Indonesia Asks Where the Money Is for Green Transition

“When I went to Washington last month, we explained it, they said yes, then I said, ‘where is the money?’ … They’re just talk.” Luhut Pandjaitan, Indonesia’s coordinating minister for investment and maritime affairs, was frustrated as he talked to Indonesian reporters on May 9.

In 2022, as Indonesia hosted the G-20 in Bali, it triumphantly announced it had secured $20 billion in funding to accelerate its decarbonization. On the other side of the deal, the United States and its allies were crowing, too. The deal not only struck a blow for decarbonization, but was also an implicit response to China’s infrastructure projects. No longer was the West turning up with a lecture while the Chinese showed up with a hospital or a solar power plant.

Turning the deal into a reality, however, has proved challenging.

Negotiations with Indonesia have revealed a pandemonium of devils in the details. Multiple Indonesian sources have privately declared that the headline goal of Indonesia’s power sector emissions peaking at around 290 million metric tons of carbon dioxide by 2030 is not feasible. The nature of both the funding and the phasing out of Indonesia’s coal power plants have proved particularly controversial. Eyes are now on the U.N. General Assembly, where insiders hope that sideline negotiations might unblock a tangled process.

Under the terms of the deal announced last year, which is part of the Just Energy Transition Partnerships (JETP) program, the $20 billion was to be provided by multiple parties. Half would come from a consortium of developed countries, including the United States, Japan, and the European Union—called the International Partners Group. The other half would be provided by developed world financial institutions—grouped under the Glasgow Financial Alliance for Net Zero (GFANZ). In return, Indonesia would ensure its power sector emission peaked in 2030 by closing coal plants early and rapidly rolling out renewable energy.

The goals were always ambitious. “You’re trying to do 30 years of projects in five years,” said Alice Carr, the executive director of public policy at GFANZ. Renewables would have to provide 34 percent of Indonesian power generation by 2030. They currently make up just under 14 percent, and growth until now has been relatively sluggish. Closing coal power plants early is also costly.

Indonesia’s own priorities are complex—and sometimes contradictory. As a developing nation, it is reluctant to take any action that might threaten its economic growth and bristles when developed countries offer condescension instead of cash. “Developed nations have benefited financially from using most of the world’s carbon budget. So, it is only fair if developing nations get real financial support for energy transition and decarbonization,” said Rachmat Kaimuddin, the deputy coordinating minister for investment and maritime affairs and Luhut’s point man on the green transition.

However, Indonesia also sees a chance to seize a share of industries dominated by the developed world as the green transition takes hold. Leveraging nickel reserves to try to build an electric vehicle battery industry has become a key government priority. “We want to become a developed country—we want to industrialize. And currently, we are facing a megatrend of decarbonization,” Rachmat explained.

And Indonesians are as worried about impending climate catastrophes as anyone else. There are plans to move the capital, partly because of the encroachment of rising sea levels on Jakarta. Something like a green conscience is even growing among key decision-makers. As a former general under the Suharto dictatorship and the owner of substantial stakes in companies profiting from coal, skeptics assumed that Luhut would be a roadblock to deals—but he’s proved surprisingly keen on change. “He thinks he has a divine blessing to guide and reform Indonesia, including through the climate crisis,” said an energy researcher and activist who asked to remain anonymous. The researcher is now working as part of JETP Indonesia and suggested that traditional Third World developmentalism and the influence of younger, Western-educated family members both played a role.

But Indonesia’s green ambitions don’t preclude it standing up robustly for its own interests. Over the course of negotiations, three interlinked issues have emerged. First, the need to revise the emissions targets. Second, the exact composition and nature of the $20 billion in funding. And lastly, the early closure of coal power plants.

When it comes to revising emissions targets, much blame has been heaped on the problem of off-grid, privately owned coal power stations. Nickel refining is booming in Indonesia and is central to the government’s EV ambitions. To fuel the expanding industry, many companies are knocking up off-grid coal plants. The sheer number was reportedly underestimated in the models used for the initial JETP agreement.

However, some sources also suggest that modelers at the International Energy Agency underestimated on-grid emissions as well due to a lack of access to the most accurate Indonesian data on the matter. Convincing countries such as the United States to accept a higher target, and then striking a balance in negotiations between setting a more realistic goal and remaining ambitious, has been tricky.

Funding is an even thornier question. Many Indonesian politicians and energy specialists have been disappointed by the offer. Only $289 million in grants is available, and much of that comes in the form of technical assistance tied to specific projects, according to reporting by Bloomberg. The rest of the public will be a mix of concessional loans and guarantees. Some of this may not be new money anyway, as International Partners Group countries scrape together capital from a hodgepodge of funds and programs, some of it already promised to specific projects.

Meanwhile, the $10 billion from GFANZ is simply a promise to mobilize capital—with no plans for concessional terms of any sort. If that’s the case, why bother, some Indonesian politicians grumble. They’re perfectly capable of raising capital at market rate from the private sector themselves.

Getting the money into the right areas is also tricky. Cash is apparently relatively available for funding solar and wind projects, which are uncontroversial and quick to offer returns. Hydropower and geothermal projects—which face higher upfront costs, greater uncertainty, and slower returns—attract less support. The same goes for the vital issue of upgrading Indonesia’s electricity grid.

But by far, the most difficult area to channel money into is paying to retire coal power plants early, which is the third issue holding up negotiations. When asked about this, an Indonesian figure involved in the negotiations, who wished to remain anonymous, literally groaned. “That’s even worse than the rest of the funding. No one wants to pay for coal phaseout.”

But taking coal off the grid early is vital if JETP is to succeed. Coal provides 67.5 percent of Indonesia’s electricity generation on the public grid. However, burning coal is so carbon-intensive that Indonesia now emits a third more carbon dioxide per unit of energy consumed than in 2000, according to a 2022 report by the International Energy Agency. A boom in coal plant building in mid-2010 means that Indonesia now actually has excess generating capacity in key areas, and many plants could operate for decades. Some will have to come offline early to make space for renewables.

Financing what is essentially a write-down is tricky at the best of times. Developed world governments and financial institutions also often have policies in place preventing any investment in coal—even for early closures. So far, only $2 billion is available from the Asian Development Bank’s Energy Transition Mechanism, an independent program being bundled into JETP.

This falls well short of what is likely needed. Recent estimates by the Institute for Essential Services Reform, an Indonesian think tank, showed that to meet JETP goals, Indonesia would need retire around 8.6 gigawatts of coal fired power plants by 2030. It expects that this will cost about $4 billion, a figure which some analysts view as optimistic.

However, if serious cash is not forthcoming, the task of displacing coal in Indonesia’s economy looks herculean. Indonesia has a potent coal lobby, and as with China and India, some officials are inclined to see coal as a complement to the green transition, rather than something to be replaced. The chair of Indonesia’s financial services regulator recently floated the idea of defining green investments to include not just coal retirement, but also investment in coal power used to develop renewable energy industries.

Lurking behind all of this is the question of whether a successfully concluded JETP would even be enough to meet the ambitions of either Indonesia or the International Partner Group members, particularly the United States. The head of the Institute for Essential Services Reform, Fabby Tumiwa, estimated that to hit JETP targets, roughly $100 billion in investment would be needed by 2030.

JETP’s ability to conjure up the remaining $80 billion relies heavily on the concept of de-risking and crowding in private investment. Carr admitted that “If the JETP is to succeed, it needs to attract more finance over time.” Public finance should be used “catalytically,” she said. If the government can deploy cash to assume a greater share of risks in financing deals and incentivize Indonesian pro-green reforms, then private finance will hopefully follow.

A great deal now hinges on this hypothetical cash. There are some promising signs—Indonesia has relaxed local content requirements on solar panels, which had been a big impediment to rapidly deploying them at a large scale, deterring investors. Still, so far, GFANZ’s partners, the supposed heralds of the private capital that would crowd in, continue to promise only $10 billion.

On the part of the United States, it may have to reckon with the limits of its geoeconomic bid to intertwine decarbonization and competition with China. Domestically, the Inflation Reduction Act intertwined generous subsidies for green industries with strict limits on the involvement of Chinese companies. Promoting such policies abroad is much more complicated.

Of the three other JETPs signed so far, the deal with Vietnam seems to be facing difficulties comparable to Indonesia’s. The deal with South Africa has descended into a morass thanks to corruption and dysfunction in the state energy provider Eskom. This, of course, only piles on the pressure to make the Indonesia deal work.

Yet limited funding also means limited influence. In private discussions, various parties indicated that the concept of trying to keep Chinese companies out of JETP-linked projects hadn’t even been raised. A JETP-funded solar park using Chinese panels and construction companies seems to be a plausible hypothetical. China is also already Indonesia’s second-largest source of foreign direct investment—and its companies play a vital role in Indonesia’s infrastructure and EV ambitions.

Indeed, Indonesia has no intention to let the JETP be its only option. President Joko Widodo recently visited China to drum up investment even as Beijing has begun to make noises about a Green Belt and Road Initiative. Japan, despite being joint leader of the International Partners Group with the United States, has also launched its own Asia Zero Emissions Community as a potential JETP supplement, or alternative if required.

“This agenda is too important to be left to one partnership,” Rachmat explained.