Energy Transition Mechanism and Early Retirement of Coal Fired Power Plan (CFPP)
The global climate crisis is getting worse if there is no concrete effort in overcoming it. Since the Paris Agreement was signed in 2015, nearly 200 countries have committed to addressing the climate crisis and pursuing efforts to strengthen climate mitigation, adaptation and climate finance. Paris Agreement encouraged countries that ratify the agreement to reach global peaks of greenhouse gas emissions as soon as possible and recognizes that peak emission reductions will take longer for developing countries. Indonesia as a developing country has committed and renewed its Nationally Determined Contribution (NDC) target on September 23, 2022 by increasing its own emission reduction target from 29% to 31.89% in the latest NDC. Meanwhile, the emission reduction target with international assistance also increased from 41% to 43.20%.
Based on the 2021-2030 Electric Power Supply Business Plan (RUPTL) document, the projected total greenhouse gas emissions in Indonesia from the energy sector in 2030 in the Business as Usual 433 million tons of CO2. The results from the use of coal energy contribute to emissions of 298.9 million tons of CO2 out of a total emission of 335 million tons of CO2 or equivalent to 89% in 2030 under a low carbon. Thus, the transition from fossil energy to Renewable Energy (RE) and the development of renewable energy-based public transportation is needed as an effort that must be taken by Indonesia in reducing greenhouse gas emissions.
One of the energy transition efforts from fossil energy to RE is the Energy Transition Mechanism (ETM). This program is a commitment from the Asian Development Bank (ADB) for climate action in the Asia Pacific region. Indonesia is one of several countries that are collaborating on climate action using ETM in the form of early retirement of CFPP and also the transition to cleaner energy. The ETM partnership itself was launched on November 3, 2021 in Glasgow in conjunction with the agenda for the Conference of the Parties (COP 26 Glasgow). Currently, the State Electricity Company (PLN) plans to gradually stop the operation of CFPP to achieve Net Zero Emission 2060.
There are three options for CFPP early retirement funding schemes presented in the introduction to ETM, namely 1) the acquisition model focuses on acquiring the CFPP in terms of capital and ownership, 2) the synthetic model focuses on providing direct investment to the CFPP owner to be managed by the owner in retiring his CFPP, and 3) the portfolio model focuses on providing funds to third parties (financiers) in managing funds for early retirement. Quoted from the Climate Investment Fund-Acceleration Coal Transition (CIF-ACT), ADB together with the PLN plan to apply early retirement to 9 CFPPs before 2030. However, early retirement activities are carried out at CFPPs, most of which have been operating for a long time (more than 10 years) so that the implementation of early retirement will not be optimal.
The Ecological Action and People’s Emancipation (AEER) recommends that the early retirement of CFPP should be carried out on new CFPPs operating for less than two years, not CFPPs that have been operating for a long time. Naturally, outside of the ETM program, a cessation of operations must be carried out on CFPPs that are considered “quite old” due to the declining performance of environmental pollution control, not up-to-date, and already having a return on investment value. In addition, AEER also recommends that early retirement projects need to be applied to CFPPs that have a negative impact on biodiversity and CFPPs sourced from coal mining with a high level of risk on biodiversity.
Based on the AEER research, coal mining owned by PT Berau Coal which is one of the biggest suppliers of coal for the CFPP is one of the mines that is included in the category of high threat to biodiversity. The results of the AEER indicate that, as many as 23 mining sites are classified as high threat to biodiversity, 10 mines are in the moderate threat category, and 2 mines are classified as low threat to biodiversity from 35 coal mines that are the object of study in Kalimantan. This report can be used as a reference to determine which CFPP whose coal source comes from coal mining located in areas sensitive to biodiversity .
In 2021, AEER also conducted a study on the impact of CFPP and coal mining on biodiversity on the island of Sumatra. The report states that of the 28 CFPPs studied, 12 CFPPs are in the high threat category to biodiversity, 15 CFPPs are in the moderate threat category, and 1 CFPP is in the low threat category. Based on this study, AEER recommends that the early retirement of CFPP on the island of Sumatra be carried out at CFPP Sumsel-8 because it has the highest threat and will only start operations in 2022. In addition, the CFPP that has the most negative impact on biodiversity are CFPP Sulut-3 and CFPP this new operation in 2021 so it is more appropriate to recommend early retirement.
Net Zero Emission and Renewable Energy Mix
Until 2022, the ETM in Indonesia will still focus on early retirement of CFPP, rather than the development of RE. The development of RE still does not have a clear funding scheme and program, and its development will only begin to be planned based on the 2022 Electricity Supply Business Plan (RUPTL).
Analysis of the Net Zero Emission Roadmap (NZE) suggests that Indonesia’s net zero target can be achieved through the application of renewable energy (by sustainable resources), energy efficiency, electrification, and grid interconnection. Energy efficiency and electrification are top priorities to reduce emissions. Indonesia will add a large amount of equipment, cars, machinery and infrastructure this decade with electrical technology. The new and renewable energy mix is one of the cornerstones in the energy transition process.
Indonesia has a target of renewable energy mix for electricity generation by the end of 2025 at 23%, and by 2050 at 31%. Based on the study report “Indonesia Energy Transition Outlook 2022” issued by the Institute for Essential Services Reform (IESR), the renewable energy mix until the end of 2021 only reached 11.2%. The IESR states that the development of renewable energy is still one fifth of the capacity that should be added every year to achieve the target of 23% by the end of 2025.
In the NZE Roadmap it states that the road to zero emissions requires more capital intensive, meaning that the energy transition process to renewable energy requires more funding. By 2030, investment in the promised scenario provides information that is approximately USD 8 billion higher per year than the business as usual (BAU) scenario, with investment in renewable energy generation and grids (USD 25 billion) more than current investment worldwide in the energy sector. Investment in energy efficiency rises to USD 10 billion per year by 2030, a fivefold increase today. Mobilizing this level of investment will require significant policy reforms as well as international support.
Based on the Press Release of the Ministry of Energy and Mineral Resources (MEMR) September 1, 2022, Rida Mulyana, Secretary General of MEMR stated that the acceleration of the energy transition in Indonesia requires an investment of up to 1 trillion US dollars until 2060 for RE generation and transmission. As a developing country, Indonesia needs support from other parties in funding towards accelerating the energy transition, namely funding from developed countries such as the G7 through the Just Energy Transition Partnership (JETP) scheme, bilateral support from Indonesia-Germany through the Green Infrastructure Initiative (GII), international finance such as the Asian Development Bank (ADB) or the other funding.
Energy Transition Funding
Carbon Zero Analytics (CZA) Report 2022 states that South Africa is a pilot project for developing energy transition funding where several developed countries are committed to supporting a fair transition to a low-carbon economy in South Africa. Just Energy Transition Partnership (JETP) sees France, Germany, the UK, the US and the EU (International Partner Group, or IPG) commit to providing USD 8.5 billion over three to five years to support South Africa’s national climate plan. The financing provided can be in the form of grants, soft loans (at lower interest rates than those available from commercial banks), through private financing, guarantees or technical support. The JETP program aims to phase out coal and accelerate the deployment of renewable energy in South Africa’s coal-dependent power system.
In the Climate Finance Report, the G7 members confirmed their intention to move forward in JETP negotiations with Indonesia, India, Senegal, and Vietnam at COP 27. Three of the 4 countries are developing countries with the largest coal energy consumption in the world. The CZA report its 2022, it criticizes how the ongoing JETP process in South Africa lacks sufficient transparency and civil society engagement, limiting its effectiveness. Then, to make it more effective, CZA added that donors should prioritize grants and concessional financing in the JETP agreement to fund the most important elements of an equitable transition, such as support and retraining of workers. Indonesia, which will become one of the recipient countries of theJETP initiative, should also need to be accompanied by the government’s readiness to prepare clear policies and guidelines in carrying out early CFPP retirement.
The Government of Indonesia and the Federal Government of Germany have a partnership in the mission of fighting climate change under the name of the Green Infrastructure Initiative (GII). The GII is part of the Indonesia-Germany climate initiative which was agreed in the framework of the bilateral negotiations between the Indonesian-German government on October 1, 2019 in Berlin. One of the project implementations of GII is the construction of Urban Public Transport which is estimated to reach 4057 million EUR or equivalent to 61.8T Rupiah.
The Asian Development Bank (ADB) In its press release stated that the Energy Transition mechanism (ETM) pioneered by ADB has the potential not only to become a powerful tool in combating climate change, but also to reform the energy sector in Asia and the Pacific. The ETM aims to accelerate the decommissioning or reuse of fossil fuel generation while creating space and investment opportunities for renewable and clean energy technologies. Shutting down 50% of the coal fleet in ETM’s three pilot countries—Indonesia, the Philippines and Vietnam—could cut 200 million tonnes of CO2 per year, the equivalent of removing 61 million cars from the road. That would make it one of the largest carbon reduction programs in the world. This work will have far-reaching consequences, including changes in jobs, supply chains and infrastructure as countries transition from energy systems that rely on fossil fuels to systems based on clean energy.
In climate action, apart from trying to stop the use of fossil fuels as an energy source, it must also be oriented towards the development of renewable energy. ADB is considered not to have made development the main focus which should have been carried out with the early retirement of the CFPP simultaneously. This is illustrated in the Indicative timeline to operationalize ETM which illustrates that until Q4 2022 the focus of ETM is still on the technical funding of ETM for the technical early retirement of CFPP, which is also described in detail how the ACT Investment Program is.
Indonesia needs large funding in the development of new and renewable energy. At the G7 meeting in June 2022 in Germany, the President of Indonesia stated that Indonesia needs around 25-30 billion USD to switch to clean energy over the next eight years (until 2030). As a developing country, Indonesia needs international support to be able to transition to energy by developing new and renewable energy. Previously, at the 2021 G7 meeting, it was said that two new types of funding were planned for CIF in suppressing climate change in developing countries, including Indonesia. The two funding sources are Accelerating Coal Transition (ACT) and Renewable Energy Integration (REI). However, in the Energy Transition Mechanism (ETM) Introduction issued by ADB, it is stated that currently it is still focusing on the main work flow of ACT, while REI does not yet have a main work flow plan. Therefore, it is necessary to strengthen the commitment of ADB in the development of REI, because the development of renewable energy requires very large costs.
The development of renewable energy needs to be maximized to reduce the negative impacts of pollution and climate change that result in natural disasters. Reporting from Bisnis.com, the Minister of Finance, Sri Mulyani said that the annual state loss due to natural disasters reached Rp. 20 trillion, and was dominated by hydrometeorological disasters such as forest and land fires, floods, landslides, and tornadoes. So the consequence of this energy transition is not only a reduction in greenhouse gas emissions, but there will be many good impacts that accompany it such as minimizing the occurrence of disasters by mitigating climate change using Renewable Energy (RE).
Energy transition funding needs estimated in Indonesia are 25-30 billion USD until 2030, which is equivalent to a value range of 8-8.5 billion USD per year. Indonesia’s biggest challenge in the energy transition is how to meet these funding needs quickly. The funding that will be received by Indonesia in the Financing Plan (Indicative) as of 2022 is recorded at 800 million USD, with details of 150 million USD from ADB, 150 million USD from CIF, and another 500 million USD based on other funding sources. When compared, of course, the available funds with the number of needs are still very far in number, covering 2% of the total existing funding needs.
The need to cover Indonesia’s entire coal fleet by 2040, Indonesia will need 37 billion USD, or 1.2 million USD per megawatt, according to the analysis, which uses data from the Transition Zero called Coal Asset Transition (CAT). . President Joko Widodo said the government would close 5.5 GW of coal-fired power plants before 2030, at an estimated cost of 6 billion USD or equivalent to 94T Rupiah.
Until now, there has been no notification regarding the nominal funding from JETP for Indonesia. Previously, JETP provided funding to South Africa of USD 8.5 billion last year. JETP funding for Indonesia can refer to the comparison of coal consumption between Indonesia and South Africa. Based on data from Worldometers, South Africa’s annual coal consumption reached 202,298,474,200 MMcf, while Indonesia’s was 102,623,737,100 MMcf. Based on this comparison, JETP is recommended to provide funding to Indonesia amounting to USD 4.3 billion.
Climate Investment Fund (CIF) pledged their CIFs Funding Program of USD 2 billion to start a program consisting of an Accelerating Coal Transitions (ACT) program of USD 1.5 billion and a Renewable Energy Investment of USD 500 million. The data shows that the focus of funding is still larger for ACT activities with the CFPP early retirement program. In fact, the development of RE itself also has a significant funding requirement.
The cost of discontinuing existing coal-fired power plants in Indonesia by 2040 is estimated at USD 37 billion. This does not include the costs of expanding renewable generation, upgrading transmission lines or ensuring a fair transition for workers and communities. The coal industry has cost the country USD 10 billion in the last 12 months due to its carbon emissions. On the other hand, the surge in coal prices in the midst of the energy crisis caused Indonesia as the largest coal exporter in the world to gain huge profits. The benefits from the windfall should be used as capital in the energy transition process towards cleaner and more equitable energy so that the losses caused by carbon emissions do not get bigger.
Considering the need for cost in developing renewable energy, apart from expecting international assistance, Indonesia itself is actually also capable of developing RE independently. In 2022, as reported by Investor ID, it was stated that PT Tamaris Hidro held a public offering of Tamaris Hydro I bonds with a maximum value of Rp 750 billion. As planned, the proceeds from the bonds will be used for investment in renewable energy development. Thus, the private sector has a great opportunity for the expansion of Hydroelectric Power Plants to support the 35 gigawatt (GW) program and the distribution of new and renewable energy (RE) with a minimum target of 23% by 2025, as well as supporting government programs in the plan to increase electricity capacity of 35,000 MW. which is stated in Presidential Regulation Number 04 of 2016.