Coal capacity grows despite Indonesia's push for cleaner energy transition

In an article published by Financial Times, Indonesia is at a crossroads in its energy transition, grappling with the dual challenge of increasing coal capacity while striving to meet ambitious net-zero emissions targets by 2060.

Coal producers in Indonesia are increasingly distancing themselves from the commodity, shifting focus to nickel and aluminum smelting as financing for coal becomes more challenging. Despite the country's ongoing growth in coal capacity, Indonesia remains a top carbon emitter, facing criticism from environmental groups for its slow transition to renewable energy.

Corporate diversification efforts highlight the mounting pressure on businesses during this energy transition and concerns about the future demand for coal. Ray Gunara, president-director of Harum Energy, noted the heightened environmental, social, and governance (ESG) pressures, stating, “It’s very challenging for us to raise any money for anything that’s coal-related.” Harum, a smaller coal producer, plans to phase out its coal operations once reserves are depleted, having shifted its focus entirely to nickel processing.

Since entering the nickel market in 2020, Harum aims for nickel to account for approximately 60 per cent of its revenues by the end of the year, up from just 11 per cent last year. Other coal producers are also adapting; Indika Energy is launching electric motorbikes and solar plants while planning to reduce its coal revenue to 50 per cent by 2025. Adaro Energy is investing in an aluminum smelter and a hydro power plant, announcing a spin-off of its coal business valued at around $2.5 billion. 

An analysis by the Institute for Energy Economics and Financial Analysis indicates that five of Indonesia's seven major publicly listed coal producers are diversifying their portfolios. Ghee Peh, an energy finance analyst at IEEFA, emphasized the difficulties in securing financing, noting that foreign banks have largely withdrawn support for coal projects, leaving Indonesian companies reliant on domestic funding. Despite efforts to diversify, Indonesia's coal capacity continues to grow, posing a challenge to its goal of achieving net-zero emissions by 2060. 

Although the government banned the construction of new coal power plants in 2022, it has made several exceptions allowing new plants to be built for exclusive use in mineral processing sites and other projects deemed strategically important for national interests. According to Ghee Peh from the IEEFA, two of Indonesia's seven publicly listed coal producers have significant expansion plans that could increase capacity by an estimated 58 million tons. Last year, the country reached a record coal production of 775 million tons. 

Coal remains a dominant energy source, accounting for over 60 per cent of Indonesia's electricity generation, supported by abundant thermal coal reserves, making it the world’s third-largest producer. Major buyers of Indonesian coal include China, India, Japan, and South Korea. While developed countries have pledged $22 billion in financing through both public and private channels to assist Indonesia in reducing its reliance on coal, the distribution of these funds has been progressing slowly.

By Naila Huseynova