#1Energy Transition in Indonesia Indonesia Economic Prospects, December 2021 INDONESIA ECONOMIC IEP PROSPECTS Download the Report at www.worldbank.org/iep THE WORLD BANK Australian Government IBRD IDA WORLD BANK GROUP#2Indonesia's energy sector's past success has come at the cost of natural capital Energy sector has been a fundamental enabler Access: Near universal electrification achieved (34 million customers connected to the grid in 10 years) Growth: increased installed capacity from 40 GW in 2011 to 61 GW in 2020 Presence: PLN is present in over 600 islands and is considered one of the strongest utility in the region. Electrification 100% 90% 95% 97% 98% 99% 91% 88% 84% 80% 76% 80% 72% 70% 60% 50% 40% 30% 20% 10% 0% 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 • • • but has become a leading GHG emitter Coal power capacity: doubled in just 10 years (16 GW added) Coal usage: 105 m tons; comparing EAP region: China 3.8 b tons, Vietnam 85 m tons, Philippines 34 m tons Emission: increased by 140% between 1990 and 2017 (excl. land use) • Emissions intensity: 804 gCo2/kWh (compared to 449 for G20 average) GHG Emissions From Energy Sector Annual CO₂ emissions from fuel combustion (MtCO2/year) 600 500 400 3% 1% Other energy-related sectors" Household 27% Power Sector 37% Industrial Sector CO. 2019 300 200 100 4% 27% Transport 91990 1995 2000 2005 2010 2015 2019 Building Sector Sector#3Indonesia's energy sector is facing several challenges A PLN's financial sustainability is challenged by inadequate tariff and revenue structure. Large investment will be needed for the energy transition which will require a financially sustainable utility. The fragmented sector regulation challenges effective coordination of sector policies and energy transition goals. Indonesia is lagging behind peers in Variable Renewable Energy deployment and has yet to adopt standards of automation and digitalization. Despite some progress, the grid quality stays low with poor reliability. Coal and fuel subsidies as well as renewable energy pricing distortions constrain the mobilization of private investments in RE. The coal phasedown is likely to have measurable economic and social impacts, including in coal-dependent regions#4In the wake of COP26, Indonesia's government made new climate commitments 2010 1,335 MT CO2/Year Climate commitments: ■ NDC: 26% reduction from BAU (unconditional) and 41 % reduction from BAU (conditional) ■ RE targets: 23% by 2030 (from 12%) ☐ Net zero: by 2060 or earlier BAU 2030 2,870 MT CO2/Year Energy sector increasing from 34% to 58% of total emissions ■ Coal: no new coal-fired power plants committed after 2022 no more coal after 2056 (but might be accelerated in the 2040s) ■ Accelerated retirement of coal plants: retirement of a minimum of 8 GW of coal projects by 2030#5Power sector decarbonization is now a priority for the government New RUPTL master plan significantly reduces the planned coal capacity, but more needs to be done 2020 61.1 GW Target 2030: 100.7 GW Diesel: Hydro: 5 GW 4.9 GW Geothermal: 2.4 GW Coal: 31 GW RE: 0.3 GW Gas: 17.4 GW Coal: 44.8 GW Diesel: 5 GW Hydro: 15.4 GW Gas: 23.2 GW Technology RUPTL 2019 - 2028 targets RUPTL 2021 - 2030 targets difference Hydro (and pump 14.5 15.4 6% Geothermal: storage) 5.8 GW Geothermal 5.2 5.8 12% RE: 6.5 GW RE (PV, wind, 2.6 6.5 145% biomass) Gas 28.8 23.2 -20% Coal 56 44.8 -20% Diesel 5 5 Total 112.1 100.7 -10%#6But decarbonization faces several challenges in Indonesia and all options need to be explored Power sector decarbonization is facing technical and economic constraints Limited space to integrate RE Complex island grid situation limiting potential for imports Excess power and potential carbon lock-in Regulatory impediments Average Cost of Electricity Generation under the three Transition scenarios 100 95 2021 2022 2023 $/MWh ខ 8 ៨ ៨ ៖ ៖ ៖ ៖ ៖ 75 3. Decarbonization 92.1 2. Coal phaseout @20 years... 1. NDC (RUPTL 2021-30) 2. Coal phaseout @20 years 2034 2035 2036 2037 2038 2039 3. Decarbonization 2040 but options are available A scenario-based analysis focused on the Java-Bali grid was carried out to assess decarbonization options for the next two decades. Three scenarios were assessed: Phasing down coal and scaling up RE are central to reducing the carbon footprint of the power sector. Under the Coal Phase down scenario coal power generation would move from 30% of the mix in 2040 in the baseline scenario to 5% and emissions would be cut by 40% while the generation cost would increase by 6% in 2040* compared to the baseline scenario. Under the more ambitious decarbonization scenario (emissions cut by 70% in 2040 vs the NDC Scenario), coal is fully phased-out in 2040 and the generation cost is 27% higher* than in the NDC scenario. *Not including the cost of coal plant retirement#7Policy Recommendations: Decarbonization Planning, Sector Efficiency and Performance Decarbonization planning: Aligning strategies and targets across Government agencies will be critical to minimize the costs and risks of stranded assets in the future. To that end, appropriate pathways to phasing-down coal with innovative financing mechanisms will need to be carefully assessed. Solutions to decarbonize the grid such as interconnections (domestic and international), Carbon Capture and Storage (CCS) or hydrogen need to be explored further. To improve sector coordination, a new inter-ministerial commission could be created to align environment, financial and fiscal targets. To improve sector efficiency, separating system planning, generation procurement and system operations from PLN's other activities could increase transparency and reduce conflicts of interest.#8Policy Recommendations: Clean Energy Deployment Develop clear medium-term VRE deployment targets with associated tender timelines would help PLN benefit from low PV and wind power prices. Three regulatory changes can help Indonesia boost private investment in RE: reducing local content requirements, phasing out coal and fuel subsidies and lifting RE price controls. New investments in grid flexibility are needed to integrate RE and appropriate pricing mechanisms and regulation is critical for their viability.#9Policy Recommendations: Financial Sustainability Setting the appropriate revenue requirements is critical for the financial viability of PLN. Increasing the share of revenue received from tariffs through a subsidy reform will improve PLN's financial health. PLN could explore new financing schemes and sources develop an ESG framework and FISCAL IMPACTS Assessing the fiscal cost of subsidies and the fiscal impact of reform POLITICAL ECONOMY Assessing the political context for reforming subsidies OE ECONOMIC & ENVIRONMENTAL IMPACTS Modeling macroeconomic effects and impact of reform on GHG emissions. Assessing the impact of subsidies on the environment CONTEXT ENERGY SUBSIDIES Identifying and quantifying energy subsidies HOUSEHOLD IMPACTS Analyzing the incidence of subsidies and impact of reform on households. Assessing the readiness of social safety nets to mitigate this impact D 88 COMMUNICATION Assessing public opinion and designing communication strategies FIRMS & INDUSTRIAL IMPACTS Identifying the impacts of reform on firms and industrial competitiveness#10Policy Recommendations: Coal Phase-Down Phasing down the use of coal would require a just transition for the people, communities, and businesses which rely on Indonesia's coal industry. JUST TRANSITION FOR ALL: THE WORLD BANK GROUP'S SUPPORT TO COUNTRIES TRANSITIONING AWAY FROM COAL#11THE WORLD BANK IBRD IDA WORLD BANK GROUP Thank You Indonesia Economic Prospects, December 2021 Download the Report at www.worldbank.org/iep Sal INDONESIA ECONOMIC IEP PROSPECTS#12GW Decarbonization options for Indonesia Installed Electricity Generation Capacity in 2021 and 2040 under Different Transition Scenarios 140 120 100 80 60 40 2.8 15.6 20 26.5 6.6 12.5 6.6 45.0 45.0 45.0 5.2 18.4 25.3 5.2 37.6 6.1 30.4 4.9 1. NDC (RUPTL 2021-30) 2. Coal phaseout @20 years 3. Decarbonization 2021 2040 Coal Oil Gas Gas+CCS Hydro Solar Other renewables ■Storage