A focus on Indonesia from the perspective of how Indonesia engages with renewable energy and decarbonisation initiatives. Here we look at the themes emerging in export and project finance through the perspective of a funding strategy for Indonesia. How are the private sector, export credit agencies, development banks, and organisations such as ICIEC engaging with financing energy transition in this OIC Member State
Indonesia has been an active project and export finance market over the past five years. According to TXF Data, Indonesia was the second biggest user of ECA debt in Asia-Pacific, with a total volume of roughly US$80 billion since 2018, only second to Vietnam.
Deal volume was mostly driven by the power sector (around US$7 billion of export credits over the same period), followed by manufacturing & equipment (US$2.4 billion) and telecommunications (US$570 million).
Conventional power, from coal and oil to gas-fired power generation, accounts for 90% of baseload power in Indonesia. So, the world’s 16th largest economy has a long way to go before realising carbon neutrality by 2060, even with the government’s ambitious targets. That means significant long term financing will be needed.
Climate mitigation targets
The government of Indonesia has always had a strong commitment to tackling climate change and achieving the Sustainable Development Goals (SDGs). For example, in 2016, under its Nationally Determined Contribution (NDC) to limit global warming by 1.5 degrees Celsius, Indonesia ratified the Paris Agreement and pledged to reduce emissions by 29% under its efforts and by 41% with international support by 2030.
But more recently, in 2022, according to the latest Enhanced NDC document from the Glasgow Climate Pact, Indonesia has committed to increasing its targets to reduce greenhouse gas emissions. The target has now increased from 29% to 31.9% and from 41% to 43.2% with international assistance by 2030.
The energy sector, specifically, with a focus on the energy transition to new and renewable energy, is expected to reduce emissions by 358 million tons of CO2e with its efforts and 446 million tons of CO2e with international support.
Renewables capacity
Indonesian decarbonisation can be compounded by upping renewable energy generation – which stands at 3,000GW – given the favourable geography of the country comprising solar, hydro, wind, bioenergy, ocean, and geothermal.
But renewables as a sector have only been financed to the tune of US$540 million over the past five years, which is very small when pitted against the volume of conventional power finance over the same period. In short, there is real potential for agency finance – as well as Islamic finance – in Indonesia, especially for green projects, as ECAs and DFIs can provide significant comfort to both international and local banks eyeing this asset class.
And with ICIEC well placed to support this OIC Member State, given its ESG-related investments and Shariah-complaint product suites, there is real potential for greater ECA involvement in the Indonesia renewables market.
The TXF perspective
Winding down carbon-intensive assets is essential if the race to net zero is to be won. But accelerating the deployment of energy so that renewable energy comprises at least 34% of all power generation by 2030 means that green projects need to be top of the financing agenda.
International ECAs are no strangers to Indonesia, but there is an imperative to shoulder more green projects. This is especially key in fledgling renewables sectors, such as floating solar schemes.
A precedent financial template exists in Indonesia for a floating solar project deal. In 2021, the Cirata reservoir in West Java was used for the 145MW Cirata floating solar project, developed by PT Pembangkitan Jawa Bali Masdar Solar Energi (PMSE), a joint venture between Masdar and PT Pembangkitan Jawa‑Bali (PJBI), a subsidiary of Indonesian state-owned energy company PT Perusahaan Listrik Negara (PLN). PJBI holds a 51% stake in PMSE, while Masdar holds a 49% stake. The project benefits from a 25-year PPA with PLN at a tariff of US$0.0582/kWh.
While the Cirata deal reached close without ECA or DFI support, this nascent sector is expected to gain momentum over the coming years. Sunseap Group also signed an agreement in 2021 with local development authority BP Batam for the construction of a 2.2GW floating solar project at the Duriangkang Reservoir in Batam. The Cirata financing has been seen as a marker of the success of the burgeoning floating solar sector in several Asian markets.
Also, expect ECA support to emerge on the refinancing and reinsurance agreements, not just for green projects, but for conventical power too. Gas-fired plants in emerging market economies will be needed in the short term to help dovetail the energy transition. After all, gas is significantly less carbon-intensive than oil and coal plants. And while ECAs have retreated from supporting coal (unless ultra-supercritical technology is used), gas is very much a transitional fuel in the wake of the pandemic and the war in Ukraine.
