Can Indonesia Really Quit Coal After 2023? – The Diplomat

Pacific Money | Economy | Southeast Asia

A recent article from Mongabay reports that as of 2023 Indonesia will no longer build new coal-fired power plants. The article notes, however, that Indonesia still intends to finish dozens of projects that are currently under construction, and that these will continue burning coal and emitting carbon for many years to come. Nevertheless, if Indonesia is serious about quitting coal it would be a welcome development, as the country accounted for 2 percent of global emissions in 2020 and the economy is likely to continue growing rapidly for the foreseeable future. While the 2023 deadline is not perfect, powering future growth with an increasing share of renewable energy would be a good thing. But just how credible is this commitment?

The first thing to note is that the Indonesian government often makes very ambitious policy pronouncements which get a lot of press coverage but are not always that realistic. For instance, the government’s stated goal is still to source 23 percent of its electricity from renewable sources by 2025, something which is probably not achievable at this point and perhaps never was. So this pronouncement cannot be taken at face value, and there are reasons to be skeptical.

For one, Indonesia has large domestic coal reserves. The main goal of policymakers is to keep the retail cost of electricity low and because there is a lot of it, the government can to some extent control the cost of generation by placing a ceiling on the price of domestic coal (as it did in the run-up to the 2019 election). The ability to control the price of a key generating input is an important part of this story. The domestic coal lobby is also very powerful, and it will take a lot of political capital to force them to cede market share to renewables.

On the other hand, international sentiment on fossil fuels is changing rapidly and it may be that Indonesia sees the writing on the wall and wants to get out ahead of events. Several major international players have recently said they will be ending financing for coal projects. Loans form development banks in China, South Korea, and Japan provide critical funding for coal power in Indonesia and if that funding is cut off it would seriously change the calculus of Indonesia’s domestic actors.

Of course, the key is that all these international lenders have to agree to cut off financing at the same time, and abide by a mutually agreed upon set of standards governing their lending decisions, a framework which at the moment does not exist. But in any case, Indonesian policymakers would be wise to start planning as if funding for these coal projects will be more difficult to come by in the future, and that seems to be what’s happening here.

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Another potential factor is that Indonesia is actually looking at a power supply surplus, especially in Java and Sumatra. For a while, the government’s energy plans were based on assumptions of 7 percent economic growth, when in reality growth ended up closer to 5 percent, leading to some potential overbuilding of capacity. If that’s the case, it’s pretty shrewd to announce you are hitting the brakes on coal in 2023, when in reality the grid doesn’t need additional capacity right now anyway.

But even if it’s just a happy accident, the opportunity is there to start developing renewables in earnest. And the best way to do that, given the particularities of Indonesia’s political economy and geography, is to focus on Eastern Indonesia. There are many parts of Eastern Indonesia that are pretty remote and where it is not economically feasible to build high-capacity power plants or extensive power grids. These areas would benefit considerably from moderate gains in generating capacity from solar and wind power.

Moreover, it would give PLN, the state-owned electric utility, valuable experience in building and operating decentralized grids that draw on a variety of distributed generating sources. This technical know-how and experience will be vital if the grids in Sumatra and Java (which are predominantly powered by high-capacity plants burning fossil fuels) are ever going to make the switch to renewables at scale. So can Indonesia really quit coal after 2023? Sure, it can. Especially if external financing for coal dries up and the grids on Sumatra and Java are experiencing supply surpluses. Whether it will or not remains to be seen, but focusing on moderate capacity gains and better decentralized grid management in Eastern Indonesia would be a good start.