Thursday, September 7, 2017

The financial case against coal power in Indonesia

The financial case against coal power in Indonesia

Closing the gap between those who have electricity and those who do not is
no easy feat, especially in an island nation like Indonesia. With over
17,000 islands - 6,000 of them inhabited - the country's scattered Pacific
geography defies construction of a national transmission grid. Nonetheless,
the country's economic ambitions and its substantial coal reserves have
encouraged developers to rely on big centralized coal-fired power plants.

A solution is at hand. New generating technology and changing energy markets
are making it easier and cheaper to supply electricity with smaller power
stations more readily distributed across regions. A sweeping global pivot
away from centralized power plants and fossil fuels and towards cleaner
wind, solar, geothermal, and small hydropower is gaining momentum.

Global pivot away from coal

The details of the pivot away from coal are emerging in the research
findings of a select group of small non-profit investigative organizations
operating around the world. One of them is the Institute for Energy
Economics and Financial Analysis (IEEFA), a US-based research group that is
pushing Indonesia to join an Asian-led transition away from coal-fired power
that is shaking the world. IEEFA's research, focused on the ever more
apparent mismatch between the rising cost of fossil-fueled power and
diminishing price of renewable technology, is helping to tilt the views of
utilities and government administrators not swayed by environmental or
public health concerns.

In its newest report on the Indonesian electricity market, released in
August, the four-year-old nonprofit warned Indonesia that a central
provision of its coal-based electrical strategy risked wasting $76 billion
over the next 25 years. IEEFA also asserted that Indonesia underestimated
savings from energy efficiency. As a result, the country's planners
overestimated how much power it would need to electrify every home and
business.

Essentially, said IEEFA, energy authorities, influenced by Indonesia's large
coal reserves and mining job prospects, ignored both the escalating cost of
fossil-fueled electricity and the plunging prices for efficiency and
renewable energy. Indonesia's program of building big coal-fired power
plants, argued the IEEFA, was obsolete.

"As renewable energy costs have come down drastically," wrote Yulanda Chung,
the report's author, "renewables are forcing utility policy makers and
regulators around the world to rethink the way the electricity sector is
structured."

In a nation that exports more coal than every other except Australia, and
wants to use more of it to fuel its domestic power plants, such a message
could be expected to be roundly dismissed. As recently as May 2015,
Indonesia President Joko Widodo pushed for a new plan to finish electrifying
all of his big country, once again focusing on large, centralized
fossil-fuel plants.

Widodo said Indonesia would raise $75 billion to add 35 gigawatts of new
electrical generating capacity, 60 percent more than exists in Indonesia
today. He proposed that more than half of the new capacity - 20 gigawatts -
would come from building 117 new coal-fired power plants.

A gigawatt is 1,000 megawatts. It's a lot of electricity, equivalent to the
generating capacity of a big power plant. Never had Indonesia added 35
gigawatts in new generating capacity during any four-year period. For that
reason and others, Widodo's plan quickly began to implode. Within weeks,
pricing turbulence occurred in electrical markets. Lenders grew nervous.
Within months, Indonesia's big state-owned utility, Perusahaan Listrik
Negara (PLN), which was charged with executing the plan, began reneging on
power plant construction contracts.

In April 2017 Widodo blinked. He replaced the 35-by-2019 target and
introduced a smaller proposal to add 15 gigawatts of capacity by 2019. That
plan also is in trouble - just like coal-centered electricity programs all
over the world.

Tiny organization with global influence

None of what is happening in Indonesia's electrical sector surprises the
Institute for Energy Economics and Financial Analysis. Headquartered in a
tiny office in Cleveland, Ohio, with revenues of close to $2 million, IEEFA
has a 12-member staff of energy analysts who have served in government
finance departments, investment institutions, and energy market research
firms. Working from offices in Boston, London, Manila, New York, Sydney and
other cities, IEEFA acts like an auditing firm. It has dug deep into the
accounts of the coal mining and electrical sectors in 13 nations, including
Australia, Bangladesh, China, India, Japan, Russia, and the United States.

What they've found has been influential. IEEFA's 2014 report on the mounting
costs of India's Ultra Mega Power Program anticipated the country's decision
last year to curtail building any more 4,000-megawatt coal-fired power
plants, and to cease reliance on imported coal.

IEEFA's various studies on the escalating costs of the $16 billion to build
two coal mines in Australia's Galilee basin influenced that nation's four
biggest banks to not fund development of any mining projects in new coal
basins.

IEEFA studies also helped convince major financiers, among them the $960
billion Norwegian Sovereign Wealth Fund, one of the world's largest
investors, to divest their portfolios of interests in coal mines, coal-fired
power plants, and utilities dominated by coal-fired power.

"The fundamental economics show that coal is on its way out, maybe not as
fast as it needs to be for climate reasons," said Michael Noble, co-founder
and executive director of Fresh Energy, an American clean energy advocacy
group in St. Paul, Minnesota. "It's great that a group from Cleveland is on
the front lines showing that coal economics is getting worse."

Focus on Indonesia's electricity sector

Like nearly all of IEEFA's researchers from around the world, Yulanda Chung,
the IEEFA analyst and author of the Indonesia report, focused not on
environmental or public health concerns, but rather on the enormous
financial risk of pursuing electrical power with anything having to do with
coal. An investment banker and former head of Standard Chartered's
sustainable finance team in London and Singapore, Chung reached deep into
the guts of Indonesia's national energy policy. She highlighted a popular
incentive program designed to encourage development of privately owned power
stations that also presented serious financial risks for taxpayers.

For decades Indonesian energy authorities and PLN, the government-owned
utility, paid fixed fees to private power plant builders based on a new
plant's generating capacity. The fee payments were guaranteed regardless of
how much electricity the plant actually produced. And the so-called
"capacity payments" were guaranteed up to 30 years. These payments formed
the financial certainty that builders and lenders needed to construct
billion-dollar power plants.

The problem, said Chung, is that the strategy is inordinately expensive. The
most current plan calls for PLN and private developers to produce 24
gigawatts of new electrical generating capacity from coal-fired power plants
between 2017 and 2026. If PLN signs capacity agreements for those new plants
it will saddle the country and its ratepayers with $76 billion in payments
for coal-fired electricity that IEEFA argues are a waste. Such payments,
Chung writes, "stand to defeat efforts to achieve energy security at the
lowest cost possible."

Why? Chung offers three primary reasons:

First, new coal-fired power plants are much more expensive, more difficult
to build and manage, and more socially disruptive than smaller and cleaner
renewable energy plants.

Second, Indonesia needs less generating capacity than it projected earlier
in the century when annual economic growth rates were higher than they are
today.

Third, Indonesia plans to spend $12.5 billion annually to electrify all of
its residences and businesses. The steadily declining cost of cleaner,
renewable sources of energy are a much better investment.

Certainly in the $18 billion Indonesia export coal industry, which generates
more foreign exchange revenue than any of the country's other industries,
outside groups advocating sharp pivots in coal use are not welcome. Until
2014, when global demand fell and coal prices plummeted, Indonesian
authorities proposed immense rail, port, and mine infrastructure projects to
increase production for export and domestic markets.

IEEFA asserts that implementing plans to increase coal consumption is
foolish. Largely due to declining imports from India and China, Indonesia's
two biggest customers, production in Indonesia coal mines fell to 419
million metric tons in 2016, 12.3 percent less than the peak of 474 million
metric tons in 2013, according to the Ministry of Energy and Mineral
Resources. (The Indonesian Coal Mining Association, which publishes its own
annual production numbers, reported the industry mined 440 million metric
tons in 2016, a smaller decline than reflected in ministry figures. The
association projected that production could rise 5 percent in 2017, largely
due to rising exports to China, which has halted imports from North Korea.)

Indonesia's coal industry, like coal sectors in every other fossil
fuel-producing nation, is operating in an unstable market. Global coal
production peaked in 2013 at 8 billion metric tons and has been falling 1 to
2 percent annually in the years since, according to the International Energy
Agency. Coal exports worldwide are declining. Prices are erratic. Public
concern about water supply and water and air pollution from big coal-fired
power plants has escalated in Indonesia and other coal-producing countries,
along with construction delays and expenses.

Simultaneously new and cleaner fuel sources are becoming mainstream.
Electric plants that rely on wind, solar, geothermal, and small hydropower
dams are easier and cheaper to build and operate. Investments worldwide in
new generating capacity from water-conserving wind and solar energy reached
$286 billion in 2015, twice as much as investments in fossil fuel-generated
electricity, according to a study by the United Nations Environment Program.

Results in Australia

IEEFA has been instrumental in digging out the statistics that help
illustrate this momentous story of transition. Arguably, in no other country
has its work been more influential than in Australia, where IEEFA has been
diligent in uncovering the massive US$16 billion cost of constructing two
mammoth coal mines in Australia's Galilee Basin and building new rail lines
to transport coal to proposed Pacific Coast ports.

The Galilee mines are meant primarily to serve export markets in India and
China, both of which are introducing long term policies that permanently
diminish the demand for imported coal. India vows to halt almost all coal
imports by the end of the decade.

Though the Galilee development has attracted the support of the provincial
and national governments, IEEFA researchers produced various studies that
show the projects are not possible without enormous public subsidies.
Moreover, IEEFA notes that the market capitalization of Adani Enterprise
Ltd., the Indian industrial developer of the US$5 billion Carmichael mine,
fell to US$1.8 billion this year from US$10 billion in 2015. Adani, in other
words, is not nearly big enough to take on such a costly project.

IEEFA's research has played a role in turning the Galilee development into a
prominent political struggle in Australia over coal-fired power, subsidies,
and common sense. Not surprisingly, IEEFA has come under attack from
conservative political leaders and the coal industry. "The activist movement
has turned the creation of spurious, pseudo-intellectual reports on the coal
industry into high art," said Brendan Pearson, chief executive of the
Minerals Council of Australia, in a typical statement following a 2014 IEEFA
report.

An investment analyst and IEEFA's Sydney-based director of energy finance
studies, Tim Buckley authored the Galilee reports and takes the criticism in
stride. "IEEFA's examination of the proposal to export low quality
Carmichael coal to India found the project economics and risk analysis did
not stack up," Buckley said in an email message to Mongabay. "Our
discussions with Australian governments and leading financial institutions
over the last four years have highlighted the economic and strategic shifts
in India that have made the Carmichael proposal a stranded asset unable to
make a viable economic return. The Australian government's response has
bizarrely been to offer a multitude of subsidies to try to prop up the
project. But subsidies alone won't change the fact that India no longer
wants low quality Australian thermal coal. India has more than enough of
their own."

IEEFA's allies in Australia's environmental community anticipate the Galilee
project will collapse. "IEEFA's work has been indispensable to the work of
many NGOs and community groups in Australia in recent years," said Tim
Hollo, executive director of the Green Institute in Canberra, Australia, in
an email message to Mongabay. "It is helping us get a very clear
understanding of the global economics of fossil fuels that Australia
operates in. Their superb quality analysis has informed a tremendous amount
of the work that has been going on, helping shift opinions broadly in the
public, in the media, and very much in the investment community."

In Indonesia, following IEEFA's latest study, national authorities issued no
statements of support or criticism. One reason is that IEEFA added financial
certainty to a case Indonesia government and business executives were
already starting to make about the expense, and myopia, of generating more
electricity from the country's reserves of coal.

The most recent energy plan issued by the Ministry of Energy and Mineral
Resources still projects adding coal-fired electricity by 2030, about 50
gigawatts. But the agency also envisions diversifying its electric supply
by producing over 60 gigawatts from wind, solar, geothermal, biomass, and
from big and small hydropower plants over the next 13 years.

IEEFA counters in its newest study that little of the 50 new gigawatts of
coal-fired power is needed. Virtually all of it can come from clean,
renewable energy sources constructed much more quickly at much lower cost in
small plants, or affixed to roofs, and distributed across every one of
Indonesia's inhabited islands.

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Link to Original Article:
https://news.mongabay.com/2017/09/the-financial-case-against-coal-power-in-i
ndonesia/


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John Diecker
APT Consulting Group Co., Ltd.

www.aptthailand.com

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