Cutting coal power: Indonesia’s test case for turning a climate pledge into reality
The technical, financial and legal hurdles to get an Indonesian coal-fired power plant off the grid.
The 2022 G20 Summit marked a turning point for Indonesia’s energy transition with the signing of an agreement to explore the early retirement of Cirebon-1 coal-fired power plant. The 660-megawatt Cirebon-1 is historic for being the first coal-fired power plant in Indonesia owned by an independent power producer, Cirebon Electric Power (CEP). The agreement signing was therefore celebrated on a global stage as it signalled Indonesia’s first decisive move towards phasing out its reliance on coal.
A year later at COP28, a follow-up agreement was signed in which the Asian Development Bank (ADB), CEP, Indonesian Investment Authority (INA), and state-owned electricity company PLN conditionally committed to shortening the power purchase agreement of Cirebon-1, terminating its electricity supply by December 2035, six-and-a-half years ahead of its original closure month of July 2042.
However, the next step to finalise this transaction, initially set to be realised by mid-2024, has faced delays.
With the UK recently shutting down its last coal-fired power plant and hopes to build on climate negotiations globally, the momentum and urgency to demonstrate real progress is clear. This highlights the need to address ongoing technical, financial and legal challenges that have formed a stumbling block in finalising the transaction.
Technical: Grid stability to support energy transition
As Cirebon-1 feeds into a transmission grid controlled by PLN, its retirement will have implications on the grid stability. PLN is bound by a requirement for the grid to preserve 30% reserve margin – a safety buffer that helps absorb demand changes. To avoid losing reserve margin, PLN is expected to add various renewable energy sources into the grid to replace power lost from Cirebon-1’s closure and invest in energy storage and smart grid technology to ensure smooth integration without blackouts or disruptions.
However, given Indonesia’s energy transition targets, investing in energy storage and smart grid technology is something PLN needs to do irrespective of Cirebon-1’s closure. The closure serves as a catalyst for the much-needed system upgrades, which brings us to financing as the second key aspect.
Financial: Key infrastructure investment, not state loss
Cirebon-1’s early retirement uses a refinancing model where ADB pre-pays existing creditors and becomes the new lender at a lower interest rate and shorter tenor. This is a common business-to-business refinancing scheme, with the added innovation that debtor must agree to shutting down operations after debt repayment and return on investment. The refinancing package to retire Cirebon-1 is estimated at US$230-300 million, including a portion for shareholders’ loss of future dividends.
Apart from Cirebon-1’s early retirement covered by the scheme, PLN requires an infrastructure investment of US$1.3 billion for system upgrades to accommodate renewable energy integration into the grid, and ensure long-term grid stability. This number is often characterised as the prohibitive cost of plant closure which may lead to state losses.
However, it is important to note that grid optimisation is overdue and needs to be prioritised for a successful energy transition. Infrastructure investments that are important for Indonesia’s economic competitiveness and sustainability should not be pre-characterised as state loss. Countries that are moving ahead with adding renewables into their energy portfolio, such as Vietnam, Malaysia, and the Philippines, have placed significant investments in grid optimisation.
This is where Indonesia ETM Country Platform should serve its purpose as a blended finance mechanism to mobilise various public and private, international and domestic financing sources. It needs to prove that it can accelerate a just and affordable energy transition, including key infrastructure investments needed to achieve it.
Legal: Acknowledging Cirebon-1 transaction as part of broader national strategy
One of the regulatory issues pertains to whether the US$1.3 billion systems cost can be classified as “allowable costs” under Presidential Regulation 112/2022. Recognising these costs as strategic investments and therefore “allowable” would alleviate pressure on PLN and ensure that it will not be viewed as state loss.
The Ministry of Finance, Ministry of Energy (MEMR), and Ministry of State-owned Enterprises should issue written instruction for PLN to proceed with the investment given its national priority. MEMR should also establish an Early Retirement Roadmap to formalise the process, while PLN should integrate early retirement into its Electricity Supply Business Plan (RUPTL), ensuring the inclusion of Cirebon-1 closure into a broader national strategy.
Legal safeguards are equally critical. This includes incorporating force majeure clauses to address unforeseen circumstances, acknowledging contractual social obligations, such as severance pays, upskilling and reskilling of the plant’s workers, and the socioeconomic impacts on the surrounding community.
Promptly addressing these key issues will be vital to charting financially sustainable path forward for Cirebon-1’s early retirement.
As the last flames of Cirebon-1 flicker, the world watches closely. Indonesia can’t afford to let this momentum slip as its reputation and economic competitiveness are at stake. Policymakers must act decisively, investors must commit, and citizens must hold the government accountable to ensure Cirebon-1’s early retirement becomes a reality – shifting from ambitious rhetoric to concrete action.
