Indonesia's JETP Deal Will Only Succeed if Coupled with Radical Measures to Unblock Renewable Energy Pipeline
Kamis, 24 November 2022 15:39 WIB
By: Anissa Suharsono, International Institute for Sustainable Development
At the G20 Summit in Bali, a group of developed countries—led by the United States of America and Japan—pledged to mobilize US$20 billion (around Rp300 trillion) over the next 3-5 years to accelerate Indonesia’s energy transition through early retirement of coal power plants and deployment of renewable energy. The flood of new finance for renewable energy under the so-called Just Energy Transition Partnership agreement (JETP) is certainly welcome—but unless the critical barriers to renewable energy deployment in Indonesia are addressed, the deal will fail to deliver.
The JETP appears to herald a dramatic shift in energy policy that will accelerate the coal power phase-down and renewable energy scale-up, setting a new target for renewables that will need to account for 34% of the country’s power production by 2030.
Yet, at the end of 2021, renewable energy accounted for only 11.5% of the national energy mix, with the wind and solar industries remaining at an embryonic stage. If Indonesia is serious about reaching the new renewable goal, the whole strategy of deploying renewable energy needs to be radically redesigned and accelerated.
How? By removing the barriers to renewable energy deployment: local content requirements, the pricing of renewable electricity, and improved access to finance. Indonesia now has 6 months to develop a comprehensive investment plan—JETP Investment and Policy Plan (JETP IPP)—which must urgently address these concerns to avoid another false start to the Indonesian energy transition.
Relaxing local content
Local content requirements demand that more than 40% of the materials used in on-grid solar projects are procured from Indonesian manufacturers. This policy increases project costs and, given the low and intermittent nature of the procurement, has not led to large-scale production of renewable energy equipment.
Without competitive local equipment or a significant market for products, renewable energy manufacturing in Indonesia has been stuck in a perpetual “chicken and egg” situation. Rather than seeking to build demand and supply simultaneously, resulting in neither, local content should be relaxed for components that cannot currently be competitively produced in Indonesia; retained for ancillary components that are available nationally, and gradually reintroduced to higher value components once the volumes justify local investment in production.
Removing renewable pricing cap
An inadequate price at which renewable energy producers can sell power has been another barrier to a scale-up of renewables in Indonesia. The Government recently addressed the pricing concern with PD 112/2022 by removing the electricity generation cost (Biaya Pokok Pembangkitan/BPP) approach and replacing it with a single ceiling price mechanism based on the type of technology, project location, and capacity.
Whether this new ceiling price will be attractive enough to significantly accelerate renewable energy development remains to be seen. Yet, past experiences have shown that the approach to screen out expensive projects with a cap has delayed renewable energy deployment and has failed to reduce project prices.
Instead, Indonesia could immediately remove a cap on costs and replace it with a system of auctions increasing in scale with a fixed procurement volume, not a fixed unit price. Such renewable energy auction systems have been successfully used by over 55 countries.
The JETP announcement represents a marked shift in financial flows in the energy sector. In 2020, renewables accounted for less than 8% of energy sector investment while fossil fuels received 65%. If JETP is to be a success, these flows will have to be reversed.
The increasing availability of concessional finance pledged in the JETP announcement, will improve project finances. Under the JETP deal in South Africa, for instance, a number of announced loans will have an interest rate of approximately 3%—far lower than typical commercially available debt for project finance. Cheap finance can be further “blended” with commercial finance to enable maximum deployment.
If the JETP finance is deployed in a manner that aligns with the needs of project developers, then access to finance will no longer be a barrier to the industry. Make no mistake, this is a positive and dramatic change. However, the government team leading the project must avoid adding counterproductive conditions or regulations that prevent the finance from being deployed in a timely manner.
A ”just” energy transition
But the JETP is not simply an infrastructure finance package. It also aims to address the social impacts of the clean energy transition, and as such, should be structured to prioritize projects’ social benefits: employment, support to local economies, and the best use of resources.
In practice this could mean that projects can receive more generous financial support if they are addressing energy access barriers, are located in former coal-producing regions, or are linked to community energy schemes. Projects that make use of existing infrastructure—like repurposing of grid infrastructure near former coal plants to host new renewable energy generation—could also be singled out for support. Finally, projects that avoid the use of scarce resources such as agricultural land, could also be prioritized, for example, through the deployment of solar PV on warehouse roofs and above car parks.
While the JETP is a fantastic opportunity to rethink the energy system, the upcoming 6-month period to develop the comprehensive investment plan will be critical for the success of Indonesia’s energy transition. Without serious reforms to remove structural barriers to renewable energy deployment the deal will not succeed, and without a method for balancing the social and economic benefits of projects the transition may not be as “just” as intended. Input from civil society, affected communities, and the research community will be essential to address concerns and avoid potential pitfalls.
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