Authors: Dr Rajiv Lall, Mili Fomicov
During COP29 in Baku, Indonesia announced its plans to retire all coal-fired power plants in the next 15 years. This plan is more ambitious than an earlier target of 20561. President Subianto also claimed that he is optimistic it can reach net zero emissions before 2050, a decade ahead of its previous commitment. He communicated their plan to build more than 75GW of renewable energy in the next 15 years, which would replace coal-fired powered generation.
Indonesia is a coal-reliant country and has the world’s fifth-largest operating coal-fired power capacity of over 52GW2. Additionally, it is the world’s seventh largest carbon emitter, based on the International Energy Agency (IEA) data. The country does have significant potential for solar and hydropower generation, but this requires significant investment and policy reform. Will they be able to reach this target?
Based on a joint Imperial College Business School and IEA ASEAN Renewables report3 there are many opportunities and initiatives towards this goal. Firstly, falling technology costs have improved competitiveness of renewables. Their September 2022 announcement of a tariff scheme based on competitive auctions and new location-based ceiling prices has the potential to enhance the attractiveness and bankability of projects and better support system integration. Additionally, the Indonesian government has signaled restrictions on new coal-fired power as well as the accelerated closure of existing plants. These efforts have been supported by announcements of the first early retirement of a coal plant under the Energy Transition Mechanism, alongside international support under the Just Energy Transition Partnership4.
However, many challenges still remain. To move this market forward and meet its target, our report outlines several priorities for the government:
- Put the power sector on firmer financial footing through energy subsidy reform
- Renegotiate inflexible thermal power plant contracts and accelerate the phase-out of coal
- Improve predictability and design of renewables auctions, including development support for land acquisition and feasibility studies, to create a more robust pipeline of projects
- Diversify commercial arrangements for buying and selling power for independent players
- Phase-in approaches to local content to better align with domestic manufacturing capacity
- Boost financing options through enhanced provision of international blended finance mechanisms and continued cultivation of a domestic market for sustainable finance5
PLN remains the monopoly distributor of electric power in the country with the expansion of grid infrastructure entirely dependent on them. Massive investment in inter-island grid connectivity and storage capacity will be required if the country’s growing electricity demand is to be met reliably from renewable sources.
Not surprisingly, Indonesia’s plans to phase out all fossil fuel-based power plants by 2040 are facing external scepticism. Fitch Ratings has flagged significant challenges related to policy execution, infrastructure readiness, and energy security7. Other experts point out that Indonesia will struggle to meet its ambitious target without a significant policy reform and a surge of investment in renewable energy infrastructure8.
This will not all come easily. But the new administration’s announcement signals an encouraging strengthening of resolve.
Footnotes
1 Indonesia advances coal-fired power phase-out to 2040 | Latest Market News
2 Indonesia’s ambitious coal phase-out faces major hurdles: Fitch | The Asset
3 ASEAN Renewables Challenges and Opportunities | Imperial College Business School
4 Indonesia country sheet, ASEAN Report
5 Indonesia country sheet, ASEAN Report
6 Indonesia country sheet, ASEAN Report
7 Indonesia’s ambitious coal phase-out faces major hurdles: Fitch | The Asset
8 Indonesia’s ambition to quit coal hinges on policy reforms, FT