New financing arrangements to encourage green energy growth will help Indonesia facilitate the transition from coal to renewables. But concerns arise around loan instruments and interest payment conditions.
The Just Energy Transition Partnership (JETP) launched at the COP 26 Summit by South Africa and the International Partners Group (IPG) can be seen as a historic moment in efforts to promote a just energy transition. The public funding of US$8.5 billion or the equivalent of Rp132 trillion over three to five years from a group of developed countries is likely to produce new opportunities to address climate change. Several countries are looking to move towards clean energy and break away from addiction to fossil fuels. Indonesia is the second nation to announce JETP cooperation at the G20 Summit in November 2022.
With funding of up to US$20 billion dollars (equivalent to Rp311 trillion), this partnership is the largest climate investment in history for one country. JETP is a unique energy transition financing scheme because of its emphasis on “just” responses, which has become integral to efforts to aid people and vulnerable groups who will be directly affected by the energy transition process.
JETP will encourage reskilling and upskilling efforts for workers across sectors and compensate their wages during the transition period. JETP can also be used to help transform economies that are still dependent on the coal-fossil energy industry, a very crucial matter for a country like Indonesia.
Indonesia has also ratified the Paris Agreement, which was agreed to at the COP 21 Summit in 2015, and is committed to accelerating the decarbonisation process and maintaining the global temperature target at 1.5 °C through Nationally Determined Contributions. The Indonesian government has a target of achieving a zero-emission economy in 2060, and 2050 in the energy sector. The projections for renewable energy in Indonesia’s national energy mix is 34 percent by 2030.
The G20 Summit in Bali established momentum for Indonesia to become a recipient of JETP funds. However, researchers and civil society organisations warn that loan funds must be used carefully, making sure not to ignore people’s rights or exacerbate existing environmental damage.
The funds to be disbursed are derived from a “joint” operation between public sector commitments (US$10 Billion) and private investment (also US$10 Billion). The White House, for instance, has noted that private financial institutions involved in funding JETP Indonesia will be coordinated by the Glasgow Financial Alliance for Net Zero, which includes the Bank of America, Citi, Deutsche Bank, HSBC, Macquarie, MUFG and Standard Chartered.
In a joint statement document between the government of Indonesia and the JETP donor countries, it was confirmed that an action plan must be completed by Indonesia within six months, which includes an investment plan related to funding needs for a fair energy transition project. The Director General of New Renewable Energy and Energy Conservation of the Ministry of Energy and Mineral Resources, Dadan Kusdiana, has said that interest payments on JETP funding loans already exist, though these currently differ depending on the origin (bank) of the loan. The funding package is disbursed through various mechanisms, including grants, concessional loans, technical assistance, commercial loans, and guarantees
But as a loan, it is important for the government not only to encourage low interest rates in JETP funding, but also to pursue debt cancellation or debt relief. This scenario will prevent Indonesia from falling into a trap where it has significant debt obligations due to high interest rates.
South Africa’s JETP Fund, which was agreed to at COP26 in Glasgow, Scotland, last year, was reportedly dominated by discussions on debt concessions and commercial loans, with a grant portion of less than three percent. As this example illustrates, there needs to be an attitude of anticipation so as not to over-burden state finances in the future. The government must ensure that the funding is proportionately distributed between grants and other soft financing arrangements rather than commercial financing norms with interest rates accorded by the market.
Indonesia’s Ministry of Energy and Mineral Resources has emphatically stated that no more than 50 percent of JETP funds can come from commercial loans.
In implementing JETP, the government also needs to prioritise the principle of transparency. When providing compensation for early retirement for coal-fired steam power plants, for example, there must be clear accounting standards and detailed budgets. If not, the JETP funding scheme has the potential to become a new debt burden that will ensnare the state.
Negotiations on energy transition financing with developed countries (G7) and multilateral institutions need to be encouraged by governments, and must include debt cancellation conditions so that developing countries don’t become trapped in unsustainable climate financing burdens.
JETP needs to be interpreted as the responsibility of developed countries, which for so long have profited from environmental pollution and destruction resulting in the climate crisis. Therefore, the funding for this project must be able to provide for larger grant portions and lower interest rates. Finally, the government needs to ensure that every dollar of financing has a multiplier impact on the workforce and the economy over the long term.
Dr. Muhammad Zulfikar Rakhmat is a researcher at the Center of Economic and Law Studies. His research focuses on China-Indonesia-Middle East relations.
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