Indonesia’s Coal Dependence and the New JETP
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27 January 2023 – by Heba Hashem
Indonesia’s coal dependence may soon be a thing of the past. Having signed the Just Energy Transition Partnership (JETP), the government has pledged to move away from fossil fuels. But, it won’t be smooth sailing in a country that relies on coal for more than half of its energy supply.
The expansion of coal has led to a huge overcapacity, making it difficult for renewables to compete domestically. It has also caused significant pollution.
Coal power generation is now Indonesia’s second-biggest source of emissions after deforestation. As the world’s top exporter of coal, exporting around 75% of its output, Indonesia also contributes to pollution abroad.
New Funding Subject to Energy Sector Reforms in Indonesia
The launch of the JETP at the G20 summit in Bali last November offers new hope for Indonesia’s clean energy transition. Under this deal, leaders of the International Partners Group said they would mobilise USD 20 billion to support Indonesia’s decarbonisation efforts.
Ursula von der Leyen, president of the European Commission, said that the JETP would chart a road map to a greener, cleaner future in Indonesia – and a future full of opportunities for the Indonesian people.
“They will be the ones reaping the benefits of the transformation of their economy, as Indonesia becomes a renewables hub,” she said.
The amount will be split evenly between public and private financing and distributed over the next three to five years. It will involve instruments such as grants, concessional loans, market-rate loans, guarantees and private investments.
While the nine donor countries will mobilise USD 10 billion, the Glasgow Financial Alliance for Net Zero (GFANZ) will facilitate the other half through private finance. GFANZ represents over 550 financial institutions worldwide, including Bank of America, Deutsche Bank, HSBC and Standard Chartered.
How Will the JETP Help Indonesia Move Away from Coal?
To access the funding, Indonesia must develop a comprehensive investment plan to achieve its new targets. It includes freezing the pipeline of planned coal-fired power plants and accelerating the early retirement of existing plants.
Specifically, Indonesia plans to decommission 33 coal-fired power plants with a combined capacity of 16.8 gigawatts (GW). It also intends to increase the share of renewable electricity to 34% by 2030 from the previous target of 23%.
Within the power sector, it aims to cap emissions at 290 million tonnes (Mt) by 2030. This is almost a 20% reduction from the previous baseline value of 357 Mt of carbon dioxide. Furthermore, it targets net-zero emissions by 2050, a decade earlier than originally planned.
The funding through JETP will help Indonesia achieve these goals in several ways.
For example, some capital will go towards de-risking and catalysing private investments. Another part will go towards developing renewable energy, such as solar and geothermal. And some will help launch human capital development programs focusing on reskilling and upskilling workers, as well as creating green jobs.
Importantly, the deal aims to support the nearly 250,000 Indonesian workers that depend on the coal industry for their livelihoods.
Indonesia’s Energy Transition Fraught with Challenges
Indonesia’s new JETP builds on the first pact signed with South Africa at COP26. The partnership saw developed countries pledge USD 8.5 billion in funding to support South Africa’s decarbonisation. However, due to the country’s bureaucracy and coal lobby, the agreement has reportedly been slow to take off.
Indonesia could face similar impediments. Most mines in the country are controlled by a few influential conglomerates that spend a lot of money on political campaigns. Also, coal-associated finances significantly contribute to public budgets.
There are doubts that the new JETP will support pathways to keep temperatures below 1.5°C. An analysis by environmental think tank Ember found that the JETP targets were 10 years too late for a 1.5°C-aligned pathway.
To reach net zero by 2050, Indonesia should fully phase out unabated fossil fuels by 2040. The analysis said it should also target a net-zero electricity sector by that date. JETP’s commitment to both is currently 2050.
Coal Is Embedded in Indonesia’s Politics and Economy
Compared to South Africa, Indonesia’s deal benefits from its focus on the power sector. While the transition from coal to renewables is a priority in both countries, Indonesia wants this transition to be the sole purpose of the funding.
In contrast, South Africa wants the deal to generate investments in other nascent green technologies. These include electric vehicles and green hydrogen. However, green hydrogen remains prohibitively expensive, while more EVs means more electricity will need to be produced.
With that said, Indonesia’s transition will not be free from obstacles. For a start, it will take more than USD 20 billion for the country to abandon coal effectively. According to climate analytics firm TransitionZero, retiring Indonesia’s fleet of 118 coal-fired power stations would cost USD 37 billion.
Another challenge stems from the economy’s heavy reliance on coal. The sector contributes to about 5% of Indonesia’s GDP.
With 38.84 billion tonnes of coal reserves as of 2021, Indonesia is the world’s third-largest coal producer. Based on the production rate of 600 million tonnes per year, these reserves are sufficient to last 60-65 years.
Abandoning these coal reserves will take substantial political will and is already proving difficult. For instance, Indonesia is still moving forward on coal plants that were previously tendered out. Despite signing the JETP deal, it is allowing the construction of 13 GW of coal plants.
Moreover, a 2022 regulation allows the construction of captive coal plants for industrial purposes. Around 15 GW of such plants will be built across the archipelago. These projects could derail the agreement from coming to fruition.
Paving the Way for Future JETPs in Asia
These challenges aside, Indonesia’s JETP is a promising first step that will propel the country in the right direction. If all goes according to plan, the outcome could have a far-reaching impact, bolstering decarbonisation throughout Asia.
Most of all, it could serve as the foundation for future partnerships between developed and developing countries, speeding up their transitions from fossil fuels.