 billion rupiah ($328,000) bribe to Eni Maulani Saragih, who sits on the parliamentary oversight committee for energy policy and has also been charged.

“A project like this wasn’t tendered, but directly given to PJB for it to look for a partner,” Fabby said. “We don’t know how it decides when it comes to choosing a partner. This creates opportunities for corruption.”

Mine-mouth scramble

The Indonesian government’s embrace of mine-mouth power plants and the opacity that shrouds them make these projects ideal for miners looking to offload their low-grade coal, says Pius of the NGO PAEER.

“Many coal producers try to supply their coal for mine-mouth power plants, like what we see in the Riau-1 case,” he said. “This makes for a very competitive market.”

Heating things up even further is a government plan to proceed with building a high-voltage undersea cable between Sumatra and Java. When it was first brought up in 2013, the idea was to feed excess power from Sumatra into the main Java-Bali grid. Now, though, a glut of power generation in Java would mean more electricity pouring into Sumatra.

“In the end, the market [for power generation] in Sumatra will get even more competitive because Java no longer needs power from Sumatra,” Pius said. “This compels coal producers to resort to corrupt practices to ensure their coal continues to feed mine-mouth power plants.”

In the case of BlackGold, the Singapore-listed company had “good reason to be highly motivated” to secure its stake in the Riau-1 project, according to the US-based Institute for Energy Economics and Financial Analysis (IEEFA). Melissa Brown, an energy finance consultant at the IEEFA, said the project “promised to provide demand for low-grade coal which would struggle to find a market outside of Sumatra.”

BlackGold is not the only miner eyeing the mine-mouth boom. Other coal producers in Indonesia, such as PT Tambang Batubara Bukit Asam and PT Adaro Energy, are also looking to get involved in mine-mouth power plant projects.

“The future of the company is in power plants,” Tambang Batubara Bukit Asam’s chief director, Arviyan Arifin, said. “We want to transform to mine-mouth power plants in the future. With our known deposits, we have the capability to contribute up to 5,000 MW [of power generation].”

Adaro Energy CEO Garibaldi Thohir said separately that his company preferred to supply coal for domestic power plants than for export.

The IEEFA’s Brown highlighted the “severe conflicts of interest associated with many of the mine-mouth” projects recently awarded. “In many ways, the circumstances surrounding [Riau-1] are emblematic of Indonesia’s strategic challenges,” she wrote, “due to over-reliance on coal [power plants] backed by a revolving cast of coal producers who are highly motivated to push speculative projects that will benefit narrow interests.”

This story was published with permission from Mongabay.com. Read the full story.

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