November 14, 2023
JAKARTA – Indonesia’s early coal retirement program has received paltry funding in the Just Energy Transition Partnership (JETP), which experts say indicates how hard it is to persuade donors and financial heavyweights to back the program.
According to the draft investment plan, only around US$1.5 billion of the $21.5 billion total pledged for Indonesia’s JETP is designated for the early retirement and managed phaseout of coal-fired power plants in the country.
That figure could rise to around $4.1 billion if Indonesia could use other funds, currently have no defined project or program to be allocated for.
Andri Prasetiyo, a researcher at Senik Centre Asia, told The Jakarta Post on Thursday that the small portion of funds allocated for early coal retirement was inseparable from donors’ judgment that the program was commercially unviable.
The miniscule amount of grants for the JETP had also proved challenging for Indonesia, as he understood this was why the government had opted to delay its plan to retire the country’s coal plants early.
Of the total $21.5 billion pledge, only $300 million were grants, including those designated for technical assistance.
Meanwhile, commercial loans comprised the lion’s share of $10 billion in pledges from private financial institutions, coordinated through the Glasgow Financial Alliance for Net Zero (GFANZ).
Following these were $6.9 billion in concessional loans and then $2.1 billion in guarantees from multinational development banks and the International Partners Group’s (IPG), coled by the United States and Japan.
The government is now planning to start retiring coal plants no earlier than 2035, compared to its previous commitment to begin the phaseout by 2030.
The plan foresees that coal-based power-generating capacity will be reduced by 1.7 GW by 2040 through early retirement of plants.
“The early coal retirement program is not attractive from the business as usual approach, so grants from rich countries are the most ideal type of funding,” said Andri.
“It is a form of [their] climate commitment and responsibility as large emitters for reaping obscene profits from fossil fuel,” he explained.
Indonesia has been battling with surplus electricity, most of which is generated by coal-fired power plants. Experts say the excess supply has partly contributed to hindering the country’s transition to renewables.
“Early retirement of coal-fired power plants is and should be part of Indonesia’s energy transition,” the US Embassy in Jakarta said in a statement on Nov. 7.
“It is one of the five key investment focus areas outlined in the JETP investment plan, and it should happen in tandem with a build-up of affordable renewable energy sources.”
Separately, the Japanese Embassy said on Wednesday that retiring coal plants early was crucial to Indonesia’s energy transition. It also said Tokyo had shown its commitment to help kick-start the project by providing $25 million for the Energy Transition Mechanism (ETM), which the Asian Development Bank (ADB) established during COP26 in 2021.
“Given the involvement of numerous stakeholders, ADB continues discussions towards the implementation of the ETM,” it said.
GFANZ has declined to comment on the matter.
Theoretically, rich countries and multilateral banks must assist in early coal retirement as a key energy transition project by providing grants and low-cost loans, combined with market-rate funds from private financial institutions to lighten the overall funding burden.
This scheme is expected to allow for either refinancing a country’s coal fleet so investors can achieve their operation targets much earlier and close prematurely, or purchasing a coal fleet for early closure.
Sacha Winzenried, the lead adviser of energy, utilities and resources at PwC Indonesia, said the usual economic risks from interest and currency exchange rates would be key considerations for investors financing early coal retirement projects in Indonesia.
“But the largest risks will still come from political commitment and stability of untested governance frameworks,” he told the Post on Wednesday.
Winzenried questioned whether the low-cost financing pool proposed in the blended financing scheme would be sufficient or affordable enough to fund compensation for coal plant operators.
He said the government might need to secure alternative financing sources, such as impact investments or grants, to supplement financing for its early coal retirement program. Winzenried said this could include enhancing the policy framework for carbon trading, which could help finance the program through the sale of carbon credits.
JETP negotiators must also grapple with institutional policies that bar financing coal-related projects including early coal retirement, he said, as more banks were unwilling to finance fossil fuel operations amid political and investor pressures.
Alloysius Joko Purwanto, an energy economist at the Economic Research Institute for ASEAN and East Asia (ERIA), said addressing the bankability of renewable energy projects was also crucial to maintain the country’s electricity generation capacity, especially in view of the early coal retirement plan.
“I think the key is in the policy to get the government to buy renewable energy. If we are still struggling with a [pricing] limit that does not guarantee independent power producers a profit margin, even if it is small, then the early coal retirement program will never be attractive to investors,” he told the Post on Friday.