First coal phase-out projects under Indonesia’s JETP could commence by end of 2023

INDONESIA has identified two coal-fired power plants that could potentially be the first concrete early coal phase-out projects under the Indonesia Just Energy Transition Partnership (JETP), and plans to unveil them during the United Nations annual climate change conference held in Dubai at the end of this year. 

One is operated by an independent power producer, and the other by PLN, Indonesia’s state-owned power generation company, said Joko Try Haryanto, president director of the Indonesian Environment Fund during a panel session last week, which was organised by the Glasgow Financial Alliance for Net Zero (GFanz), a global coalition of financial institutions.

Plans to come up with a comprehensive investment and policy plan by August is also on track with the first draft already signed off by the Indonesian government, said Um Woochong, managing director general of the Asian Development Bank (ADB), who was also one of the panellists. The multi-lateral development bank is working with Indonesia on its JETP.

The Indonesia JETP is a US$20 billion programme funded by the G7 countries and some members of GFanz to help the country bring forward the closure of its coal power plants and the sector’s peak emissions date by seven years to 2030. Announced in November 2022, it came one year after the US$8.5 billion South Africa JETP – the very first of such partnerships – was inked. Vietnam’s version was announced about a month after Indonesia’s.

Despite the progress made, Haryanto laid out several challenges underlying the JETP, even as the international community is looking to it as a pilot model for energy transition that, if successful, can be replicated across the world to achieve global 2050 net-zero targets.

The first relates to concerns over greenwashing. Another challenge is the inability for such projects to produce carbon credits currently, as global certifiers of carbon credits have not developed the methodology to calculate the emission reductions arising from the early retirement of the plant.

For now, early coal phase-out projects are classified as carbon avoidance and not reduction. So, carbon credits cannot be generated and sold as an alternative revenue stream.

Another hurdle involves the willingness of financial institutions to participate in early coal phase-out projects.

The initial feedback from financial institutions, including members of GFanz, was that transition finance – a sub-category of sustainable finance which coal phase-out falls under – was not properly defined or included in nationally recognised taxonomies.

However, after coal phase-out’s inclusion in the second version of the Asean Taxonomy – the Association of South-east Asian Nations’ classification system that defines which activities qualify for sustainable financing – as an eligible activity, the next challenge is getting GFanz members and the country partners to be aware of the taxonomy itself, in particular the criteria on coal phase-out, said Haryanto.

He noted that outside Asean, there is little knowledge of the taxonomy, and that adds to the difficulties they face when seeking financial support from financial institutions.

“This is our challenge, how to connect the technical aspects of the Asean taxonomy, in particular on coal phase-out, deliver it to them so they can adopt it to their business plans and make it easier for them to recognise and finance coal transition,” said Haryanto.

In response to queries from BT, Setiaji Hadiprayitno, country managing partner of Indonesia for sustainability consultancy ERM, said that financial viability and risk management associated with transitioning to cleaner energy sources is also one other major concern among investors.

“The substantial financial investments required and uncertainties about profitability and risk mitigation discourage potential investors from participating in coal phase-out projects,” he added.

There are also technological limitations and inadequate infrastructure, such as grid integration issues.

Having to align domestic policies with international commitments and climate goals, as well as balancing conflicting interests and priorities among the multiple stakeholders are also issues that have not been resolved, noted Hadiprayitno.

In another panel discussion at the Ecosperity conference, which also took place last week, Tiza Mafira, director of Climate Policy Initiative Indonesia, pointed out that Indonesia is ranked as one of the lowest in market attractiveness for renewable energy. This is because of differing internal policies within the country.

Given that the country is one of the largest coal exporters in the region, its policies around renewable energy expansion tend to be more timid, she added.

Despite these hurdles, there is international pressure for the Indonesia JETP to succeed as the world looks to it as a role model for best practices that could be replicated, said Anna Skarbek, chief executive officer of Climateworks Centre.

“Of course, one JETP won’t do (the job of getting to net-zero). But if you do the first one well, and create the best practice model for it, then finance markets love to press repeat,” said Skarbek, who was also speaking at the GFanz panel.

Given that it’s still a very new programme, Surendra Rosha, co-chief executive officer of HSBC Asia-Pacific, recognised that there is a lack of bankable projects and there is a need for one or two transactions to go through this year for the various stakeholders to learn through the experience.

“We need to go from the high-level initiatives that we’ve all signed up, to now micro projects,” he said.

While there are currently six banks that have signed up to the Indonesia JETP, with HSBC being one of them, Rosha said that the partnership is not restricted to just these six banks. The participation of domestic banks would be crucial.

While both the public and private sector will mobilise an equal amount of financing of US$10 billion for a start, Rosha said that the contribution from the private sector has to be scaled to be five times more than the public sector.

Hadiprayitno said that addressing the challenges of JETP requires a comprehensive approach involving clear policy frameworks, financial incentives, technology transfer, stakeholder engagement, and capacity-building measures.

These include: developing risk management strategies to address regulatory changes and market fluctuations, investing in technological capabilities and infrastructure for renewable energy and fostering international collaborations and partnerships to access resources and expertise.