Indonesia’s energy transition plan may be short on concessionary support: Singapore banks

INDONESIA’S investment plan to finance its transition to low-carbon energy adds clarity, but may not tap enough concessionary capital to sufficiently draw private capital, Singapore banks told The Business Times.

The investment and policy plan was released on Nov 21 almost a year after the signing of the US$20 billion Just Energy Transition Partnership (JETP) by South-east Asia’s largest economy, a group of developed nations comprising mainly of the Group of Seven countries, and seven private-sector banks that are members of the Glasgow Financial Alliance for Net Zero (GFanz).

The document outlined specific targets in emission reductions, five key investment areas and the total amount of investments required to hit JETP targets.

Joseph Poh, head of energy and chemicals for the sector solutions group at UOB, said that the document provides greater clarity on the bankability of the energy transition projects in Indonesia. However, the bankability of each coal-fired power plant slated for early retirement must still be considered on its own merits, including how to structure financing mechanisms to ensure debt repayment for banks.

Out of the five investment areas the document has set out, financing the early phase-out of coal has been the more contentious one for the local banks, as the commercial viability of such transactions has not been worked out. Banks have also made commitments to exit thermal coal financing, and such lending activities will increase their financed emissions.

The other investment areas are: transmission lines and grid deployment; accelerating the growth of renewable energy including dispatchable sources such as geothermal, hydropower and biomass, as well as variable ones such as solar and wind; and enhancing the supply chain of variable renewable energy.

Indonesia’s comprehensive plan identified at least US$97.1 billion of investments needed for about 1,000 projects across the five investment areas, out of which a minimum sum of US$66.9 billion is required for over 400 JETP priority projects.

Between 2030 and 2050, the investment costs are expected to increase to US$580.3 billion. That does not include a sixth investment area – energy efficiency and electrification – which is planned to be added in the 2024 version of the JETP investment plan. About US$295 million, including technical assistance, will be in the form of grants, while US$6.9 billion are concessional loans that will be disbursed through international financial institutions such as multilateral development banks. Excluding technical assistance, the amount of grant funding is only US$153.8 million – just 0.8 per cent of the total size of the US$20 billion climate deal.

Within that comprehensive plan, the JETP initiative aims to mobilise US$20 billion over the next three to five years into these five investment areas, which will act as a catalyst for the total investment amount required to meet the JETP targets of peaking Indonesia’s power sector emissions by 2030 at no more than 250 million tonnes of carbon dioxide equivalent, and increasing the share of renewable energy generation to 44 per cent. This does not include emissions by captive coal plants as the modelling and analysis of coal-fired plants that service industrial sites are not complete.

Given the high level of capital required, Poh noted that while the amount of grants and concessional loans are a good starting point, they may not be enough. “Hopefully, the already-committed amount would be a catalyst for additional incremental contributions from various other sources.”

Mike Ng, chief sustainability officer of OCBC Bank, said that the committed grants would be “a small but important step in supporting the scale of investments required to enable Indonesia’s energy transition”.

Before the investment plan was published, several Indonesian officials have also publicly criticised the direction JETP was headed, with several parties unable to come to an agreement on how much of the funding should be in grants versus loans.

The lower the share of grants and concessionary loans in the funding mix, the more Indonesia will have to pay for the transition. The JETP projects will also represent higher risk, which could hinder the participation of private-sector capital.

Kelvin Wong, deputy head of energy, renewables and infrastructure at DBS, said that just-transition programmes are complex as there are many different and dynamic factors impacting risk profiles, making it challenging to determine what is an adequate amount needed to lower the associated risks for the private sector.

He added: “However, the current concessional funding is an important base with which to scale up blended finance and catalyse more investment. Another key consideration is the need for more innovative financing models that look beyond traditional financing models.”

Poh said that banks would like to see more – in both numbers and amounts – from concessionary lenders, new equity investors such as concessionary or transition equity and climate conscious equity funds, as well as guarantees and grants from national governments from the participating developed countries.

Poh said that greater governmental or regulatory involvement towards permanent early phase-out will ensure that the financing proceeds of JETP are not diverted to new coal fired power plants, when they close. “This will instill greater confidence for financiers and provide clarity on how to reconcile such early phase-outs with the potential approvals of new coal-fired power plants,” he noted.

Wong said that regulations can provide opportunities for the private sector to achieve commercial returns in different ways. “For example, parties undertaking the early managed phase-out of a coal fired power plant may also be appointed to undertake the development of replacement renewables, with an appropriate risk allocation between private and public sectors,” he added.

Nonetheless, Ng noted that Indonesia’s emission-reduction targets are ambitious, and that it is “encouraging” that the JETP secretariat pledged to carry out a more detailed study and roadmap on decarbonising Indonesia’s off-grid captive power systems. “Indonesia remains a major growth market for OCBC and we recognise the country’s need to balance economic growth and energy transition.”

Poh said that UOB would be keen to support a just and fair transition in Indonesia where the bank has a significant presence. He added: “We will continue to observe the latest developments in JETP and would consider projects which are both bankable and provide a positive impact.”