Indonesia’s $20 Billion Energy Transition Partnership Takes Shape

pacific money | Economy | Southeast Asia

The Just Energy Transition Association has laid out a roadmap to net zero, but many details are still vaguely sketched out.

Indonesia's $20 billion energy transition partnership takes shape

A view of a wind farm in Sidenreng Rappang, Indonesia, on January 23, 2020.

Credit: Depositphotos

In the weeks leading up to this year’s G-20 summit in Bali, Indonesia was signaling your readiness move away from coal if the international community was willing to step up with financing and other forms of support. At the summit, President Joko Widodo unveiled the Partnership for Just Energy Transition, a $20 billion program that is expected to accelerate Indonesia’s clean energy transition. The program is being funded and run by the United States, Japan, and several European countries.

As described in a white house statement The program aims to “mobilize an initial $20 billion in public and private financing over a period of three to five years, using a mix of grants, concessional loans, market-rate loans, guarantees, and private investment.” $10 billion will come from “public sector commitments” and the program entails “a commitment to work to mobilize and facilitate $10 billion in private investment.” The funds will be used to retire coal-fired power plants early and invest in renewable energy projects, to reach peak emissions by 2030 and net-zero by 2050.

$20 billion is a significant sum and a good starting point. The ad features some headline numbers and sets out basic goals and a timeline. It shows that developed countries are willing to step up and help speed up Indonesia’s clean energy transition. But many problems still need to be resolved before this is translated from a splashy announcement into concrete political results. One of the key unknowns is how the financing and investment will be structured. Will it be primarily state or market driven, and how will risk be shared between the public and private sectors?

The statement suggests it will be a 50/50 split between private investment and public sector pledges, but the wording on the private sector pledge is vague. The exact balance is something they are obviously still working on. This is quite important because the State and the market are often governed by different logics and incentive structures. The Indonesian state may feel the time is right to pivot to clean energy, but if private companies don’t find the scheme attractive or profitable enough, they may simply not come forward. This has been a problem for Indonesia in the past.

Private investment in renewable energy has struggled in recent years due to regulatory confusion and other financial and administrative bottlenecks. High levels of uncertainty may cause investors to demand higher rates of return or government guarantees to offset this heightened risk. When mismanaged, this effectively transfers the risk of private investment to the state.

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It could be argued that this is an acceptable tradeoff, especially in emerging markets. If the state did not absorb some of the risk involved, then there might be no private investment at all. On the other hand, if the pendulum swings too far the other way, it could end up with the state assuming all the risks and saddled with billions in foreign-currency-denominated, market-rate liabilities owed to the private sector. That could be worse than no investment at all.

New renewable energy legislation is in the works, and may address some of this uncertainty, particularly around procurement and pricing. But it’s not on the books yet, and Indonesia’s energy sector has never been particularly market-oriented, so we don’t know how investors will respond. The most likely result is a hybrid approach employing a mix of commercial and non-commercial tools depending on the situation, the actors, and the objective.

The Asian Development Bank, as part of the larger $20 billion package, is developing a Energy Transition Mechanism designed for Indonesia, which will likely offer PLN concessional financing from the state power company to build renewable energy projects. In return, PLN will have to retire some of its coal-fired power plants ahead of schedule. This is not something a private investor is interested in doing, and little effort has been made to present it as such or appeal to market logic. But it is a realistic way to induce the early shutdown of some of PLN’s coal capacity and jump-start investment in clean energy.

If combined with a comprehensive renewable energy law that contains an effective mix of incentives, a transparent and consistent design, and strong political support, this could go a long way toward accelerating the adoption of renewable energy in Indonesia, with the private sector playing An important paper. This is a big if, because of the barriers involved. But striking a workable balance between public and private investment, including making sure that the risk assigned to the state is not so unbalanced as to undermine the entire project, would mean that there is a good chance that this $20 billion fund will be more than just good public relations.

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