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Toward Indonesia’s energy transition
In her recent visit to Indonesia, the former secretary-general of the United Nations climate change negotiations, Christiana Figueres, a global key player in climate change, coined a new term that could describe the best prescription for energy transition in the country: “Gragent” — meaning gradual but urgent
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span>In her recent visit to Indonesia, the former secretary-general of the United Nations climate change negotiations, Christiana Figueres, a global key player in climate change, coined a new term that could describe the best prescription for energy transition in the country: “Gragent” — meaning gradual but urgent.
Figueres was referring to the way Indonesia needs to address its greenhouse gas (GHG) emission cut in the energy sector. The UN Development Program (UNDP) embraces the Gragent term, given the fact that more than half of Indonesia’s current energy is supplied by fossil fuel.
The transition toward more renewable energy is a matter of urgency since Indonesia contributes significantly to global GHG emissions and climate change from burning fossil fuel. At the same time, a gradual transition is pivotal, since an abrupt shift may cause social and economic instability. Moreover, Indonesia has ratified the Paris Agreement and committed in its Nationally Determined Contribution (NDC) to reduce by 2030 at least 11 percent of GHG emission from energy sector compared to business as usual level of emissions.
An increase in renewable energy use and reduction in GHG emissions will contribute to the Sustainable Development Goals (SDGs) achievement particularly Goal 7 (Affordable and Green Energy) and 13 (Climate Action).
The UNDP has proposed three innovative and achievable proposals for Indonesia’s transition towards renewable energy. All three ideas have been formulated and pilot tested.
First proposal — private sector investment in electrification of remote areas. In Indonesia, at least 9,028 villages have not been or are currently inadequately electrified. Most of these are settlements in remote areas and small islands that have not yet been reached by the grid of state utility company PLN.
Despite its monopoly on power provision and the electricity business area in Indonesia, PLN does not consider these remote areas as being economically profitable. At the same time, the current state budget will not allow for a timely and massive provision of electricity for those underserved villages.
The most cost effective solution for electrification of these remote areas would be to construct isolated power generators based on renewable energy. However, investments in these areas are usually costly, and therefore not immediately attractive for private sector investments.
To address these challenges, the UNDP is currently facilitating the development of a public private partnership (PPP) scheme for the electrification of small islands. The PPP scheme is being developed in cooperation with the Indonesian government — the Energy and Mineral Resources Ministry, the National Development Planning Ministry (Bappenas) and the Finance Ministry. The Energy and Mineral Resources Ministry acts as the Contracting Agency (PJPK) that will engage the private sector to invest in non-profitable areas.
The government contributes to the PPP scheme by providing availability payment to de-risk the private investment in addition to land and road access. Compared to the average annual spending for rural electrification this will be less costly for the government. An independent power producer will build and operate the renewables-based generator and transmission, and then sell the power to PLN — or directly to the communities as a private power utility — at the current electricity tariff regulation.
At the end of the contract, the generator and transmission facilities will be owned by PLN. This scheme will guarantee that the communities pay the same tariff as the rest of Indonesia and receive 24-hour electricity service.
Second proposal — blended finance for small-medium scale projects. The second UNDP innovation is a blended finance instrument for renewable energy projects below 10 megawatts.
The purpose of this scheme is to overcome the bankability barrier commonly faced by the small-medium sized projects of renewable energy and the resistance from commercial financiers that perceive renewable energy projects as being a high risk investment.
The innovative scheme supports “SDG Indonesia One”, a blended financing platform, launched by the Finance Ministry in October 2018. The de-risking features are clustered into a cycle of three components. The project development facility component will be supported by various grants to improve technical bankability.
The second component improves the financial bankability through project structuring, use of de-risking fund, financing and investment allowing for project financial closing. Funding from climate funds and development banks may be required to further de-risk the investment.
The third component is a project impact assessment on the SDGs. The UNDP, in support of the Energy and Mineral Resources Ministry, has been piloting the SDG Indonesia One scheme for renewable energy projects, in which we provide a project development facility and SDG impact assessments in collaboration with the state-owned financing institution PT Sarana Multi Infrastruktur as the project financier.
Third — creating a carbon market for the renewable energy sector. The current fiscal incentives are obviously insufficient to stimulate scaled up investments in low carbon energy production. A way forward is to establish a carbon market to provide an additional pool of finance for renewable energy investment. Among the tested carbon market concepts, implementation of a cap and trade policy on the power generation sector is deemed the most feasible.
The model is simple in nature. By imposing a cap or a maximum allowable emission level for fossil fuel-based power generation facilities including an applicable financial penalty, the government can ensure that the total annual CO2 emissions from the power generation sector will not exceed a certain limit. Within this framework, tradeable emission permits will be issued according to the total cap, thereby creating a market for trading with CO2 emission permits.
The cap, the amount of tradeable permits issued and the market mechanisms will then automatically dictate a price on carbon. Hence, if a power facility has not yet been able to manage its CO2 emissions below the allowable cap, they can either choose to do the necessary investments in low carbon technology, or they can purchase an emission certificate at the carbon market from another cleaner facility that has emission permits in excess.
The domestic voluntary cap and trade scheme in the power generation sector will be piloted by the Office of Coordinating Economics Minister and the Energy and Mineral Resources Ministry. The UNDP will act as facilitator with funding from the World Bank’s Partnership for Market Readiness.
Coming back to “gragent” — this is indeed the way forward in Indonesia’s energy transition. It is part of the overall shift required for transforming Indonesia’s development towards an inclusive and low carbon development path with long lasting benefits for its people, environment and the global climate.
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The writer is senior adviser for Renewable Energy Strategic Program and Policies at UNDP Indonesia.
