Introducing the Coal Asset Transition tool

Summary

Based on estimates of power purchase agreements (PPAs), it will cost $37 billion in total or $1.2 million/MW to buy out Indonesia's existing coal fleet to achieve a 1.5°C trajectory

Replacing coal with clean energy creates windfall of new jobs, but investment in retraining is vital

When air, water and climate costs are included, the operating costs of coal is $67/MWh - 27% more than the new cost of clean energy alternatives

High reserve margins will drive initial refinancing projects

Asam-Asam, Paiton units and Banten Suralaya units are interesting case-studies for early coal retirement

A global phase-out of coal-fired power plants remains the most important and urgent policy measure to avoid dangerous climate change.

The transition away from coal power is in various stages of development across different regions. Implementing a coal phase-out, particularly in emerging economies, requires careful consideration of costs and benefits within a wider local context.

In no other country are these considerations starker than Indonesia - a coal-reliant country with aspirations to be net-zero by 2060. Financing mechanisms that support the retirement of coal plants are gaining momentum in many countries, including Indonesia.

In this blog, we introduce our Coal Asset Transition (CAT) Tool, its results for Indonesia and the implications for policymakers and financiers.

What is the Coal Asset Transition (CAT) Tool?

Our CAT Tool is an open data project to help refinance and replace coal plants in an affordable and just way. Each metric included in the CAT tool is tied to a Sustainable Development Goal (SDG). The CAT tool is designed to allow high-level screening of coal plants, to identify and rank for replacement using one or multiple criteria. The first iteration of our CAT Tool provides a plant-by-plant estimate of the following for Indonesia:

• SDG 3: Good health and well-being
  • Social cost of local air pollution ($/MWh)
  • Social cost of total air pollution ($/MWh)
• SDG 6: Clean water and sanitation
  • Social cost of water stress ($/MWh)
• SDG 7: Access to affordable, reliable, sustainable and modern energy
  • Estimated PPA price ($/MWh)
  • Remaining asset life (years)
  • Financial buyout of PPA ($)
  • Potential CO2 savings from early retirement (tCO2)
  • Value of CO2 savings from early retirement ($)
  • Reserve margin of grid (%)
  • Operating cost ($/MWh)
  • Long term profitability ($/MWh)
  • Levelised cost of clean replacement ($/MWh)
  • Levelised cost of clean replacement plus battery storage ($/MWh)
  • Switch price to gas ($/tCO2)
• SDG 8: Decent work and economic growth
  • Jobs loses from closures (full time equivalent)
  • Jobs added from replacement renewables (full time equivalent)
• SDG 13: Take urgent action to combat climate change and its impacts
  • Climate externality cost ($/MWh)

The CAT Tool is published as an excel spreadsheet with accompanying methodology, which we plan to regularly update.

How does Indonesia’s power sector work?

Indonesia is a large archipelagic country compromising more than 17,000 islands, which stretch 5,000 kilometres across Southeast Asia and Oceania. It is home to about 270 million people, of which more than half live on the main Java island, where most of the economic activity is concentrated. The remaining 130 million is spread across Sumatra, Bali, Sulawesi, Kalimantan, Nusa Tenggara, Maluku, Papua, and about 6,000 smaller inhabited islands.

Indonesia is a middle-income country, with a GDP per capita of slightly above $4,200 in 2021. Indonesia is energy resource-rich, taking the first and seventh spots for coal and LNG exports respectively. The extraction of fossil fuels has been central to Indonesia's economic development.

The energy sector in Indonesia is primarily governed by the National Energy Policy NEP 2014, also known as KEN 2014, which is issued by the President of the Republic of Indonesia. NEP 2014 sets the overarching national strategic direction for the energy sector in Indonesia. The NEP 2014 is supported by the National General Energy Plan (RUEN) which lays down sectoral policies to achieve the targets of NEP.

The RUEN also serves as the basis for the National Energy Council from the Ministry of Energy and Mineral Resources (MEMR/ESDM) to develop the Nation Electricity General Plan (RUKN). The RUKN lays down a 20-year projection of the electricity sector, covering demand and supply projections, investment policies and strategies to achieve targets laid down by RUEN. The state-owned utility, PT Perusahaan Listrik Negara (PLN), then uses that as a basis to formulate its business plan for the next ten years in the Electricity Supply Business Plan (RUPTL) 2021-30.

Regulatory framework for Indonesia's energy policy

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n terms of the regulatory bodies, MEMR/ESDM is the primary body responsible for energy policy in Indonesia. MEMR/ESDM is further split into various Directorate Generals, each tasked with regulating a specific segment of Indonesia's energy sector. The Directorate General of Electricity, alongside the Directorate General of New Renewable Energy and Energy Conservation, are responsible for regulating the power sector.

As energy is central to Indonesia's economy, energy policy is deeply intertwined with other segments of government policy. For example, energy sector goals are often a key part of Indonesia's National Medium-Term Development Plan (RPJMN 2020-2024), laid out by the Ministry of National Development Planning (BAPPENAS).

The Electricity Law (2009) forms the backbone for the power sector regulation. However, its implementation is often governed by additional regulations at presidential, ministerial, provincial, and director general levels, which adds a degree of regulatory uncertainty to the sector.

Climate targets within the power sector

In recent years, due to increasing political momentum on climate change issues, power sector development in Indonesia is seen pivoting to addressing climate-related targets, alongside meeting electrification and affordability goals. The table below lists some of Indonesia's climate goals.

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Notes: Indonesia uses a unique classification for its electricity generation sources. Under Indonesia's definitions, 'new energy' refers to energy produced from liquefied coal, coal bed methane, coal gasification, nuclear and hydrogen. Renewable energy covers geothermal, hydropower, bioenergy, solar, wind and tidal energy.

More recently, Indonesia has been at the forefront of the coal transition debate in the Southeast Asian region. A recent presidential decree issued in September 2022 required the Ministry of Energy and Mineral Resources (MEMR/ESDM) to work on a roadmap to retire its fleet of coal-fired power plants, with the plan to eliminate coal generation by 2050, a decade before its net zero target.

This new regulation came alongside provisions that allowed the Indonesian government to cover some of the losses related to early retirement and opened the door to state subsidies for renewable energy projects. Although this step was largely applauded, the new regulation has been criticised for relaxing previous commitments to halt the project pipeline of coal power plants.

Power sector trends

Indonesia's power sector remains heavily coal-reliant, with about 70% of the 300 TWh of electricity generated coming from coal in 2021. This results in a grid emissions factor of about 0.6 tCO2/MWh, which has not changed since the start of the 21st Century.

Due to its archipelagic nature, Indonesia's grid system is split into various regional grids, with some interconnections between grids. The main grid system is the Java-Bali, which makes up more than 70% of power demand in Indonesia. As each regional grid has a different generation mix, regional grids also have varying emissions factors. The Java-Bali grid has an emissions factor of 0.8 tCO2/MWh, while the Sumatra grid is slightly cleaner at 0.77 tCO2/MWh.

Market structure

The state energy utility PLN is the owner of the largest power plant fleet in Indonesia and acts as the single buyer in Indonesia's power sector. PLN, alongside its various subsidiaries including Indonesia Power and PT Pembangkitan Jawa Bali (PJB), dominates generation. Private sector participation is allowed under independent power producer (IPP) agreements or public-private partnership (PPP) schemes.

Foreign ownership of power plants is allowed, although it is common practice to partner with Indonesian entities via joint ventures. PLN also owns and operates all the transmission and distribution networks in Indonesia. It also has a monopoly over the retail end of power sales.

What is coal refinancing?

Driven by climate goals, in recent years several financial mechanisms have sprung up to facilitate the buy-out and closure of coal plants in developing countries before the end of their economic life.

These usually include some form of blended finance, with public money from donor countries being leveraged to ‘crowd-in’ much larger volumes of private finance at a lower cost of capital. Given the sums involved, even wealthy countries cannot possibly fund the transition through public money alone, hence the need to scale private finance via energy companies, investors and banks. Examples of coal refinancing schemes are detailed below.

Energy Transition Mechanism

A mechanism developed by the Asian Development Bank to accelerate the retirement of coal power plants and replacement with clean energy projects. The scheme is designed to be collaborative, pragmatic and flexible to the diverse national contexts of each country, while also being a scalable model that can be deployed across Southeast Asia and beyond. A pilot project is currently underway to close 5-7 coal plants in Indonesia and the Philippines.

Just Transition Transaction (JTT)

A multilateral mechanism which was developed to enable accelerated coal refinance and replacement in South Africa, conceptualised by the think tank Meridian Economics. The core component is a concessional debt instrument backed by a consortium of developed country governments.

JTT partly inspired the Just Energy Transition Partnership (JETP) which was announced at COP26 and sees a group of wealthy countries committing an initial $8.5 billion for South Africa’s coal transition. There are plans to adapt this model to other countries, including Indonesia and V1. The JETP deal for Indonesia is expected to be announced in November 2022.

Carbon Reduction Bonus

A type of financial incentive that banks can offer to companies for reducing carbon emissions, e.g. by closing a coal plant ahead of schedule. This can be provided as a discount on the interest rate of a loan, or through a credit that can be sold on a carbon market. For example, in February 2021 IDB Invest provided a $125 million package to ENGIE Energía Chile to fund wind and solar projects and monetise decarbonisation gains from closing coal plants early.

Asset Refinancing

A process where an energy company borrows money to pay off the remaining debt on an existing coal asset, allowing the savings from reduced interest payments to fund the early retirement of the coal asset and the development of renewables. The process for asset refinancing is laid out in a report by Rocky Mountain Institute, Carbon Tracker and Sierra Club. For example, Vistra Energy Corp has refinanced over $8 billion of debt to fund the early retirement of 8 coal plants and replacement with renewable energy projects.

Key findings

Despite its reliance on coal, our CAT tool shows Indonesia can close its coal fleet by 2040 - a date considered consistent with the goals of the Paris Agreement - in an affordable and just way, with access to the right transition finance. Below is a summary of the main findings from the CAT Tool for Indonesia.

Based on estimates of PPAs, it will cost $37 billion or $1.2 million/MW to shutter the existing coal fleet by 2040

Early retirement of the grid-connected coal plants in Indonesia is expected to cost $37 billion¹. This will entail buying out a maximum of 10 years of future coal generation based on current PPA² prices (excluding the fuel cost and carbon cost components) at current capacity factors. The coal retirement deal is expected to cover the capital expenditure, operational expenses and acceptable profit margin for power plant owners. Fuel costs and carbon costs are excluded from the total retirement cost³.

To put this in context, Indonesia’s coal subsidies have cost the nation more than $10 billion⁴ in the past year alone, while Indonesia’s first CCUS project, BP’s Vorwata CCUS development, is capable of capturing and storing 25 million tonnes of CO2, is expected to cost $3 billion, equivalent to a cost of $120t/CO2 captured.

The financial mechanism to facilitate an early coal phase-out should serve the interests of all parties involved, particularly local communities and energy consumers. For the power plant owners, who can be either private entities operating as independent power producers (IPPs) or PLN⁵, it is considered important to adhere to the original terms of the PPAs. This sensitivity is shared by the government which needs to continue to attract foreign investment to fund energy infrastructure. For donor financiers backing the coal retirement deal, the limited climate finance needs to go the extra mile to maximise impact, while ensuring that overcompensation is avoided as much as possible.

Beyond PPA buyouts, other financial mechanisms, including carbon pricing instruments and profit-sharing mechanisms for renewable replacement, may help to ease the financial burden. Before such facilities can be arranged, an established ecosystem and framework to support such instruments needs to be developed. For example, in India, a regulatory framework to support the replacement of coal PPAs with hybrid coal and renewables PPAs has been enacted.

Overall, our analysis effectively shows that a future where Indonesia retires its existing coal fleet by 2040 is economically feasible, providing PPAs are renegotiated alongside wider regulatory reforms to incentive cost-effective clean energy.

Replacing coal with clean energy creates a windfall of new jobs, but not without challenges

No discussion on the phase-out of coal power is complete without addressing the impact on jobs in the communities in which the plants operate. Addressing the impact to local communities is central to achieving a Just Transition. For coal plants already in operation, most of the jobs associated with each plant are focused on operation and maintenance tasks.

For Indonesia, this translates to an average of 1.3 jobs/MW at a coal plant, with an average of 245 jobs associated with each coal plant. While there will inevitably be job losses associated with plant closure, that is only one side of the story. In Indonesia, the jobs associated with solar and onshore wind are two jobs per MW ⁶ and five jobs per MW ⁷ respectively. This accounts for both the construction and project development, as well as the ongoing operation and maintenance of the installation. Assuming that a replacement renewable energy plant is built for every coal plant retirement, this will translate to an average of 1,580 new jobs created per replacement solar installation, and 2,265 jobs per replacement onshore wind installation.

While not all coal plant closures will come with renewable replacement plants, it is fair to say power sector decarbonisation is likely to come with net job gains at the power plant level. Thus, to facilitate the re-employment of former workers in low-carbon sectors and in accordance with Just Transition principles, a structured coal retirement deal should adequately account for training and transition programs for employees.

Apart from direct job losses in the power sector, the knock-on impacts on the upstream coal mining sector prove much more concerning. Domestic coal plant shutdowns may negatively affect upstream mining operations, which currently employ 250,000 people in Indonesia, most of whom are low-skilled workers in less developed regions. The friction associated with transitioning away from an upstream mining job may be exceptionally high in Indonesia due to:

1. The localisation of mining activities, which may leave entire communities with limited employment and economic opportunities once local mining activities cease,
2. Temporal challenges as job losses are immediate, while employment opportunities in nascent low-carbon industries may take years to develop, and
3. Educational misalignment, particularly in less developed mining communities can prevent existing coal workers from active participation in the low-carbon sectors requiring specialised skillsets.

The responsibility of fiscal support and training programmes to ensure a smooth transition to low-carbon jobs fundamentally lies with the state. With the goal of leaving no one behind, it is important that coal retirement deals include provisions for social retraining programs, particularly for PLN-owned assets. In our estimates, we assume that the cost of Just Transition retraining programmes would be covered by the profits embedded in existing PPAs.

When air, water and climate costs are included, the average operating cost of coal is $67/MWh, 27% more than the new cost of clean energy

In order to gain a holistic view of the true cost of operating each coal plant, the externalities associated with air pollution, water stress and climate change should be accounted for. While not included in owner balance sheets, these variables reflect the true cost of operating the plant when accounting for the impact on local communities, local resources and the environment as a whole.

Without pricing these externalities, most operating coal-fired power plants in Indonesia cost less to operate than building and operating new renewable energy, but that does not capture the true impact. After translating these negative externalities into financial terms and including them in the operating cost, building and operating new renewable energy is more cost-effective than nearly all coal-fired power plants.

High reserve margins will drive initial refinancing projects

There is no overarching blueprint to shutter coal plants. This is because incentives to phase-out coal vary from country to country, province to province and plant to plant based on several variables.

Some stakeholders are motivated by air pollution, water use and carbon price risk, while others are concerned with long-term PPA contracts, supply chain job losses and power market oversupply.

For instance, coal plants have been closed for the following reasons:

• EU: air pollution regulations, carbon price and power market oversupply
• China: air pollution regulations and mandatory efficiency upgrades
• India: low solar photovoltaics costs
• US: high capital addition costs and air pollution regulations

For Indonesia, the high reserve margins may drive the initial wave of coal retirement projects. As seen in the chart below, the Java-Bali grid has a reserve margin in excess of 55%, which is unsustainably high. For this reason, we believe that coal plants in Indonesia should initially be refinanced within this grid system, then working towards the refinancing of coal plants in the Kalimantan and Sulbagsel grids.

These high reserve margins imply that the social, environmental and financial benefits of coal retirement can be reaped with minimal impacts on grid stability and without the immediate need to invest in replacement capacity. This will present policymakers with an opportunity to improve the carbon intensity of the grid-connected power, without compromising on its duty to reliably meet power demand-providing PPAs can be renegotiated.

Asam-Asam, Paiton units and Banten Suralaya units are interesting case studies for early coal retirement

Various considerations come into play when searching for a suitable candidate for early coal retirement. Besides the cost of the buy-out, other asset-level factors, such as carbon emissions, level of water stress and air pollution, provide an additional lens to evaluate the benefits of early coal plant retirement.

Additional grid level constraints also exist, as sending a coal plant offline in a capacity-constrained grid may compromise grid reliability and stability. While this does not pose much of a problem at the regional level for Indonesia, with major regional grids operating with high reserve margins, challenges may emerge at subregional levels if there is insufficient interconnection linking demand centres with power plants.

As such, based on the broad set of criteria described above, we have identified a few plants that may pose as interesting case studies for energy transition mechanisms. These plants include the Asam-Asam power plant in South Kalimantan, Paiton power plants in East Java and Banten Suralaya power plants in Banten.

The Asam-Asam power plant is one of the dirtiest power plants in the Indonesian coal fleet, with an emissions intensity of 1.38 tCO2/MWh. With eight years of operational life remaining, retiring the plant this year could bring about 9 million tons of emissions savings alone.

The Paiton (Units 1,2) power plants in East Java and Banten Suralaya (Units 1,2,3 and 4) power plants in Banten are selected for their superior performance in terms of cost per ton of emissions savings. Emissions saved from early retirement across these six assets only cost $8/tCO2, just marginally higher than the average global carbon price of $6/tCO2. In addition, the Paiton units operate in areas exposed to significant water stress and local air pollution risk, presenting additional societal benefits with their early retirement.

Conclusions

Coal refinancing could be an effective way to help incentivise the closure of coal in a manner consistent with a 1.5°C outcome. To stand any chance of being a scalable solution, coal refinance projects must prove to be both affordable and socially just. The objective of the CAT tool is to inform coal refinance decisions, supporting stakeholders to plan their own coal retirement schedules based on their particular priorities. More research and consultation is required to understand what are acceptable terms for early coal retirement for all stakeholders, particularly local communities, tax payers and energy consumers. We hope open data projects, such as the CAT tool, can be used to drive decisions about the risks and opportunities associated with coal refinancing.

Notes

1. Other estimates include: $28 billion by IESR and the University of Maryland and $600 billion to retire 15 GW from an Indonesian government official.

2. We refer to PPA prices in more general terms to refer to agreements to sell electricity at predetermined prices.

3. The rationale that fuel costs are removed is that the unused coal will be sold on the international market. Thus, it does not make sense to buy out the fuel costs at plants. As carbon costs are not incurred once a coal plant retires, carbon costs are also excluded from the cost of the buyout.

4. The cost of coal subsidies per tonne has been calculated using the difference between the prevailing reference market price (HBA price) released by ESDM and the fuel price for each plant. The HBA price was adjusted from 6322kcal/kg to an average 4200kcal/kg, to account for quality differences. To calculate the total subsidy, we estimated the annual coal consumption based on the 4200kcal/kg coal quality and average thermal efficiency (LHV) of 35%. The total coal subsidy then equates to the coal subsidy per tonne, multiplied by the total consumption of the coal fleet.

5. For PLN-owned plants, it is assumed that the retirement deal should treat PLN and IPPs equally as both groups will need to recoup their investments. PLN, which is operating in the interests of the Indonesian people, cannot be unfairly disadvantaged as losses are covered by state funds. The pressures are, in fact, even more, acute for PLN as it continues to face pressures recovering its cost of generation from subsidised tariff rates.

6. Based on the GGGI report on Employment Assessment of Renewable Energy: Power sector pathways compatible with NDCs and national energy plans.

7. Based on IRENA report on Renewable Energy and Jobs - Annual Review 2021.

TransitionZero would like to thank the following people for their help in the development of this analysis:

• Fabby Tumiwa, IESR
• Deon Arinaldo, IESR
• Raden Raditya Yudha Wiranegara, IESR
• Ahmad Ashov Birry, TrendAsia
• Andri Prasetiyo, TrendAsia
• Ryna Yiyun Cui, University of Maryland

TransitionZero would like to thank the Quadrature Climate Foundation and Bloomberg Philanthropies who were the principal funders of this project.