JAKARTA: When Indonesia agreed last year to clean up its energy system with an estimated US$20bil of help from a coalition of wealthy countries and large financial institutions, world leaders hailed the deal as “extraordinary,” “realistic,” and “historically large.”
Almost 10 months later, as South-East Asian leaders gather in Jakarta, the hosts have little to show off.
A much-anticipated investment blueprint has been postponed. Parties have yet to agree on governance, baseline data or the funding required to curb greenhouse emissions and wean the world’s largest coal exporter off fossil fuels.
The most ambitious of the Just Energy Transition Partnerships (JETP) – the international finance projects designed to cut climate-warming emissions-is faltering.
One especially thorny issue is that Indonesia’s coal-dependency is greater and more complex than all sides initially acknowledged.
A 362-page draft document reviewed by Bloomberg spotlights the rapid growth of a fleet of dedicated, “captive” coal-fired plants powering industrial expansion but not connected to the grid.
Incomplete data, especially on new and planned facilities, means even the exact scale of the problem is unclear.
“The process started top-down,” said Edo Mahendra, chair of the secretariat tasked with turning the JETP, as the climate package is known, into reality. “Once we do the bottom up, all the devils that lurk in the details come out.”
How these issues are resolved will set a precedent for any future deals, determining to what extent the agreement can create “valuable lessons for the global community that can be replicated in other countries to help meet our shared climate goals through concrete collaborative actions,” as Indonesian president Joko Widodo put it in November, when he announced the deal in Bali alongside US President Joe Biden.
Indonesia is the biggest emitter in South-East Asia by a long shot, thanks to vast coal reserves and a power-station construction boom over the past decade or so.
But its regional neighbours and other emerging economies also depend on coal-fired plants that will need to be retired to prevent the worst consequences of global warming.
Vietnam is advancing with its own JETP. Senegal struck a deal in June.
In the end, the outcome in Indonesia will also reflect on the credibility of countries that enriched themselves through coal and other fossil fuels for centuries and now cite the need for global emissions cuts. It will test the claims of big private financial institutions that the capital markets can create solutions to the world’s biggest problems.
Bloomberg reporters spoke with more than a dozen people with knowledge of the negotiations, most of whom asked to remain anonymous because the discussions are private and ongoing. They described deep gaps between all sides over even the most basic terms and the scope of the problem they have to fix.
The initial promise of peaking Indonesia’s power sector emissions by 2030 at no more than 290 million tonnes of carbon dioxide, about 20% below a baseline level for the year, looks out of the question.
An alternate scenario laid out in the draft plan would raise the target maximum to 395 million tonnes of CO2, to account for the construction of new captive plants to serve growing industrial power needs.
Officials have said they are aiming to have a revised-perhaps final-investment plan before the COP28 climate conference begins in Dubai at the end of November, taking on public feedback.
But to do that, they will need to come to agreement on at least three major, interrelated issues: the money, the emissions target and the mechanics of the coal phaseout, including changes to Indonesian laws and policies that hold back wider green progress.
First, the funds. At around US$21.5bil, according to the latest figures, this is the biggest attempt to blend private and public capital to jump start the energy transition in the developing world, more than twice the size of the original deal struck with South Africa in 2021.
The capital is supposed to come from two sources: US$11.5bil mostly in grants and concessional loans from the donors (the Group of Seven economies plus Denmark and Norway), the rest from private-sector investments, marshalled by members of the Glasgow Financial Alliance for Net Zero (GFANZ).
But there may not yet be enough in either bucket. There is just US$289mil in grants, with half earmarked for technical assistance-funding for experts, consultants and advisors to model and support the energy transition.
Almost all of the rest is loans, at interest rates to be determined later.
For Indonesia, which is responsible for a tiny fraction of historical emissions relative to the donor countries, this adds up to a problem.
JETPs are supposed to bring costs for emerging countries more in line with what already wealthy nations would pay, via grant financing or ultra-low-rate loans.
They are intended as catalysts, facilitating affordable investment. Otherwise, there’s little financial incentive for South-East Asia’s biggest economy to risk its own development to clean up the rich world’s mess, as Jakarta sees it, especially when interest rates are rising globally.
To make matters more complicated, there are significant restrictions on how the public money can be used. Around US$4.2bil has already been allocated to specific projects, including two early coal-plant retirements currently underway.
The remainder is more flexible-but only roughly a quarter is eligible for shutting down coal-fired power plants, a cornerstone policy that has failed to attract meaningful support in practice.
On the private side, people close to the bank partners say investors are waiting to see what their options are. So far, there’s been little appetite for funding phase-outs currently in more advanced negotiations, energy-sector and financing sources said, one a privately owned power plant in Cirebon, the other the state-owned facility in Pelabuhan Ratu.
Risks are high, and coal exclusion policies remain in place for many large banks and funds. All fear accusations of greenwashing.
“We welcome the progress that has been made on the Indonesia JETP,” GFANZ said in an email. It declined to comment on ongoing negotiations. Then there is the question of the emissions target agreed last year.
People close to those discussions say negotiators sidestepped the impact of Indonesia’s growing fleet of captive coal-fired power plants, single-purpose engines built to support nickel production and other heavy industry in places the grid doesn’t reach. At best, the issue was dramatically underestimated, which may explain why the original deal included a loophole for new captive coal plants. — Bloomberg