Early retirement for Indonesian coal plants could cut CO2, boost jobs, analysis says

by Hans Nicholas Jong on 20 October 2022

news.mongabay.com

At a cost of $37 billion, Indonesia could retire its coal power plants as early as 2040 and reap economic, social and environmental benefits from the shift, a new analysis by nonprofit TransitionZero shows.

Replacing coal with renewables will create a windfall of new jobs, which would outweigh coal closure job losses by six to one, according to the analysis.

The analysis has also identified three coal plants in Indonesia that are the most suitable for early retirement, as they have lower abatement costs and are the most polluting.

JAKARTA — Indonesia’s plan to retire its coal-fired power plants and replace them with renewable energy by 2050 is not only feasible, but, when environmental costs are considered, will be less costly than relying on coal to power the Indonesian economy, according to a new analysis.

Indonesia is often dubbed as the last bastion for coal, as its power sector remains heavily reliant on the fossil fuel — about 70% of its generated electricity came from coal in 2021. Indonesia is also the world’s biggest thermal coal exporter.

In a bid to tackle climate change, the Indonesian government announced that it would start retiring its coal fleet soon, as coal is the world’s largest contributor to global warming.

The analysis, by climate analytics nonprofit TransitionZero, shows that Indonesia could actually retire all 118 of its coal facilities by 2040, earlier than planned, by buying out coal power plants before the end of their life cycle and before the end of their contracts, called power purchase agreements (PPAs).

Doing so will prevent approximately 1.7 gigatons of CO2 emissions from being released into the atmosphere, equivalent to almost three years of Indonesia’s annual emissions, which will be in line with the greater effort to limit global warming to 1.5 degrees Celsius.

It will also prevent Indonesia from being stuck with the hefty cost of burning coal in the long run, as operating coal power plants exacerbate air pollution, water stress and climate change.

When these impacts of coal plants on local communities, local resources and the environment are taken into account, the true cost of coal power plants in Indonesia is $67 per megawatt-hour, 27% more than the new cost of clean energy alternatives, the analysis shows.

To shutter the entire coal fleet in Indonesia by 2040, the country will need $37 billion, or $1.2 million per megawatt, according to the analysis, which uses data from TransitionZero’s open data project tool called Coal Asset Transition (CAT).

This money is expected to be sufficient to cover the capital expenditure, operational expenses and acceptable profit margin for power plant owners.

While this might seem to be a huge sum of money, it’s relatively small compared with the amount of money the government paid to subsidize coal.

In 2021, Indonesia’s coal subsidies cost the country more than $10 billion.

Indonesia has also shown that it’s willing to invest in expensive carbon capture, utilization and storage (CCUS), which is aimed at lowering emissions from existing coal plants, but the technology so far has largely been unproven.

Its first CCUS project, BP’s Vorwata CCUS development, capable of capturing and storing 25 million metric tons of CO2, is expected to cost $3 billion.

And if Indonesia wants to install CCUS technology at all state-owned coal power plants, it will cost the country $700 billion.

Under its “Long-Term Strategy for Low Carbon and Climate Resilience 2050,” the government plans to retrofit three-quarters of all coal plants with CCUS and carbon capture storage technology.

“Compared to fossil fuel subsidies and carbon capture projects, retiring coal plants earlier than expected is not only economically beneficial but would also reduce air pollution and put Indonesia on track to meet its net-zero ambitions,” Matt Gray, CEO at TransitionZero, said in a press release. “We hope our new tool can be used to drive decisions about the risks and opportunities associated with coal refinancing.”

Fabby Tumiwa, executive director of the Institute for Essential Services Reform (IESR), an Indonesian private policy think tank, said the CAT tool and its analysis are especially relevant for Indonesia as the country is gearing up to transition from coal to renewables.

Last year, the state-owned power utility, PLN, announced that it would retire its coal fleet by 2055. Earlier this year, President Joko Widodo said the government would shut down 5.5 GW of coal power plants before 2030, at an estimated cost of $6 billon.

Then, in September, the president issued a decree that ordered the Ministry of Energy and Mineral Resources to come up with a road map to retire its fleet of coal power plants, with the plan to eliminate coal generation by 2050.

View of Suralaya coal power plant in Cilegon city, Banten Province, Indonesia. Image © Kasan Kurdi / Greenpeace.

Where will the money come from?

Arifin Tasrif, the minister of Energy and Mineral Resources, said that will require lots of money because the government would have to pay back the operators of coal power plants.

“We also need additional funds to provide training to mine workers so that [they] could shift to clean and renewable energy,” he was quoted by bisnis.com.

TransitionZero said closing coal plants would surely impact jobs in the communities in which the plants operate.

Therefore, it’s necessary to address the impact of the early retirement on local communities by replacing coal plants with renewable power plants.

According to the analysis by TransitionZero, an average of 1,580 new jobs will be created per replacement solar installation, and 2,265 jobs per replacement onshore wind installation.

To make sure that former coal workers are not being left behind, a coal retirement deal should include training and transition programs for employees, TransitionZero said.

TransitionZero analyst Jacqueline Yujia Tao said the researchers considered the costs of transitioning from coal to renewable energy, including reemployment of former coal workers and incentives for renewables, in their calculation.

With substantial money needed to retire coal plants and develop renewables so coal workers can be reemployed, the government won’t be able to bear the full costs of a coal retirement plan by itself, said Sinthya Roesly, PLN finance and risk management director.

“This is not a small amount of money,” she was quoted by bisnis.com. “We have to look at Indonesia’s fiscal capacity, how much it can cover that.”

Therefore, Arifin said the government is opening up opportunities for nongovernmental parties to invest in the program.

“We’re inviting investors, financial institutions, industries and policymakers to increase collaboration to support [our] energy transition to achieve net-zero emission in 2060,” he said.

However, investors and foreign financial institutions are still cautious about pouring their money into Indonesia’s coal retirement program, Sinthya said.

PLN has approached banks and investors in Japan and South Korea about the possibility of their funding the coal retirement program, but they’re still assessing the proposal, she said.

Sylvi Juniarty, the director of funding and investment at state-owned infrastructure financing company PT Sarana Multi Infrastruktur, said investors are still reluctant to invest in the coal retirement program because it’s still perceived as too risky.

Nevertheless, there are positive signs that money will start flowing to Indonesia.

Arifin said the government had been in talks with the Asian Development Bank (ADB) and World Bank to potentially fund early coal retirement.

Furthermore, Indonesia is also currently negotiating with the Group of Seven (G7) countries to form a partnership in which the world’s wealthiest nations would fund energy transition in Indonesia.

G7 member countries the U.S. and Japan are leading the negotiations and the partnership, called the Just Energy Transition Partnership (JETP), which is planned to launch in November.

With the right transition finance, Indonesia could close its coal fleet by 2040 in an affordable and just way, according to TransitionZero.

A coal-fired power plant. Image courtesy of Benita Welter from Pixabay.

Low-hanging fruits

One of the contributing factors to the cost of early retirement of coal plants in Indonesia is the age of the fleet.

Coal plants in Indonesia are relatively young, with the average age across the fleet being 12-13 years, according to Fabby.

Some privately run power plants are even less than 10 years old. Retiring those plants would be more costly than retiring older plants.

Therefore, experts recommend the government first retire old power plants, most of which are run by PLN.

Arifin said the government aims to retire three coal plants this year.

He didn’t disclose the plant names, but he said they were likely to be located on Java Island, as the electricity supply on the island is already over capacity.

Therefore, Arifin said the retirement of the coal plants wouldn’t disrupt the electricity supply in the region.

TransitionZero said it was likely that the initial wave of retired coal plants would be those that are producing electricity in excess of demand, something known as reserve margin.

TransitionZero pointed out that the electricity grid on the islands of Java and Bali has a reserve margin exceeding 55%, meaning its power plants are producing excess electricity in the amount of 55% of expected peak demand.

Therefore, it’d be wise to shutter coal plants in that grid before moving to other regions like Kalimantan, TransitionZero said.

Based on several criteria, TransitionZero identified three power plants in Indonesia that had the most potential to be shut down early.

Those low-hanging fruits were the Asam-Asam power plant in South Kalimantan, Paiton power plants in East Java and Suralaya power plants in Banten.

Jacqueline of TransitionZero said the Paiton power plants and the Suralaya power plants presented the greatest opportunity for early retirement, as they cost the least per ton of emissions savings, with only around $8 per ton of CO2 saved from shutting down those plants.

That is just marginally higher than the average global carbon price of $6 per ton of CO2.

And that is also much lower than the abatement cost of Indonesia’s first CCUS project, which is at $130 per ton of CO2.

In addition, the Paiton units operate in areas exposed to significant water stress and local air pollution risk, and thus there would be additional societal benefits with their early retirement.

In addition, the Asam-Asam power plant should be prioritized for shutdown because it’s one of the dirtiest power plants in the Indonesian coal fleet, according to the analysis.

“With eight years of operational life remaining, retiring the plant this year could bring about 9 million tons of emissions savings alone,” TransitionZero said in its analysis.

With the ability to identify coal plants that have the lowest cost and could provide the most benefits if they’re retired early, Fabby said the CAT tool could be useful in advancing the effort to push coal retirement, particularly in the Asia region where some new coal plants are still planned for construction in the coming years.

In Indonesia, at least 13.5 GW of new coal-fired power plants are planned, excluding captive coal-fired power plants for industry.

“We know that coal is still growing strong here in a number of countries, and that’s where we actually have to retire most of the coal fleet if you’d like to save the planet from climate catastrophe,” Fabby said.

Citation:

Indonesia Long-Term Strategy for Low Carbon and Climate Resilience 2050. (2021). Retrieved from United Nations Framework Convention on Climate Change website: https://unfccc.int/sites/default/files/resource/Indonesia_LTS-LCCR_2021.pdf

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