November 21, 2022
JAKARTA – A recently announced international climate financing deal will kick-start Indonesia’s efforts to wean itself off coal-fired power plants, though the country must manage its debts and the program prudently, experts have said.
A coalition of rich nations will mobilize US$20 billion in grants and concessional loans over a three- to five-year period to help Indonesia shut down coal power plants and bring forward the sector’s peak emissions date by seven years to 2030.
The financing commitment, known as the Just Energy Transition Partnership (JETP), chips away at the estimated $600 billion Indonesia will need to phase out coal power in favor of renewables.
Putra Adhiguna, an energy economist with the Institute for Energy Economics and Financial Analysis (IEEFA), said the country needed to ensure the funds were utilized prudently for early coal plant retirement and new investments in renewables.
The country would also have to consider its existing debt burden, particularly given the number of past infrastructure investment projects with “less-than-stellar outcomes”.
“Expansion of Indonesia’s energy sector to meet future demand will require funding. Thus, the availability of concessional lending should be appreciated, but we need to know the details and terms of the funding,” he told The Jakarta Post on Wednesday.
Putra added that information on the share of concessional loans, grants and commercial loans in the total $20 billion package had not yet been disclosed to the public.
“All stakeholders need to ensure that the process is well governed, as many eyes are watching Indonesia’s JETP model and its promise to be replicated in other countries,” he said.
Indonesia has massive funding needs for energy transition and development, but the country also has a low appetite for debt. It has a relatively small debt ratio of 42.71 percent of gross domestic product (GDP), the fourth-lowest among G20 nations, International Monetary Fund (IMF) data show.
Andri Prasetiyo, a researcher at Trend Asia, said he worried that much of the deal could consist of loans that would put Indonesia further in debt, rather than grants and funding with more favorable terms. He went on to say that the country would need major assistance in fixing current policies that make it hard to add more renewable energy to the grid.
Over the next three to six months, Indonesia, the United States and other partners aim to finalize the details of the plan, including identifying policy changes Indonesia will need to make as well as establishing the structure of financing.
“This won’t be easy at all, and everything is going to depend on the details,” Andri said on Nov. 16.
Meanwhile, Trend Asia program director Ahmad Ashov Birry is concerned about the lack of criteria for early retirement of coal-fired power plants. This may lead to overcompensation, he said, citing the example of the 660-megawatt Cirebon 1 power plant early retirement deal, worth $250 million to $300 million.
“How do [stakeholders] calculate the [refinancing costs]? Do they consider [the fact that] the value of the asset will decrease over time?” he said in a webinar hosted by think tank Center of Economics and Law Studies (CELIOS) on Thursday. “[Relevant parties] must not let [the funding] go to power plants that don’t quite fit the criteria.”
Coordinating Maritime Affairs and Investment Minister Luhut Binsar Panjaitan previously said Indonesia would only agree to the JETP if the rates offered were as low as those in developed markets. “If it’s the same as for emerging markets,
then what’s the point for us?” he said at the Bloomberg CEO Forum in Bali, which was broadcast live on Nov. 11.
Both public and private funding should be welcomed to enable Indonesia’s transition to cleaner energy, said IEEFA energy analyst Elrika Hamdi.
“All debt has the risk of becoming a debt trap, but that doesn’t mean [Indonesia] needs to avoid debt [altogether],” she told the Post on Wednesday. “The biggest challenge [for stakeholders] is ensuring that transparency, accountability and political commitment will coexist consistently in the long term.”
Rising global borrowing costs are denting the finances of some of the most climate-vulnerable countries just as they most need money to fight the impacts of global warming.
It is a convergence of events that risks pushing developing nations into a “debt trap”, according to Pakistan Prime Minister Shehbaz Sharif, who spoke at the 27th United Nations Climate Change Conference (COP27) in Egypt on Nov. 8.
Countries that borrowed heavily when interest rates were low are now struggling to fund projects that would make them more resilient to extreme weather, leaving them vulnerable to even higher borrowing costs in the future.
Leaders of nations most vulnerable to climate change have long argued that the countries that contribute the bulk of emissions should foot the bill for mitigation and adaptation, but rich nations have consistently fallen short of their promise to provide $100 billion in annual climate financing to the developing world.