Net-zero: Indonesia wobbles

By Richard North - August 26, 2023

Returning to the “Just Energy Transition Partnership” (JETP) theme which I broached earlier this week, it is important to note that the scheme is far more than South Africa.

In what amounts to a stepping stone or incremental programme, it is a mechanism for encouraging the transition from coal (and other fossil fuels) to renewables in most of the major third world coal users.

Thus, once South Africa had been recruited to the scheme, others were to follow, starting with Indonesia and then, in no particular order, Senegal and Vietnam, followed by the great prize – India. China was not included because that country is subject separate agreements and, in any event, cannot rightly be considered a third world country.

The Indonesian JETP was in fact agreed on 22 November last year. With great fanfare, the British government announced its launch at the G20 meeting in Bali, hosted by the Indonesian government.

As with the South African scheme, it was to be funded by a mix of grants, loans and loan guarantees, only this time the ante was raised to $20 billion, over a three-to-five-year span, with the UK “standing ready” to support delivery of the partnership, including through a $1 billion World Bank guarantee.

The plans for the implementation of the scheme were supposed to be finalised by 16 August just past but, as the tempo of the talks increased, the first intimation of problems began to emerge.

This was in March when representatives of the so-called International Partners Group (IPG) of wealthy governments, with foreign participating banks, were flying to Jakarta for to finalise the arrangements.

It was then that we learnt that details of their $20 billion support package were being kept deliberately secret. The IPG governments would not reveal which of them was paying which part of the $20bn or what form the support would take, while one bank blandly stated that its contribution to the figure was only the amount it was “willing to consider”.

The situation was made that much more obscure when the funding nations, the US, Japan, Canada, France, Germany, Italy, Denmark and Norway refused to announced how much they would be contributing or how the money would be spent.

One area of serious contention that had emerged, however, was the IPG’s reluctance to provide better financing terms. In June it had been revealed that the proportion grants proposed comprised a mere $160 million – or 0.8 percent of the total on offer.

That was even less than the 3 percent of South Africa’s grant support, leading civil society groups fear that if loans took up the bulk of the support the JETP could become “a debt trap” for the country.

A source “close to the Indonesian government” then complained that such money that was on offer might in any event “come too slowly due to donor country conditions”. Under the deal, the government would be obliged to commit to an “action plan” to the satisfaction of the IPG, in order for funding to be released.

Politically, though, the reforms were complicated and risky, particularly with a presidential election scheduled for February 2024, placing the government in an awkward position. The risks would have to be taken before the election while the rewards would only start flowing afterwards.

Pointing to some of the problems is a detailed article is the Washington Post. It avers that, unlike many other countries which have been attracted to renewables because of the apparent cost savings, Indonesia is a rare exception.

The world’s third largest coal producer, its reserves vast and cheap, accounting for 43 percent of the country’s energy mix. Last year, its coal consumption reached a record high, catapulting the country to become the world’s sixth-highest fossil CO2 emitter, behind Japan.

When it comes to renewables, wind speeds close to the equator tend to be low, so it’s ill-suited for generating much power from wind turbines. Cloudy skies and year-round warmth reduce the efficiency of solar panels, so photovoltaic power potential is well below that of most other large developing countries.

Problem are then compounded by geography, says the WaPo. In many parts of the world, fears that renewable power takes up too much space are spurious. In the main island of Java – which crams a population bigger than Russia into an area the size of Greece – they’re far more credible.

Building the sort of large-scale electricity transmission networks that China has developed is also problematical. Not least, the cost of cables soars once they cross water, and Indonesia has more than 18,000 islands.

These fundamental issues, we are told, are made even more intractable by politics. Coal power receives a subsidy from the country’s export sector thanks to policies that require miners to sell a quarter of their product to domestic generators at prices that are often below the cost of production.

Renewables, meanwhile, are penalised: local content rules require that 60 percent of solar power components are made locally, pushing domestic costs far above those available on the global market.

Meanwhile, the excess of coal-fired capacity in the main Java-Bali grid has led to monopoly power distributor PLN to delay permits to add rooftop panels that would reduce its own revenues.

On top of that, as with South Africa, coal is a major source of wealth and political influence, too. The country’s investment minister, Luhut Binsar Pandjaitan, one of the lead players in charge of the JETP programme and a key ally of President Joko Widodo, has historically been a significant coal mining shareholder.

Altogether, there is little sign of Indonesia making the progress necessary to achieve even existing targets, let alone those envisaged by the JETP. Just 12.5 gigawatts of renewables were connected at the end of 2022, barely more than half the 24 GW the country has promised to have by 2025.

Only two additional gigawatts have been connected since 2019, and the government has cut its target for 2023 solar installations by half relative to 2022’s figure. Early retirement of coal power stations will be pointless, too, unless the government closes loopholes allowing more to be built in future.

Then, even if local political will and coordination were better, the $20 billion available doesn’t match the scale of the problem. An estimated $2.42 trillion will be needed to fund Indonesia’s energy transition up to 2050.

Against this background, it is hardly surprising that, as the deadline loomed to the finalisation of the implementation plan, the Indonesian government announced a delay, claiming it needed more time to bridge divisions with wealthy donor nations on financing terms and new coal plants.

International talks were said to have been “tense”, with Indonesia openly demanding more money on better terms from the IPG countries. The plan was re-scheduled for an unnamed date “later in the year” to give experts additional time to develop “a technically credible pathway”.

Not least of the issues are Indonesia’s plans to build new coal power plants to power metal smelters – so-called captive plants – ironically producing massive quantities of the nickel and stainless steel essential for “green” electric car batteries.

Now enter the New York Times which introduced further complications with a piece entitled “How Geopolitics Is Complicating the Move to Clean Energy”. The fate of Indonesia’s unrivalled stocks of nickel, it told us, is caught in the conflict between the United States and China.

It turns out that, while the Western nations which form the IPG Group have been seeking to define and constrain Indonesia’s investment plans for energy and related issues, the country is relying primarily on Chinese companies for the $14 billion investment spent on building smelters used to make stainless steel and nickel for EV batteries.

The situation is not at all helped by an EU ban, introduced in 2014, on Indonesia’s exports of nickel products, blocked because EU asserts that its companies are being deprived of a fair chance to import raw nickel ore and process its own metal. It brought and won a case at the WTO, gaining the power to apply punitive tariffs on Indonesia’s exports.

Despite that, exports of nickel products have multiplied more than tenfold, exceeding $30 billion last year, pushing Indonesia further into the Chinese camp as it complains of “the arrogance of European countries” which maybe think “Indonesia is still colonised”.

Caught in the fallout is the United States, which is accused of being “missing in action”, despite being a key IPG partner. And while it cannot be said that the JETP programme is officially dead, the complications are such that it is extremely hard to see a way through.

As of yesterday Indonesia’s finance minister, Sri Mulyani Indrawati, was blaming the delay in concluding the implementation plan on “rising borrowing costs”. Furthermore, matching Indonesia’s plans with the IPG’s wishes and funding sources was proving to be “challenging”.

“Especially now that pricing (for borrowing) has risen and (with) interest rates on capital also becoming increasingly high, we also have to see whether this will fit with our principle of a just and affordable energy transition”, the minister said.

Reading between the lines, this has the feel of the first stage of a graduated, official brush-off as the Indonesian government walks away from the entire JETP programme. There will be face-saving statements and perhaps a fudged settlement, but this global arm of net-zero looks to be in serious trouble.