Understanding recent developments on Indonesia’s Coal Transition on the lead up to COP28

Understanding recent developments on Indonesia’s Coal Transition on the lead up to COP28

Picture of Yesaya Mulia, Associate

Yesaya Mulia, Associate

Picture of Evano Djatmiko, Analyst

Evano Djatmiko, Analyst

Picture of Yesaya Mulia, Associate

Yesaya Mulia, Associate

Picture of Evano Djatmiko, Analyst

Evano Djatmiko, Analyst

Summary

  1. The Government of Indonesia is shifting its policy emphasis towards “accelerated renewables with coal phase-down” in contrast to “early coal retirement”;
  2. Early coal retirement will still be pursued opportunistically if financial resources are made available;
  3. Climate Smart Ventures will continue to focus on enabling the energy transition by unlocking practical business models that advance technically and commercially viable pathways for private sector-led decarbonization–and these include a complementary emphasis on commercial and industrial (C&I) power transition and innovative finance for renewables development

What is the state of Indonesia’s Coal Transition?

Since the announcement of a Just Energy Transition Partnership (JETP) for Indonesia at the G20 summit in November 2022, the country has been at the center stage of the global energy transition movement, specifically on the topic of coal retirement. The archipelagic nation currently has over 40 GW of coal capacity in operation, generating over 50% of its energy supply and emitting over 400 million metric tons of CO2 per year1. Over the past 12 months, the Government of Indonesia (GoI) has been working closely with international and local organizations in developing a roadmap, enabling policies, and pilot projects to phase out coal-fired power plants in the country. Anticipation grew over the prospect that Indonesia’s JETP would coalesce into a coherent vision, like several puzzle pieces coming together, in the lead-up to COP28.

Announcements from PLN and MEMR leading to the release of 2023 JETP Indonesia CIPP (defined below)

 

On 15 November 2023, during a hearing with Commission VII of the People’s Representative Council of the Republic of Indonesia (DPR-RI), the president director of PT Perusahaan Listrik Negara (PLN), Darmawan Prasodjo alongside the Director General of Electricity of the Ministry of Energy and Mineral Resources (MEMR), Jisman Hutajulu, stated that they have opted for “phase down” or a gradual reduction in the utilization of coal-fired power plants rather than a “phase out”2. This follows a joint study done by the International Energy Agency (IEA) and MEMR where five (5) generation model scenarios were assessed namely: 1) business as usual (BAU) based on coal; 2) BAU based on gas; 3) accelerating renewable energy with coal phase down; 4) ultra-acceleration of renewable energy with coal phase down; and 5) ultra-acceleration of renewable energy with coal phase-out.

Following this study, both PLN and MEMR concluded that scenario 3 (accelerating renewable energy with coal phase- down) was the most feasible scenario for the Government of Indonesia to embark on considering grid security and reliability issues. To achieve this, it had been agreed that the path to be taken will be coal phase down until the end of the power purchase agreement (PPA) on existing CFPPs. Jisman added, “However if there is sufficient funding along the way, early retirement is allowed (early termination of CFPP operations). So it is conditional as long as there is funding. However, the default is to phase down, not phase out. Even though it is (still) from fossils, in the end, by 2060 the emissions will be zero. So, it’s not a war on generators, but on emissions,” said Jisman.

Additionally, PLN and MEMR intend to increase the ambition of the existing National Electricity Supply Business Plan (RUPTL) for 2021-2030, which currently aims to develop 20.9 GW of renewable energy (RE) capacity. They propose replacing it with a new RUPTL for 2024-2033, which includes an increase in RE generation by 31.6 GW

2023 JETP Indonesia CIPP Launch in November 2023

 

In less than a week after PLN and MEMR’s presentation to Commission VII of DPR-RI, the Just Energy Transition Partnership (JETP) secretariat officially launched its Comprehensive Investment and Policy Plan (CIPP) Indonesia on 21 November 2023. The main purpose of the CIPP is to identify the investment requirements and opportunities to deliver on a just energy transition and outline the policy reforms necessary to address any regulatory barriers that may hinder private investment for the transition. The JETP CIPP has five investment focus areas:

  1. IFA 1: Transmission Lines and Grid Deployment; around 000 km circuit of transmissions costing up to US$19.7 Bn by 2030;
  2. IFA 2: Early Coal-fired Power Plant (CFPP) Retirement and Managed Phase-out; coal flexibility retrofits and early retirements requiring up to US$2.4 Bn by 2030;
  3. IFA 3: Dispatchable Renewable Energy (DRE) (e.g. bioenergy, geothermal, hydropower) Acceleration; 1 GW built out by 2030, costing up to US$49.2 Bn by 2030;
  4. IFA 4: Variable Renewable Energy (VRE) (e.g. solar, wind) Acceleration; 4 GW built out by 2030, costing up to US$25.7 Bn by 2030; and
  5. IFA 5: Renewable Energy Supply Chain Enhancement.

 

To provide a clearer understanding of the available public sector funding within the JETP for early CFPP retirement, allocations are broken down below.

Designated and Non-Designated IPG Public Funding (US$ million) available for early CFPP retirement

Grants/TA Concessional Loan Non-concessional loan
Designated The IPG Funding
All IFA Eligible
18.1
580
-
Early Retirement of CFPP
6.0
1,045
400
Early Retirement of CFPP and RE
5.4
216.2
Non-designated The IPG Public Funding
All IFA Eligible
134.7
1,700
Early Retirement of CFPP
32.4
Total
196.6
3,541.2
400

Source: (JETP analysis based on the IPG submissions and consultations, 2023)

The aggregate funding available for early CFPP retirement, from the International Partners Group (IPG), encompassing grants/technical assistance (TA), concessional loans, and non-concessional loans, amounts to approximately US$4.1 billion. It’s important to note that this figure includes funding designated for “All Investment Focus Areas (IFA).” The specific funding earmarked exclusively for early CFPP retirement stands at approximately US$1.7 billion.

CSV analysis on recent events

PLN and MEMRs latest announcements echo similar findings in different country-level studies and discussions on accelerated coal retirement – energy security, stability, and affordability remain key drivers in emerging markets. As Indonesia and Vietnam started to work on details following their COP27 JETP announcements – concerns have resurfaced on (i) high levels of potential losses and costs of salvaging trapped value in-built and fully committed facilities and (ii) the allocation of these expenses.

This should not be a surprise to most given that as early as September 2022, IEA and MEMR already mentioned that “contractual adjustments are needed to allow coal and gas power plants to operate more flexibly and at lower annual capacity factors, but these adjustments need to be conducted carefully to preserve investor confidence”3. The report further added that adjusting CFPP operations is critical to cut CO2 emissions to provide opportunities and create more space for RE and other sustainable sources.

Our key observations on these and other recent developments are listed below:

 

For early CFPP retirement to be viable in the short to medium term, blended finance will continue to be necessary to absorb lower revenues, else other capital-like solutions or new business models have to be explored to get decarbonization underway. There is a lot of stranded value in the fleet of existing and committed CFPPs and GoI does not want to be the country that aggressively renegotiates long-term contracts translating to large losses to local and international investors. Concessional and donor financing will have to lead the way in structuring a financing structure that lowers the costs of the transition with the private sector and GoI. Without these levers, GoI will have to explore organic and capital light solutions such as phase downs, repurposing (including the introduction of carbon capture and other modifications), or expansion of business models outside the existing single PPA structure to spread out the potential losses (see below).

Key policy reforms within the CIPP regulatory reform roadmap are urgently needed if RE targets are to be achieved from now to 2030. Hitting 16 GW DRE buildout and 40 GW VRE targets by 2030 requires the deployment of ~2.3 GW of new DRE per year and ~5.7 GW of new VRE per year. To enable this, the CIPP proposed changes including the temporary relaxation of Local Content Requirements (LCR), accelerating RE project procurement processes, shouldering RE data collection for development, and others.

Addressing Local Content Requirements Regulation

Addressing the challenge related to LCR necessitates more than placing the burden solely on RE developers. Instead, policy reform is essential to provide adequate time for the establishment of a sufficient market that can support domestic supply chains. This, in turn, will contribute to the growth of local manufacturing capacity to a level where it becomes internationally competitive. The JETP CIPP suggested that LCR policies be introduced in a “staged manner”, as illustrated below for the solar PV industry.

Achieving these RE deployment targets will be very challenging given the long development periods and high development costs, especially for hydropower and geothermal, which not a lot of local and international independent power producers (IPPs) are able to absorb. Even if one assumes development stage risks are mitigated in 1-2 years from now, it will take a while before IPPs get comfortable with accelerating RE projects and raising funding for them.

Business model innovation for CFPPs and other power generators will need to be part of reforms. MEMR is currently in discussion to re-introduce a regulation to enable power-wheeling for RE, specifically designed to enable private establishments and power producers to source and supply clean energy independent of PLN’s power portfolio –which, if passed, could unlock increased demand and supply for privately generated RE similar to how Vietnam’s “Direct Power Purchasing Agreements”, the Philippines’ “Retail Competition and Open Access” and Malaysia’s “Supply Agreement for Renewable Energy” did4. This can be further expanded to CFPPs with short-term agreements in exchange for an earlier scheduled shutdown.

For grid-connected CFPPs, new business models should be enabled to allow a more limited role for CFPPs in the medium term as it shifts to more flexible operations (from 24/7 operations) to support higher RE share in the Indonesian grid. Allowing IPPs to also bundle new RE projects as part of early CFPP retirement programs, whether as a new regulation from GoI or as a combined submission under existing regulations, should make early retirement more feasible. The development of the Indonesia carbon credit market may also help create new sources of cashflows for CFPPs angling for early retirement.

For off-grid and captive/ C&I CFPPs, minimal discussions were made but it was already recommended that low-carbon alternatives should be part of future studies given its size. These studies can include the potential hybridization of captive CFPPs with RE or the replacement of coal boilers.

Existing and Planned Captive CFPP Capacity

Captive Coal-Fired Power Plants (CFPPs) represent the predominant source of electricity in the C&I sector, boasting an existing capacity of approximately 14 GW. These strategically positioned CFPPs are situated juxtaposing industrial facilities, serving as dedicated power sources tailored to meet the specific operational needs on-site. Presently, the nickel industry stands out as the primary player in captive CFPPs, boasting a total installed capacity of around 9 GW, followed by the pulp and paper industry with a cumulative installed capacity of approximately 2 GW.

Moreover, there is an additional planned or under-construction capacity of about 20.5 GW for captive CFPPs. Once

again, the nickel industry takes the lead in driving this development, contributing around 6.5 GW, followed by the aluminum sector with approximately 2.3 GW in planned or under-construction capacity.

Upgrading the grid and expanding the role of energy storage to absorb more RE and manage supply surplus. PLN already enumerated its grid-related plans comprehensively in the CIPP to absorb more RE and make a smarter grid. The new aspect is the openness to explore potential public-private partnerships to ease financing requirements which is a deviation from its existing 100% government-owned and operated structure for transmission.

Energy storage systems (ESS) (e.g., pumped hydro, battery energy storage systems (BESS) and beyond) will be key in managing more RE power generation in a grid but are still very expensive today vs existing traditional technologies. PLN and GoI should deeply explore the role of ESS, governing regulations, and its pricing for future PPAs. To date, there are no unifying regulations or tariffs for ESS or guidance on acceptable tariffs for related technologies. To illustrate, solar projects can be profitable on their own even at USD2-3 cents per kWh but if coupled with a BESS it jumps to USD15 to 20 cents per kWh to reach commercial returns for IPPs. This is a key issue, as the current CIPP plan targets 4.3 GW storage in the system by 2030 and needs to double that by 2040. Unless PLN and GoI will finance these new ESS assets, IPPs need guidance and certainty on long-term tariffs and regulations to ensure commerciality.

Limited interest or understanding of domestic banks and local investors to finance RE and push for early CFPP retirement. In a report released by IESR last October 20225, the lack of comprehensive stringent regulations on lending to CFPPs and pathways to supporting more RE lending has led to continued financing for CFPPs and translated to slow lending to RE projects. Another cited issue is the slow pace of RE awarding and approvals which lowers the number of new projects despite the availability of state-sponsored financing platforms such as the SDG Indonesia One6. These issues, along with the lack of a deep local capital market, will make Indonesia rely on international funding to support the energy transition, starting with the ~USD20 bn JETP bill. In context, considering the estimated funding requirement for the Cirebon 1 – 660 MW Power Plant, ranging from USD 250 to 300 million, it becomes evident that the available funding from the public sector alone would not be sufficient to facilitate the early retirement of Indonesia’s coal fleet.

The good thing is that help is on the way for bankers and investors to further understand how to tackle energy transition, with various green/sustainable taxonomies such as the ASEAN Taxonomy for Sustainable Finance and guides such as GFANZ’s guide to Financing the Managed Phaseout of Coal-Fired Power Plants in Asia Pacific already available or becoming available in next few months.

Local banks are still financing CFPPs despite some having “no coal” announcements as early as 2020. Of the four (4) largest banks in Indonesia, PT. Bank Negara Indonesia Tbk. (BNI), PT. Bank Rakyat Indonesia Tbk. (BRI), PT. Bank Mandiri Tbk. (Mandiri), and PT. Bank Central Asia Tbk (BCA), only BNI and BRI have a limitation on funding businesses or projects related to coal.7 Despite a declining trend in disbursements to the coal sector, these banks still allocated a total of IDR 93.6 trillion (equivalent to USD 6.2 billion) in funding to this sector between 2018 and 2021.

These banks are already facing foreign and domestic pressure to stop funding coal business and regulators have begun pushing for the transition as well. Indonesia’s listed companies, which include top Indonesian banks, are required to publish their sustainability reports increasing transparency. In addition, the Indonesian Financial Services Authority (OJK) already requires lenders that belong to the BUKU 4 category8, to diversify their lending portfolio from fossil fuels to reduce their climate risks but not yet mandatory. Coordinated developments are needed to improve the quality of reporting9, to improve accountability, and to improve decision-making for both regulators and investors in these financial institutions.

The private sector plays a crucial role in Indonesia’s energy transition. Out of the 81 GW of existing power plants in the country, Independent Power Producers (IPPs) own approximately 19 GW10. Various investors, including Indonesians, Japanese, Koreans, Chinese, and other global investors, are already involved or expressing interest in investing in Indonesia’s energy transition. They are directing their investments towards new renewable energy projects or, as current owners of CFPP, are considering early retirement as part of the transition process.

Top Japanese conglomerates such as Marubeni and Sumitomo have already announced their own plans to reduce their existing CFPP portfolios or not support new CFPPs at minimum. The South Korean state-owned power utility Korea Electric Power Corporation (KEPCO) has announced plans to sell its own existing CFPPs outside Korea. China has also announced it will halt financing new CFPPs overseas.

Unlocking interest from private investors will be key in preserving Indonesian government capital and limited concessional/ donor resources in enabling early CFPP retirement or new RE investments.

In summary, the commitment of the Government of Indonesia to phase out coal remains steadfast but will require more time, resources, and collaboration between private, public, and international stakeholders to develop and roll out. The JETP CIPP outlines a series of policy reform recommendations dedicated to facilitating the early retirement of CFPPs. Additionally, in collaboration with the Ministry of Finance (MoF) and the Ministry of State-Owned Enterprises (MSOE), MEMR is expected to develop a roadmap to accelerate the decommissioning of CFPPs, further emphasizing Indonesia’s dedication to transitioning away from coal-based energy sources. With so many moving parts and timelines there is too much room for delay and the need for more strategic initiatives, 12 to 36 months, is imperative.

CSV’s renewed focus for Indonesia’s energy transition

The government and the public sector at large are key actors in this energy transition given Indonesia’s power industry structure. The private sector still has room to innovate with commercially viable solutions to address pressing issues with the accelerated transition out of coal (via phase down) and expansion of more RE, ESS, and other related technologies. CSV is channeling its focus on the short to medium-term programs noted below:

Category Topic
Economic
• Business and revenue models for CFPP early retirement for IPPs and PLN-owned plants
• Pricing and structuring ESS as stand-alone projects or attached with RE
• Feasibility of hybridization of C&I and captive CFPPs
• Financial support programs for the development of strategic RE projects or RE-rich areas
• Feasibility of off-shore wind applications and roadmap to affordability/ commerciality
• Optimal pricing for RE and ESS based on global case studies and data
Financial
• Roadmap for financing RE projects including the role of government and multilateral
• RE due diligence and financing 101 for mid to large-scale local banks (in coordination with IFC, ADB, etc)
• Global trends in energy transition (including CFPP retirement)
• Global case studies on effective financing platforms and funding sources (e.g., green bonds, sustainability-linked loans and bonds, etc)
Technical
• CFPP repurposing or retrofitting
• Additional infrastructure needs to enable accelerated RE growth (outside power infrastructure)
• Technical assistance in applying other RE technologies (e.g., offshore wind, tidal, etc)
• Global case studies from developed markets with accelerated CFPP retirement and RE deployment for IPPs
Regulatory
• PPP models for large-scale and strategic JETP projects
• Bundling of RE with CFPP early retirement
• Expansion of business and revenue models for thermal and RE projects
• Accelerated regulatory processes for large-scale RE projects
• Global case studies on regulations and government support for RE, ESS, and other related aspects

To date, CSV is already actively pursuing opportunities for the development of the RE ecosystem. Our focus is on accelerating the integration of RE through various means, including but not limited to realistic assessments of biomass and biomass processing, solar PV and battery manufacturing, pathways to transforming and increasing RE penetration into the grid such as the utilization of batteries for ancillary services and enhance grid flexibilities, sustainable minerals, and other relevant technical, financial and legal dimensions. With the expected rise in market interest towards unlocking renewables, we aim to contribute to the broader ecosystem by presenting insights and business models that are anchored to commercial realities. This exploration aligns with our commitment to not only transition existing energy sources but also actively participate in the creation of a robust and sustainable RE ecosystem.

Notes

1 Carboncredits.com – Indonesia’s Coal Emissions at Record High, Up 33% in 2022

2 “Coal Use Will Be Reduced, Not Eliminated” – Kompas.com, 16 November 2023

3 “An Energy Sector Roadmap to Net Zero Emissions in Indonesia” – International Energy Agency, September 2022

4 MEMR to Re-introduce Power Wheeling Regulation – Ekonomi.bisnis.com, November 2023

5 “Indonesia Sustainable Finance Outlook 2023” – IESR, October 2022

6 Managed by PT. SMI, SDG Indonesia One (SIO) mobilizes financing from various sources respective to its four pillars of financing support schemes to back SDG-related projects, including renewable energy, throughout all project cycles (project preparation up to post-construction). This blended financing mechanism also channels financing sources through grants, loans, bonds, sukuk, equity, and technical assistance.

7 “Indonesia Sustainable Finance Outlook 2023” – IESR, October 2022

8 BUKU 4 (from BUKU 1 to 4 with 4 as highest) are banks with a common equity of at least IDR 30 tn (~USD2.0 Bn)

9 Are Indonesian Banks Ready to Account for Climate-related Matters? – Climate Policy Initiative, December 2022

10 Part Three: Indonesia to Close Coal Plants by 2050—But How? – Earthjournalism.net, September 2023