Figure 1: Distribution of coal-fired power plants (CFPPs) in Indonesia. (Source: Global Coal Plant Tracker, Global Energy Monitor)
Coal-fired power currently contributes to 60% of total generation in Indonesia (Listiyorini et al. 2023). As of July 2024, 256 coal plants are operational with a cumulative 52.3GW installed capacity, according to data from Global Energy Monitor (Global Coal Plant Tracker 2024). 74 coal-fired power plants (CFPPs) (15.7GW) are either fully- or majority-owned and operated by PT Perusahaan Listrik Negara (PT PLN, the national grid operator), 59 CFPPs (21.6GW) are fully- or majority-owned by independent power producers (IPPs), and the remaining 123 (15.0GW) are off-grid captive plants (Ibid.).1,2 Cumulatively, CFPPs alone emitted some 176 MtCO2 in 2022 – just under 80% of the country’s total power sector emissions (Ember Climate 2024).
Most Indonesian CFPPs are relatively young. A whopping 44% of CFPPs were built after 2012, while another 36% were built between 2002 and 2012 (Listiyorini et al. 2023). The decentralisation of its coal mining industry in the post-Suharto era after 1998 caused a surge in export volumes and the mass expansion of the industry to the point that it is now the largest exporter by value (IEA 2016; TradeImeX 2024). To this end, Indonesia has traditionally viewed, and continues to view, coal as its “national wealth” and the “cheapest, most reliable, and most accessible energy source,” according to Hendra Sinadia, executive director of the Indonesian Coal Mining Association (Agence France Presse 2023). Under PLN’s procurement guidelines, CFPP power purchase agreements (PPAs) between the PLN and IPP typically are for 25 years, up to a maximum of 30 years (Chung 2017). Hence, without even considering any prior renewals, a bulk of these existing plants should run until at least 2025, with some PPAs being contracted until as late as 2045.
This fleet is slated to expand even further. As of the PLN’s most recent energy business plan, Rencana Usaha Penyediaan Tenaga Listrik (RUPTL) 2021-2030, a further 13.8GW of CFPPs are scheduled to be built (PT PLN 2021). Although Presidential Regulation No. 112 of 2022 banned the building of any new coal plants, the capacity that has already been included in the 2021 RUPTL is exempt from the ban. Thus, the PLN’s plan is to build out any planned capacity, but as of 2023 it will not execute any other new builds or expansions (Cui et al. 2022).
On its part, Indonesia does have a multi-pronged approach to addressing its climate impact. It has taken many steps to address deforestation and increase forest rehabilitation, and is also looking towards facilitating innovative climate finance solutions like green bonds and green sukuk3, as declared by President Joko Widodo in his speech at COP26 in 2021 (Widodo 2021). Referencing coal in particular, Indonesia signed the Coal to Clean Power Transition statement at COP26 in 2021, agreeing to accelerate coal phaseout by the 2040s. However, Indonesia has repeatedly qualified that this is ultimately contingent on the provision of loans, grants and other technical assistance by external sources (Global Coal to Clean Power Transition Statement 2021). This signals that Indonesia likely does not have the means – nor willingness, it would seem – to finance the transition from coal alone.
Financing the early decommissioning of CFPPs is no easy feat. CFPPs usually enter into long-term PPAs with utility companies, and over 93% of CFPPs globally are “insulated” from being out-competed by other – often cheaper – renewable power generation sources through unbeatably low tariffs (RMI 2021). Thus, a significant amount of capital will be needed to compensate the plant owners for the losses they will incur from these early retirements, and parallelly, to finance the building out of replacement renewable power generation. This dynamic currently holds true for Indonesia, as a result of political and economic choices – which will be discussed shortly.
In light of this, the Energy Transition Mechanism (ETM) is a non-binding concept pioneered at COP21 by the Asian Development Board (ADB). It aims to bridge the funding gap and realise these early CFPP retirements and transitions in the ADB’s developing member countries (DMCs) (UNESCAP n.d.; ADB 2024a). According to the ADB, the ETM is defined as such:
“[The ETM] is a program that utilizes concessional and commercial capital from various public and private sources to incentivize the early retirement or repurposing of coal-fired power plants and other carbon-intensive power generation (e.g., heavy fuel oil) while also unleashing new investments in clean energy, grid modernization, and energy storage.” (Jeffries 2023)
To achieve the two bolded goals, the ADB – as the guardian of the ETM – has set up a ‘funding vehicle’ comprising two separate ‘facilities’ (in essence, funds): the Carbon Reduction Facility (CRF) and the Clean Energy Facility (CEF). The facilities are funded through what is commonly referred to as blended finance: a mix of government- or philanthropic-sourced concessional capital and privately-sourced grants, debt, equity, or guarantees (Ibid.).4
The ETM’s first undertaking has been a project to decommission the 660MW supercritical5 Cirebon-1 CFPP in Cirebon, West Java. Commissioned in July 2012, the plant has been supplying power to PLN for 12 years under an initial 30-year PPA. In November 2022, however, a Memorandum of Understanding (MOU) was signed between the ADB, the Indonesia Investment Authority (INA), PLN, and Cirebon Electric Power (CEP – a consortium that owns the plant) to decommission Cirebon-1 by 2035 (ADB 2022).
Figure 2: The 660MW supercritical Cirebon-1 CFPP. (Source: Cirebon Power)
This early closure would cost up to US$300 million mostly to compensate stakeholders within the CEP for lost revenue (White et al. 2024). Banks like HSBC, Standard Chartered, Bank of America, and MUFG could be potential sources of funding (Ibid.).6 In a recent update from the ADB, legal documentation for the operationalisation of this project is currently ongoing, following a more recent MOU signed at COP28 in Dubai in 2023 (Chaerani 2024; Kamalina 2023). The Asian Development Bank expects to close financing for the project by June 2024 (White et al. 2024).
The Indonesia ETM Country Platform, also launched by the Indonesian government in November 2022, signals the country’s larger commitment to phasing out coal power. It has signed a number of further MOUs to reduce coal power – including one to retire 1.68GW of PLN-owned CFPPs. It has also secured US$500 million of concessional funding from the Climate Investment Funds (CIF)’s Accelerating Coal Transition Investment Program, which could leverage at least $2.3 billion USD of co-financing from the ADB, the World Bank (WB), and other public and private sources, according to the a recent update by the CIF (2024).
Figure 3: Launching of the Indonesia ETM Country Platform in 2022. (Source: PT SMI)
But all the buzz around the ETM’s progress in the country risks glossing over a number of key questions that remain unanswered. Firstly, as mentioned, Indonesia’s ban on new CFPPs precludes the 13.8GW of planned capacity by the PLN, which are unlikely to be covered under the ambit of the ETM in the next decade as they would present huge financial cost. Moreover, PLN’s current plan is to phase out the country’s last set of CFPPs only by 2056. These will cover the last remaining ultra-supercritical CFPP assets – but this far eclipses the Paris Climate Agreement’s 2040 deadline for complete coal phaseouts. On its part, though, Indonesia only plans to hit net zero by 2060 (Yustika 2024). The presence of captive coal plants poses further doubts as to when exactly Indonesia can move away from coal, since no steps seem to be taken to do anything to these plants.7
Indonesia’s reluctance to accelerate its shift away from coal is best demonstrated in its stipulations governing the sale of its domestically-produced coal. Firstly, coal miners are mandated by law to sell 25% of their supply (reaching 775.2 Mt in 2023) to Indonesian offtakers under a domestic market obligation (DMO), of which a huge majority goes towards power production (Bridle, Suharsono and Mostafa 2019; Roy and Saha 2024. Moreover, the Indonesian government introduced a price cap of $70 USD per tonne of high-grade coal in 2018 (Bridle, Suharsono and Mostafa 2019). But transacted prices are even lower in reality: in 2022, the PLN paid only an average of $50 USD per tonne, far lower than the market price of $123 USD per tonne at the time of writing (JETP Indonesia 2023; Business Insider 2024).8
Combined, this steady supply of cheap coal has meant that the price of coal-fired power has been artificially deflated, between $22-$33 USD/MWh compared to $56 USD/MWh for natural gas-fired power in 2022 (JETP Indonesia 2024). Thus, economically speaking, the PLN is incentivised to prioritise power generation from coal over other sources. This is especially important for PLN since it is also required by law to sell power to consumers with a subsidy (MEMR 2024). In this way, coal use in power generation becomes an inherently political issue, and any move away from coal reliance – which might entail a rise in power prices in the absence of other government subsidies – could be politically tenuous.
The ETM’s Cirebon project itself is not free of controversy. First off, the news surrounding the closure of Cirebon-1 has largely overshadowed the opening of an adjacent plant in the second half of 2023, the 1GW ultra-supercritical Cirebon-2 CFPP. This plant was part of a planned expansion to Cirebon-1, and initially included another 1GW Cirebon-3 unit, although that has now been scrapped due to Korea Midland Power (KOMIPO) pulling their funding to focus on renewables (ElecTimes 2018). A position paper released in February 2024 by The Indonesian Forum for Living Environment (WALHI) West Java criticises the inherent “contradiction” between the concurrent retiring of Cirebon-1 and the opening of the larger Cirebon-2 (WALHI West Java 2024). If the Cirebon-1 closure was supposed to be a step in the right direction and the model for retirements going forward, this works to somewhat reduce the project’s claims to a level of posturing. Or, as WALHI deems, a “shell game” (Ibid.).
Figure 4: Workers pictured at the construction of the 1GW ultra-supercritical Cirebon-2 CFPP. (Source: Listrik Indonesia and Cirebon Power)
The focus placed on funding and shareholder compensation also risks overshadowing the negative social impacts that the Cirebon plant(s) have posed – and will likely continue to pose – to the communities living in the area, according to reports by EcoBusiness (Albay 2023) and WALHI West Java (2024). The abundance of black dust and toxic fumes, the closure of previously lucrative salt mines, and the poisoning of shellfish, et cetera, due to Cirebon-1’s operations have all been to the detriment of living standards and quality of life for residents. To their credit, the ADB has traditionally heavily prioritised social and environmental safeguards in the projects it has undertaken, and this seems to be the case for the Cirebon-1 ETM project as well.9 To truly achieve the ‘Just Transition’ that the ETM aims to embody, the project would do well to include further considerations of the impacts posed not only through retiring Cirebon-1, but the operations of Cirebon-2 as well.
Figure 5: Kanci fishermen harvesting shellfish in polluted conditions along Mundu Bay (Source: EcoBusiness and ResponsiBank Indonesia)
The pilot ETM project to retire Cirebon-1 early has a lot going right for it: its (likely) ability to secure notoriously elusive concessional funding, a strong country platform backing the deal, and the benefit of international scrutiny to ensure that the project progresses as planned. Yet, Indonesia’s sustained reliance on its coal industry for power generation binds efforts like the ETM to a seeming paradox, and the fears of sceptics who question the country’s commitment to achieving its climate undertakings are certainly justified.
Nonetheless, if costs are still to be the main kicker, an accelerated transition away from coal could yet be cheaper for Indonesia in the long run. A 2022 analysis by the Institute of Essential Services Reform (IESR) in Indonesia highlights that the quantified benefits from reducing coal power subsidies ($34.8 billion USD) and savings from treating adverse health effects from coal ($61.3 billion USD) greatly outstrip the costs of accelerated retirements of coal ($27.5 billion USD to 2050) (IESR 2022).
Ultimately, the best way for such a coal-dependent country to seek to accelerate the decarbonisation of its power industry is still unclear. But regardless of how one crunches the numbers, the fact of the matter is that this transition will be front-loaded in terms of cost. Therefore, along with other market-based efforts to transition Indonesia away from coal like the Indonesia Just Energy Transition Partnership (JETP)10, the ETM still represents a viable – if imperfect – model to finance a just, fair, and equitable transition. Crucially, these efforts must aim to prioritise the drastic shortening of the 2056 timeline to ensure a genuine weaning off from coal, and a fertile environment for more renewables to come online.
Written by Nicholas Loh. All views are my own. Special thanks to Ernest Lee for edits and comments.
Footnotes
- Some CFPPs are co-owned by both PT PLN and IPPs; they are tagged based on the entity that owns the majority of the stake in the power plant. ↩︎
- Captive coal plants are off-grid coal plants used generally for industrial purposes, such as nickel smelting or chemical production. ↩︎
- The green sukuk is Shari’ah-compliant bond whose proceeds go into financing or re-financing projects to address either climate change or biodiversity loss. For more information on green sukuk, refer to the infographic provided by the United Nations Development Programme (UNDP), here.
↩︎ - For more on the ETM, refer to the ADB’s explainer here. For a more recent update which details the status of activities in Indonesia, Philippines, Vietnam, Kazakhstan, and Pakistan, go here. ↩︎
- Coal plants are generally categorised into subcritical, supercritical, and ultra-supercritical, in increasing order of coal combustion efficiency. For a detailed write-up, refer to the Global Energy Monitor’s wiki page, here. ↩︎
- One of the funding models for the ETM – the synthetic model – involves the investing of funds into a debt-like instrument. Funding is first used to compensate existing shareholders, and lenders (like private banks) will receive payments over the investment period. A more detailed write-up of the funding models for the ETM can be found here. ↩︎
- I would recommend reading this wonderful piece by the Centre for Research on Energy and Clean Air for more information, here. ↩︎
- To be precise, the market price does not reflect exactly the cost of coal for Indonesian power producers. As with other commodities, offtakers might also sign futures contracts to secure the resource at a certain price – for more information, read an explainer by the Commodity Futures Trading Commission here. An analysis done by Indonesian research firm Katadata on the Indonesian coal reference prices (HBA) for 2018 shows that the HBA still exceeded the DMO price cap from between $19.53 to $37.83 USD per tonne of coal in that year, proving that coal prices are indeed artificially deflated. ↩︎
- For more information, refer to the project’s first social safeguards report, here. ↩︎
- For more information on the Indonesia JETP, refer to its website, here. ↩︎
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