Experts Urge Awareness of Debt Trap as Indonesia Eyes Funding for Energy Transition

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Sharm el-Sheikh, Egypt

Experts Urge Awareness of Debt Trap as Indonesia Eyes Funding for Energy Transition

While negotiators and delegates were bogged down in battles of interests and narratives, in the second week of COP27, Indonesia welcomed heads of state from the world's most powerful countries. The G20 Summit agenda took place on November 15-16, 2022 and was attended by 17 heads of state.

On the first day of the G20, news from Bali travelled fast to COP27. The G7+ Denmark and Norway announced funding of up to US$20 billion to support Indonesia's energy transition ambitions. The United States and Japan will take the lead in raising up to US$10 billion from wealthy countries. The rest will be met by the private sector in the Glasgow Financial Alliance for Net Zero (GFANZ). Some of the financial institutions involved include Bank of America, Citi, Deutsche Bank, HSBC, Macquarie, MUFG, and Standard Chartered.

The Just Energy Transition Partnership (JTEP) is the second chapter of the same program program initiated by developed countries at COP26 in Glasgow last year. South Africa was the initial recipient of this program with a value of US$8.5 billion. For the South African partnership, around 97% of JETP funds are in the form of loans and only 3% are grants. As for Indonesia, no details have been shared about the how this funding scheme will be carried out. Most likely, the mechanism will not differ much from South Africa, which relies on blended financing.

Justin Guay, Director of Global Climate Strategy for The Sunrise Project – a charity organization working energy transition based in Australia – said the US$20 billion agreement will be a strong political testament from Indonesia, especially to countries that have been relying on coal power plants. Apart from South Africa and Indonesia, several other countries such as India, Vietnam and Senegal are slated to receive similar funds.

"Five years ago it was difficult to imagine that Indonesia would want to start an early coal power plant retirement project. This will be a game changer," Guay told Katadata.

However, Guay said it is still too early to see this project in the long term, absent the many important details about the scheme and mechanism of this agreement. "The Indonesian government must be vigilant. The devil is in the details," Guay said.

Fabby Tumiwa, Director of the Institute for Essential Services Reform (IESR) – an Indonesia-based energy transition think tank – said that the details in negotiating the US$20 billion deal are very important. Over the next few months, the Indonesian government will develop an investment plan that includes the composition of funding and what the government will do with the money. Another crucial aspect, according to Tumiwa, is the loan interest rate.

Learning from the South African case, where loans account for 97% of total funding, this detail should be a concern. He said that Indonesia hopes to get cheap funds with an interest rate of around 3%-4% and a long loan period. "Every loan has its risks. This must be mitigated," Tumiwa said. The blended financing scheme in this deal could be a challenge in itself. Furthermore, as much as US$10 billion of this funding will come from commercial banks that have the potential to offer higher interest rates. “From the start, the discussion about JTEP hasn’t been transparent. I hope the formulation of the investment plan can involve public participation,” Tumiwa added.

Debt trap

The JETP is not the only channel through which Indonesia is using to raise billions of dollars loan to support its energy transition. Finance Minister Sri Mulyani said Indonesia had also secured a US$500 million loan from the Climate Investment Fund (CIF) to help the country retire some power plants in the short term. Katadata learned that Sri Mulyani had sent an official letter as well as an investment plan document to the CIF on October 18, 2022. In the letter addressed to the Head of CIF Mafalda Duarte, Mulyani explained how much funds were targeted as well as what the government would do. The letter detailed that the government is requesting around US$600 million in concessional loans from the CIF. These funds will be combined with US$2.2 billion in co-financing from multilateral institutions, and US$1.3 billion in commercial co-financing. The document also stated there the government will potentially cough up US$1 billion from state coffers. In total, Indonesia is eyeing a sum of US$4 billion funding through this scheme.

"The purpose of this funding is to reduce the excess capacity of energy supply by retiring around 1-2 GW of base load power plants within 5-10 years," wrote Sri Mulyani, in the letter obtained by Katadata. Mulyani said the plan to retire up to 2 GW of power plants has the potential to reduce 50 million carbon emissions by 2030 and 160 million tons by 2040. The combined US$4 billion loan scheme and US$20 billion JETP will give Indonesia a head start on energy transition projects. "All countries will now be watching how Indonesia negotiates the details of funding," says Guay.

However, the total funding of US$24 billion or around Rp370 trillion will mostly be in the form of loans. Learning from the JETP project in South Africa, where only 3% went to the state treasury as grants, economists warned the government of the potential mounting debt from energy transitions financing schemes.

An economist from the Institute for Development of Economics and Finance (Indef) Ahmad Tauhid said, the loan for the energy transition is actually a productive debt. However, he adds, the government needs to pay attention to details about loan interest rates. Echoing Tumiwa, Tauhid said Indonesia should opt for cheap financing with interest rates below 4%. Tauhid also said that the loan tenure must be long term, at least 10-15 years.

"For private financing, [interest] should not be more than our SBN [Government Securities] which is around 7%," Tauhid told Katadata. Similar view from David Sameul, head economist of Bank BCA – Indonesia’s largest private lender – who said the energy transition must be carried out carefully over a long period of time. In addition, Samuel said the government should boost domestic supporting industry and technology transfer to avoid the burden on the current account balance.

"[Energy transition] cannot be done in 1-2 years. It must be in the range of 25-30 years so that the burden and debt ratio do not become a problem in the future," he told Katadata.

Meanwhile, Bank Permata economist Joshua Pardede is quite optimistic about JETP funding. He said with these funds the government can encourage new renewable energy investment initiatives. "Given that the energy transition fund is a soft loan, we can predict the impact on debt will tend to be limited," Pardede said.

Data from the finance ministry shows Indonesia’s debt ratio is relatively safe. In July 2022, the ratio of Indonesia's (public and private) debt to gross domestic product (GDP) reached 42.17% while the ratio of government (public, including central bank) debt to GDP reached 39.56%. A figure that is still below the safe limit for Indonesia's debt of 60% as stipulated in Indonesia’s financial law.

"Compared to developed and developing countries, the 42% debt ratio is relatively small," said Mulyani.

Over the next few months the Indonesian government will engage in negotiations for the disbursement of US$20 billion JTEP fund to hash out transaction details and an implementation plan, as the agreement comes with a number of binding conditions. For example, Indonesia must limit peak electricity emissions to no more than 290 metric tons by 2030. Emissions in this sector must also reach zero by 2050. In addition to that, the renewable energy mix must also reach 34% by 2030 – the current mix stands at 12%.

Program Director for the Indonesia Center for Environmental Law (ICEL) Grita Anindarini said Indonesia must prepare mechanisms and regulations to accommodate a just transition. "The word 'just' in this initiative is not only about the environment, but also human rights, especially for those affected," she said.

Until now, the government has not provided a clear picture of how the energy transition will be carried out. However, in the investment plan document for CIF obtained by Katadata, a short term plan has been laid out. The document also mentioned one of the major challenges Indonesia is dealing with in the energy sector, which is overcapacity, especially from new coal power plants that are averaging about 12 years in operation. "Indonesia's climate ambitions can only be achieved by 'decommissioning' and/or 'repurposing' PLTU," Mulyani wrote in the document. The word 'repurposing' is interesting.

According to Tumiwa, this could mean that the government opens up opportunities for coal power plants to be utilized for other needs, for example for thermal storage. "But I am not sure know what the government mean by this, as written in the CIF document," Tumiwa said.

As an initial step in the transition, the state utility company PLN will retire 2-3 coal power plants with a capacity of 1 GW in 2030 and another 9 GW in 2035. In the next phase, PLN will retire 49 GW of power plants in 2030-2055. "PLN will be a key player in decarbonization of the energy sector," reads the same document. The document details at least nine coal power plants that will be shut down by PLN until 2030. These include the Suralaya plants 1, 2, 5, 6, 7, and 8. In addition, there are also Paiton plants 1 and 9 and Adipala power plant. These nine plants have a capacity of 4.9 GW with a book value of Rp82 trillion.

Energy transition and sustainability expert, Dicky Edwin Hindarto said, the retirement of coal power plants needs to consider several key factors. Apart from the age issue, it is also necessary to look at the technology and supply balance. This is because PLN still needs to ensure that electricity supply remains evenly distributed once the power plants are closed. "Talk about the Suralaya and Paiton power plants, that should have been the first to retire," Hindarto told Katadata.

Hindarto described four aspects that must be taken into account in energy transition. First, the technology implemented must be greener and more sustainable than coal-fired power plants. "The technology must also be one that can be adopted and produced in Indonesia," he said. Second, the measurement reporting system (MRV) must also be well-prepared, transparent, accountable, and in accordance with international standards. Dicky underlined that emission measurement must also be based on a clear baseline. The third is transparent and sustainable financing and fourth is justice.

“Just in energy transition means justice. There must be no one left behind in its implementation,” said Hindarto.

In an exclusive interview with Katadata on the sidelines of COP27 in Sharm el Sheikh, PLN resident director Darmawan Prasodjo revealed that the main challenge in energy transition is not investment, but fossil-fuelled stranded assets. "So there are many [assets] that must be shut down, and some of them have not been paid off," Prasodjo told Katadata.

Darmawan said that currently carbon emissions generated from Indonesia's electricity sector are around 228 million tons per year. The number is expected to jump to 1 billion tons per year by 2060. In the 2021-2030 Electricity Supply Business Plan (RUPTL), Darmawan said that PLN has been able to eliminate the construction of 13 GW of coal-fired power plants. This means that 1.8 billion tons of carbon emissions have been avoided.

"Is this enough? It’s not enough," he said. Darmawan continued that PLN has also replaced 1.1 GW of coal-fired power plants with renewable energy plants, and replaced 880 MW of power plants with gas. This can reduce 50% of greenhouse gas emissions. "Is it enough? It’s not enough. We have design additional 51.6% capacity from 2021-2030 to use new and renewable," he said.

This story was produced as part of the 2022 Climate Change Media Partnership, a journalism fellowship organized by Internews' Earth Journalism Network and the Stanley Center for Peace and Security. It was first published in Katadata on 17 November 2022. It has been translated from Bahasa Indonesia to English and has been lightly edited for length and clarity.

Banner illustration credit: Lambok E. Martin Hutabarat for Katadata. 

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