Issue 176: Indonesia’s U-turn on coal phase-out; climate scenarios caught in paper retraction

Energy transition

Indonesia’s coal phase-out back-out

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Indonesia’s decision to call off the early retirement of the Cirebon-1 coal-fired power plant may jeopardise the future of the landmark multilateral coal phase-out initiative known as the Just Energy Transition Partnership (JETP).

The Indonesian government’s decision to cancel the Cirebon-1 early retirement widens a gap between the South-east Asian country and the international public and private players that have committed capital to phase out the use of the carbon-intensive fuel. To get back together, Indonesia must regain trust about its commitment to ending the use of coal and a just transition, while the international partners must strive to lower the transition costs for Indonesia.

Indonesia has said that it is dropping plans to accelerate the shutdown of the 660-megawatt (MW) Cirebon-1, citing high costs. The state-owned power utility, PLN, also said that it is switching to a coal “phase down” approach of letting its coal plants run to the end of their operational lives, instead of the previous “phase out” stance of shutting the plants early.

JETP in trouble

Both decisions are problematic for the Indonesian JETP.

JETP Indonesia was launched in 2022 with US$20 billion of public and private commitments to support the energy transition in Indonesia. The commitment amount comprises US$10 billion of development funding – from the governments of co-leads Japan and the United States, and of Canada, Denmark, the European Union, France, Germany, Italy, Northern Ireland, Norway and the United Kingdom – that would catalyse a further US$10 billion of private financing from the international banking coalition known as the Glasgow Financial Alliance for Net Zero (Gfanz).

Cirebon-1 was to be the pathfinder project for JETP Indonesia, with the Indonesian government, PLN, independent power producer Cirebon Electric Power and the Asian Development Bank (ADB) agreeing two years ago to close the plant seven years ahead of schedule in December 2035.

Now the project that would have served as a model for future early retirements has been ditched, and it’s anybody’s guess if the Indonesian government is even interested any more in pursuing coal phase-out. While the JETP Indonesia programme encompasses other aspects of the energy transition, including infrastructure upgrades and social development initiatives, all of that is premised on Indonesia pursuing a credible energy transition.

South-east Asian challenge

The Cirebon-1 reversal is a setback on multiple fronts.

It’s quite obviously negative for the climate. Coal-fired power plants are among the largest sources of greenhouse gases around the world and in Indonesia. The problem is especially acute in Indonesia, which owns one of the world’s largest and youngest fleets of coal plants. Keep in mind that phasing out Cirebon-1 has been stalled for two years and JETP Indonesia doesn’t have anything to show after three years. The cancellation could add even more years to any future attempts to phase out another coal plant in Indonesia under JETP.

Indonesia has also raised doubts about its commitment to its climate goals of retiring all coal plants in the next 15 years and to achieve net-zero carbon emissions by 2060. The existence of that doubt could break JETP Indonesia if the external funders are no longer confident that their capital will create the desired impact.

A parallel JETP programme in Vietnam is also struggling to make progress on coal phase-outs. It’s unclear how and if the Indonesian experience will affect the trajectory in Vietnam.

Even non-JETP coal phase-out projects might be adversely affected. For example, transition carbon credits are being pilot-tested at a project to accelerate the shutdown of the 270 MW South Luzon plant in the Philippines.

Transition credits are a new form of carbon credits that have been proposed and championed by the Monetary Authority of Singapore. Each transition credit will represent a tonne of emissions reduced due to the early retirement of a coal plant. If successfully implemented, transition credits could give coal early-retirement projects a way to tap private capital to close financing gaps, especially when there is insufficient concessional and private capital.

However, a challenge with transition credits is a timing mismatch between when the funds need to be obtained, at the start of a project, and when the credits can actually be issued – near the end of a project, when the coal plant is finally shut down.

One approach to address the mismatch is to have transition credit buyers provide upfront financing, and then take delivery of the transition credits later on. However, such transactions are exposed to the risk of the project not being completed, like what has just happened to Cirebon-1. The aftermath is that upfront-financing approaches for transition credits could become more expensive for project developers as investors demand greater protections against failures to deliver.

The shockwave from the collapse of the Cirebon-1 project can therefore be felt all around South-east Asia, a region that has a huge coal problem. The International Energy Agency estimates that coal consumption in South-east Asia will grow by more than 4 per cent a year until 2030, the fastest growth rate in the world.

Closing gaps

The Indonesian government has said that high costs fuelled its decision, so it makes sense that costs should be the starting point to look for ways to rescue coal phase-out in the country.

The international partners involved in the project have to find ways to address legitimate concerns about the cost of coal phase-out. Replacing coal requires more than just building a new power plant; it also needs significant investments into adjacent needs such as transmission infrastructure, energy storage and workforce support.

Financial innovation could help to find ways to mitigate those costs for local governments. Investors might also have to be more flexible about boundaries. For instance, allowing existing coal plants to remain as grid stabilisation power sources instead of supplying baseload power could help to reduce replacement costs.

Unfortunately, it’s not transparent which aspect of the cost of phasing out Cirebon-1 lies behind the cancellation. The ADB’s Energy Transition Mechanism (ETM) is mostly shouldering the load of compensating coal plant investors’ lost income through a blended loan. Developmental loans and aid are also available for building a greener power plant and improving grid infrastructure for renewable supply.

It’s also possible that the change of mind has a fiscal basis, with the recently weakening Indonesian rupiah sparking caution about increasing foreign currency-denominated public debt.

As Tiza Mafira, director of the Indonesian chapter of Climate Policy Initiative, says: “I am not sure what PLN means by huge economical costs, when they are not the ones paying for the retirement.”

Indonesia needs to be specific about where its pain points lie.

The government also needs to demonstrate commitment to its climate goals and policy consistency in its strategy for achieving those goals. Indonesia cannot be seeking help to retire coal plants on one hand and building new plants on the other. Fossil fuel subsidies and the lack of meaningful carbon pricing also distort markets in favour of coal. These self-inflicted problem policies can and should be removed.

The irony of sticking with coal because of costs is that coal will cost Indonesia more in the long term. Solar prices are historically low at the moment, and Indonesia should use this opportunity to phase out coal. Renewable power also improves public health because of reduced pollution. Furthermore, Indonesia is highly vulnerable to loss and damage from climate change, and cutting down on coal today could mean spending less on adaptation and resilience in the future.

Getting back on track with coal phase-out ultimately benefits Indonesians even if costs today are high, but whether that can happen will hinge on the ability of the Indonesian government and its external partners to close the gaps between them.

Sustainability reporting

NGFS scenarios take damage

A set of widely used long-term climate scenarios has been ensnared in the fallout from a retracted academic paper about the economic costs of climate change.

The next version of the Network for Greening the Financial System (NGFS) long-term scenarios will stop using a retracted paper by researchers at the Potsdam Institute for Climate Impact Research, says representatives of NGFS, a global coalition of central banks and financial-sector supervisors.

The paper in question is titled “The economic commitment of climate change”. The 2024 paper was recalled this month, with the authors citing errors in its data for Uzbekistan and the way that the paper calculated uncertainty ranges. Those errors meant that the original findings showed significantly higher probability of damage with narrower uncertainty ranges than they should have.

The paper was used in the fifth – and current – edition of the NGFS scenarios to update the “damage function”, which is used to model the cost of damage from physical climate risk across the different scenarios.

The NGFS scenarios model different plausible climate outcomes depending on the level of physical risks and on the level of transition risks. The current version comprises seven scenarios:

• Net Zero 2050: Through stringent climate policies and innovation, the world achieves net zero carbon emissions around 2050.
• Below 2 Degrees Celsius: Gradual tightening of climate policies give a two-thirds chance of limiting global warming to below 2 deg C.
• Low Demand: Net zero around 2050 driven by significant behavioural changes in addition to carbon pricing and technology-induced efforts.
• Nationally Determined Contributions: The outcome if all countries stick to pledged climate targets.
• Current Policies: Assumes that only currently implemented policies are preserved, with no new policies.
• Delayed Transition: Assumes that no new climate policies are implemented until 2030, and strong policies are needed thereafter to limit warming to below 2 deg C.
• Fragmented World: Climate policy is delayed and divergent as countries do their own thing.

Forecast losses due to climate change have increased significantly in the current edition of the scenarios due to the updated damage function. For example, forecast losses under the Current Policies scenario increased to 15 per cent by 2050 in the current edition from about 5 per cent in the previous version, based on NGFS explanatory materials.

The expected removal of the retracted paper’s findings from the NGFS scenarios could lead to less dire predictions in companies’ scenario analyses.

The issue highlights the challenges of performing climate scenario analyses, which companies have to do under the widely used IFRS accounting standards. Modelling future climate scenarios is still a highly uncertain exercise with significant margins of error. Most companies won’t have the resources to perform their own detailed modelling, so they will rely on available resources such as the NGFS scenarios. When these resources need correcting, the ripples spread far and wide.

Nevertheless, the models are constantly being updated and revised as better information becomes available, which means that users should already be somewhat prepared for changes. This means that nobody should be making business decisions as if their NGFS scenario models are generating predictions with pinpoint accuracy.

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