Five principles for Indonesia’s just coal transition

In November at the G20 meeting in Bali, Indonesia launched a $20 billion Just Energy Transition Partnership which includes a promise to make the Indonesian economy net-zero carbon by 2060. And while Indonesia is still building coal power plants, debates about an early retirement of existing coal power stations have recently gained traction.

These are significant promises especially given that Indonesia is the second largest coal producing country in the world after China.

Despite these commitments, however, the road to implementation can be bumpy. SEI’s research including fieldwork in East Kalimantan points to five principles that policymakers might consider to make the just energy transition and coal phase out a success.

Economic diversification is key

Coal is important for the Indonesian economy. It is a source of foreign currency and state revenues as well as employment. In coal mining regions such as East Kalimantan or South Sumatra where the majority of Indonesia’s coal is mined, coal revenues often account for more than 40 percent of provincial government’s revenues; in East Kalimantan, up to 11% of the workforce works in coal value chains.

If coal is to be phased out, economic plans need to be in place to replace the coal regime with more sustainable economic activities. The energy transitions provide economic opportunities to fill this gap.

Indonesia is already planning to become a hub for EV batteries, but this economic diversification needs to be safeguarded against environmental externalities. Just because an industry is renewable, it does not automatically mean that there are potential negative consequences for environment and people.

Invest in education and up-skilling

Both re- and up-skilling will be needed as jobs in renewable energies and other green innovation fields such as bioeconomy often require a specific set of skills and competencies. Especially in coal-dependent regions, Indonesia needs to invest in training and education opportunities so that fossil fuel workers can find jobs in other sectors after mines and power plants close down.

Education opportunities should be aligned to the alternative economic sectors that each region plans to develop. For instance, regions that would like to pursue eco-tourism should have appropriate education facilities in hospitality management. This will help avoid repeating the past experience where skilled workers for coal industries came from other provinces, especially in Java, due to the lack of skills in the local labor force.

Level the playing fields for renewables

Theoretically, renewable energy sources, such as solar PV, biomass or geothermal, will be as economically competitive as coal power, usually the cheapest source of electricity in Indonesia. But coal power still enjoys direct and indirect subsidies such as price caps, making it difficult for renewables to compete. As long as the market structure of the Indonesian power market is not yet optimized for increased renewable energy uptake, the transition will face challenges.

Perusahaan Listrik Negara (PLN), the state utility producer and distributor, still enjoys a quasi-monopoly in which its ‘take-or-pay’ contracts with independent power producers does not allow for the flexibility needed to integrate renewables efficiently into the grid. Moreover, the regulatory and investment frameworks are usually deemed risky in Indonesia, thus driving up the cost of capital when investing into renewable energies.

Widen the benefit beyond local elites

One of the most important aspects in just energy transitions are in the term itself: justice. In Indonesia, as also in many other fossil fuel producing countries across the globe, benefits of this production have traditionally accrued to wealthy elites. Meanwhile, pollution and environmental degradation and its adverse health impacts are borne by the majority of people. The close political relationships between coal companies and political elites contribute to the power imbalance and uneven distribution of wealth in the coal industry.

The just transition and the scaling of renewable energies need to benefit a large number of people instead of the usual elite groups. This is best achieved when the affected communities are engaged with from the beginning on individual transition pathways to ensure their voices are heard and their aspirations are taken genuinely into consideration.

Improve the governance process

Transparency and accountability are key to achieving just coal transition and enable local and national stakeholders to act. Although Indonesia has been decentralizing its governance systems since the early 2000s, which also led to the expansion of coal mining development, the country has gone back to favoring centralized systems in recent years.

Through the Job Creation Law enacted in 2020, for instance, local governments no longer have the authority in the electricity tariff setting which could affect their ability to incentivize renewable energy development.

Governance processes need to be improved through delegation of authority in line with decentralization to local governments, such as on renewable incentives and post-mining reclamation monitoring. Allowing more localized actions to take place also requires capacity building and monitoring and evaluation systems to ensure transparency and accountability between central and local governments.

All in all, Indonesia’s implementation of its promises to a just energy transition and a low-carbon economy needs to ensure that the transition does not exacerbate existing inequalities and power imbalances.