Can Indonesia's New Capital Attract Capital for Renewable Energy?

In Brief

Indonesia's Paris Agreement commitment and declared strategy  involve renewable expansion, and the government has committed to creating a new capital city. 

Can the new capital become a showcase for large-scale renewable finance, deployment and innovation? It can... 

...if a network of long-view investors and advocates can pry the cozy relationship between the government, the state-owned utility, and the coal industry. Our reporter explores the situation. 

A view from above, courtesy CIFOR, of a promised capital city for Indonesia. Do you see a place for a solar grid?

A view from above, courtesy CIFOR, of a promised capital city for Indonesia. Do you see a place for a solar grid? 

In 2019, Joko Widodo, the current president of Indonesia, announced the relocation of Indonesia’s administrative capital; from the dense, metropolitan city of Jakarta to the forested area in East Kalimantan. The plan purports to alleviate air and water pollution, land subsidence, traffic congestion and waste management crisis by relocating to a clean slate. Furthermore, it provided a means to alleviate the unbalanced economic growth notoriously centered around the capital, Jakarta, and its state of Java.  To some, the new capital city project could create a space where clean energy agendas can flourish. 

There’s no lack of need for renewable initiatives. Five years after the Paris agreement in 2016, ministerial regulation has obliged Indonesia to achieve 23% of renewable energy mix in 2025. Nevertheless, the progress towards it has been sluggish; as of 2021, the current renewable energy mix is only 14.71%. The total fossil-fuel generated energy contributes 86% in 2018. Half of it comes from coal.

Besides support in regulation and subsidies, Indonesia would need enormous flow of private capital to develop more renewable projects. As the brand-new city will be built from scratch, plenty of room would be available to seize the abundant renewable potential in East Kalimantan. So private investment in Indonesia’s renewable sector, if it can work patiently and in concert with activists, can find chances to help the nation reach the renewable mix and Paris target it has promised. 

Where can investors find prospects in East Kalimantan? The path to an answer begins with recognition that coal still dominates the country.  

Coal domination affects renewable development

As the second largest coal producers and exporters in the world, Indonesia’s state-owned energy producers depend on coal and have promised t expansion plans to build more coal power plants to meet the growing demand of affordable electricity supply. These coal investments may bring social conflict along with environmental harm, creating transition risk.  

Yet renewable development faces a lot of near-term hurdles in Indonesia: erratic change of policies, monopoly distribution by the state-owned electricity company, and coal-favored electricity markets abide An article issued by the ministry of Energy and Mineral Resources Ministerial in 2017 set a price ceiling for renewable energy at 85% of the area’s electricity supply cost if the local renewables electricity production cost is higher than the national production cost. With the current technology and scale, the production costs of renewables run much higher than the national production costs, which are based on a coal-based electricity rate.

The ripple effect from this regulation creates an uncertainty on how much the state-owned utility, PLN, will pay a solar  developer. This elevates risk in a bank’s perspective.  In prior ventures, soft loans from local financial institutions or local banks was unrealistic and it adds another layer of drawback for the developer to acquire promising capital. Past successful projects found capital through MDBs, MNBs and other international banks. 

Nevertheless, the government insisted that the price regulation was issued to protect customers and to ensure affordable electricity for everyone. They also argue that the regulation could encourage developers to advance technology to achieve competitive tariffs. Yet, technological development can’t happen overnight in a vacuum, and the government plays a huge role in creating an enabling environment for renewables to grow. 

Ery Wijaya, a senior analyst from Climate Policy Initiative, said that a government initiative to establish a demand for renewable energy is imperative to promote renewable energy technology development in Indonesia. Climate Policy Initiative is a think-tank organization that aims focuses to help the government of Indonesia to achieve its climate goal, as well as businesses and financial institutions to drive economic growth. By increasing the national renewable energy project plan, the government could encourage key market players to invest in a  local supply chain and expertise in renewables. With a strong supply chain and large-scale demand, the cost of renewables will rapidly fall.

By increasing national renewable energy, the government could encourage key market players to invest in local supply chains and expertise. 

Could foreign investors press for a renewable expansion?

International financial institutions have played a significant role in supporting and financing the clean energy projects that have scaled in Indonesia. For instance, the Asahan 1 hydroelectric plant, completed in 2011, was funded by IFC. The IFC took a minority stake in Indonesian independent power producer, PT Bajradaya Sentranusa, and committed to oans of US$75 million along with arranging parallel and syndicated loans in total of $205 million. PT Indonesia Infrastructure Finance was the parallel credit-lender, and the syndicated loan lenders are Korean Development Bank, Maybank International, Labuan Branch, Societe Generale, Natixis Singapore Branch and Sumitomo Mitsui Banking Corporation. The hydroelectric plant was estimated to create savings for the owner up to $250 million per year, compared to predicted costs from a diesel-fueled power grid. 

This model can expand. Besides offering financial and technical support, foreign investors can urge the government of Indonesia to create fairer rules for the renewable market. Foreign direct investment is key to Indonesia’s overall capital inflow, and has been financing a good deal of power generation, gas and water, transportation and telecommunication projects. In 2019, the amount of FDI inflows in Indonesia reached $23.56 billion, 14% over the number in 2018. Additionally, as global companies are gradually integrating ESG into its core business, the demand for clean energy projects will also rise.

A rendering of Indonesia's proposed new capital city, from architecture firm Urban Plus

As the architecture firm Urban Plus renders it, the new capital will sparkle- whatever it uses for lights and industrial power. 

Responding to the news of the new capital city, several foreign investors showed interest in flowing some capital to fund a major energy project. Rumors circulated that the CEO of SoftBank Group, Masayoshi Son, joined with the UK’s former prime minister, Tony Blair, will set up funding for the new capital city. In addition, the Middle East also joined the investment, more specifically through Indonesia’s new sovereign wealth fund. These three prominent figures, Masayoshi Son, Tony Blair and the Middle East’s crown prince, Sheikh Mohammad bin Zayed, were recruited by Joko Widodo to form a steering committee to lead the new capital city project.

Could the new capital city pave the way to clean energy?

Official announcements are hard to find, perhaps in part because controversy followed the new capital city announcement. Environmental communities such as Greenpeace and Indonesian Forum for the Environment (WALHI) have expressed their concern of further environmental degradation on East Kalimantan, where coal-mining activities, palm oil plantations and timber industries have already damaged air and water.

Answering these questions, the government has repeatedly claimed the city developments are in conformity with sustainable city guidelines. Proceeding, the representative of Indonesia’s state-owned electricity company stated in an interview that renewable energy would supply 39% of the new city’s electricity consumption. Hydroelectric power dominates the renewable energy potential in Kalimantan due to the area’s abundant wide and long rivers.

East Kalimantan possesses  huge potential for clean energy. A research from the ministry of Energy and Mineral Resources shows that the potential of hydroelectricity, solar power, wind power, biofuel and other renewable energy sources combined together in East Kalimantan alone can reach up to 20 GW. Hydroelectric comprises 26% of it, and solar power 65%. 

Nonetheless, renewable energy supply in the region is still insignificant. In the 2019 version of Regional General Energy Plan for East Kalimantan, renewable energy only took 3.13% of the produced electricity mix. To reach the goal of supplying 39% renewable energy in the new city, the government would need a tremendous effort and huge financial capability.

Due to COVID-19, the planning of the capital city is halted to prioritize public health crisis expenses. Although it is premature to predict how the government will live up to its commitment as the project’s masterplan is still unfinished, this prolonged period could provide room for a careful and thorough planning as well as execution of the capital city, providing sufficient expansion to reach out to international investors in the energy sector. It is worth mentioning that Investment opportunities in Indonesia’s energy sector remains the largest and most liquid infrastructure sector. The World Energy Investment report stated that annual investment increased by nearly 50% since the early 2010s, whereas the other developing countries only grew by 15-20%. The increase of energy demand and the government’s electrification target are behind this situation. The nation’s plan to add 35 GW back in 2015 was amended to add another 8.8 GW in 2020. It will require an enormous capital inflow to realize the target, and it’s probable that both fossil fuel and renewables will be involved.

The new capital city might become a good stepping stone, although the current trajectory shows that drastic clean energy transition seems unlikely  anytime soon. In that context, the emerging economies and untapped renewable potential creates an attractive scale for foreign investors with time and patience to participate in a long-term investment in Indonesia’s renewable energy sector.

 

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