How Indonesia Might Turn Its Back on a Future of Cheaper Renewable Electricity

Short-term gain can lead to long-term pain. This might be the case with Indonesia’s recent decision to bet on coal as its preferred source to supply reliable and affordable electricity.

Indonesia’s decision comes at a time when the rest of the world is moving in the opposite direction: countries are increasingly switching from coal to renewables and encouraging competition between power generators to obtain the best prices.

What Is Indonesia’s Strategy?

PLN (the state-owned electricity company) has set ambitious targets of boosting access to electricity, increasing generation capacity in less developed areas, and maintaining affordable electricity tariffs. To meet these goals, PLN aims at reducing its generation costs, notably through the development of coal power.

In its latest business plan (the RUPTL), PLN included the development of 25 GW of new coal capacity by 2026. It also it plans around 7.5 GW of additional coal power plants located close to coal mines, the so-called mine-mouth power plants. The RUPTL is promoting mine-mouth plants because they will sell electricity to the grid at a lower price, as determined by the Ministerial Decree 19/2017. This decree caps the price of the electricity sold by mine-mouth plants at 75 per cent of the regional or national average rate, whichever is the lowest. The lower price is justified by the strong reduction of coal transportation costs, since the mine will be delivering directly to the power plants.

The energy policy landscape for renewable energy has been less favourable. Ministerial Decree 12/2017 effectively limits the prices that can be paid to renewable energy generators to 85 per cent of local average cost of production. This decision means that renewable energy must compete directly with existing generators and no premium will be paid in recognition of the benefits of renewable energy, such as reducing pollution.

Going Against Global Trends

The International Energy Agency (IEA) estimates that coal power generation might have reached its peak already, heading to an irrevocable decline. Each year, new renewable capacity installations are overtaking new fossil fuel capacity, at competitive prices. As evidence of this shift, large coal power producers, such as India and China, are announcing coal power moratoriums and capacity cuts. Both countries are replacing coal with renewable energy technologies, driven by lower costs and by the need to reduce air pollution. Indonesia is becoming a laggard in energy developments in Asia.

By promoting coal power plants, Indonesia’s government is doing more than devoting its future to coal, just as other countries are moving on to cleaner energy sources. It is also risking the primary objective of these reforms: lowering the price of electricity for Indonesians. This can happen because:

  1. Renewable energy solutions are competitive—and prices keep going down. Solar has reached prices as low as USD 29 per MWh in Chile. In India, recent solar projects are selling electricity at USD 40 per MWh. In Indonesia, the estimated price of the electricity sold by mine-mouth plants (which have a price cap lower than standard coal plants) is USD 55 perMWh, based on PLN average tariff in 2016.[1] The price of batteries is also going down very quickly. Integrated systems of intermittent renewable sources and batteries offer the same supply reliability as thermal power plants. In addition, batteries help to make the grid more stable and reliable—an important factor to consider for Indonesia’s electric grid, which is running close to its maximum capacity.
  2. The promotion of coal-fired power plants locks in investments and has a high opportunity cost for development: deciding on building coal power plants now will block financial resources and capacity for at least the next 40 or 50 years. In addition, PLN is currently obliged to pay independent producers of coal electricity for the contracted amount of power, independently of whether it is delivered or not (see this report by IEEFA). Whereas other countries are investing in renewables, Indonesia’s energy mix will be dominated by an expensive and polluting form of electricity. This can damage Indonesia’s future competitiveness. Instead, the same investment could go into development of cleaner energy. 
  3. Environmental and health costs will increase: an IISD study on the true cost of coal in Indonesia values the cost of health and climate change externalities of coal at USD 61.5 per MWh. This is more than double the price of coal generation in Indonesia. In addition, the RUPTL 2017-2026 and Indonesia’s Minister of Energy, are encouraging the usage of coal with low calorific value for mine-mouth power plants, so that mine-mouth plants will need more coal to produce the same amount of electricity. If we consider the cost of externalities, Indonesia’s government is promoting coal at the expenses of health and the environment.

A Better Alternative

Countries around the world are demonstrating that the most efficient way to drive down prices is to create competitive electricity generation markets, for example, through reverse auctions. In a competitive market, auctions determine the cheapest electricity sources (including coal and renewables) and eliminate the need for government price support. Project developers submit their best bids, resulting in lower prices.

Considering the true costs of coal—including the impacts on health and climate change—in determining energy sources would also give a clearer picture of what is really the cheapest form of energy, when all costs are considered.

If Indonesia wants to become a leader, it should prioritize long-term solutions and develop an electricity market where renewables will be able to compete on a level playing field with coal for the benefit of people’s health and the environment. Betting on coal over the long term may result in diminishing returns for Indonesians.

[1] From PLN, 2016 average generation cost was 983 INR per kWh (2016 exchange rate of 13.301 INR/USD). Mine-mouth coal power plants sell electricity at 75 per cent of that price.