Coal phaseout uncertainty persists in Indonesia

Indonesia, one of the world's top 10 emitters of carbon dioxide, is grappling with the impacts of climate change and the need to transition from coal to cleaner energy sources. With 67% of its power generation depending on coal, the country is the world's third largest coal producer.

However, the rising risks of droughts and coastal flooding, coupled with the potential loss of the export market due to countries moving towards renewables, have sparked a push for investment in green projects in the region. The energy security and local jobs narratives are being used to encourage this shift.

Indonesia must invest in renewable energy like solar and wind, promote the use of natural gas through gas turbines, and implement government policies to reduce carbon emissions and encourage cleaner alternatives in its power generation sector. Ember suggests that a coal phaseout would require boosting renewables to 65% of power production by 2040.

Yet, Indonesia's state electric utility, Perusahaan Listrik Negara (PLN), has been slow to invest in clean energy. This is partly due to the personal fortunes of Indonesia's political elite, including the president and the minister of state-owned enterprises, being dependent on coal mining. Additionally, a cap on the price of coal encourages coal consumption and discourages the integration of renewables into the grid.

The current situation has led to an oversupply of power after massive investment in fossil fuel plants in recent years, resulting in "poor financial returns and heavy debt burdens" for PLN. Renewables, on the other hand, contribute only 12% to Indonesia's power generation in 2023.

The Asian Development Bank (ADB) has taken steps to help Indonesia transition. It has helped Indonesia agree a framework with investors to retire the Cirebon-1 coal plant early, with grants from Japan and Germany and a refinancing package worth an estimated $325mn. However, NGOs say the ADB is still supporting a range of new coal power projects in the country.

Shuang Liu, China finance director of the World Resources Institute (WRI), echoes this concern, stating that there has not yet been enough investment in renewables in Indonesia from the public or the private sector. Grant Hauber suggests that the departure of the US from JTEP could boost efforts to scale up renewable energy capacity in Indonesia.

Tumiwa of IESR adds that margins are low on PLN projects, making it less attractive for investors compared to countries such as the Philippines, Vietnam, and Thailand.

Despite these challenges, the government plans to increase power capacity from coal by 26.8GW in the next seven years. This move, if implemented, could potentially exacerbate the country's carbon emissions and further delay the transition to cleaner energy sources.

As Indonesia navigates this complex transition, it is clear that a balanced approach, combining government policies, private sector investment, and technological innovation, will be crucial in ensuring a sustainable and secure energy future for the country.