Concerted effort to quantify and deliver financial solutions for Indonesia’s transition to renewable energy and storage
Mason Wallick, Director, Southeast Asian Clean Energy Facility
Panel Discussion: "Mobilising Finance and Investment for the Clean Energy Transition"
2021 United Nations Climate Change Conference #COP26
Singapore – 2 November 2021: Clime Capital, the Singapore-based investment management company focused on accelerating the low carbon transition in Southeast Asia, addressed today at the COP26 conference in Glasgow.
Mason Wallick, Clime Managing Director, spoke on behalf of the Energy Transfer Partnership (ETP), Indonesia, on how philanthropy and public funding can work together to break through the barriers to private-sector funding for the low-carbon transition in the country. In particular, his insights were sought on the most critical actions by the public sector to enable flow of private investment to energy transition.
Transcript of Mr. Wallick’s Speech
The current situation in Indonesia reflects a high level of will to make changes, which must work to modernize the power sector. There is no lack of potential for Indonesia to become a low-carbon economy – if philanthropy, the public and private sector are able to work toward a common goal, following a united strategy.
First we must define the problem in a way that enables the public sector and philanthropy to facilitate the influx of investment capital for the energy transition.
For Indonesia, costs for the energy transition should be based on the state of the market:
A green COVID recovery must create new jobs and industries to replace extractive industries (e.g. coal mining).
The current oversupply of coal-fired capacity is a financial burden that prevents PLN from contracting for all but the very cheapest renewable energy.
Electricity demand is unlikely to catch up with current oversupply for around 10 years.
Given this oversupply, renewables are only economic for PLN when costs are lower than the marginal cost of existing energy, which is around US$30-50/MWh. This price is low.
However, low-hanging fruit is available, such as low-cost solar and floating solar is becoming available.
Low-cost solar solutions are a start, but not nearly enough for a meaningful low carbon transition, which requires power to be delivered at times when the sun doesn’t shine.
Beyond helping to develop low-cost solar, it is crucial for all parties to collectively plan the energy transition investments and funding solutions for Indonesia to make the bold long-term financial commitments for a green future.
These long-term investments will dramatically alter PLN’s cost structure and PLN will also have to make significant changes to its electricity tariff design.
For Indonesia to remain competitive in the region and grow its economy, power prices must be in line with those of other developing middle income economies in the region. Hence PLN’s power price must be moderated.
To mobilize private sector funds, these crucial issues need to be solved together. Philanthropy, PLN, donor and host governments (the public sector) must craft an economic and financially viable solution.
Long-term commitments by Indonesia to replace coal-fired generation will entail substantial costs and burdens for:
PLN and the private sector to develop significant new renewable generation
PLN to upgrade transmission and distribution networks as well as building substantial amounts of energy storage.
Philanthropy and the public sector must fund technical assistance to assist Indonesia in meeting these long-term commitments.
To assess the low carbon transition, the impact on electricity rates through a ‘cost of service’ and unbundled rate design analysis is needed. These analyses are familiar to many utilities, the private sector, and the institutional bondholders that fund PLN and the Government of Indonesia. Donor countries have vast experience in providing this capability and analysis to PLN to accelerate its understanding of economic impacts.
Increases in costs for the low carbon transition must then be managed and mitigated in such a way that electricity tariffs are reasonable. Significant public and private sector finance is needed as more green assets are committed or funded by PLN.
The cost of energy storage to provide power during peak hours will be substantial and this must also be allocated to the customers that need these services. These new ‘storage’ costs will require PLN to reconsider its tariff and rate design.
Appropriate tariff designs will also be needed by other stakeholders. The Government of Indonesia would want PLN to manage risks to prevent unforeseen losses and requests for subsidy. Donor governments, blended finance facilities, PLN and the Government of Indonesia bondholders would also need PLN to manage new risks prudently. Philanthropic and donor governments are ideally situated to assist PLN with these studies and efforts given the lessons they have learned in their countries.
Prudent rate reforms will give comfort that funding provided by private sector investors and bondholders can be well managed. The international community will be assured that PLN is taking action to manage new risks associated with the transition – and that the Government of Indonesia will not retain an undue risk to fund PLN in the future.
Once these financial solutions and tariffs are modernized to manage the risks associated with the low carbon transition, the flow of private sector capital will occur. With increased capacity and a track record in execution year after year, a virtuous cycle will result where lower renewable energy costs and new jobs will revitalize the economy.
The reward for this collaboration is well worth the effort and cost. Host and donor governments, PLN and philanthropy have the capacity and capability to put the low carbon transition well in reach in Indonesia.