Indonesia has identified the first coal plant it will retire early under the Asian Development Bank’s new Energy Transition Mechanism (ETM).
The country is the world’s biggest thermal coal exporter and heavily reliant on the fuel for electricity.
The ETM aims to assist the sustainable replacement of coal-fired power with renewables.
Low-cost refinancing and early cash-flow recovery for corporate bond issuers exposed to coal-fired power, are the key benefits of the scheme.
Market watchers are hopeful it could also unlock the large potential of renewable energy in Indonesia, providing new business opportunities for the energy companies.
In a note analysts at Barclays Bank said from an ESG perspective, Indonesia’s action under the ETM offers more opportunities for investor engagement on climate action and coal abatement.
They said: “Indonesia’s early coal-power retirement, supported by multilateral transition-financing programs, provide opportunities for investors and may set an example for other coal-intensive economies to follow.”
The analysts noted some potential positive overlap with the $20bn Just Energy Transition Partnership Indonesia signed in December 2022.
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Looking over the medium term, analysts at Barclays said stronger efforts in decarbonisation will likely help curb climate risks, and reduce Indonesia’s dependence on natural resources to create a more sustainable energy sector to support economic growth.
It could also expand employment opportunities, they added.
Coal dependence
Indonesia derives 39% of local energy supply from coal, according to Barclays’s data, near an all-time high compared with just 16% two decades ago.
On the supply side, the country has become the world’s largest thermal coal exporter, and now commands an 8% global production share, also near an all-time high.
Production has grown by 10% a year across the past 20 years, outpacing 5% for Asia Pacific and 3% for global aggregate.
As a result, Indonesia’s greenhouse gas (GHG) emissions from fossil fuel have grown by 4% a year over the past two decades (vs. 2% globally), according to Barclays data, to the point where the Asian country is now the world’s 5th biggest gross GHG emitter.
To elicit change, however, near-term challenges will need to be addressed, Barclays’s analysts said.
These include ensuring stable electricity supply amid increasing demand, offsetting reduced coal-related activity in areas highly dependant on the industry, and providing retraining for people whose livelihoods are affected by the transition.
According to Climate Action Tracker, Indonesia’s current policies and actions are only consistent with a global outcome of mean temperatures of more than 3°C above pre-industrial levels.
They have been rated “highly insufficient”, in line with other coal-intensive emerging economies like China and India.
