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Indonesia can lead G20 in sustainable energy transition
Indonesia needs close to $20 billion of clean energy investments in its energy system every year from 2021 until 2030 to achieve deep decarbonization.
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It may feel a bit like the strange case of Dr. Jekyll and Mr. Hyde when we speak highly of green energy and energy transition while at the same time scramble to secure coal supply. In the early weeks of 2022, the government had to take drastic measures to ensure that (coal-fired) electricity is not interrupted, while in this same year it is leading the Group of 20, in which one of three priority issues is sustainable energy transition.
It would be a gross oversimplification to pass quick judgement on any government facing one of the most challenging wicked problems – namely energy transition. Governments, not only Indonesia’s, have no easy task when it comes to energy transition. Last week, the World Economic Forum released The Global Risks Report 2022, in which it identified climate inaction as the top global risk over the next 10 years. It also soberingly notes that “governments will face backlash whether climate action is slow or aggressive”.
With over 70 percent of global greenhouse gases attributed to the energy sector, energy transition sits at the core of climate change mitigation. However, many countries today – developed and developing alike – would concur with a statement from a prominent English economist. “Day by day it becomes more evident that the coal we happily possess in excellent quality and abundance is the mainspring of modern material civilization,” William Jevons wrote in 1865. It has been clear for a while of course that the energy system of Jevons’ time cannot take us to a sustainable future.
The pace of historical energy transitions was not really driven by a specific target such as economic or environmental output in mind. Rather, innovation and dissemination of new energy technologies drove economic growth and environmental impact. The energy transition of our time is reversing that relationship whereby a global climate goal drives the transition whilst sustaining social and economic growth. A reversal of such relationship requires a different scale and pace of investments.
The International Energy Agency estimated in its Net Zero Emissions by 2050 Scenario (NZE) the amount of clean energy investment required to achieve net zero by 2050 is close to US$4 trillion every year for the period 2026-2030, of which more than $2.5 trillion is expected to come from the private sector. The scale of the challenge is stark when comparing such investment needs with the global energy investment of 2021, which was only in the range of $1.9 trillion.
This means that shifting existing investments from a carbon-intensive energy chain toward a cleaner one is far from sufficient. Additional investment of $2 trillion per year is required for the energy transition. This is roughly equivalent to the annual government budgets of the United Kingdom and Japan combined.
In the Indonesian context, the Institute of Essential Services Reform in its Indonesia Energy Transition Outlook 2022 estimated that the country needs close to $20 billion of clean energy investments in its energy system every year from 2021 until 2030 to achieve deep decarbonization. This is over 10 times the $1.4 billion investment in new and renewable energy in 2021 as reported by the Energy and Mineral Resources Ministry.
To contrast, Indonesia’s start-ups attracted $4.7 billion of investment deals in the first half of 2021 alone, according to e-Conomy SEA 2021 by Google, Temasek and Bain & Company. We must not forget that the Fourth Industrial Revolution still needs energy – and it must be clean.
Society at large, especially policymakers, captains of industry and financial institutions, must appreciate the depth of the challenge: The already huge annual investment in the global energy system (relative to other sectors) needs to double in just four years from now. In the case of Indonesia, tenfold.
Achieving this goal requires way more than just attracting the additional investment – but equally important is ramping up the (clean energy) industry to be able to absorb those investments and deliver at an unprecedented pace and scale. When one manages a business today, even if he gets enough money to build 10 more, those additional 10 will only be built and begin operating if the venues, supply chain, workforce, clear regulations and consumers are available.
Indonesia’s presidency of G20 is a great opportunity for the sustainable energy transition agenda, partly because Indonesia can be an empathetic leader as its own transition journey contains a full set of conundrums that other countries only experience partially: (i) Indonesia is not a laggard but it is also not a superpower; (ii) it has the moral high ground to appeal for affordable growth, but by its sheer size it also has the responsibility to mitigate greenhouse gas; (iii) it is still dependent on fossil fuels, but it has abundant renewable energy potential and minerals critical for renewable energy equipment; and (iv) it is one of the top 10 emitters, but given its archipelagic nature it is also exposed to the changing climate.
The opportunity should not be missed. The G20 summit of 2022 must progress the unleashing of clean energy investments, particularly in populous developing countries. Most G20 countries are either countries with large energy systems that must transition fast and/or homes to companies and investors who could invest in energy transition elsewhere. Investments flow to places where risks and rewards are balanced and competitive. The rare meetings of world leaders should be able to mitigate the biggest enemy of any investment, which is uncertainty, by means of strong commitments that are credibly followed through.
This author wrote in this newspaper in 2009, “the window of opportunity for Indonesia to embed climate change considerations into its development plan and muster international support to undertake a low carbon development is still open – but not for long.” G20 chairmanship puts that opportunity on steroids, but only this year.
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The writer is a professional in the energy sector and a PhD candidate at Rotterdam School of Management, Erasmus University. The views expressed are his own.
