Indonesia energy sector grapples with net zero

Indonesia’s energy sector is at an impasse. The government is finally starting to address its carbon emissions, however, the best way to do that is cause for debate.

Western energy majors BP and ExxonMobil both said at an upstream oil and gas conference in Bali in late September that they were optimistic about their respective carbon capture storage and utilization (CCSU) projects in Indonesia.

The two oil and gas giants claim that CCSU offers a solution to the “global need to balance energy security and emissions reduction,” the Nikkei Asian Review reported.

The increase in CCSU development comes as the Indonesian government sets a goal of reducing its greenhouse gas (GHG) emissions by 31.89 percent by 2030. It also aims to reach net zero by 2060.

Coal makes up around 35 percent of Indonesia’s energy supply, followed by oil at 29 percent, and gas at 14 percent, according to International Renewable Energy Agency (IRENA) data. Renewables make up 21 percent. However, only 4 percent of its renewables are solar and wind power. The remainder includes bioenergy and geothermal.

Indonesia’s economy also keeps growing, demanding even greater amounts of energy. Its economy grew by 5.03 percent year-on-year in Q1 of 2023, beating market estimates of 4.95 percent growth. This marks the eighth consecutive period of economic expansion for the country.

New legislation

The government is also promoting CCSU. On March 3, the Indonesian Ministry of Energy and Mineral Resources (MEMR) passed new legislation to boost carbon capture storage efforts in the country’s oil and gas sector.

Although the new legislation will encourage the use of CCSU at oil and gas production sites, it doesn’t make the installation of carbon capture storage mandatory.  Under the regulation, companies will be incentivized to install the climate technology through carbon credits.

However, CCSU has a growing list of critics. Some see carbon capture storage technology as a false climate change mitigation narrative. They claim that the oil and gas sector is using CCSU as a way to justify their massive capex intensive projects, particularly new project proposals.

At first blush, this criticism seems valid.

Operating a CCSU system is still expensive and has yet to be deployed successfully at large scale. It’s also incredibly energy intensive. Moreover, once CO2 is stored there’s also a risk of leakage.

Mardika Parama, a Jakarta-based Senior Analyst of Public Policy/Government Affairs at BowerGroupAsia, told Gas Outlook that there’s still some doubt about leaks, but the question the government is still trying to decide is who will handle CCSU, either the mining ministry or the environmental ministry.

“I believe that the government is having an entrepreneurial spirit by backing CCSU in the country,” he added. “The reason has also been authentic interest from global companies in CCSU. They really want to partner with the government.”

However, an argument can be made that Indonesia doesn’t need more fossil fuels project development, along with CCSU implementation. Given its emissions problems, and the still underweight share of renewables in its energy mix, the country needs to develop more solar and wind power projects. Indonesia, with a population of 275 million people, is the ninth largest polluter in the world.

Energy project economics also support this supposition. Renewable energy project costs have reached cost parity with their fossil fuel counterparts and now in many cases are less expensive, a recent IRENA report found.

To its credit, however, the Indonesian government recently set an earmark that renewables make up at least 23 percent of its energy mix by 2025 and 30 percent by 2030. Is it enough? That’s another question currently being debated in the country.

Just Energy Transition Partnership

Moreover, how to finance these projects presents a hurdle – at least with regards to the tapping of funds provided by the Just Energy Transition Partnership (JETP).

Indonesia and several of its international partners launched the second JETP round at the G20 Summit in November 2022. The initial JETP round was announced a year earlier at COP26 in Glascow, Scotland. Funding partners include Japan, the U.S., Canada, Denmark, France, Germany, Italy, Norway, the EU, and the UK.

Much of the JETP scheme includes grants, concessional loans (funding at more advantageous terms than prevailing market conditions), along with lower interest commercial loans.

JETP funders hope to bridge the gap between so-called developed and developing nations to help finance clean energy projects and in some cases retire coal-fired power plants. South Africa, Vietnam and Indonesia are the first three countries to receive funding. Sri Lanka has also recently been added to the list of upcoming recipients.

The JETP has earmarked some US$20 billion over the next three to five years to help Indonesia develop more renewable energy projects. It also committed to provide Vietnam with US$15.5 billion over the next three to five years, while already providing US$8.5 billion in initial funding for South Africa, also over a three to five year period.

However, JETP problems are already surfacing.

Some officials in Indonesia are claiming that donor countries aren’t yet ready to fund projects, Reuters reported on September 25. This has led to a disagreement over what the funds are actually intended for, the report added.

“Our demands are very clear – early retirement of coal-fired power plants and building a smart grid,” said Septian Hario Seto, Indonesia’s deputy of investment and mining coordination.

However, “they [JETP funders] are more interested in renewable commercial projects. For Indonesia, the challenge is excess electricity supply,” he added.

Parama said the disagreement is mainly between the U.S., the lead JETP funder, and the Indonesian government. “There’s concern if JETP is able to move forward because of funding. Initially JETP was for US$20 billion to help with coal-project retiring,” he said.

“When it comes to funding, the devil is in the details,” he added.

He explained that the amount of U.S. government funds coming from public financing is small so it’s mostly commercial loans which can have higher interest rates, while there’s a need for more grants.

“The Indonesian government argument is that it’s very costly for the country to make early retirement for coal-fired power plants because its producing excess electricity and coal is very cheap and abundant in Indonesia,” he said.

The country is also still industrializing and building a lot of independent coal-fired power plants. A lot of these are tied to industrial parks, he explained.

Some in Indonesia are claiming that the JETP mechanism is another form of Western colonization, since developing countries will once again be indebted to richer, developed countries.

However, Parama said that those claims are politically motivated due to the onset of the election season in the country. Indonesia will hold presidential elections next February 14.

South Africa and Vietnam for their parts, haven’t voiced similar complaints. However, there are allegations that the Vietnamese government its violating its JETP agreement by continuing to build out more coal-fired power plants, while imprisoning environmental activists for criticizing the government’s moves.