JETPs in Indonesia: reaction to the CIPP and the future under a Prabowo government

April 2024  |  SPECIAL REPORT: INFRASTRUCTURE & PROJECT FINANCE

Financier Worldwide Magazine

April 2024 Issue

With 75 percent of its substantial fleet of coal fired power plants having only been built since 2005, decarbonisation of Indonesia’s energy sector is a challenge that requires substantial alterations to the nation’s fiscal policy and, more precisely, well-crafted energy incentives.

Indonesia’s energy transition framework, known as the Comprehensive Investment and Policy Plan (CIPP), was published in November 2023 after some delay and, while progress has been made following prior announcements, the early retirement of coal fired power plants is not proceeding as quickly as some had hoped.

There is a broad perception expressed in the media that the upcoming Prabowo administration will largely continue the existing government’s environmental policies. If this proves to be the case, it is not clear whether the new administration can implement the changes necessary to achieve the ambitious energy transition targets announced under the Indonesian Just Energy Transition Partnerships (JETP) in November 2022.

While Mr Prabowo promised to create green jobs during his campaign, his focus has not been the country’s power sector. If the JETP targets are to be met, there may need to be a shift in focus.

Background to the JETP

JETPs were first announced at COP26 in Glasgow in 2021. The purpose of this financing mechanism is to assist emerging economies that are heavily dependent on highly polluting fossil fuels to make a just energy transition to clean energy, while simultaneously accounting for the economic and social consequences of such a transition.

Currently, the donor pool for JETPs is comprised of the International Partners Group (IPG) which includes Japan, the US, Canada, Denmark, France, Germany, Italy, Norway, the EU and the UK, and the Glasgow Financial Alliance for Net Zero (GFANZ) Working Group that is made up of various commercial, multilateral and national development banks and development finance agencies.

Since COP26, South Africa, Indonesia, Vietnam and Senegal have been promised JETP support. Of these, the Indonesian JETP is the largest.

JETPs in Indonesia

While Indonesia is one of the world’s highest aggregate emitters of fossil fuels, emissions per capita are significantly below global averages. Consequently, there has been little appetite for the country to decarbonise in exchange for limited growth.

Indonesia’s JETP was announced and signed on 15 November 2022 at the G20 leaders’ summit in Bali by Joko Widodo, the president of Indonesia, and the IPG. The Indonesian JETP commits to provide $20bn in financing over three to five years, with half to be provided by the donor nations and the other half by the private sector.

In February 2023, the Indonesian government and the co-leads of the IPG launched the Secretariat for the JETP, hosted within the Ministry of Energy and Mineral Resources and supported by the Asian Development Bank, that serves as the coordinator for internal and external stakeholders to the JETP and carries out important planning and project development functions.

The Indonesian JETP creates the following targets: (i)         total power sector emissions capped at 290 million tonnes of CO2 equivalent by 2030; (ii) accelerate the deployment of renewable energy to contribute at least 34 percent of all power generation in Indonesia by 2030; and (iii) to reach net-zero emissions in the power sector by 2050.

However, initial announcements with regard to the Indonesian JETP have led to some criticisms and challenges. First, committed funding for the JETP (initially $20bn and since increased to $21.7bn) falls far short of the estimated $150bn required for Indonesia’s energy transition. Second, state electricity company PLN acts as both the buyer and supplier of electricity in Indonesia, making the industry structure less attractive for private investors in renewables. Third, an electricity surplus in Java-Bali and Sumatra up to 2029 hinders the PLN’s interest in renewables in those regions but does provide an opportunity to retire coal fired power plants. Fourth, the priorities of building transmission networks and developing baseload renewable energy, particularly hydro and geothermal power, clash with IPG countries favouring variable renewables, creating potential conflicts. Fifth, uncertainty about public funding from IPG countries has raised concerns among Indonesian stakeholders about the JETP’s success. And lastly, the current unfavourable investment climate in Indonesia, including uncompetitive tariffs and inhibiting factors, such as significant local content requirements, hinders commercial funding for renewables.

The early retirement of coal fired power plants might also struggle to attract investments due to financial green taxonomy categorisations, as some lenders have policies against funding any coal-related projects even if their purpose is decarbonisation.

Indonesia initially pledged to stop building new coal fired power plants, but subsequently announced that 117 new coal fired power plants already under construction would proceed. It also did not restrict the building of captive coal plants (which are not connected to the national power grid and are used to power industry specific infrastructure directly).

In addition, in January 2024, the Ministry of Mineral Energy and Resources formally announced the draft government regulation on the National Energy Policy of Indonesia, which is under review by the House of Representatives and is expected to be completed by June 2024. It has been reported that the draft regulation will reduce renewable energy targets from 23 percent to 17-19 percent by 2025 and from 26 percent to 19-21 percent by 2030. This would mean that coal would continue to dominate Indonesia’s energy mix, attracting international concern on the timeline for the JETP’s implementation and the lack of clarity around how reliance on coal will be reduced.

CIPP

One of the Secretariat’s functions is to produce the CIPP, which sets out a consolidated energy transition pathway for the Indonesian power sector, its financing needs and requirements, policy reform recommendations, and a just transition framework.

Originally intended to be released to the public in August 2023 (and updated annually thereafter), the eagerly awaited first draft of the CIPP was delayed for numerous reasons.

According to some reports, there were difficult negotiations between the Indonesian government and international parties over the type of funds to be provided and the technical challenges surrounding the transition from coal to renewables.

The original draft of the CIPP also did not include any data on captive coal plants, sparking protest from various industry experts and political critics.

Instead of launching the plan in August, the Secretariat submitted a draft document to the Indonesian government and its international partners for further review, and the CIPP was subsequently released to the public on 1 November 2023.

While Indonesia’s ambitions to increase the share of renewable energy in power generation by 2030 through the CIPP is commendable, experts are concerned that the plan contains some significant gaps.

Most significantly, the CIPP only allocates $1.3bn for the early retirement of 1.7GW of coal power capacity. In effect, more funds are needed. The CIPP draft also does not address emissions management for Indonesia’s coal power plants, which currently lack essential air pollution control devices.

The refusal to retire and cease development of new captive coal plants is problematic. Captive coal power currently accounts for 25 percent of the national operating coal capacity. The rapidly declining cost of renewable power makes it increasingly competitive for captive power applications. Utility solar supported by batteries is currently projected to be cost competitive with coal power from around 2030 in the region. Captive capacity has increased nearly eightfold in the past decade and is estimated to reach 30GW by 2030 (43 percent of the projected national coal power). Estimates also show that captive power is currently responsible for one-fifth of all health impacts from coal power.

Additionally, the first publication of the CIPP was only available for public comment for one week (and was not published in Bahasa Indonesia in that period), significantly reducing the impact that public consultation could have on the direction of the CIPP, particularly by those most directly affected.

Prabowo election

While counting continues following the Indonesian general election on 14 February 2024, the indication is that defence minister Prabowo Subianto, the defence minster, is set to become the new Indonesian president. As a result, many are curious as to how the new leader will shape and implement Indonesia’s JETP. While Mr Prabowo has not yet made any specific comments on his new government’s plans for JETP funding, he has made numerous public comments on his vision for Indonesia’s energy transition and has indicated that he would largely continue the policies of the departing president, Mr Widodo.

In his presidential campaign, Mr Prabowo emphasised the importance of energy self-sufficiency for national security defence. His agenda focused on promoting biodiesel, bio-aviation fuel (derived from palm oil), and bioethanol (produced from sugarcane and cassava) to increase Indonesia’s renewable energy mix. His campaign pledged to create 5 million new green jobs but leans heavily on bioenergy for the primary energy mix rather than power generation. In early March 2024, Mr Prabowo expressed his optimism that Indonesia can reach green energy self-sufficiency in the near future, ending importation of diesel through the use of biodiesel produced from Indonesia’s substantial palm oil production (48 million tonnes in 2023). However, there are questions about the sustainability of bioenergy entering the market, particularly when sourced from key feedstocks and unsustainable deforestation practices.

Mr Prabowo has many of the same views on energy transition issues as Mr Widodo. While Mr Prabowo has committed to a phase-down of existing fossil fuel-based power plants, he has notably not ruled out the construction of more coal fired power plants. He also supports an existing ban on exports of raw nickel, which is designed to encourage nickel processing within Indonesia. This ban has been successful in attracting foreign investment (most notably Chinese) but requires vast amounts of baseload power. This power is often supplied in large part by captive coal fired power plants, although Indonesia expects about 2.9GW of power demand by its smelter projects that commence operations over the next five years to be met by liquid natural gas fired power.

While he has addressed the need to amend regulations that impede investments in new and renewable energy, Mr Prabowo has also expressed a commitment to continue Indonesia’s existing energy subsidy programme, despite the discontinuation of subsidies for conventional fossil fuels being a key initial measure in addressing the financial challenges associated with Indonesia’s energy transition.

While the creation of the JETP and the Secretariat, preparation of the CIIP and decarbonisation commitments are positive developments, it seems clear that the implementation of a just energy transition in Indonesia will be complex, with multiple challenges.

 

Chris Wright and Aditya Rebbapragada are counsel and Salman Sembiring is an associate at Norton Rose Fulbright (Asia) LLP. Mr Wright can be contacted on +65 6309 5430 or by email: chris.d.wright@nortonrosefulbright.com. Mr Rebbapragada can be contacted on +65 6309 5341 or by email: aditya.rebbapragada@nortonrosefulbright.com. Mr Sembiring can be contacted on +62 21 2965 1825 or by email: salman.sembiring@nortonrosefulbright.com.

© Financier Worldwide

BY

Chris Wright, Aditya Rebbapragada and Salman Sembiring

Norton Rose Fulbright (Asia) LLP

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