Can Indonesia’s Just Energy Transition Partnership (JETP) Succeed?

Phasing out coal is critical to Indonesia’s decarbonisation goal: coal is the second largest contributor to its greenhouse gas emissions, after deforestation. According to the International Energy Agency, Indonesia generates more than 60 per cent of its electricity by burning coal, accounting for over 200 MtCO2(metric tons of carbon dioxide equivalent) — around 80 per cent of power generation emissions. It is timely that global initiatives are emerging to help the country to solve its wicked coal problem.

The Just Energy Transition Partnership (JETP) was announced at the 26^th Conference of the Parties (COP26) as a financing mechanism provided by developed countries to help coal-dependent emerging economies realise just energy transitions. To date, South Africa, Indonesia, and Vietnam have been promised US$8.5 billion, US$20 billion, and US$15.5 billion, respectively, in financing consisting of concessionary and market-based loans, grants, guarantees, and investments from public and private entities. In essence, Indonesia, the third largest coal producer in the world, takes the lion’s share of the JETP pie. In February, Indonesia’s JETP Secretariat was set up in the Ministry of Energy and Mineral Resources (Kementerian ESDM) with support from the Asian Development Bank to coordinate stakeholders and coordinate JETP project development.

While serving as a new model of climate financing, the JETP has elicited criticism. Some are concerned about the recipient countries’ readiness to deliver their self-defined pathways of coal phaseout. In the case of South Africa, many raise the problem of energy security. South Africa has been experiencing rolling blackouts and daily outages, and transitioning to new energy sources is much more arduous than keeping the existing coal plants running. Additionally, the coal industry employs 200,000 workers, roughly equivalent to 1 per cent of South Africa’s formal employment. In Indonesia, coal remains an economic heavy hitter –coal exports are projected to reach 465 million tonnes (Mt) in 2023 at US$70-78/Mt. The industry also contributes tens of trillions of rupiah in non-tax state revenue. 

Despite these criticisms, enthusiasm for Indonesia’s energy transition remains high.

In Indonesia, concern about the JETP’s implementation is mainly about the timeline and clarity on exactly how the cessation of the use of coal for power generation is to happen. Although the country immediately pledged to stop building new coal-fired power plants after the JETP announcement in 2023, Indonesia will still carry out 117 constructions of new coal-fired power plants already in the pipeline. Moreover, the pledge does not include ceasing the building of so-called captive plants or coal-fired power plants that are not connected to the grid but are used to power factories. Under current policies, coal is still expected to dominate Indonesia’s energy mix and drive up more carbon emissions in the coming decades.

Despite these criticisms, enthusiasm for Indonesia’s energy transition remains high. Unlike South Africa, which still struggles with energy security, Indonesia has a better energy outlook. Perusahaan Listrik Negara (PLN), a state-owned enterprise that monopolises electricity power distribution, is at risk of producing more power than needed as demand growth slows and the construction of the aforementioned new plants is underway. Thus, Indonesia plans to export some of its electricity to neighbouring countries, to identify new economic demand centres, and to improve transmission and distribution networks. The security of its energy supply should give Indonesia some leeway with which to experiment with its renewable energy policies to replace coal.

Another promising factor is the JETP’s importance to Indonesia’s overall climate ambition. Major developments in the form of a net zero target and the submission of its Long-Term Strategy for Low Carbon and Climate Resilience 2050 (LTS-LCCR) occurred shortly before COP26. The LTS-LCCR pledged to peak greenhouse gases by 2030 and outlined low-carbon scenarios for various sectors. Given the power sector’s major contributions to emissions (accounting for 13.1 per cent of emissions in 2019), the JETP is pivotal to Indonesia’s obtaining the necessary climate financing. In fact, the JETP is aligned with Indonesia’s long-term plans: one of its deliverables to peak power sector emissions by 2030 is also a milestone in the LTS-LCCR’s low carbon scenario. This synergy with Indonesia’s long-term plans and high-level political will augurs well for the JETP’s eventual success.

Indonesia is also rich in alternative energy resources like geothermal, solar, hydropower, and wind. These have been under-explored as the investment capital needed for the initial adoption of those alternatives is high. Unlocking private investments needs government provision of incentives and clear prospects for attractive financial returns. To this end, the New Energy and Renewable Energy regulation (RUU EBT) is expected to be launched this year to provide legal certainty for an increase in the use of renewable energy resources. Kementerian ESDM, through the RUU EBT, needs to eliminate red tape in the form of overlapping regulations for renewable energy projects such as business licenses, location permits, and social and environmental impact assessments required by different government agencies. 

Finally, the JETP is a valuable opportunity to exercise Indonesia’s climate diplomacy. Many are sceptical of Indonesia’s reputation in international environmental diplomacy owing to conflicts such as its protests against the EU’s palm oil ban and domestic controversies such as the Omnibus Law, widely criticised for deregulating environmental protection. Besides launching its JETP, Indonesia as G20 chair in 2022 took pains to cultivate an image of sustainability, from providing electric two-wheelers for attendees and the greening of toll roads, to a tour of Ngurah Rai Forest Park where world leaders planted mangrove trees. While clearly part of a diplomatic showcase, these gestures speak to Indonesia’s desire to reverse negative perceptions of its environmental and climate track record.

The above analysis shows that Indonesia may have the supporting conditions to cut coal from its energy mix, but implementation will remain challenging. Moving forward, developed countries must deliver on their promises to provide clear and attractive financing mechanisms, especially by offering better interest rates than commercial loans for Indonesian stakeholders. Indonesia must show that its pathway to eliminate coal is achievable, by passing stronger renewable energy laws and making more significant investments.

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