Unlocking Indonesia’s $22 Billion Green Plan Hinges on Grid

By Vandana Gombar, Senior Editor, BloombergNEF

Indonesia has no shortage of projects that can tap into a $22 billion package put together by developed countries and multilateral institutions to help green its power sector almost a year ago but it’s going to take time to get funding flowing, according to a minister.

The country committed to retire coal plants early and increase investment in renewables under the so-called Just Energy Transition Partnership, or JETP.

“JETP is not a single loan document for $20 billion – it is a collection of financing packages from multiple organizations,” Indonesia’s Deputy Coordinating Minister for Infrastructure and Transportation, Rachmat Kaimuddin, told BloombergNEF in an interview in New York last month. “I like to think of this as an IPO. We will prepare the prospectus and see who wants to fund it.”

Indonesia has identified more than 1,000 projects that can be part of the JETP, with the most important ones being transmission infrastructure that can enable more renewables and reduce the need for coal power. “Most of the projects will be positive IRR, positive NPV. The question marks will be on lower return projects – coal retirements and transmission,” he said.

Nickel mining presents a specific dilemma. Indonesia is a major producer of the battery metal and needs – in the absence of transmission links – captive coal power plants for it. Alternative fuels, when available, would inflate costs. Kaimuddin underlined the hard choices available: “If you want nickel from Indonesia which is greener, are you prepared to pay more?”

Indonesia has almost 10 gigawatts of captive coal plants, with capacity being added. The expected compound annual growth rate for captive coal plants is 14.6% from 2023 to 2030, according to data shared by Kaimuddin’s office.

Indonesia’s installed capacity totals almost 70 gigawatts. Over half of this is coal power, while natural gas plants make up about 30% of the mix.

It has a plan to export clean power to Singapore via sub-sea cables by 2027. The initial plan is to deliver 2 gigawatts of low-carbon electricity which would involve development of 11 gigawatts of solar plants and 21 gigawatt-hours of battery storage in Indonesia.

“This will be big, but we said JETP funding should not go there because that is for Singapore,” Kaimuddin said.

The following Q&A has been lightly edited for clarity.

Q: How do you view climate change from a developing country perspective?

A: I believe in science – we need to act fast to address the impact. As Indonesia is an archipelagic country, we probably will get impacted more.

Q: You also believe in the Just Energy Transition Partnership. What are the next steps there?

A: This is a partnership between the government of Indonesia and the International Partners Group – basically the G7 countries plus Denmark and Norway – to support Indonesia in its energy transition journey, especially in the power sector. The idea is to create a plan that enables Indonesia to be more ambitious while also being “just”, meaning, it does not impact Indonesian development. We need to keep growing as a country. We will create an [investment] plan, and IPG will help mobilize the capital required.

We have set up an independent secretariat which consists of four working groups. We invited the international community to be part of those working groups. The technical working group, led by the IEA [International Energy Agency], is to design the roadmap for Indonesian electricity, and the technologies that need to be deployed. The policy group is led by the World Bank and oversees what policies should Indonesia practice to support the roadmap. Then there is the finance working group that is led by ADB [Asian Development Bank] and focuses on analyzing the current funding that has been written in the JETP. Lastly there is the working group that focuses on the “just transition” aspect, which is led by UNDP.

The working groups submitted a draft to the government of Indonesia as well as to IPG on August 16, 2023. We are currently reviewing the draft. We need to assess it in a real life scenario. In general, we have identified a significant amount of investment opportunities in renewables along with several policies that we can align to support this.

Q: Is the aim of the $20 billion JETP program essentially to build more renewables and enable early retirement of coal plants?

A: The commitment is going up. Right now it is $21.5 billion.

As Dean Arun Majumdar from Stanford Doerr School of Sustainability said, each country has different initial conditions and boundary conditions. For Indonesia, we are still a developing country that – beyond the need to grow its GDP growth – will also need electricity. We also have relatively younger coal plants – many built in the last two decades. We currently have excess supply in our major market, which is Java island. We cannot really distribute it, because as an archipelagic country, we are not well connected.

We are also seeing very good opportunities today with all the decarbonization efforts that typically require batteries or critical minerals. Take nickel for instance. The world needs Indonesian nickel – we have the world’s largest reserves. But these reserves are mostly located in areas where the electricity is not so mature. To process nickel sustainably, we need mines that have access to the required energy. Beyond early retirement, the most critical component is transmission.

In the JETP plan, we split it into a few specific investment focus areas. The first one is transmission. This is the foundation for me as it connects where the renewables are and where the demand is coming from. Early retirement or capacity reduction of projected output is the second focus area, and building renewables is the next one, followed by supply chains. There is usually no problem in funding new renewable projects because they generate positive returns.

Q: Is early retirement of coal plants feasible?

A: Capitalistically, it’s a fairly destructive exercise. In a world where you have unlimited resources, you do it, because you can reduce emissions. Building renewables doesn’t reduce emissions. It just does not add to emissions. To lower emissions, you have to lower the output of coal plants, which entails costs. It is a choice you make depending on the money available. Not only the amount of money, but how concessional it is. A $10 million grant is probably better than $1 billion at market rate.

Transmission projects offer positive returns, but at a very low level, so concessional funding is required to build. Early retirement is a negative IRR, negative NPV project, so you need grants or highly concessional funding. For renewable projects, there is both positive IRR and NPV, and there is a high interest in funding this project. Unfortunately, we haven’t seen significant funding in the form of grants and it is quite difficult to find offsets for these negative IRR and NPV projects.

Q: For nickel production – which is critical for the EV battery supply chain – are captive coal power plants essential?

A: Without transmission, unfortunately they will be. If you don’t build transmission, how do you power it? So you will [then] have to build fossil fuel plants because smelters are very energy intensive. Today, the old ones [smelters] are powered by coal, whereas the new ones are looking at options. Hence, one of the main projects we are pushing for JETP is the Sulawesi grid or the green enabling infrastructure.

I happen to sit on the board of a nickel company, PT Vale, the largest in Indonesia. They want to quintuple the output, open two other locations, and specifically target the low carbon market. Gas is very expensive compared to coal. They are trying to work with state owned utility PLN to secure green electricity as the anchor user from a new grid line, and they have signed an MoU for this.

If you want Indonesia not to use coal for nickel, then please pay a premium. Make it economically viable for people to use green electrons, because people will lean toward cheaper energy products. If you cannot give grants to make projects feasible, then you make the market demand different – pay more for greener products. If you want nickel from Indonesia which is greener, are you prepared to pay more?

Q: What lessons can be drawn from the JETP exercise, given that other countries are looking at similar partnerships?

A: For Indonesia, I would say this process has been an eye-opener. JETP Indonesia was announced during our G-20 presidency. It helped us create momentum internally and also gather a lot of international support and attention. One of the reasons we wanted to open our kitchen was so people understand the problem. It is not easy to link all the islands.

If we were to do this again, my advice would be to do the technical work first, before making political statements because JETP is more about technical design, policy framework and a financial package designed to support transition. Creating this is not easy.

Q: When do you see implementation begin? When does money actually start flowing?

A: Some policy recommendations are already implemented. It is a journey, not a race. I like to think of this as an IPO. We will prepare the prospectus and see who wants to fund it. JETP is not a single loan document for $20 billion – it is a collection of financing packages from multiple organizations. There is a list of potential projects that will get tendered and are seeking funding. Some technical assistance funding for the Medco Wind has already been committed.

There are more projects than there is money available under JETP. We have identified almost 1,000 projects. Around 400 are prioritized. A significant amount is from the transmission investment focus group. We also know that JETP is not the only source of money. We have to be open to all possible sources.

The discussion between the project owner and funder will need to happen. PLN will need to come back with a long-term plan, and then raise money for specific projects. I am not going to give a date on when the funding actually happens because I am not the one financing.

Q: To continue the analogy you made, IPOs can be very successful or find no takers. Is that a risk for Indonesia?

A: It is up to those who fund it. From the Indonesian perspective, we can only put our best plan forward. No takers is not something I worry about. Most of the projects will be positive IRR, positive NPV. The question marks will be on lower return projects – coal retirements and transmission. But again, transmission and renewable projects usually come as a package.

Q: Indonesia will soon be exporting green power to Singapore. Is that easier to link?

A: That is a short subsea cable. We have a lot of islands next to Singapore. That idea came to us also because of the discussions on energy transition. We said we are open to exporting green electrons to Singapore, but all the panels have to be made in Indonesia and the battery storage has to be made in Indonesia complying with our domestic content requirements. It is a win-win-win scenario. Singapore gets green electrons, Indonesia will be able to build [green] industry to meet local demand, and the world has alternatives. The demand from Singapore is significant. This will be big, but we said JETP funding should not go there because that is for Singapore.

We have traditionally been an energy exporter. We are an exporter of coal. We are starting with Singapore, a model, for when coal is no longer in demand.

Q: Hadn’t Indonesia essentially banned new coal plants?

A: There is a Presidential decree that allows PLN to build whatever is in the pipeline only. Non-PLN (captive) plants are allowed only for strategic projects, or to improve value addition for natural resources. All these plants must stop operating by 2050 and gradually lower their emission profile.  The installed capacity of captive coal goes up every day.

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