Industry Decarbonization Roadmaps for Indonesia: Opportunities and challenges to net-zero emissions

Each month, SIPET Newsletter invites clean energy professionals from Southeast Asia to share their insights on the Energy Transition. This issue highlights the role of Energy Transition Mechanisms (ETMs) in the region's evolving energy landscape, featuring insights and reports on coal retirement and financing from CASE Indonesia, NewClimate Institute, and TransitionZero.

The coal phase-out initiative is crucial for addressing climate change, reducing greenhouse gas emissions, improving air quality, and accelerating the transition to renewable energy sources, while also offering economic opportunities.

Fadhil Ahmad Qamar, Project Officer of Clean, Affordable and Secure Energy (CASE) for Southeast Asia (SEA) at the Institute for Essential Services Reform (IESR), discusses the challenges and initiatives in advancing coal phase-out in Indonesia. Meanwhile, Isabella Suarez, Southeast Asia Lead at TransitionZero, addresses similar issues in the Philippines, focusing on facilitating coal retirement discussions through data-driven tools. Imogen Outlaw from NewClimate Institute explores the role of public development banks in financing early retirement of coal plants, highlighting transition barrier strategies. 

We reach out to these individuals to gain insights into the specific challenges and developments regarding coal phase-out initiatives in Southeast Asia. Their expertise provides valuable perspectives on the complexities, barriers, and progress in advancing cleaner energy transitions in the region, helping us understand the strategies and opportunities for promoting sustainable energy development and addressing climate change. Read their insights below.

Fadhil Ahmad Qamar

Project Officer of Clean, Affordable and Secure Energy (CASE) for Southeast Asia (SEA)

Institute for Essential Services Reform (IESR)

Q1: What is the primary challenge you face in advancing coal phase-out initiatives in Indonesia?

Ans: One of the challenges I think Indonesia is facing in advancing coal phase-out is the lack of an updated and integrated carbon emission pathway agreed upon across different ministries. The Long-Term Strategy for Low Carbon and Climate Resilience report published in 2021claimed to be compatible with the Paris Agreement targets. However, a more recent assessment from Climate Action Tracker suggests that the efforts are critically insufficient.

Q2: How are you addressing this challenge?

Ans: A clear emission reduction pathway will help determine the retirement plan for coal-fired power plants. This pathway defines how much and by when emission reductions from the power sector must be achieved. Such a clear retirement plan will provide a strong signal for investors to develop financing plans. This pathway will also help the government choose among different options for power sector decarbonization approaches, such as biomass co-firing, CCS retrofit, or replacement with renewable energy-based power plants, given their different implementation cost, and emission reduction opportunities.

Q3: Could you highlight specific projects or initiatives within the coal phase-out that your organization is currently engaged in?

Ans: A recent analysis by CASE Indonesia on the cost and benefit of coal-fired power plant (CFPP) early retirement and CCS retrofitting demonstrates that, in general, early retirement is less expensive than retrofitting CFPPs with CCS. Other studies also suggest that CCS retrofitting of CFPPs would considerably increase electricity generation costs. Despite these findings, the Indonesian government still includes CCS retrofitting for power plants in its power sector planning document, without yet considering a retirement plan for its CFPP fleet.

Q4: Do you have resources or publications available online for further information?

Ans: The cost and benefit analysis between CFPP early retirement and CFPP retrofit with CCS is detailed in the CASE Coal's Endgame report, available online at s.id/CASE-CoalEndgame or simply visit http://www.caseforsea.org

Isabella Suarez

Southeast Asia Lead

TransitionZero

Q1: What is the primary challenge you face in advancing coal phase-out initiatives in the Philippines?

Ans: Many developing countries are grappling with increasing demand, concerns on energy security and a system that is built around coal power. The Philippines is understandably concerned about energy security and affordability amidst their energy transition, but we’ve found that limited access to asset-level data on the operational and financial value of coal plants has not facilitated a common knowledge base for coal retirement discussions.

Q2: How are you addressing this challenge?

Ans: TransitionZero develops open-source tools to facilitate energy transition planning, focusing on system-level implications of replacing coal with clean alternatives. Thus far, our work in Southeast Asia has focused on improving access to Power Purchase Agreements (PPA) with our Coal Asset Transition (CAT) database, which provides asset-level data for over 50 environmental, financial, and operational metrics for coal-fired power plants in Indonesia and the Philippines. The tool includes difficult-to-access data like buy-out costs, long-term profitability, and average PSA tariff. It also incorporates societal impacts such as emission reduction costs and potential job losses from plant closures, enabling targeted and informed discussions on the benefits and cost of coal phase-out.

Q3: Could you highlight specific projects or initiatives within the coal phase-out that your organization is currently engaged in?

Ans: Our data has been used in the GFANZ’s report on Coal Phase-out in the Asia-Pacific, and developing policy insights with Carbon Trust’s report analyzing Odisha’s coal assets for retirement. Our energy systems modeling suite that will be made available in 2024 is also the backbone to partnerships with the V20 Group of Countries, UN ESCAP, ClientEarth, and the Climate Compatible Growth Initiatives.

Q4: Do you have resources or publications available online for further information?

Our CAT tool for Indonesia and the Philippines is accessible on our website. We have a 4-part ETM series that will focus on how the energy transition mechanisms have evolved and what to watch out for moving forward. We’re also breaking down some of the crucial inputs to energy systems modeling, and folks can begin to explore our software platform to answer ‘what if’ questions about the energy future, which we call Model Builder.

Imogen Outlaw

NewClimate Institute, focused on this report named ‘Financing Coal Phase-Out: Public Development Bank’s Role in the Early Retirement of Coal Plant

Q1: What are the main findings from your report? What is the primary reason for covering this topic? 

Ans: Policymakers and public development banks are actively exploring strategies to accelerate the early retirement of coal plants and overcome transition barriers.  We took stock of early retirement initiatives and the risks to public funds when engaging three key power sector stakeholders: national policymakers, utilities, and independent power producers.

Q2: How are you addressing the challenges identified in your report? 

Ans: The report examines how public development banks can tackle barriers and associated challenges in coal phase-out engagements. It stresses the need for firm commitments from partner governments and stakeholders to halt future fossil fuel investments, shrink current pipelines, and prevent backtracking on coal phase-out amid political changes.

Q3: Could you highlight specific projects or initiatives within the coal phase-out that your organization is currently engaged in?

Ans: We’ve been actively involved in developing analysis to inform Indonesia’s JETP, which is heavily focused on shifting its economic dependence away from coal. Our work in the CASE project, amongst others, involves exploring pathways, financing options as well as economic and health impacts of decarbonizing energy systems in Southeast Asia.

Read More:

- ‘Coal’s Endgame: Cost-Benefit Analysis (CBA) of Early Retirement Coal-Fired Power Plant (CFPP) versus CFPP with Carbon Capture and Storage’, a report by CASE Indonesia.

- ‘Financing Coal Phase-Out: Public Development Bank’s Role in the Early Retirement of Coal Plant’  and ‘Caution on Co-Firing, Retrofitting, and Carbon Credits for Retirement: Considerations for Public Development banks on Coal Phase-Out Risks’, reports by Newclimate Institute

- Coal Refinancing in the Phillipines analysis by TransitionZero

Peter du Pont, Co-Founder and Co-CEO, Asia Clean Energy Partners

Sasina Tangphitthayawet, Knowledge and Stakeholder Engagement Associate, Asia Clean Energy Partners

Each month, the SIPET Newsletter invites experts from Southeast Asia to share their work and thinking on important aspects of the unfolding Energy Transition. In this month’s issue, we highlight the critical role of Energy Transition Mechanisms (ETMs) in Southeast Asia's evolving energy landscape. The issue includes reports and perspectives on coal retirement and financing from CASE Indonesia, NewClimate Institute, and TransitionZero. See below the lists covering ETMs from different perspectives: 

- ‘Coal’s Endgame: Cost-Benefit Analysis (CBA) of Early Retirement Coal-Fired Power Plant (CFPP) versus CFPP with Carbon Capture and Storage’, by CASE Indonesia

- Process, Not Product: Why Southeast Asia’s Energy Transition Mechanisms need time to evolve, by TransitionZero

- ‘Financing Coal Phase-Out: Public Development Bank’s Role in the Early Retirement of Coal Plant’, and ‘Caution on Co-Firing, Retrofitting, and Carbon Credits for Retirement: Considerations for Public Development banks on Coal Phase-Out Risks', by Newclimate Institute

We are very impressed by a highly informative blog written by Melissa Brown, a longtime fixture in the financing of Asian power markets and a Consultant Analyst at TransitionZero. Her blog highlights the evolution of ETMs and analyzes ways that modifying the capital structure of an ETM can more effectively attract the investment needed to finance early retirement of coal-fired power plants and in clean energy.  We provide a brief summary here, and highly recommend that interested professionals read the blog in full.

2024 is an Important Year for ETMs

The year 2024 will be crucial for understanding how ETMs can evolve in different Southeast Asian markets. These mechanisms, which facilitate the early retirement of coal assets, are becoming increasingly vital as they offer flexibility to align policies and enable bankable deals in the energy sector.

Brown’s analysis emphasizes how ETMs can transform a country's emission trajectory, citing examples like the ACEN ETM in the Philippines in 2022—one of the first of its kind. This deal has had significant influenced on subsequent initiatives. The pending refinancing of Cirebon I ETM in Indonesia, which is expected during the first half of 2024 is being shaped significantly by its technical and financial support from ADB and the International Partners Group (IPG), and will be an important milestone in Indonesia’s efforts to restructure its power sector, and will be a valuable reference point for the region going forward.

The importance of new financing tools like transition credits, introduced by institutions such as the Monetary Authority of Singapore (MAS), underscores the need for ETMs to attract capital to support the transition away from high-carbon assets.

Some Key Points:

- ETM Flexibility: ETMs play a critical role in enabling the early retirement of coal plants, a crucial step in reducing emissions and accelerating the shift towards cleaner energy sources. They offer the flexibility needed to finance these retirements, foster policy alignment, and enable feasible deals within the energy sector.

- Evolution of Deals in the Market: The year 2024 represents an important juncture for ETMs in Southeast Asia. The earlier ACEN ETM deal in 2022 set a benchmark for future transactions. The pending Cirebon I ETM deal in Indonesia will be an important reference point, and it demonstrates the tangible impact that ambitious government targets can have on stimulating finance to restructure Indonesia’s power sector.  

- Financial Innovation: The blog highlights the pros and cons (mostly pros) of a new “portfolio approach” to refinancing early plant retirements, which can reduce transaction costs and allow fleet-wide retirement efforts. The blog reviews and compares three different refinancing models (Acquisition Model, Synthetic Model, and Portfolio Model) in detail.

- Market Acceptance: Individual ETM transactions can catalyze broader market acceptance and drive policy innovation, addressing the evolving needs of the energy transition. Comprehensive frameworks and local market insights are crucial for attracting investment towards retiring coal assets and developing renewable energy sources.

- Size of the Prize! TransitionZero’s analysis for Indonesia reveals that through 2060, intentional refinancing to achieve early coal retirement can avoid 1.3 gigatonnes of CO2 emissions. Numbers like this demonstrate the feasibility of transitioning away from coal and can pave the way for broader market acceptance and policy innovation.

Why ETM Matters to Southeast Asia's Energy Transition:

ETMs offer a strategic pathway to accelerate coal plant retirements and stimulate investments in renewables within a region characterized by a young coal fleet and evolving policies. They are indispensable for achieving ambitious emission reduction goals in Southeast Asia. We highly recommend reading this informative blog by Melissa Brown of Transition Zero and sharing it widely across your networks.

For More Information:

Read the blog by Melissa Brown for TransitionZero: Here.

Co-written by NewClimate Institute and the Institute for Climate Economics (I4CE), this report reviews public development banks' instruments to help address barriers and the associated challenges and risks, including cases on existing phase-out engagements. It underscores the importance of seeking firm commitments from partner country governments and other stakeholders to stop future fossil fuel investments, shrink current pipelines to avoid emission leakage and moral hazard risks, and prevent backtracking on coal phase-out in the event of political turnover.  

This report, co-written by NewClimate Institute and the Institute for Climate Economics (I4CE), addresses the urgency to accelerate efforts towards reducing unabated coal power globally. It highlights the complexities of achieving a just transition to renewable energy, including considerations around existing coal infrastructure. The term "unabated" allows for technologies aimed at reducing emissions, which could potentially slow down the phase-out of coal. Strategies discussed in the report include co-firing with alternative fuels like biomass, hydrogen, or ammonia, as well as retrofitting coal plants with carbon capture and storage (CCS) systems.

Read more.

Developed by CASE, this study investigates how Indonesia can achieve its ambitious decarbonization goals for the power sector. The study analyzes the economics of two decarbonization strategies for Coal Fired Power Plant (CFPP): early retirement by 10 years and replacing it with solar power, compared to retrofitting the CFPP with carbon capture and storage (CCS) technology. The report recommends a multi-pronged approach: strategically retiring coal plants while least-prioritizing the use of CCS on CFPPs, creating a clear national plan for coal phase-out, and implementing carbon pricing to incentivize renewables.