Climate Bonds Initiative has released a report titled, “Green Infrastructure Investment Opportunities INDONESIA: Green Recovery 2022 Report”. This report considers four key sectors that are considered to be traditional infrastructure assets, low-carbon, and generate climate positive impacts: renewable energy, low-carbon transport, sustainable water management, and sustainable waste management. Green energy and transportation are emphasised as they will have the highest funding needs by 2030. The Climate Bonds Taxonomy is used to identify which projects and assets are green. REGlobal provides an extract of the report focusing on the renewable energy sector…
The pandemic has created an economic shock nationwide including in the energy sector. To mitigate this impact, the government has channelled at least USD 6.78 billion towards energy. This spending includes the expansion of electricity subsidies to protect 31 million of the poorest households of Indonesia; a critical safety net. The majority of this budget was earmarked to subsidise fossil fuel energy. At least USD 6.54 billion was spent on fossil fuel in the last stimulus programme, while spending on renewables only amounted to USD 240 million. Overall, green energy only accounted for 3.5% of the total stimulus spending from the national economic recovery programme, indicating that the previous rounds of stimulus have not prioritised clean and green energy. Energy will be key in driving the economic recovery of Indonesia. Prioritising green energy in Indonesia would boost green recovery while making progress in decarbonisation. Renewable energy spending should be increased in future stimulus packages. Decarbonising energy is also critical to achieving climate ambitions of Indonesia, as energy is the second largest national source of emissions at 39%, only after forest and land use. Transitioning away from fossil fuels will also minimise the risk of locking future emissions and exposure to stranded assets, especially for coal plants.
Fossil fuels—especially thermal coal plants—still dominate the Indonesian energy mix (74.4% of the energy mix as of 2020). The government has recently rolled out a plan to phase out coal plants. This includes retiring coal plants earlier to achieve net-zero by 2060 or sooner. Some analyses have cited that this target could be achieved much sooner with sufficient regulatory framework and investments. The recent call from the government for a coal moratorium in 2025 is an optimistic development.
Indonesia has set a target to achieve 23% renewable in the energy mix by 2025, and recently sent a strong signal for renewable energy growth moving forward. The latest electrification development plan of Indonesia (RUPTL) 2021–2030 published in October 2021 has increased the renewable energy target to 51.6% of the energy mix by 2030, compared to only 30% from the prior plan. This is also the first time the renewable energy target has been larger than the fossil fuel share, which is 48.4% by 2030.
The abundant natural sources of renewable energy in Indonesia are still heavily underutilised. In 2020, total installed renewable energy capacity only reached 10 gigawatts out of 417 gigawatts renewable resources available (i.e., 2.5% of available resources). Hydropower and geothermal are the largest contributors while solar energy remains under-utilised.
As of June 2021, renewable energy accounted for an 11.4% share of the national energy mix and, to achieve the 2025 target, Indonesia needs to double this and deliver an additional 14 gigawatt capacity. This would require a massive investment of USD154bn by 2025. The investment poured into renewable projects—complemented by a favourable policy ecosystem—will determine how rapidly Indonesia can deploy its renewable energy plants. However, the restrictive and relatively opaque procurement rules and uncertainty in contract negotiations and power purchase agreements (PPAs) are still hampering the growth of renewable energy projects in Indonesia. These barriers cause uncertainty for independent power producers and limit the bankability of renewable projects.
Further policy reform that improves the bankability of renewable energy projects could attract more green capital. As of 2021, the PPA and tariff scheme has not resulted in predictable cash flow, limiting investor confidence. The upcoming presidential regulation on renewable energy tariffs — a regulation highly anticipated by market players — is intended to address this. This is a positive step towards boosting renewables investment.
More profitable pricing schemes for renewable projects could improve project bankability and boost the confidence of private investors. Favourable regulations—especially for solar rooftops—are already in place. To support the 6,500 megawatts (MW) of installed solar power capacity target by 2025, the Ministry of Energy and Mineral Resources introduced regulation No. 26 of 2021. This regulation eliminates the discounted price for solar energy exported to PLN, the sole power buyer of the country.
Before this new regulation, solar energy exporters could only sell the electricity at a discounted price. This financial incentive is expected to spur the growth of domestic solar PV installations and industry, and potentially promote green jobs. In 2018, the government also required that all government building rooftops have at least 30% of solar panel coverage. This regulation facilitated the growth of solar roofs from 592 consumers in 2018, to 3,781 consumers in 2021.
In 2020, the government also removed the build, own, operate, and transfer requirement for—and improved the commercial viability of—renewable projects. Many developers said that the old scheme undermined project bankability.
Indonesia requires USD 154 billion of investments to achieve the renewable target of 23% by 2025, and public funding is expected to only cover 51% of this requirement. The pandemic may cause further setbacks, as portions of the public budget have been diverted. In this context, the role of the private sector becomes increasingly critical for Indonesia to achieve its 2025 target and enable a sustainable recovery. Non-state financing plays an important role in renewable investments. According to past renewable financing trends, private finance, DFIs, and credit export agencies financed 58% of renewables during 2016–2019. Most renewable energy projects are eligible to be financed using green bonds. Conversely, most of the green bonds issued by Indonesian entities up until 2021 have included renewable energy as a component of the Use-of-Proceeds (UoP).
Green bonds can be structured in several ways, including project bonds, corporate bonds, covered bonds, or Asset Backed Securities (ABS). Aggregation of smaller projects can be done through securitisation or by banks originating green loans and refinancing in the green bond market. This structuring is particularly beneficial for smaller scale renewable projects in Indonesia.
State-owned banks—such as Mandiri Bank, Bank Rakyat Indonesia, and Bank Negara Indonesia— are providing soft loans for residential households that would like to install solar rooftops. This financial incentive is intended to spur the uptake of domestic solar. Municipal governments are also potential issuers of green bonds. So far, complex regulatory challenges and bureaucratic requirements have prevented municipal governments from entering the market. Adjusting regulatory requirements— such as lowering the debt service coverage ratio or streamlining the approval process—would encourage municipal green bond issuance.
SOEs should consider issuing green bonds to finance their projects, as clean energy projects are easily suitable for inclusion in green bonds. Indonesia has seen positive development towards green bond by the two major energy SOEs: Indonesia State Electricity Utility Company (PLN), and Indonesia State-Owned Oil Company (PERTAMINA). Both SOEs have announced that they will issue a green bond in 2022. In October 2021, PLN—in partnership with ADB— launched the Statement of Intent for Sustainable Financing. This document looks at project eligibility, framework development, and external review, and will help in both pre- and postissuances of this green bond programme. This deal could pave the way for other SOEs to issue sustainability bonds.
The growth of green infrastructure pipelines and associated green finance (including the green bond market) in Indonesia could be accelerated by key policy and institutional changes. Such measures could aim to prioritise green infrastructure for future stimulus spending, raise the profile of green infrastructure, support critical finance channels for infrastructure development stakeholders, and create more options for investors. Six suggested measures are:
- Incorporate climate risk exposure and ESG criteria into new infrastructure plans, including during PPP preparation. Account for future depreciation of assets due to change in precipitation patterns, temperature increases, and extreme weather events. Fossil fuel assets are categorised high climate risk assets.
- Introduce financial incentives for green, social, and sustainability (GSS) bond issuers. This could take the form of exempting the pre- or post-issuance cost for issuing a green bond, such as waiving the verification and external reviewer fee, or reducing or exempting of the listing fee altogether.
- Promote “COVID-19 Recovery” bond programmes and exclude assets that are at risk from future shocks or at risk of being stranded— like fossil fuels assets—to support a green recovery. The issuance of green, resilience and/or blue bonds can support a more sustainable recovery. The USD 750 million sovereign green tranches from 2020 and 2021 are examples of COVID-19 recovery bonds and can be replicated in the future. Asset selection should exclude activities that are at risk from future shocks or assets that can become stranded because of climate policy changes, or which are not resilient to physical climate risks.
- Promote blended finance and de-risking, credit enhancement, or guarantee mechanisms for green transactions to improve the bankability of an infrastructure project. Global multilateral development banks could help to catalyse the local green bond market by providing credit enhancement in the form of guarantees or the taking of first loss.
- Encourage state-owned enterprises (SOEs) to issue green bonds to finance ongoing green infrastructure projects to complement state budget financing. The Makassar – Parepare railway—which is funded partially by a sukuk—is an example of this. In the future, SOEs could consider a similar financing scheme where sukuks or bonds are issued as green.
- Promote municipal green bonds. This could include incentives such as credit enhancement for local governments or establishing green municipal finance for local governments to aggregate debt requirements and access lower costs of capital. The government could also consider lowering the debt service coverage ratio criteria for short- or medium-term bonds to allow flexibility for municipal governments.
The full report can be read here