Indonesia made headlines last week when it unveiled plans to gradually wean itself off coal and achieve carbon neutrality by 2060, in a move that surprised energy experts observing the country’s rapid fossil fuel expansion with deep concern in recent years.
The director-general of Indonesia’s energy and mineral resources ministry said on Thursday the government will not approve new coal projects, and that only ventures that are already under construction or have reached financial close will proceed.
This reaffirmed a commitment made earlier in May by state-owned electricity utility Perusahaan Listrik Negara (PLN) that there would be no more new thermal plants after an ongoing programme to add 35 gigawatts (GW) to the national grid—60 per cent of which comes from coal—is completed in 2023.
Data by research firm Fitch Solutions indicates that more than 15 GW of coal projects under the 35 GW programme are already being built or have reached financial close. As of August 2020, a quarter of the scheme had been completed. This means that none of the plants under the programme, rolled out in 2015, are at risk of cancellation.
The plan to halt new coal development has been lauded as a sign that Southeast Asia’s largest economy, which has long bucked the global shift away from fossil fuels, is stepping up efforts to slash emissions, following criticism from local media of the country’s lack of climate action.
To meet its climate ambitions, Indonesia is also mulling the introduction of a carbon tax for emissions released from factories, vehicles, and carbon-intensive industries, including power generation.
Daine Loh, power and renewables analyst at Fitch Solutions in Singapore, said increased awareness of climate threats was a key driver behind Indonesia’s about-turn, as was the growing challenge of securing financing for coal projects.
“Indonesia relies on foreign direct investment to support its power projects. Now that some of the world’s top coal financiers like Japan and South Korea have announced plans to tighten their coal lending policies, obtaining financing for coal projects might become much more difficult,” she said.
A coal power moratorium would bode well for the transition to renewables in the country, reflecting a rising trend in Southeast Asia as more governments scramble to respond to rapidly shifting economic and political tides, said Liming Qiao, Asia director at the Global Wind Energy Council (GWEC), an industry association.
PLN looks to more than triple its renewable generation capacity, from 7.9 GW currently to 24.1 GW, by 2030. By 2060, it envisions that 53 per cent of the expected energy demand will come from solar and wind, up from less than 1 per cent currently.
“It used to be common to say that the energy transition isn’t happening in Southeast Asia,” said Qiao. “But what’s been happening over the past two years has proven that on the contrary, governments are moving—some faster, some more slowly—in that general direction.”
But there are several question marks looming over Indonesia’s shift away from coal, not least because of PLN’s notoriously opaque planning processes.
The announcement that no new coal will be approved currently has no legal standing, said Elrika Hamdi, an energy finance specialist at the Institute for Energy Economics and Financial Analysis (IEEFA) in Indonesia.
Writing the commitment into a binding policy is necessary to ensure that authorities cannot backpedal from the announcement, she said. It should also be reflected in PLN’s upcoming electricity procurement plan (RUPTL), a document that will lay out a pathway for the country’s power development through to 2029, she added.
“We hope that PLN and the government will stay true to their word,” said Putra Adhiguna, an Indonesia-based energy economics and policy specialist at the IEEFA. “It needs to be commended that some coal plants have disappeared from planning documents. But with PLN’s planning, power plants sometimes come and go, so we hope this is a long-term commitment.”
Another issue is PLN’s “tricky definition” of projects it considers to be under construction, Hamdi said. Projects that are lying idle and could be delayed for years may fall into this category. The problem is, the longer ventures take to complete, the higher the risk that they will become stranded assets, with some experts suggesting that solar power coupled with storage and wind farms will generate cheaper electricity than coal by 2027.
Hard times for renewables
To develop renewables, Indonesia also has to make the policy changes needed to resolve persistent regulatory uncertainties that have deterred investors and stood in the way of greater private sector involvement. Like other emerging markets, Indonesia won’t be able to shoulder the cost of its energy transition on its own.
Industry players have long been waiting for more favourable policies. For instance, the Presidential Regulation on the Purchase Price of Electricity from Renewable Energy Sources, which is expected to provide incentives and fix the pricing mechanism for clean energy projects, has yet to be finalised after more than a year of deliberations in parliament, said Loh.
Indonesia is very unlikely to reach its renewable energy target.
Daine Loh, analyst, power and renewables, Fitch Solutions
Amid persistent policy challenges, several clean energy projects included in past power development plans have reportedly come to a standstill, and only a fraction of an estimated 442 GW in renewable energy potential has been tapped.
In 2020, the share of coal in the archipelago’s energy mix rose to 38 per cent, up from 37.1 per cent in the previous year, while renewable energy development has stood at an average of 500 megawatts (MW) annually in recent years, which experts say won’t be enough to meet the country’s target of 23 per cent renewables in the energy mix by 2025.
“Indonesia is very unlikely to reach its renewable energy target. They’re very far from it now,” said Loh.
There is also controversy over what the government considers “new and renewable” energy, in which it lumps renewables like solar, geothermal and hydro, but also controversial sources such as biomass, palm oil-based biofuel, gasified coal and, theoretically, nuclear.
In hopes that it can keep leveraging its coal-fired power plant capacity, PLN has reportedly devoted considerable planning resources to explore biomass co-firing—which refers to adding biomass as a partial substitute fuel in coal boilers—while ignoring opportunities to engage with investors and developers in active dialogue about the potential for industrial-scale renewable energy auctions.
An IEEFA report released earlier this year raised questions about the economic feasibility, feedstock supply stability and technical challenges of biomass co-firing, warning that Indonesia’s big bet on the technology may backfire.
Hamdi said Indonesia needed to rethink energy planning and implement modern strategies that enable more renewables to come online, such as demand management, increased interconnectivity, and more robust transmission infrastructure.
Not ambitious enough
For some experts, PLN’s ambitions also don’t go far enough, with environmentalists questioning the decision to give plants in the pipeline the go-ahead.
“Indonesia is taking a step in the right direction by not approving any new coal-fired power plants,” said Sisilia Dewi, Indonesia team leader at international environmental organisation 350.org. But, she told Eco-Business, there was no revision to projects in the pipeline, which will lock in significantly more emissions for decades.
In addition, allowing new coal capacity to be built where PLN has too much of it already will put more financial strain on the state utility, said Adhiguna. As a result of poor planning and inflated demand forecasts, the Java-Bali grid, the utility’s most expansive transmission network, has been plagued with excess generation capacity, which not only incurs substantial costs to PLN but also leaves little room for renewables to grow, except in the nation’s eastern islands.
Terminating existing ventures will be no easy feat, according to Nuki Agya Utama, executive director at the Asean Centre for Energy, a Jakarta-based energy think tank. “It is difficult to stop a project where contracts have been signed,” he said.
Yet Hamdi said there was potential for PLN to invoke the Covid-19 pandemic as a force majeure event. Force majeure is a common clause enshrined in power purchase agreements that frees both parties from liability when an extraordinary circumstance beyond their control prevents them from fulfilling their obligations under the contract.
To make way for cleaner alternatives, PLN could be more aggressive in retiring old coal plants, some of which were built in the 1970s and are highly polluting and expensive to operate, said Hamdi. The company has released a list of plants scheduled for retirement by 2030, but some of Indonesia’s oldest plants have not been included in the plan, she said.
“Many of PLN’s coal power plants are already really old. It’s time for them to retire,” she said.
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