Indonesia Navigates Energy Transition Planning

Exhibit: Envisioned Funds Flows for Indonesia Energy Transition

Source: Government of Indonesia, Ministry of Finance

Key Points: Indonesia has delayed release of its Just Energy Transition investment plan. The issues create a laundry list of the challenges such plans face, although a draft points to some progress/concessions. A related carbon credit program may be announced by year-end. Meanwhile, the first Energy Transition Mechanism also needs to be finalized.

Indonesia JETP investment plan release delayed. Originally scheduled for release August 16, Indonesia’s Just Energy Transition Partnership (I-JETP) Secretariat announced instead that publication of its US$20 Billion (B) investment plan would be delayed until later this year. The Secretariat did submit a draft to the Indonesian government and I-JETP partners. The rationale for the delay is the need for more time to develop a “technically credible pathway,” although press coverage/analysis also credited the delay to:

• Expensive financing (1): insufficient inexpensive financing being offered, including specifically that too little was in the form of grants (0.8% of the total $20B as of June 2023);
• Expensive financing (2): concern that the loans at commercial rates would now be prohibitively expensive in light of the higher global interest rate environment
• Just Transition concern: the need for (more) community involvement
• Investor community perception: feedback from some commercial lenders that they are reluctant to be seen as funding coal plants, even if it is for early retirement (which suggests that the I-JETP must still “build the book” to fund the $10B of the $20B package that is to come from commercial sources).
• Broadening the scope: to include what are known as “captive” plants — coal plants that are to be built to provide power specifically for metal smelters (Indonesia is planning to build 34 smelters across different minerals to add to the 19 currently operating as the country seeks to retain more of the value from its mineral resources, including through processing).
• (Perhaps) too much to focus on: rather than trying to figure out spending the $20B, at least at least one Indonesian official has encouraged focusing on the nearer term (next 2 years), on how to spend the first $2B, and on solidifying governance of the program.

The Indonesian government appears open to making a concession on local content rules. It was reported that the draft investment plan includes the recommendation for Indonesia to relax its local content rules for solar power production, which require 70% of the materials to be made locally, until 2025 when local PV manufacturing is expected to commence.

A carbon credit initiative to supplement JETP funding to be announced by year end. The Deputy Head of the I-JETP Secretariat noted in late July that carbon credits are likely going to be necessary as part of funding and that he thought a “mechanism” for crediting would be ready by late this year. This was consistent with earlier messaging from the Indonesian government in the sense that it planned/intended that its financial contributions to funding the energy transition would be recouped through credit offset sales (see Exhibit, steps 7 and 8).

To offer some additional perspective, indicative financing arrangements, set by the government of Indonesia, Asia Development Bank (ADB) and the World Bank Group (WBG), called for the Government of Indonesia to contribute $1.3B of a total $5.1B in an initial phase of spending (in this iteration, the WBG’s Climate Investment Fund is to provide $0.5B, MDBs are to provide $2.1B and private capital is to provide $1.2B). This phase is designed to retire up to 3 GW of coal fired plant capacity, along with repurposing the site, supporting grid stability, and investing in Just Transitions for affected communities. As depicted, the carbon avoidance crediting would flow to the Indonesian government to recoup its investment.

Meanwhile, the partners are still working on finalizing the first ETM transaction. The JETP model envisions shutting down coal plants early using a financial mechanism, executed at either an individual plant level or at a corporate level to encompass multiple plants. This mechanism is referred to as an Energy Transition Mechanism (ETM). The first proposed ETM is in Indonesia; a Memorandum of Understanding (MOU) was signed with the Independent Power Producer owner/operator in November 2022 for the plant, Cirebon, 1 to be refinanced with ~US$300 Million of lower cost debt in exchange for a commitment to close the plant early.  Per an ADB presentation in late June, Feasibility, Just Transition, and Strategic Environmental & Social Assessment reports were all still pending and all needed to finalize the agreement.

JETP Background. JETPs are financing cooperation mechanisms to help coal-reliant countries transition to cleaner energy. The goal is for the specified countries to develop their own comprehensive transition plans and that initial, catalyst funding is to be provided by a set of donor countries. The first JETP announced was for South Africa in late 2021, with financing support to be provided by the U.S., France, Germany, the UK, and the European Union. South Africa published its corresponding investment plan for the first five years of its transition path in late 2022. A second tranche of transition countries were announced in 2022 for Indonesia, India, Senegal, and Vietnam, with the donor pool expanding to include Multilateral Development Banks (MDBs) and development finance agencies. The Energy Transition Accelerator, announced by the U.S. at last year’s COP, may also tie in with JETPs.

ETM Background. The ETM was conceived as a mechanism to encourage the early retirement of coal fired power plants and (possibly) help fund power generation replacement with zero-emissions sources. ETMs are expected to include (1) running the coal plant for some period of time to continue to support the financial returns of the plant owners, (2) some low cost (concessional) financing to allow owners to retire the plants earlier than originally intended (while preserving financial returns) and (3) possibly some form of carbon mitigation-based financing, perhaps through the sale of carbon offset credits or from philanthropic sources. ETMs can “house” single coal plants or multiple and are an expected tool in the JETPs.

8/30/2023