Indonesia's Energy Transition from Oil to Coal

Reshetova | Indonesia's Energy Transition

Indonesia's Energy Transition From Oil to Coal

Elena Reshetova

Widely recognized as ASEAN’s economic powerhouse, Indonesia recently joined the trillion-dollar economy club with its GDP crossing the $1 trillion threshold at the end of 2017.1 The country has numerous advantages that translate into steady economic growth: abundance of natural resources, large domestic market, low labor costs, evolving regulatory mechanisms for investment protection and unobstructed access to many sectors of its economy. However, as an archipelagic nation of 17,000 islands and home to a growing population of over 260 million people, Indonesia is an energy-poor country still struggling to address many issues of energy access.2

Despite significant progress in electrification, which increased nation-wide from 66 percent in 2009 to 91 percent in 2016, many challenges persist.3 For example, in some, and not necessarily remote, areas electrification rates remain well below the national average, and the quality of electricity access is questionable. Also, despite a relatively low current per capita electricity consumption and in view of rapidly expanding electrification along with delays in streamlining additional electricity generation capacity4 in a system with already low reserve margins, it is unclear whether the country’s energy infrastructure will be able to keep up with mounting demand.5 1 Tassia Sipahutar, “No Fanfare for Indonesia as Economy Hits Trillion-Dollar Mark,” Bloomberg, January 3, 2018, https://www.bloomberg.com/news/articles/2018-01-03/no-fanfare-for-indonesia- as-economy-hits-trillion-dollar-mark; International Monetary Fund, “World Economic Outlook Da- tabase,” October 2017, IMF, https://www.imf.org/external/pubs/ft/weo/2017/02/weodata/index.aspx 2 The World Bank, “Data: Indonesia,”The World Bank, 2016, https://data.worldbank.org/country/indonesia; Ben Bland, “Indonesia Starts Count to Solve the Riddle of the Islands,” Financial Times, June 3, 2017, https://www.ft.com/content/3acc43f0-45f5-11e7-8519-9f94ee97d996 3 Directorate General of Electricity, “The Book of Electricity Statistics Number 30 – 2017,” Ministry of Energy and Mineral Resources, November 2017: 25, https://www.esdm.go.id/assets/media/content/ content-statistik-ketenagalistrikan-tahun-2016-1.pdf 4 Examples of programs include: Phase I and Phase II, both delayed. The government also set an am- bitious target of 35 GW power capacity expansion by 2019, also delayed. 5 In 2014, it amounted to 812 kWh versus 2,540kWh in Thailand and 4,596 kWh in Malaysia. (Source: The World Bank, “Data,” 2014, https://data.worldbank.org/indicator/EG.USE.ELEC.KH.PC) In 2016, Indonesia’s per capita electricity consumption was equal to 950 kWh (Source: Directorate General of Electricity, “The Book of Electricity Statistics Number 30 – 2017,” Ministry of Energy and Mineral

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Quantitative problems of accurately projecting supply-demand dynamics and import-export components of the energy system are further complicated by qualitative dilemmas: the controversial role of fossil fuels dominating Indonesia’s national energy mix, additional pressures of such factors as urbanization and environmental concerns, and, more generally, the dual role of government in the energy sector as an active player (represented by state-owned companies) and a regulator. As a result, the country has a difficult task of balancing existing and emerging short- and long-term energy security, environmental sustainability and broader social and economic objectives. While each of these topics warrants a lengthy discussion, this piece explores them in the context of recent developments in the conventional energy sub-fields of oil, gas, and coal, which constitute the backbone of Indonesia’s national energy system. The country’s ongoing transition from an energy system dominated by oil to one heavily reliant on coal and reasons behind this change are analyzed.

Indonesia’s National Energy Policy (Government Regulation No. 79/2014) calls for reductions in oil (petroleum) consumption, optimization of natural gas use, and in- creases in the supply and utilization of coal in the domestic market.6 As of 2015, the biggest share in the energy mix belonged to oil (47 percent), followed by coal (27 percent) and gas (21 percent). According to the 2025 targets put forward in the policy document, the shares of resources are expected to change as follows: coal (30 percent), oil (25 percent), and gas (22 percent). In percentage terms, only the change in oil consumption targets appears significant. But taking into account that Indonesia’s total primary energy supply is expected to almost double from 225 million tonnes of oil equivalent (Mtoe) to 400 Mtoe in the same period, in real numbers changes in all three components of the mix are substantial.7 Finally, although together fossil fuels are fore- casted to relinquish almost 25 percent of their combined share to renewables by 2025, the feasibility of the latter target is dubious.8Although the government put forward a number of programs to promote renewable energy utilization and several pioneering projects have been successfully implemented in recent years,9 the renewable energy Resources, November 2017: 25); “As of June 2017, only 13 of PLN’s 22 large power systems across Indonesia were considered normal, with reserve margins above 30 percent.” (Source: PWC, “Power in Indonesia: Investment and Taxation Guide – 5th edition,” PWC, November 2017, https://www.pwc. com/id/en/energy-utilities-mining/assets/power/power-guide-2017.pdf). 6 The President of the Republic of Indonesia, “Government Regulation of the Republic of Indonesia Number 79 of 2014 on National Energy Policy,” 2014, http://ditjenpp.kemenkumham.go.id/arsip/ter- jemahan/2.pdf 7 International Energy Agency, “Indonesia: Indicators for 2015,” http://www.iea.org/statistics/statis- ticssearch/report/?country=INDONESIA&product=indicators&year=2015; International Energy Agency, “Energy Supply Security: Emergency Response of Partner Countries. Indonesia,” 2014: 6, https://www.iea.org/publications/freepublications/publication/ESS_Indonesia_2014.pdf 8 In 2015, share of renewables was 5 percent. In 2025, it is supposed to be at least 23 percent (Source: The President of the Republic of Indonesia, “Government Regulation of the Republic of Indonesia Number 79 of 2014 on National Energy Policy,” 2014, http://ditjenpp.kemenkumham.go.id/arsip/ter- jemahan/2.pdf). 9 Indonesia’s largest solar power plant (5MW) was completed in December 2015 in Kupang (Felix Utama Kosasih, “Kupang Houses Indonesia’s Largest Solar Power Plant,” Global Indonesian Voices, January 7, 2016, http://www.globalindonesianvoices.com/24393/kupang-houses-indonesias-largest-solar-power-plant/). Operational since March 2018, Indonesia’s first wind farm with the capac-

[19] Georgetown Journal of Asian Affairs Reshetova | Indonesia's Energy Transition target is unlikely to be met due to the current macroeconomic conditions,10 existing electricity market design, contradictory regulations and electricity pricing system, all of which put electricity production from renewable energy sources at a disadvantage. The government’s goal of reducing dependence on oil is understandable given Indone- sia’s transforming profile in the oil industry. The oil and gas sector used to contribute up to a quarter of state revenue in the early 2000s; that share dropped to 3 percent in 2016.11 A former OPEC member12 and a net importer of oil since 2006,13 at current production levels, Indonesia is set to stop producing oil by 2030, subject to new discov- eries and technological improvements.14

The problem lies in the divergence between decreasing availability and affordability of oil and its increasing consumption. If electricity generation is not as dependent on oil (in the form of diesel: 9 percent) as on coal (56 percent) and gas (24 percent), the country’s transportation sector runs almost exclusively on fuel oil (96 percent).15 When other factors, such as growing urbanization, increasing access to personal vehicles and fuel subsidies, are taken into consideration, it becomes evident that Indonesia will continue to heavily rely on oil in the decades to come.16

ity of 75WM is located at Sidrap, Sulawesi. Fergus Jensen and Wilda Asmarini, “Less Headwinds for Renewables Now Say Indonesia Pioneer,” Reuters, February 12, 2018, https://www.reuters.com/ article/us-indonesia-renewables-windfarm/less-headwinds-for-renewables-now-says-indonesia-pioneer-idUSKBN1FW0W4 10 Indonesia’s economy has been growing by around 5 percent instead of expected 7 percent and as a result, electricity demand has been increasing at a much slower pace than planned: 4.4 percent instead of 8 percent a year. Basten Gokkon, “Indonesia May Achieve Renewables Target, but Still Favors Coal for Power,” Mongabay March 29, 2018 https://news.mongabay.com/2018/03/indonesia-may-achieve- renewables-target-but-still-favors-coal-for-power/ 11 Karlis Salna and Yoga Rusmana, “Whatever Happened to Indonesia’s Mighty Oil and Gas Indus- try?” Bloomberg, August 15, 2017, https://www.bloomberg.com/news/articles/2017-08-14/whatever- happened-to-indonesia-s-mighty-oil-and-gas-industry 12 Fergus Jensen, “Indonesia to Keep OPEC Membership Frozen: Deputy Energy Minister,” Reuters, De- cember 5, 2017, https://www.reuters.com/article/us-indonesia-opec/indonesia-to-keep-opec-membership-frozen-deputy-energy-minister-idUSKBN1DZ20O 13 International Energy Agency, “Indonesia: Oil for 2006,” http://www.iea.org/statistics/statistics- search/report/?country=INDONESIA&product=Oil&year=2006 14 “Indonesia’s Proven Oil Reserves Recorded at 3.3 Billion Barrels,” Tempo, March 27, 2018, https://en. tempo.co/read/news/2018/03/27/056917019/Indonesias-Proven-Oil-Reserves-Recorded-at-33-Bil- lion-Barrels 15 2015 data (Source: Secretariat General, “Indonesia Energy Outlook 2016,” National Energy Council, 2016: 48, https://www.esdm.go.id/assets/media/content/content-indonesia-energy-outlook-2016-versi-inggris-my33nxb.pdf); MEMR statistics. 16 Krithika Varagur, “Indonesia to Effectively Continue Fuel Subsidy,”Voa News, March 19, 2018, https://www.voanews.com/a/indonesia-fuel-subsidy/4304709.html; Erwida Maulia, “Indone- sia Creates Oil and Gas Holding Company to Expand Production,” Nikkei Asian Review, April 12, 2018, https://asia.nikkei.com/Business/Companies/Indonesia-creates-oil-and-gas-holding-company-to-expand-production; Fergus Jensen and Gayatri Suroyo, “Shell Asks Indonesia to Reconsider New Fuel Pricing Policy,” Reuters, April 13, 2018, https://www.reuters.com/article/us-indonesia-gas- oline-shell/shell-asks-indonesia-to-reconsider-new-fuel-pricing-policy-idUSKBN1HK1GM).

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While the loss of profits from oil exports is likely irreversible, Indonesia would like to take advantage of domestic production for as long as possible in order to minimize the amount of costly oil imports. Nevertheless, the country’s policy and regulatory measures designed to sustain current levels of production have been focused too much on collecting more revenue and not enough on retaining and attracting investors. As an indicator of a struggling oil sector and ineffective policy changes, investment into exploration activities plummeted from $1.3 billion in 2012 to $100 million in 2016.17 Consequently, despite ongoing attempts to provide new tax incentives and further re- vise production-sharing contracts (PSCs), it is unclear whether enough interest can be generated from investors for projects and auctions planned for 2018 and beyond.18 Although Indonesia is the eleventh largest gas producer in the world19 and exports almost half of its domestic production,20 for the past decade it has been gradually re- routing its exports to the domestic market and is expected to become a net importer of gas by 2020.21 This trend is consistent with declining gas reserves as well as the current national energy policy.

Indonesia’s gas sector faces strong competition from the coal industry while also being plagued by problems similar to those in the oil industry. Foreign investors find Indo- nesia’s oil and gas regulatory and tax conditions unfavorable, and gas exploration and production are suffering as a result. For example, in July 2017, Exxon Mobil exited the East Natuna gas project, leaving Pertamina, the state-owned company, without partners.22 Competition from coal, which is comparatively cheaper, further slows down the investment in gas upstream projects and downstream infrastructure which could negatively affect domestic production (resource supply, pipelines, storage, etc.), exports (LNG terminals) and imports (regasification plants) in the near future. Thus, Indonesia’s gas sector is hostage to competing objectives of its government’s policies, which lead to unintended consequences. First, gas exports are held back in an- ticipation of stronger domestic demand. Second, the role of the latter in the energy mix is growing at a slower pace than desired due to strong competition from coal. Third, gas imports are soaring as shrinking domestic production is negatively affected by the unfavorable investment climate with Pertamina losing valuable expertise and coping with more financial constraints.

17 Karlis Salna and Yoga Rusmana, “Whatever Happened to Indonesia’s Mighty Oil and Gas Indus- try?” Bloomberg, August 15, 2017, https://www.bloomberg.com/news/articles/2017-08-14/whatever- happened-to-indonesia-s-mighty-oil-and-gas-industry 18 “Indonesia Sets Sights on $17.04b Oil and Gas Investment in 2018,” The Jakarta Post, January 10, 2018, http://www.thejakartapost.com/news/2018/01/10/indonesia-sets-sights-on-17-04b-oil-and- gas-investment-in-2018.html 19 International Energy Agency, “IEA Atlas of Energy: Natural Gas,” 2015, http://energyatlas.iea. org/#!/tellmap/-1165808390 20 International Energy Agency, “Indonesia (Association Country),” 2015, https://www.iea.org/countries/non-membercountries/indonesia/ 21 John McBeth, “Indonesia’s Oil and Gas Prospects Running Dry,” Asia Times, October 30, 2017, http://www.atimes.com/article/indonesias-oil-gas-prospects-running-dry/ 22 “ExxonMobil Withdraws from Natuna Gas Consortium,” The Jakarta Post, July 19, 2017, http:// www.thejakartapost.com/news/2017/07/19/exxonmobil-withdraws-from-natuna-gas-consortium. html

[21] Georgetown Journal of Asian Affairs Reshetova | Indonesia's Energy Transition

Indonesia’s coal industry has been on the rise since the 1990s. A relatively new player in the market, the country is now the fifth largest producer and the second largest exporter in the world.23 Until the government’s 2014 decision to significantly increase domestic consumption of coal was articulated in the National Energy Policy, the vast majority of production was destined for export; close to 80 percent as of 2015.24 Although the share of coal exports is likely to decrease in the future, ramped up domestic consumption is not the only reason. As a large exporter, Indonesia is extremely dependent on major buyers such as China and India. Between 2013 and 2015, the reduction in the two countries’ import demand associated with their new energy and economic policies lowered Indonesian exports by 13 percent.25 Also, low and low- er-medium quality of most of Indonesia’s coal reserves26 puts its exports at an additional disadvantage as climate change and environmental sustainability agendas becomes increasingly prioritized in countries that consume Indonesian coal. Exports to ASEAN neighbors, who are promoting the use of coal in the power sector, are least affected by coal-unfriendly regulations at the moment. However, these exports will not be able to absorb India and China’s demand and will remain uncertain as ASEAN member-states’ energy policies continue to evolve.

With large coal reserves in hand,27 a well-established national industry, and growing ambiguity around exports, Indonesia is pushing for coal as a preferred electricity generation source at home. This is evident from the planned and implemented additional generation capacity heavily focused on coal since 200628 and domestic consumption of coal doubling in a short period between 2010 and 2016.29 Additionally, compared with oil and gas, coal has many more advantages beyond its relatively low price. These 23 International Energy Agency, “IEA Atlas of Energy: Coal,” 2015, http://energyatlas.iea.org/#!/tellmap/2020991907/1 24 Secretariat General, “Indonesia Energy Outlook 2016,” National Energy Council, 2016: 26, https:// www.esdm.go.id/assets/media/content/content-indonesia-energy-outlook-2016-versi-inggris-my- 33nxb.pdf 25 Sylvie Cornot-Gandolphe, “Indonesia’s Electricity Demand and the Coal Sector: Export or Meet Domestic Demand?” The Oxford Institute for Energy Studies, March 2017: 12, https://www.oxfordenergy.org/wpcms/wp-content/uploads/2017/03/Indonesias-Electricity-Demand-and-the-Coal-Sec- tor-Export-or-meet-domestic-demand-CL-5.pdf 26 Secretariat General, “Indonesia Energy Outlook 2016,” National Energy Council, 2016: 23, https:// www.esdm.go.id/assets/media/content/content-indonesia-energy-outlook-2016-versi-inggris-my- 33nxb.pdf 27 “The reserves-to-production ratio is estimated at around 70 years at current production levels.” (Sylvie Cornot-Gandolphe, “Indonesia’s Electricity Demand and the Coal Sector: Export or Meet Do- mestic Demand?” The Oxford Institute for Energy Studies, March 2017: 9, https://www.oxfordenergy. org/wpcms/wp-content/uploads/2017/03/Indonesias-Electricity-Demand-and-the-Coal-Sector-Ex- port-or-meet-domestic-demand-CL-5.pdf). 28 Keith Burnard, Shelly Hsieh, Noor Miza Muhamad Razali et al., “Reducing Emissions from Fos- sil-Fired Geenration: Indonesia, Malaysia and Viet Nam,” International Energy Agency, 2016: 14-15, https://www.iea.org/publications/insights/insightpublications/ReducingEmissionsfromFossilFired- Generation.pdf 29 Sylvie Cornot-Gandolphe, “Indonesia’s Electricity Demand and the Coal Sector: Export or Meet Domestic Demand?” The Oxford Institute for Energy Studies, March 2017: 18, https://www.oxfordenergy.org/wpcms/wp-content/uploads/2017/03/Indonesias-Electricity-Demand-and-the-Coal-Sec- tor-Export-or-meet-domestic-demand-CL-5.pdf

Winter 2019 [22] Policy Forum include the dominant role of local as opposed to foreign companies in the sector, the employment opportunities the industry creates, and the regional economic development it brings to remote areas of the country.

As for the commonly cited perils of coal as the dirtiest fossil fuel, such concerns as Indonesia not meeting its greenhouse gas emissions reduction targets and not yet em- ploying carbon capture and storage (CCS) technologies at the coal-fired plants are rea- sonable. But the coal industry is using clean coal technologies and increasing efficiency. For example, new and planned power plants are ultra-supercritical and supercritical plants.30 At the same time, a lot of small and least efficient illegal coal producers have been forced out of business since 2009 with the adoption of the Law on Mineral and Coal Mining. Hence, Indonesia’s reliance on coal is not ideal, but sensible given the alternatives.

A brief exploration of trends in the oil, gas, and coal sectors explains Indonesia’s reori- entation from oil to coal as the key energy source: it is an abundant and inexpensive resource capable of ensuring uninterrupted energy access for a large population. This is in line with the core objective of the Electricity Law No. 30/2009.31 The broader impli- cation of coal prioritization in the national energy policy is Indonesia’s commitment to energy security goals, with the issues of environment and sustainability moved aside to the periphery of decision-making agenda.

However, it remains to be seen if the dominance of coal will persist in the longer term (beyond 2030) or if it is a transition stage for incorporating more natural gas and renewables into the energy mix. According to the current government plans, it is the latter. By 2050, the National Energy Policy envisions the share of renewable energy at 31 percent (23 percent in 2025), gas at 24 percent (22 percent in 2025), and coal at 25 percent (30 percent in 2025).32 In other words, 2050 targets signal an expansion of the energy security agenda to integrate other issues.

30 Supercritical and ultra-supercritical coal-fired power plants emit less GHG, pollutants and partic- ulate matter because they are more efficient than their older counterparts, around 45-50 percent vs 33 percent. Their main advantage is the ability to convert water into a supercritical fluid (neither a liquid nor a gas). This requires less energy to convert water into steam resulting in a smaller amount of heat transfer to water. Therefore, less coal is needed to heat up the same amount of water (Univer- sity of Calgary, “Supercritical Coal Plant,” Energy Education, http://energyeducation.ca/encyclopedia/ Supercritical_coal_plant). 31 The Government of the Republic of Indonesia, “ELECTRICITY (Law No. 30/2009),Government Regulations, September 23, 2009: Chapter 2, Article 2.2, https://policy.asiapacificenergy.org/sites/ default/files/ELECTRICITY%20%28Law%20No.%2030%3A2009%20dated%20September%20 23%2C%202009%29.pdf 32 The President of the Republic of Indonesia, “Government Regulation of the Republic of Indonesia Number 79 of 2014 on National Energy Policy,” 2014, http://ditjenpp.kemenkumham.go.id/arsip/ter- jemahan/2.pdf

[23] Georgetown Journal of Asian Affairs Reshetova | Indonesia's Energy Transition

Independently of a prevailing scenario – coal dominated vs more diversified energy supply, Indonesia will have to tackle the same challenges it is trying to address today. They range from land acquisition disputes and limited public financing to grid infrastructure constraints and promotion of a conducive investment environment. As the country’s experience illustrates, finding robust solutions to these problems is not feasi- ble without a coordinated national – local and public – private action.

Elena Reshetova joined the Energy Studies Institute as a Research Fellow in July 2017. Ele- na has several years of experience researching natural gas market development in Asia and Europe, policy-making in the oil and gas industry in East Asia, ASEAN and North America, and the evolution of national energy security policies. She holds a Ph.D. in Public Policy from the Lee Kuan Yew School of Public Policy (NUS) and an M.A. in International Affairs from Boston University.

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