Architecting Indonesia’s Record-Setting Climate Deal
The $20 billion package to shift Indonesia away from coal, toward clean energy, sets new standards in emissions reductions and climate financing for a just energy transition.
Indonesia is the world’s fourth most populous country, and one of its largest consumers and exporters of coal. During the week of the G20 summit in Bali, the island nation pledged to sharply cut its use of the fossil fuel and speed up its transition to solar, wind and other clean energy options.
Called the Indonesia Energy Transition Mechanism (ETM) Country platform, the initiative is initially supported by a Just Energy Transition Partnership (JETP) package of $20 billion in public and private finance that spans the next three to five years.
The largest single carbon-cutting deal in history, the move promises to shave gigatons of emissions from the global tally by mid-century.
The JETP announcement marks the culmination of nearly a year of negotiations between Indonesia’s government and a coalition led by the United States and Japan called the International Partnership Group (IPG).
Funding is split into two equal shares. The first half comes from a coalition — led by the US and Japan, along with Canada, Denmark, the European Union, Germany, France, Norway, Italy, and the United Kingdom — that together is lending $10 billion. The remaining $10 billion will be mobilized from private financial institutions that are part of the Glasgow Financial Alliance for Net Zero (GFANZ).
What do we know, and what remains pending?
Indonesia has committed to an economy-wide net zero emission goal by 2060, and for the power sector by 2050. Within the power sector, Indonesia has targeted to peak emissions by 2030, at an absolute value of no more than 290 million tons (Mt) of carbon dioxide, which is approximately a 20 percent reduction from the previous baseline value of 357 Mt of carbon dioxide.
For context, as of 2020, Indonesia had an operating fleet totaling almost 40 gigawatts (GW) of coal-fired power plants (CFPPs) plus another 13.8 GW planned or under construction. The state-owned power distribution utility, Perusahaan Listrik Negara (PLN), has identified 4.9 GW of PLN-owned CFPPs for early retirement by 2030 and as much as 14 GW of PLN- and independently owned CFPPs by 2035, as outlined in a draft investment plan submitted to the Climate Investment Funds (CIF) Accelerating Coal Transition (ACT) program.
In line with the early retirement of CFPPs, Indonesia pledged to source 34 percent of its total power from renewable sources by 2030. More than 10 GW of localized power systems in Indonesia are set to be redirected to renewables instead of coal.
How will this be funded?
The Indonesia deal advances the $8.5 billion JETP model announced at last year’s COP26 to transform South Africa’s grid. By building on details recently released by South Africa Indonesia’s JETP plan offers a new example of country-led engagement in the just energy transition.
Within the $20 billion from JETP package, multilateral development banks and CIF will account for a third of the $10 billion in public funding and CIF has committed over $500 million to Indonesia energy transition, some of which will be used to support Asian Development Bank’s (ADB) Energy Transition Mechanism (ETM) projects.
On that note, significant work has been done on funding mechanisms, including the ADB’s ETM and the CIF accelerated coal transition (ACT) program. The ADB recently announced its first ETM project, a 660 MW coal fired power plant owned by PT Cirebon Electric Power in West Java in a deal worth $250 million to US$300 million.
While this is important progress within the JETP package, more details are still needed regarding type and amounts of funding from the IPG group and the role of GFANZ private finance members will play in this constellation of energy transition projects in Indonesia.
Who are the key stakeholders?
Within the Government of Indonesia, there are several key ministries that have been deeply involved in the announcement and underlying plans:
- The Coordinating Ministry for Maritime and Investment Affairs has been the lead both on the discussions with the IPG and coordinating other ministries within Indonesia.
- Ministry of Finance, Ministry of Energy and Mineral Resources, and Ministry of State-Owned Enterprise have all engaged and are going to own key elements following the announcement today.
- Several government-owned entities have also played a critical role, including the PLN the state-owned corporation responsible for electricity power delivery in Indonesia, PT Sarana Multi Infrastruktur (SMI) which is responsible for catalyzing national infrastructure development, and Indonesia Investment Authority (INA) which is Indonesia’s sovereign wealth fund.
Indonesia sets a new standard
With this plan, Indonesia is demonstrating a new model of leadership for emerging countries on how to approach an accelerated, ambitious, and just energy transition. Finalizing the details of the announcement and securing the commitments from IPG and additional financial institutions required intensive engagement by all parties to align their funding priorities for a just transition.
To bring this ambitious deal across the finish line, key questions arose around Indonesia’s long-term plans for its energy sector and climate goals, including:
- What is the role of coal in Indonesia’s power sector will be going forward?
- How quickly will it transition away from coal as a primary fuel source?
- What will it replace the coal generation with?
- How does that transition align with national and global climate goals?
Advancing climate finance
The deal raised new challenges and set a new standard in climate finance, too, one which highlights a growing focus on transition financing. Many financial institutions are still assessing both the environmental credibility and financial viability of energy transition projects and plans, such as those outlined under the Indonesia ETM. Civil society organizations will play an important role in both helping to build confidence and to maintain guardrails to ensure the social, economic, and climate goals are achieved.
Looking ahead, there are key elements that stakeholders, including RMI, have signaled they would like to see from Indonesia and its partners as they implement the ETM:
- More comprehensive and transparent planning for power sector energy transition, including coal transition pathways by power system, lower coal utilization opportunities ahead of full retirement, and renewables-plus-storage deployment targets.
- Detailed investment plans for Indonesia developed through deep consultation with national and international experts.
- Better-defined funding commitments from financial institutions and philanthropic groups.
- Commitments to national policy reform that will enable scaling of clean energy deployment.
- Broader, transparent, and inclusive transition engagement with stakeholders including civil society organizations (CSOs) for workforce and impacted communities.
RMI’s ongoing role
Over the past year, RMI has advised and guided multiple aspects of this standard-setting transaction:
- RMI supported the Government of Indonesia to develop evidenced-based guidance for various stakeholders involved in the Indonesia ETM and JETP engagements.
- RMI is working with PLN to conduct techno-economic analysis of a few single coal assets to calculate the cost and benefits of an early transition and multiple RE options as replacement.
- In addition, RMI is also exploring how to work with SMI on just energy transition and transition finance, which was formalized under an MOU signed during G20 Bali.
RMI will continue to offer expertise and guidance to Indonesia and our partners. We look forward to helping this plan achieve unprecedented success.