Financing New Coal Projects May Hamper Indonesia’s Decarbonisation Plans

 Financing from two Indonesian banks – Bank Mandiri, the largest bank in Indonesia in terms of assets, loans, and deposits, and Bank Permata, besides companies continues to fuel coal capacity expansion in Indonesia, which is likely to impact the country’s decarbonisation plans, according to a new report by the Institute for Energy Economics and Financial Analysis (IEEFA).

The report analysed Indonesia’s seven largest coal producers, which account for 27% of the country’s coal production. These producers, listed in descending order of 2023 coal sales are: Adaro Energy, Bayan Resources, PT Bukit Asam Tbk (PTBA), Indika Energy, Indo Tambangraya Megah (ITMG), Geo Energy Resources, and Harum Energy.

These seven companies reported record profits due to surging coal prices in 2022, achieving a new high cash level of $10.3 billion, along with healthy financial results in 2023.

Having paid out dividends in the first half of 2023, the seven companies had a combined cash pile of $6.5 billion at the end of the year. This level of return to shareholders indicates that these companies believe pay-outs and diversifications were a better use of their net earnings than reinvestment in core mining businesses.

However, the high profits and cash levels could also prompt companies to expand coal capacity for captive coal-fired power plants.

While five of the seven companies have not indicated large coal capacity expansions, Bayan Resources and Geo Energy’s plans could collectively increase coal capacity by up to 58 million tonnes (MTs), Ghee Peh, Energy Finance Analyst at IEEFA and author of the new report, said.

Bayan Resources secured a $200 million loan from Bank Permata and another $200 million from Bank Mandiri, while Geo Energy secured a $220 million loan from Bank Mandiri.

Peh pointed out that in 2023, these two companies spent the most relative to their cash levels, significantly raised their debt levels, and boosted their borrowings as part of their plans to expand coal capacity in the medium term.

Peh said: “The 58 MT coal capacity expansion of Bayan Resources and Geo Energy could support 21 gigawatts (GW) of planned captive coal plants, potentially adding 53 MT of carbon dioxide (CO2) emissions.”

Potential Greenwashing            

Five of the seven companies are investing in non-coal assets, such as Adaro Energy in aluminum smelting and Harum Energy in nickel smelting.

However, Peh highlights that Adaro currently has a fleet of 2.3 GW coal power plants and may also build 2.2 GW of coal capacity.

While Adaro is considering adding renewable sources to power its proposed 2.2 GW facilities for Phase 2 of the aluminum smelter, its smelter will come with captive power facilities that would increase coal-fired power capacity.

Peh further said that they believe captive coal plants are threatening to be the major driver of future Indonesian coal demand.

“While the Indonesian government encourages the production of materials such as nickel or aluminum to support the energy transition, it is important to be aware of the potential risks of greenwashing surrounding investments in captive power plants,” Peh noted.

In October 2023, PTBA commissioned the Sumsel-8 2 x 660 megawatt (MW) coal-fired power plant. Meanwhile, at the Weda Bay Industrial Park, five captive coal-fired plants have been built, and 12 plants are planned to provide a total of 3.8 GW of coal power.

The report also said that across Indonesia, the captive power capacity of 21 GW planned was equivalent to half of the country’s 2023 coal-fired generating capacity of 40.7 GW. The analysis revealed that 13 GW of the current captive power projects comprised 32% of 2023’s coal-fired capacity.

It is estimated that when the additional 21 GW are added, it could add a staggering 52% to 2023 coal power capacity.

“Given that Indonesia has less than seven years to fulfil its Paris Agreement commitment of reducing CO2 emissions by 32% by 2030, the prospect of massive growth in newly built coal capacity is likely to prompt concern among Just Energy Transition Partnership (JETP) participants,” Peh added.