Indonesia's coal demand may increase in the coming years under the new administration led by incoming president Prabowo Subianto, whose focus is on economic growth and nickel processing. This shift comes despite the country's commitment to reduce fossil fuel dependency with a $20 billion plan under the Just Energy Transition Partnership (JETP) mechanism.
Investors are closely monitoring the administration's policies on emissions mitigation and its green ambitions, industry players told The Business Times. Indonesia is projected to raise its coal production to 970.1 million tonnes by 2030, according to a recent report by Sustainable Fitch.
Prabowo and vice-president-elect Gibran Rakabuming Raka have set a GDP growth target of 8% over the next five years. This pro-growth agenda is expected to drive coal demand higher in the short to medium term, given Indonesia's status as a highly carbon-intensive economy and one of the world's largest fossil fuel exporters, according to Melissa Cheok, the report's author.
Energy self-sufficiency is another factor boosting coal reliance, a key promise in Prabowo's election campaign. Marissa Lee, associate director at Global Counsel, highlighted the increased geopolitical volatility that makes energy importers vulnerable to supply shocks, defending coal as a stable power source.
Additionally, Prabowo's focus on developing the nickel processing industry aligns with his predecessor's policies. In 2020, President Joko Widodo banned nickel ore exports, encouraging onshore processing to integrate Indonesia into the global electric vehicle (EV) battery supply chain. Research company BMI projects Indonesia's nickel production to rise from 1.4 million tonnes in 2023 to nearly 2.4 million tonnes by 2030.
However, this nickel processing boom has led to a rise in "captive" coal plants, which serve specific industrial facilities. According to a November 2023 JETP strategy document, these plants are necessary due to the high power reliability and volume required by nickel miners and processors. These operations are often in remote or ecologically sensitive areas not connected to the grid, making renewable energy options challenging.
Indonesia has mandated that new captive coal plants must be retired by 2050. Nevertheless, Fabby Tumiwa, executive director of the Institute for Essential Services Reform (IESR), expects more coal capacity to come online in the near term. Some nickel players are considering clean energy sources like hydro and geothermal, but coal plants are seen as quicker to establish, said Ali Izadi-Najafabadi, Asia-Pacific head at BloombergNEF.
Environmentally focused investors might find Indonesia's green ambitions conflicting with its coal reliance. Despite nickel-related demands, Prabowo is expected to maintain Indonesia's commitment to reduce fossil fuel dependence under the JETP. Indonesia has also committed to achieving net zero by 2060 or sooner and supports the ASEAN Strategy for Carbon Neutrality, which includes promoting a regional circular economy.
Simon Tay, chairman of the Singapore Institute of International Affairs, emphasized that Indonesia is likely to meet its international obligations given these commitments. However, convincing investors of a genuine coal transition remains a challenge. Indonesia needs substantial funds for early retirement of its coal facilities, many of which are relatively young.
"The average age of a coal plant in Indonesia is around 12 to 13 years," Tumiwa of the IESR noted. The economic value of these assets still has a long way to go.
Tiza Mafira, director of the Climate Policy Initiative, stressed the need for discussions on decarbonizing new coal plants and assuring investors of Indonesia's commitment to consistency. Otherwise, conflicting signals may deter investment.
Reducing coal reliance is also politically challenging. The Widodo government introduced renewable energy reforms in 2022, including a new pricing system and incentives. However, these may not suffice to make renewables competitive with coal. Entrenched coal subsidies provide little incentive for the state utility PLN to purchase more expensive renewable electricity.
For insights into Indonesia's renewable energy direction, BloombergNEF's Izadi-Najafabadi suggests watching Prabowo's Cabinet picks, particularly for the ministers of energy and mineral resources and state-owned enterprises, who influence PLN's policies.
Indonesia's energy policies could also be swayed by global investor demands. As EV consumers and investors become more aware of the environmental and social impact of nickel processing, battery manufacturers may face increased pressure to decarbonize their supply chains, potentially driving investment in renewable energy over coal in Indonesia, Lee of Global Counsel concluded.
