Indonesia’s Bank Mandiri backs new coal power plant with US$1.27 billion financing

[JAKARTA] Bank Mandiri – the largest state-owned lender in Indonesia – announced on Monday (Sep 30) that it has provided US$1.27 billion in investment credit financing for a new coal-fired power plant project in South Sumatra.

The project is co-owned by Chinese asset management and financing platform Huadian Overseas Investment and Indonesian coal mining company Bukit Asam.

Indonesia’s Minister of State-Owned Enterprises Erick Thohir, who attended a signing ceremony on Monday together with Bank Mandiri president-director Darmawan Junaidi, hailed the financing as a means to foster positive competition and strengthen the supply chain within the country’s industrial sector.

The South Sumatra 8 power plant, as it is called, began operations in September 2023. It is now generating electricity commercially with a production capacity of 1.3 gigawatts (GW). The plant utilises a technology known as flue-gas desulfurisation to mitigate emissions.

The facility is part of Indonesia’s ambitious energy plan to add 35 GW to the national grid, even amid concerns regarding an oversupply of electricity.

The financing by Bank Mandiri comes at a time when Indonesia is striving to reduce coal consumption and transition to renewable energy through sustainable funding initiatives.

While many global banks have ceased funding coal assets, most Indonesian lenders still persist in financing fossil fuel projects. The coal sector continues to attract significant investment from domestic banks.

Bank financing to the mining sector reached 600 trillion rupiah (S$50.7 billion) in the first half of 2024, a staggering increase of 136 per cent compared with the same period last year, based on data from the Financial Services Authority.

Total lending to the mining sector now accounts for 8 per cent of the overall credit disbursed by banks in Indonesia, which totals 7,480 trillion rupiah.

Indonesia – the world’s fifth-largest coal producer and a leading exporter – had pledged to stop the construction of new coal-fired power plants starting in 2023.

However, coal-fired plants run by independent producers will continue to operate until their contracts with state-owned utility PLN come to an end, with some agreements lasting until 2050.

Fabby Tumiwa, the executive director of the Institute for Essential Services Reform, a Jakarta-based think tank, pointed out that banks in Indonesia are lagging behind their counterparts in other countries in their efforts to halt financing for environmentally harmful activities.

This is largely due to the lack of clear prohibitions and limitations on financing dirty energy sources like coal within the regulations set by the government and financial authorities in Indonesia, he said.

He added that Indonesia continues to face a shortage of viable and bankable green energy projects for financing.

Over the past decade, progress in new and renewable energy has added only 13 gigawatts, or less than 13 per cent, to the total energy production. This is far short of the government’s target of achieving a 25 per cent share of clean energy by 2030.

“Banks in Indonesia see coal-fired power plants as a fundamentally safe investment because of their established captive market with PLN. On the one hand, banks must increase credit growth, which directly affects their performance,” he told The Business Times.

“As a result, they (banks) continue to operate in a business-as-usual manner,” he said.

Indonesia has signalled plans to phase out coal-fired power plants by the 2040s, with plans to retire 13 units by 2030. However, observers said that this timeline largely depends on securing sufficient international support for funding and technology.