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On November 15, 2022, Indonesian President Joko Widodo and a gaggle of countries led by america introduced a $20 billion local weather finance deal to assist Indonesia curb its energy sector’s reliance on coal, and transition in the direction of a carbon-free power system. This deal is formally referred to as the Simply Power Transition Partnership (JETP). A yr later, Indonesia launched implementation plans for the settlement, outlining quite a few targets and insurance policies to assist Indonesia obtain carbon neutrality and develop its home renewable know-how business. Nonetheless, not one of the beneficial insurance policies deal with essentially the most important menace to Indonesia’s power transition: fossil gasoline subsidies.
On November 21, 2023, the federal government of Indonesia launched a draft implementation plan outlining its technique to make the most of the assist supplied by the JETP. The draft implementation plan, formally referred to as the Complete Funding and Coverage Plan (CIPP), outlines three major targets for Indonesia’s electrical energy system: 1) to cap energy sector emissions by 2030 at a degree of 250 megatons of CO2; 2) to succeed in renewable power technology of 44 p.c by 2030; and three) to realize internet zero emissions within the energy sector by 2050.
The CIPP estimates that to succeed in these targets, Indonesia should entice funding of a minimum of $97.1 billion by 2030 and $500 billion from 2030 to 2050. The $20 billion in financing from the JETP is “anticipated to function a catalyst” to assist entice additional funding from different sources.
The CIPP outlines 5 precedence areas of funding to deal with by way of 2030: $19.7 billion protecting new transmission strains and grid upgrades; $2.4 billion to retire or retrofit coal vegetation; $49.2 billion to construct 16.1 GW of dispatchable renewable capability (bioenergy, geothermal, and hydropower); $25.7 billion to construct 40.4 GW of variable renewable capability (photo voltaic and wind); and an unspecified quantity to enhance Indonesia’s renewable power provide chain, notably photo voltaic PV manufacturing. Indonesia’s continued use of fossil gasoline and electrical energy subsidies threatens these objectives.
Indonesia’s authorities offers beneficiant gasoline and electrical energy subsidies to assist poorer households and spur financial improvement by protecting costs low. These subsidies began beneath the Suharto regime (1966-1998) when Indonesia nonetheless had important home oil reserves. Nonetheless, for the reason that Nineties, Indonesia’s home oil manufacturing has fallen whereas demand for oil and electrical energy has skyrocketed.
Consequently, power subsidies have reached as much as 2 p.c of Indonesia’s whole GDP. Moreover, these subsidies primarily profit wealthier Indonesians. The World Financial institution notes that Indonesia’s center and higher class “devour between 42 and 73 p.c of sponsored diesel.”
At the moment, the next subsidies and worth caps are in place. This record doesn’t define all authorities market interventions however consists of people who may negatively affect Indonesia’s power transition.
First, Indonesia maintains a subsidy for gasoline and diesel. In 2022, the Indonesian authorities raised the worth of sponsored gasoline and diesel, however the price of these items remains to be under market charges for Indonesian customers. Often, these subsidies come as reimbursements to Pertamina, Indonesia’s state-owned oil and gasoline firm. Pertamina owns a lot of the gasoline stations in Indonesia. Indonesia’s central authorities compensates Pertamina for the distinction between the price of buying oil and gasoline and the ultimate worth customers pay.
Second, a home gross sales mandate and coal worth cap drive Indonesian coal mining firms to promote 25 p.c of their coal to PLN, Indonesia’s state electrical energy utility. Related mandates exist for oil and pure gasoline, although these two fossil fuels comprise a a lot smaller portion of whole power technology than coal.
These coal producers can’t promote coal to PLN for greater than $70 per metric ton. Determine 1 under compares coal’s yearly common market worth towards the $70 worth cap. In yearly however three, the market worth exceeded the worth cap, and in 2021 and 2022, the market worth was considerably larger than the worth cap. The gross sales mandate and worth cap artificially decrease PLN’s value of producing electrical energy with coal energy vegetation, which helps hold electrical energy prices for end-users low.
Determine 1: Worth of thermal coal vs. $70 home worth cap.
Third, a below-market tariff construction ensures that Indonesian customers pay lower than the price of producing and distributing electrical energy. The Indonesian authorities compensates PLN on an annual foundation for this shortfall. Till 2012, all electrical energy clients benefitted from this below-market tariff construction, however the authorities eliminated tariff assist for wealthier segments of society in that yr.
The “coverage enablers” outlined within the CIPP don’t sufficiently alter Indonesia’s subsidy regime. As a substitute, the insurance policies Indonesia’s authorities outlines within the CIPP merely try to deal with the anti-competitive results of those subsidies. This can be a important weak spot, as a lot of the funding for brand new renewable technology should come from the non-public sector. Few non-public sector firms will spend money on renewable power initiatives in a non-competitive market.
One enabling coverage outlined within the CIPP is titled “supply-side incentives” and focuses on strategies of decreasing home assist for the coal business. The CIPP outlines Indonesia’s home market obligation, which requires coal producers to promote 25 p.c of their whole manufacturing to the home marketplace for not more than $70 per metric ton.
These subsidies affect PLN’s electrical energy planning selections. As a result of PLN can entry a assured coal provide at a low worth, coal-fired electrical energy is considerably cheaper than different sources, corresponding to renewables or pure gasoline. Consequently, PLN is extra more likely to construct coal-fired energy vegetation or signal contracts with impartial coal vegetation. These insurance policies don’t incentivize PLN to decarbonize or interact with renewable power builders.
The CIPP recommends eradicating the home worth cap of $70 per metric ton whereas sustaining the 25 p.c home market obligation. As this might enhance PLN’s prices of buying coal, the CIPP recommends gathering prices from mining firms to assist pay PLN’s larger prices (the Indonesian authorities pays PLN for the distinction between the price of producing electrical energy and the ultimate charge charged to clients). Nonetheless, the CIPP notes that Indonesia’s authorities is formulating completely different reforms that may not take away the home market obligation or the worth ceiling.
If Indonesia implements the CIPP’s suggestion, PLN will use “a coal worth that’s nearer to market costs in its dispatch and funding selections.” Nonetheless, “nearer” could not change PLN’s funding or dispatch selections. If PLN can entry coal or coal-fired energy at below-market costs, renewable builders will likely be hard-pressed to compete, limiting funding and undercutting Indonesia’s power transition.
A second enabling coverage outlined within the CIPP focuses on energy buy agreements (PPAs). An influence buy settlement is a contract between an influence producer (corresponding to an influence plant proprietor) and an off-taker (normally a utility). In Indonesia, PLN is the lone off-taker; thus, signing a PPA with PLN is critical to draw funding and develop a brand new renewable power venture. The Indonesian authorities dictates the construction of those contracts. The CIPP outlines suggestions to enhance Indonesia’s PPA framework, together with standardizing PPA templates to make negotiations simpler and growing laws to extra clearly allocate threat between PPA signatories. Nonetheless, these measures are usually not sufficient to make renewables aggressive with coal.
Renewable PPAs in Indonesia are topic to a tariff ceiling, a cap on the worth they’ll promote electrical energy to PLN. Indonesian regulation requires PLN to make sure that signing a brand new renewable power PPA doesn’t enhance clients’ electrical energy costs. Consequently, the worth of power produced at a photo voltaic or wind farm “must be equal to or decrease than the price of supplying electrical energy generated by sponsored fossil [fuels].” So long as PLN’s can buy sponsored coal, renewables won’t be aggressive in Indonesia.
Probably the most obvious results of continued fossil gasoline subsidies in Indonesia is a continued dependence on fossil fuels. A extra insidious result’s the stagnation of Indonesia’s inexperienced know-how provide chain. If these subsidies proceed, Indonesia may miss out on a possibility to develop into a renewable power powerhouse regardless of the funding made obtainable beneath the JETP.
Given Indonesia’s quickly increasing nickel mining capability, the nation will present a big portion of the valuable metals wanted to construct electrical autos, long-term battery storage methods, and different renewable applied sciences. The CIPP outlines “renewable power provide chain enhancement” because the fifth major space of funding by way of 2030, alongside extra tangible efforts to construct new renewable power capability. Constructing a strong renewable power provide chain in Indonesia would strengthen its place globally, permitting it to develop and export extra complicated merchandise than newly mined nickel alone.
Nonetheless, the CIPP additionally identifies “cultivating a sustainable, long-term home market” as a big problem. Coal worth caps will forestall buyers from constructing renewable technology services. With out renewable facility development in Indonesia, there will likely be no home demand for Indonesian photo voltaic or battery producers. Equally, petroleum subsidies will forestall Indonesian customers from searching for electrical autos as gasoline autos will proceed to be cheaper. Solely by dismantling these subsidies can Indonesia use the JETP to decarbonize its power system and develop into a frontrunner within the international power transition.
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