Monday, September 26, 2016

Can Indonesia’s energy path be nudged away from coal?

Indonesia is at risk of locking into a high carbon power sector when other major economies are beginning to favour clean energy in pursuit of lower greenhouse gas emissions. But there are things that can help nudge Indonesia onto a cleaner energy expansion path, and other countries can help.

Power shortages, as Indonesia often experiences, raise the cost of doing business. The Jokowi government is pursuing aggressive expansion of power generation capacity. It wants to add 35 GW by 2025, out of which 20 GW or 55 per cent is to come from coal-fired power plants. Only 2.9 GW or 8 per cent is to be sourced from renewable energy sources.

The share of coal in total electricity production climbed from 36 per cent in 2007 to 41 per cent in 2015. Only recently the government announced that future plants must use supercritical technology to increase efficiency and reduce emissions, but even this technology is behind the state of the art in coal fired power plants.

Reliance on coal power makes it difficult to meet Indonesia’s commitment to reduce carbon emissions by 29 per cent from business-as-usual levels by 2030. While emissions from land use change and forestry are on a long term declining trend, energy-related emissions are on the rise, with coal based power playing a large role. Latest available data from IEA show that coal accounts for one-third of energy-related emissions. The trend is for a rising share and these power plants are long-lived, creating carbon liabilities for decades to come.

Like in other countries, high-level pledges to global goals often do not align with political realities on the ground. Currently, a priority for the Indonesian government is to push infrastructure development. Paired with resource nationalism, the use of abundant coal reserves to fuel electricity production looks like a non-negotiable issue in parliament.

So how could Indonesia’s energy path be nudged in a direction that is less reliant on coal-fuelled electricity?

If the target is to enable large-scale investment into renewables, then the state-owned electricity company Perusahaan Listrik Negara (PLN) needs to be given incentives to do so. The national utility monopolises the grid where it is the sole buyer of electricity generated by independent power providers. But it is not allowed to charge cost-reflective consumer tariffs and depends on subsidies to fund its loss-making operations. As long as coal- and gas-fuelled generation technologies are cheaper than renewables, PLN will opt to buy the former. This is despite the existence of feed-in tariffs or above-market rate payments for power from most renewable sources.

Constitutional amendment to curb PLN’s monopoly are a political non-starter, so what matters most is to reduce PLN’s financial risk of the switch to renewables. This can involve subsidies for projects, going either to PLN or independent power producers that sell electricity to PLN, to bridge the viability gap between coal and renewables.

Here, other countries can help in several ways.

First, they can support the capacity of Indonesian institutions to access innovative funding mechanisms. International financial mechanisms like the Green Climate Fund are ready to channel money into clean energy projects, but Indonesian organisations need to obtain accreditation first. With the necessary accreditation, Indonesian organisations can take up a ‘broker’ function between domestic developers and international capital.

Second, governments should increase funding for renewable power plants, especially under domestic financial mechanisms that support public–private partnerships. The Indonesian Infrastructure Guarantee Fund and the Indonesian Infrastructure Company are vehicles to get infrastructure projects going, but coal plants remain on the agenda. Donor efforts to signal the withdrawal from future coal power projects are already underway.

Third, donors can strengthen domestic capacity to develop and assess projects. There is plenty of money available to fund renewable energy investment, but well-designed projects are hard to find. Donors can also help banks in adequately assessing risks associated with renewable energy projects.

Finally, donors should continue to support analysis and strategic planning to feed into Indonesia’s energy policy. Big ideas and concepts matter. Not all of them will be implemented, but they contribute to processes within government that shape regulatory incentives. Analysis on green fiscal policies, geothermal development and green growth strategies have helped Indonesian policymakers in shaping energy policies.

The United States and China have announced ratification of the Paris Climate Agreement and this will give further boost to a growing global renewable energy industry. China and India are already spearheading the global wind and solar power industry. Indonesia, having for so long followed a labour-intensive manufacturing and then a resource-exporting model, may be able to enter an innovation-and technology-driven growth path. The move toward a green economy represents an opportunity to move up the technological ladder, and reduce the extent of lock-in to high carbon infrastructure.

Kurnya Roesad is Lead Economist at the Global Green Growth Institute Indonesia and a PhD candidate at the Crawford School of Public Policy, The Australian National University.

Frank Jotzo is director of the Centre for Climate Economics and Policy, at the Crawford School of Public Policy, The Australian National University.


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