Indonesia’s Climate Transition in the Balance
Despite the promise of funding to support its net zero journey, the country’s dependence on coal and mixed messaging around policy hamper progress.
As an archipelago, Indonesia is far more susceptible than most countries to the climate crisis.
In fact, it is highly vulnerable to sea-level rises and extreme weather events and is at risk of losing its rich forests and stunning biodiversity – as Arief Wijaya, Indonesia Programme Manager at the World Resources Institute (WRI), explains to ESG Investor. Its farmers are also facing dramatic changes in temperature and rainfall, while fishermen are struggling with their catches.
Fortunately, Indonesia has plenty to attract climate-focused investors, with an abundance of untapped renewable energy sources, large deposits of critical minerals like nickel, and a burgeoning carbon market.
“There is huge investment potential for the taking in Indonesia’s sustainable commodity supply chain for agricultural products, including in nature-based solutions (NbS),” adds Monica Bae, Director of Investor Practice at the Asia Investor Group on Climate Change (AIGCC).
Grant Hauber, Strategic Energy Finance Advisor for Asia at the Institute for Energy Economics and Financial Analysis (IEEFA), points out that Indonesia’s solar resource potential is over 3,000 gigawatts (GW) – 40 times the country’s current installed capacity. “Even wind, which is a more limited resource, holds the potential of 155 GW,” he adds.
Beyond traditional solar and wind projects, opportunities also exist across bioenergy, smart grids, and battery energy storage systems.
Momentum continued to build around Indonesia’s low-carbon transition last year. Under President Joko Widodo, the government published a raft of sustainability-focused regulations to support its decarbonisation targets. Indonesia’s 2030 emissions reduction ambitions alone will require an estimated US$285 billion in investment.
Last November, Indonesia reached a key milestone in its net zero journey with the launch of its Comprehensive Investment and Policy Plan (CIPP), which plans to utilise US$20 billion in public and private funding pledged through the country’s Just Energy Transition Partnership (JETP).
“But Indonesia’s ongoing heavy dependence on coal is hindering the transition,” says Mutya Yustika, Energy Finance Specialist for Indonesia at IEEFA. “Several unfavourable policies still exist, and weak regulations create challenges and uncertainty for potential investors and financiers of renewable energy projects.”
As the world’s 16th largest economy and sixth biggest emitter, Indonesia’s shift to a low-carbon economy is vital to solving the global climate change conundrum.
Rule reset
Indonesia has done much to develop a foundation of sustainability-related regulations and platforms to improve its focus on climate and facilitate investment.
It launched a UN Sustainable Development Goal-linked (SDG) bond in September 2021 to promote environmental protection and accelerate socioeconomic development. Last year, the country became the first Asian sovereign to complete the issuance of a blue bond.
Indonesia has also established investment infrastructure platform SDG Indonesia One-Green Finance Facility (SIO-GFF), supported by the Asian Development Bank (ADB) and focused on enabling commercial financing, concessional funds for de-risking, equity funds, and project development.
In 2022, it introduced a national and voluntary Green Taxonomy, and as it was holding the Group of 20 (G20) Presidency, promoted the establishment of a common-ground one.
The previous year, the government had published Presidential Regulation No. 98, serving as a basis for the implementation of carbon pricing. In addition, Indonesia is now set to join the international carbon market, with the launch of the first Indonesian carbon exchange (IDX Carbon).
Perhaps one of the most important pieces of regulation is Presidential Regulation No. 112/2022, through which the government has committed to not approving any new coal-fired utility power plants.
“While [that] eliminates the path for future utility coal assets, it does not totally [remove] the potential for even more coal power to be built,” Yustika points out. Plants approved before the regulation came into force, as well as plants created to support high-value processing industries like nickel smelting, will remain exempt.
Indonesia is currently revising the Electricity Supply Business Plan (RUPTL) of state-owned utility PLN, in a bid to build additional domestic energy capacity through hydropower, geothermal and biofuel-firing capacities – and with biomass co-firing in coal plants.
The framework is already paying off in many areas.
Indonesia’s efforts to combat deforestation have resulted in record low levels of net deforestation for six consecutive years, while more than half of US$35.6 billion worth of investment over the past six years has been injected into geothermal and hydropower development.
“The Indonesian government has demonstrated a strong commitment to climate transition, aiming for significant reductions in greenhouse gas emissions and an overall shift to renewable energy,” says Sameer Tirkar, Head of Climate Infrastructure Investments, APAC, at Swiss impact asset manager responsAbility Investments.
Public-private support
However, Indonesia requires international support to make its net zero commitments a reality.
The idea behind the JETP model is that donor governments from developed countries put up concessionary finance to fund the most capital-intensive elements of the energy transition – which in turn attracts private capital to invest in related clean energy transition projects.
Indonesia’s JETP was concluded at the Bali G20 summit in 2022 with the promise of US$20 billion in public and private financing through grants, concessional and non-concessional loans, investments, and guarantees. It aims to reduce CO2 emissions from the power sector to 290 million metric tonnes (MT), and to establish a 44% renewable energy generation share by 2030.
“This is a critical test for how wealthy nations and financial institutions will work together with emerging economies on climate change,” says WRI’s Wijaya. “A just energy transition would ensure that Indonesia is a beneficiary from the global shift to a low-carbon economy, and would forge a path for other countries looking to do the same.”
Published late last year, the CIPP outlines over 400 investment projects across transmission lines and grid deployment, dispatchable and variable renewable energy acceleration and supply chain enhancement, and early coal-fired power plant retirement and managed phase-out.
“[It’s currently unclear] which sectors, geographies, or individual projects are a priority – nor [is there an indication of] any means for the state to implement the massive effort that would be needed to cost-effectively procure even a portion of those projects,” says IEEFA’s Yustika.
The total investment required for the CIPP power sector pathway is over US$97 billion – with US$66.9 billion earmarked for priority transition projects – meaning there remains a 70% financing gap after JETP financing.
“Indonesia has significant potential to achieve its climate transition goals and reap the associated benefits,” a spokesperson for the Glasgow Financial Alliance for Net Zero (GFANZ) tells ESG Investor. The alliance has committed to providing US$10 billion of the JETP financing.
“Throughout 2024, GFANZ […] has worked to support the Indonesian government and JETP Secretariat in these efforts, including partnering on policy and project pipeline development, as well as working with a broad array of partners to find avenues to increase the amount of transition finance being deployed against key priority projects,” they note.
In bringing this work to fruition in the coming months, the government and JETP Secretariat will have the opportunity to “cement their role as global leaders”, the spokesperson adds.
A revised version of the CIPP – which will include a sixth investment area focused on energy efficiency and electrification – is expected to be published before COP29 in November.
Yustika hopes it will become a more focused and “action-oriented” document.
Coal-laden plans
Embarking on the JETP has been seen by experts as a positive step in the right direction for Indonesia.
“Although negotiations and progress remain slow, this is expected as there are deeper fundamental issues that require policy reforms beyond investment plans,” says Putra Adhiguna, Co-founder of the Asia-focused energy finance think tank Energy Shift Institute.
Tirkar from responsAbility points to the country’s limited fiscal space, relatively higher cost of capital, shallow domestic financial market and limited acess to international finance.
But the biggest obstacle, perhaps, is the required early retirement of the country’s young fleet of coal-fired power plants.
Indonesia has had the fastest growing per capita coal emissions of any G20 country since 2015. With more than 60% of its fleet of coal-fired power plants built within the last ten years, breaking the country’s love affair with fossil fuels is set to be an uphill battle.
This issue has been compounded by stagnating investment in renewable capacity over the past seven years. Recent research found that Indonesia attracted just US$1.5 billion in renewables investment in 2023, translating into 574 megawatts (MW) of additional renewable energy capacity. In comparison, Vietnam added 1,115MW in solar and wind capacity in 2023.
“While it’s often claimed that substantial funding is needed for the transition, the government also continues to spend tens of billions on subsidising fossil fuel use – much of which is imported,” says the Energy Shift Institute’s Adhiguna. “This needs to be questioned.”
Research suggests these subsidies account for around 9% of total state expenditure.
Indonesia also applies a lock-in US$70 price for coal. “The policy was established with good intentions to make electricity cheaper, but this masks the real economics of coal as an electricity fuel, thus making it artificially more affordable against cleaner energy resources,” Adhiguna argues.
In addition, while the country’s revised 2024 sustainable finance taxonomy outlines provisions for financing the closure of coal-fired power plants, it also labels new coal-fired power plants as a ‘transitional’ activity – or even ‘green’ if the power plant plays a part in the processing or mining of critical minerals.
Although president-elect Prabowo Subianto – who will succeed Widodo in October – has promised to reduce the role of coal in energy production, he plans to achieve this by replacing fossil fuels with biofuels. More specifically, by using palm oil for burning in power plants and blending with diesel for vehicle fuel. This will likely require the exploitation of forest land for new energy crops.
Recognising the delicate balance that must be struck, a credit investment analyst at an Indonesian multinational insurance firm tells ESG Investor that the government is right to take gradual steps to “transition from coal-based energy to gas-based energy while developing renewable energy in parallel”.
The government’s commitment to the climate transition must be accompanied by a “holistic regulation package”, the analyst adds. However, cooperation among government institutions “has not been optimised well enough”, they admit.
There are also concerns about Indonesia’s mining practices, with exits from the country by investors such as BASF, Eramet and Hedonova over sustainability-related concerns.
With COP29 just months away, experts say the time is ripe for Indonesia to demonstrate climate-related progress and secure international support.
“There is opportunity for Indonesia to become a success story for climate-related investments in the South-East Asia region,” the analyst says.
However, president-elect Subianto has so far displayed climate-related ambition and pragmatism in equal measure, raising questions as to whether the country can truly emerge as a global leader on climate, or is bound to fall further behind.
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