Indonesia presents conflicting signals on coal phase-out commitment

Indonesia, a Southeast Asian powerhouse, finds itself at a critical juncture in its energy transition. The country's reliance on coal power, deeply rooted in its economy and politics, presents a formidable challenge as it strives to meet climate goals, ensure energy security, and balance economic growth with environmental sustainability.

A cap on the price of coal, intended to stabilise the energy market, paradoxically encourages coal consumption and discourages the integration of renewables into the grid. This is a trend observed not just in Indonesia, but across the region.

The estimated remaining value of existing coal plants in Indonesia amounts to nearly $15bn. This substantial investment, coupled with the relatively young age of coal plants - under 11 years on average - suggests a significant hurdle in the transition towards renewable energy.

Regional cooperation, however, offers a glimmer of hope. Sumatra is collaborating with Singapore to export solar energy, and Malaysia is promoting the Asean Power Grid project for renewable energy integration across the region. This regional collaboration could provide a platform for Indonesia to leverage its renewable energy potential.

China, a major player in the global coal market, pledged in 2021 to stop supporting new coal projects abroad. This decision, while not directly affecting Indonesia, could indirectly influence the global coal market and potentially pave the way for more investment in renewable energy.

Indonesia's state electric utility, Perusahaan Listrik Negara (PLN), holds a monopoly in power transmission and distribution, and a share of about 62% of total installed generation capacity. The low margins on PLN projects, according to Tumiwa of IESR, make it favourable for investors to channel their resources into countries such as the Philippines, Vietnam, and Thailand.

The slow investment in clean energy by PLN can be attributed to poor financial returns and heavy debt burdens. The Asian Development Bank (ADB) has stepped in, helping Indonesia agree on a framework with investors to retire the Cirebon-1 coal plant early. Grants from Japan and Germany, and a refinancing package worth an estimated $325mn, have been secured for this purpose.

However, concerns remain. NGOs claim the ADB is still supporting a range of new coal power projects in Indonesia. Shuang Liu, China finance director of the World Resources Institute (WRI), echoes this sentiment, stating there has not yet been enough investment in renewables from the public or private sector.

The WRI also points out that too little attention has been paid to the costs the Indonesian government could face to compensate investors if it shuts down coal plants early. This is a critical issue that needs to be addressed to facilitate a smooth transition to renewable energy.

Moreover, the president and the minister of state-owned enterprises in Indonesia have personal fortunes dependent on coal mining, further complicating the transition away from coal. The potential loss of the coal export market due to increasing pressure from neighbours to invest in renewables also adds to the pressure.

In conclusion, Indonesia's energy transition is a complex web of economic, political, and environmental factors. Navigating this web requires replacing planned fossil fuel projects with renewables, legal reforms, local government ambition, transparent procurement processes, regional cooperation, and investments in clean technologies and hydrogen. Only then can Indonesia truly embark on a sustainable energy future.