Indonesia's $20 billion plan to break its coal habit is failing

Breaking a substance addiction is hard work. In the case of Indonesia’s coal dependency, it may prove impossible any day soon.

That’s going to be a problem for one of the most ambitious attempts to decarbonize our energy systems, Indonesia’s $20 billion Just Energy Transition Partnership, or JETP. Under the deal announced by the Group of 20 last November, public and private funders in rich nations promised to provide funding so the archipelago of nearly 300 million people could shutter coal-fired power plants early and replace them with renewable generators.

The deal is running into problems. A draft investment plan will be delayed until later this year while unspecified “additional data” is added and more public feedback is sought, the country’s JETP secretariat announced on Wednesday. Arguments about whether the funds provided will be in the form of grants or loans and what sorts of conditions will be attached may just be the tip of the iceberg. The heart of the problem is that Indonesia may be one of the hardest countries in the world to put on a net zero pathway. Unless those fundamental issues are fixed, this flagship climate program may be heading for the rocks.

It’s economics as much as politics that have propelled the world’s headlong drive toward renewable power in recent years. In country after country, wind and solar have taken up rising shares of generation not because of ideology, but because they’re able to produce electricity at a lower cost than the alternatives.

Indonesia is a rare exception. Its reserves of coal are vast and cheap, making it the biggest exporter. Wind speeds close to the equator tend to be low, so it’s ill-suited for generating much power that way. Cloudy skies and year-round warmth that reduces the efficiency of solar modules mean that its photovoltaic power potential is well below that of most other large developing countries, on a par with nations in western Europe.

That problem is compounded by geography. In many parts of the world, fears that renewable power takes up too much space are spurious. In the main island of Java — which crams a population bigger than Russia into an area the size of Greece — they’re far more credible. Building the sort of large-scale electricity transmission networks that China has used to move electrons from its renewables-rich north and west to its heavily-populated east is harder, too. The cost of such cables soars once they cross water, and Indonesia has more than 18,000 islands.

Those fundamental issues are made even more intractable by politics. Coal power receives a subsidy from the country’s export sector thanks to policies that require miners to sell a quarter of their product to domestic generators at prices that are often below the cost of production. Renewables, meanwhile, are penalized: local content rules require that 60% of solar module components are made locally, pushing domestic costs far above those available on the global market. Meanwhile, the excess of coal-fired capacity in the main Java-Bali grid has led to monopoly power distributor PLN slow-walking permits to add rooftop panels that would reduce its own revenues.

Coal is a major source of wealth and political influence, too. The country’s investment minister, Luhut Binsar Pandjaitan, one of the lead players in charge of the JETP program and a key ally of President Joko Widodo, has historically been a significant coal mining shareholder.

There’s little sign yet that Indonesia is making the progress necessary to achieve even its existing targets, let alone those envisaged by the JETP. Just 12.5 gigawatts of renewables were connected at the end of 2022, barely more than half the 24 GW the country has promised to have by 2025. Only two additional gigawatts have been connected since 2019, according to the Institute for Essential Services Reform, a local energy think tank, and the government has cut its target for 2023 solar installations by half relative to 2022’s figure. Early retirement of coal power stations will be pointless, too, unless the government closes loopholes allowing more to be built in future.

Even if local political will and coordination were better, the $20 billion available doesn’t match the scale of the problem. An estimated $2.42 trillion will be needed to fund Indonesia’s energy transition up to 2050.

The risk spreads far beyond Southeast Asia. Such JETP programs are the most important political tool for getting developing countries to kick their coal habits — but if unrealistic ambitions and irreconcilable objectives cause them to fail, they risk tainting the energy transition as a whole. A $8.5 billion JETP program for South Africa is already running into intractable political roadblocks amid metastasizing power cuts. The fate of other JETP policies in Vietnam and, potentially, India, will hang on the outcome of those already under way.

Across the developing world, debt-ridden and fossil-fired incumbent utilities are hoping to raise the barriers to cheaper, cleaner energy to protect their existing businesses. A collapse of Indonesia’s decarbonization efforts would be a victory for those monopolists. For the global climate and the citizens they purport to serve, it would be a disaster.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. Views are personal and do not represent the stand of this publication.

Credit: Bloomberg