Indonesia has plans for renewables to make up 70 per cent of new power projects in the next decade.
However, the “more challenging” hurdle to realising this vision is actually grid development, said Abdan Satria, executive vice president of business development and investment of the country’s state-owned utility Perusahaan Listrik Negara (PLN).
To distribute electricity from renewable energy sources scattered across the archipelago to the centres of demand, Indonesia will need to build a 50,000 kilometre-long transmission network, Satria said last Wednesday, during a panel discussion at the Asia Infrastructure Forum in Singapore.
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Under its revised power supply masterplan, which is currently under government review, PLN plans to add 33.2 gigawatts (GW) of renewable energy capacity between 2024 and 2033, based on local media reports. The remaining planned 47GW – nearly a third of additional capacity – will be powered by gas, said Satria.
PLN, which holds a monopoly over the country’s power generation and grid infrastructure, offtakes all the electricity generated by independent power producers through power purchase agreements (PPAs), which guarantees returns for the private sector.
But it is “quite a different story” for transmission, where the return on investment is “not as good” as that from power generation, said Satria. As a result, investments in transmission assets – which also tend to be more geographically dispersed compared to power plants and carry attendant higher environmental and social risks – have largely fallen to the public sector.
Innovative financing tools are therefore needed to successfully develop this new transmission infrastructure, said Satria. So far, blended finance mechanisms to mobilise more private investments using concessional capital have mostly been applied to support Indonesia’s transition away from coal to renewables, with questionable success.
Nearly two years since mobilising US$20 billion from the wealthy nations-backed Just Energy Transition Partnership (JETP), and over US$4 billion through the Asian Development Bank (ADB)’s Energy Transition Mechanism, Indonesia has yet to complete the first deal under its early coal phase-out scheme, which Satria said would slash almost 2 billion tonnes of carbon dioxide emissions.
As the world’s largest coal exporter, Indonesia continues to rely on the fossil fuel for 60 per cent of its electricity needs. Its sustainable finance taxonomy, released earlier this year, also sparked criticism for classifying new private coal plants supplying power to industrial facilities, like nickel mines and aluminium smelters, as aligned with the country’s low-carbon transition.
“In our plan, we don’t have the early retirement of coal. It’s just going to be the normal retirement of coal, so everything can be smoother,” said Satria, who stressed the importance of ensuring reliable energy supply.
“But if there is innovation, where the first early coal retirement in the world can be made in Indonesia, it will be a good achievement for Indonesia, which can also be replicated around the world.”
”We are also trying to find the best model in terms of financing. It is really difficult. Retiring coal is not attractive for business… because you just want to accelerate the depreciation of a certain asset, which increases the cost,” said Satria.
Indonesia uses a cost plus margin revenue model, where the government compensates state enterprises like PLN with a percentage markup on the costs incurred from undertaking an otherwise financially unviable public project. Thus, any increases in costs to deliver electricity would be borne by the government, he explained.
Green super grid ambitions
PLN estimates it would cost US$25 billion to build an inter-state grid which connects renewable energy sources across the country, as reported by Indonesian daily The Jakarta Post last week. When completed, the combined length of these transmission lines would be greater than the Earth’s circumference.
It also plans to extend the super grid to neighbouring Singapore and Malaysia, which could contribute to the realisation of a pan-Southeast Asian power grid.
First mooted nearly three decades ago, utilities, investors and multilateral banks have long-called for an Asean power grid in order to scale up renewables in the region.
“One of the big ‘hows’ in my mind that is stopping us from deploying renewable assets in Southeast Asia is actually the lack of planning and the deployment of grid infrastructure,” said Wong Kim Yin, group president and chief executive of Singapore-based energy provider Sembcorp, which also has vast renewable portfolios in China and India.
“Everybody is very familiar with financing wind farms, solar farms and even batteries. But I don’t hear as much [about] financing for grid infrastructure. Without grid infrastructure, you just can’t deploy renewables. We are encountering that in Vietnam, Indonesia, and I’m sure it’s happening in the Philippines and many other countries,” said Wong, who spoke on a separate panel in the same conference.
Lim Wee Seng, group head of energy, renewables and infrastructure from Southeast Asia’s largest lender DBS, who spoke on the same panel as Wong, added that policymakers in the region may need to consider public-private partnerships and privatising their national grids to increase private money flows.
“We’re seeing a lot more deal flow around long duration storage, batteries, pumped hydro and hydrogen, so we think that’s the next wave coming that policymakers need to prepare for in order to stabilise the grid,” said Lim.
The idea of privatising Southeast Asia’s grid systems was also surfaced by BlackRock’s vice chairman Philipp Hildebrand at Temasek’s annual Ecosperity summit. In April, he said adopting a market-based approach to energy markets, as the Philippines has done, would attract more private capital into grid modernisation and battery storage – clean energy infrastructure that typically receive less funding than renewable power plants.
Repowering coal on the cards?
A recent HSBC-backed whitepaper by international non-profit Repower Initiative proposed retaining and repurposing valuable infrastructure, like grid connections, from existing coal fleets in the region to cut some of the upfront costs associated with the transition from coal to clean energy.
Indonesia, one of the initiative’s target countries, has been receptive to this concept of “repowering” coal assets, which it has integrated into its national energy policy. While this could help overcome the challenge of grid integration for banks financing the region’s energy transition, ADB’s regional director Jackie Surtani emphasised that it is important to first reduce the asset lives of coal plants in the region – which are much younger on average, compared to those in the US and Europe, where this concept has already taken off.
“When you do that, then you can have a conversation about renewable energy,” said Surtani. But even after getting to this stage, he noted that typically, Asian governments prefer to run a separate competitive process for the deployment of renewable energy, rather than involve the existing owners of the coal plant with its repowering.
”I’m not saying it’s impossible, and I’ve seen some good examples where that’s happened in other parts of the world. Maybe that’s what we need to bring to governments here and we’re happy as ADB to work with the likes of HSBC and [Repower Initiative] to do that.”
