COP26: Indonesia and its Coal Pledge and Energy Transition

COP26 has highlighted the need to phase out coal and retire or repurpose existing coal plants. No where is this more important than in Asia and the Pacific as I have discussed in a previous blog. This piece focuses on the energy transition in Indonesia. Indonesia is a G-20 member and tenth largest energy-related CO2 emitter in the world. It is a major coal producing, exporting, and consuming country. Although its coal production fell in 2020, it was the second largest global coal producer after China and ahead of the United States, accounting for 8.7% of world coal production. It is the world’s largest steam coal exporter and the seventh largest coal consumer, with coal supplying 42 percent of primary energy. With financing from China, Japan, S. Korea and international financing institutions, coal power generation has increased in recent years and accounts for almost two-third of Indonesia’s electricity generation.

Despite the powerful domestic interests supporting further coal development, there are signs of a change in government policy on continued coal expansion. At COP26, Indonesia surprised participants by signing on to a pledge, together with Vietnam, to phase out coal (by 2050 for the developing countries).

In July the state utility PLN had announced its plans to stop building coal plants after 2023. And the Minister of Finance participated in the launch at COP26 of an “Energy Transition Mechanism” Partnership with the Asian Development Bank, the Philippines government, and major countries (US, UK, Japan, Denmark) to help finance through two multi-billion funds the transition to clean energy sources and to decommission or repurpose 5-7 existing coal plants. A full feasibility study is underway to develop the program.

With the G-20 announcement on ending overseas financing of unabated coal plants by the end of the year, the prospects for PLN proceeding with its planned 14.7 GW of new coal plants over the next two years are uncertain. At COP26, Indonesian officials indicated that they might be able to phase out coal by 2040, earlier than the announced 2055 date, if they received assistance. In this regard, they have pushed for more transparency in the accounting on financial assistance from the developed countries in relationship to the $100 billion a year pledge made at Paris. Indonesia is also chairing the G-20 Finance Action Committee.

Indonesia’s electricity growth has averaged, except last year, about 5-7% at year. To meet this demand, the GOI is looking to increase renewable energy’s share in electricity generation to 25% by 2025 from the current level of about 15%. PLN’s new generation plan 2021-30 raises the 2030 target from 43% to 51.6%. Solar power is expected to dominate the renewable energy additions with over 113GW in expected new capacity. A major focus will be on decentralized solar systems and micro-mini grids to serve the dispersed island communities that depend on diesel generation. Indonesia also has large geothermal energy potential and the Ministry of Energy and Mineral Resources had been targeting an increase in geothermal capacity from about 2.1 GW to 8GW by 2030, using its geothermal risk mitigation finance facility supported by the World Bank and the Green Climate Fund. But with project delays and covid-19 issues, the Ministry scaled back the target to 7.8 GW. Delays in hydro development have also occurred.

Although new investment in renewables was over $1 billion in 2020, this level has been well short of desired levels. One study estimates that $14 billion in investment in solar alone would be needed to meet renewable energy targets. In addition to the global impacts on investment of the covid-19 crisis, the weak financial position of PLN ($35 billion debt) and its delays in compensating IPPs generators, low renewable energy prices, grid access problems, and other regulatory and permitting system factors have constrained investment. At COP26, the Indonesian Minister of Finance indicated that efforts are being taken to improve the regulatory environment in order to achieve Indonesia’s NDC of reducing emissions by 41 % (conditional) by 2030 and net zero by 2060, including introduction of a carbon price and a cap-and-trade system, . The Ministry of Energy and Mineral Resources has been operating a test emissions trading system this year involving 54 PLN plants and 26 plants owned by independent power producers.

Indonesia has been slow in developing its renewable energy potential. But this is changing and it is critically important that the transition to renewables and clean energy is successful. Indonesia is a developing country whose population is expected to reach 330 million by 2050. The current trajectory of heavy fossil fuel, especially coal, production and use is not sustainable and would destroy its environment and have devastating impacts on human health not to mention the global impacts. .

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