Indonesia’s energy transition deal needs ‘low rates’ of financing: report
AS BORROWING costs have gone up along with interest rates, there is a need for international funders of Indonesia’s Just Energy Transition Partnership (JETP) to consider providing more grants or low rates of financing, beyond a discount to the market rate, said a report released on Tuesday (Sep 19) by research group Zero Carbon Analytics.
This is because even a discounted rate at current levels could produce a higher effective rate than the non-concessional rate the Indonesian government would have faced if this capital had been injected years earlier, when interest rates were lower.
“The result of this higher ‘concessional’ rate is, all else being equal, a higher cost of electricity than the government could have delivered to its consumers before,” said the report, which was authored by Philippe Benoit, an energy finance veteran, with contributions from Andri Prasetiyo, Asia regional researcher at Zero Carbon Analytics.
Speaking at a virtual webinar on his findings on the same day, Benoit said the Indonesian government does not just require discounting from current rates, but low rates. The absolute terms laid out between funders and the Indonesian government matter more than the amount being discounted relative to market rates, as they drive affordability and other economic costs.
Indonesia’s JETP is a US$20 billion climate deal between the Indonesian government and a group of countries led by the United States and Japan, with the participation of several private-sector banks that are members of the Glasgow Financial Alliance for Net Zero (GFanz). It aims to support South-east Asia’s largest economy in its decarbonisation efforts. The intention is for the public sector to provide US$10 billion in funding, while the banks would raise the other half.
The report said that the group of mostly G7 countries, known as the International Partners Group (IPG), needs to improve the terms of the financial support it is offering to better appeal to the Indonesian government. It could also support reforms at international financial institutions, such as the World Bank, to increase funding at lower costs, as well as pay the guarantee fees and other transaction costs that Indonesia would have incurred when accessing these forms of financing.
A NEWSLETTER FOR YOU
Friday, 12.30 pm
ESG Insights
An exclusive weekly report on the latest environmental, social and governance issues.
Private-sector banks could also do more to develop a strong pipeline of bankable energy transition projects.
Highlighting the danger of higher rates on energy transition, the report said it undermines the attractiveness of renewable energy projects, which typically have a heavy upfront capital cost structure. This would ultimately affect electricity affordability.
Launched last November, Indonesia’s JETP is the first energy transition deal comprising both public- and private-sector actors, and is so far the biggest. There is international pressure for it to succeed, as the world looks to it as a role model to replicate energy transition efforts elsewhere.
SEE ALSO
However, it has hit several roadblocks, the latest of which is the delay in the release of its comprehensive investment and policy plan, which has now been pushed back to October this year.
Rising borrowing costs have complicated negotiations, which have centred on how much of the capital should come in the form of grants or loans.
With estimates that Indonesia’s long-term goal of decarbonising its power sector would require an investment exceeding US$200 billion over the next 10 to 15 years, the report said the US$20 billion JETP serves as a down payment with important potential catalytic impact for the country’s long-term energy transition plans.
Besides relying on capital from the IPG and GFanz, the report suggested that Indonesia could look to expand its funding sources to China and other Middle Eastern countries.
This is because China has financed over 40 per cent of Indonesia’s surveyed coal plants commissioned between 2016 and 2019. This investment momentum could be redirected to clean energy, since China had halted overseas coal plant financing in 2021.
As for the Middle East, the report said that countries such as the United Arab Emirates and Saudi Arabia have the financial resources and an apparent increasing interest in supporting international development and emissions reduction efforts.
“Not only can this help increase the amount of available capital, it can potentially help to reduce the cost of foreign capital to the government of Indonesia as it expands and diversifies the pool of investors,” read the report.
Besides international sources, it also said domestic public and private resources would have a large role to play in the country’s long-term energy transition.
Local project developers are needed to meet the substantial expansion of renewables-generating capacity that has been projected for the country. Indonesia’s coal sector, which saw its revenue rise recently on the back of soaring energy prices, could also redirect its resources to financing renewables generation.
The participation of Indonesia’s domestic private sector can also generate broader economic and development benefits for the country, the report indicated.
“As Indonesia’s economy continues to grow, its capacity to finance its own energy investments will increase… Its domestic private sector will need to play an important and growing role if Indonesia is to raise the massive amounts of capital needed for the broader JETP,” it said.
The report also noted that the domestic public sector constitutes a major source of funding that can be better mined by the government.
For one thing, the public sector and its state-owned enterprises have substantial financial resources. The country’s state-owned enterprises accounted for over 56 per cent of Indonesia’s economy in 2019.
Revenue generated from PLN, which is the country’s state-owned utility company, could also be redirected to clean energy sources, instead of fossil fuel suppliers through the early retiring of coal-fired power plants.
Public-sector resources can also catalyse international capital if effectively deployed.
Copyright SPH Media. All rights reserved.
