On 20 February 2024, the Indonesian Monetary Providers Authority (OJK) up to date its “Indonesian Taxonomy for Sustainable Finance” (TKBI for brief in Indonesian). Ideally, such a taxonomy would make it simpler to grasp how finance is utilized in methods which can be environmentally sustainable. Nonetheless, the revised TKBI muddies the waters, doubtlessly resulting in confusion amongst traders and financiers. Moreover, it creates difficulties in harmonising with sustainability requirements set by different international locations and areas.
The TKBI states that the goal is for the requirements to be “interoperable with different taxonomies” and “supporting nationwide pursuits.” Nonetheless, as it’s presently designed, the TKBI complicates the achievement of those targets, placing in danger the inexperienced credentials of Indonesia’s processed steel exports.
On a constructive be aware, the TKBI aligns with the Asean taxonomy, by categorising actions in line with 4 broad Environmental Targets – local weather change mitigation, adaptation, ecosystem and biodiversity safety, and transition to a round financial system. It marks an enchancment over the earlier Indonesia Inexperienced Taxonomy by clearly demarcating actions into three classes: “inexperienced,” “transitional,” and a 3rd, “doesn’t meet standards,” for actions that don’t meet the requirements.
Much like the Singapore taxonomy, the TKBI consists of provisions for financing aimed toward accelerating the closure of coal-fired energy vegetation (CFPP). This method is designed to assist Indonesia’s efforts to retire coal vegetation consistent with the Simply Power Transition Partnership (JETP) and Power Transition Mechanism (ETM) plans, regardless of their restricted progress so far.
Nonetheless, these positives are considerably undermined by the TKBI’s choice to categorise financing for new coal-fired energy vegetation as “transitional”.
Not science-based
The TKBI classifies financing for CFPP as a “inexperienced” exercise if the ability plant is captive to a unit concerned within the processing or mining of minerals deemed essential to the power transition. The OJK has sought to justify this inclusion by emphasising the top use of those minerals in advancing the power transition, for instance, in electrical automobiles and battery storage programs. Moreover, it mandates that these energy vegetation should shut by 2050 and scale back their emissions by 35 per cent by 2030 in comparison with the 2021 Indonesian common. Captive energy vegetation established up till 2030 are thought of eligible.
Classifying new CFPPs as “transitional” is an method that’s neither normal nor science-based, significantly when juxtaposed with efforts to expedite the closure of current grid-connected coal vegetation. Such a transfer calls into query Indonesia’s dedication to decreasing emissions in line with its Nationally Decided Contributions below the Paris Settlement.
An Institute for Power Economics and Monetary Evaluation (IEEFA) report has highlighted that the mixed capability of the captive energy vegetation, that are both deliberate or being constructed, quantities to 21 gigawatts. This represents 52 per cent of Indonesia’s present whole energy capability and would lead to a 17 per cent enhance within the nation’s demand for coal.
Moreover, the technical specs and standards laid down are both too lax or aspirational. An influence plant exercise qualifies as transitional if it emits lower than 510 grams of carbon dioxide per kilowatt-hour (gm/KWh) over its lifecycle. Underneath the Asean taxonomy, such ranges could be categorised as Degree 3, which is the class for the very best emissions and the least most well-liked stage. You will need to be aware that the Asean taxonomy plans to part out this class by 2030, however the TKBI doesn’t specify an finish date for it.
Furthermore, the TKBI requires these energy vegetation to scale back their greenhouse fuel emissions by a minimum of 35 per cent inside their first 10 years of operation in comparison with the common emissions of CFPPs in Indonesia in 2021. This once more interprets broadly to the 510gm/KWh stage (the Worldwide Power Company in 2022 estimated an emissions depth of 750gm/KWh for the electrical energy sector). In different phrases, below the TKBI, coal-fired energy technology would stay acceptable, even when such vegetation solely handle to satisfy this minimal normal after a decade, which is past the phase-out interval set by the Asean taxonomy.
There additionally seems to be a hope that carbon seize applied sciences – and the whole transportation and subsurface storage infrastructure chain that should accompany them – would develop inside these 10 years and permit for a pointy discount in emissions.
Nonetheless, IEEFA has introduced causes as to why such hopes are more likely to be unfulfilled. The TKBI additionally seems to implicitly recognise this probability by permitting carbon offsets for use to satisfy this requirement. This once more flies within the face of science-based targets for lowering emissions.
If the 35 per cent discount goal shouldn’t be met utilizing carbon offsets and if carbon seize and storage expertise doesn’t advance as hoped, what’s the seemingly end result? Based on knowledge from the IEA, in 2020, 7 % of Indonesia’s operational energy technology capability was between 30 to 40 years previous. PT Perusahaan Listrik Negara, the Indonesian state-owned utility, additionally appears to work with the belief {that a} energy plant has a 30-year operational lifespan.
On this context, it raises the query: would a 10-year-old energy plant be decommissioned? If that’s the case, who would bear the monetary loss: the plant homeowners, the general public, or the financiers?
A latest joint research by McKinsey and the Financial Authority of Singapore (MAS) has estimated that lowering a CFPP’s operational life by 5 years can lower its worth by US$70 million per gigawatt, with a further lack of US$20 million for each subsequent yr its financial life is curtailed. This discount in financial life can also be estimated to correspond to a price enhance of 1 US cent per kilowatt-hour.
Taking these estimates under consideration, a captive energy plant that begins operations in 2029 would have its efficient financial lifespan diminished to solely 21 years if it adheres to the 2050 closure deadline. Based on the McKinsey and MAS research, this might lead to a monetary lack of US$150 million per gigawatt and a rise in energy prices by 2 US cents per kilowatt-hour. If the plant had been to close down after simply 10 years, the projected monetary loss would surge to US$370 million per gigawatt.
Credibility undermined
Indonesia’s efforts to contribute to the inexperienced transition and its intention to boost the worth of its mineral sources to learn its financial system are notable. Nonetheless, the choice to categorise new coal-generated energy as “inexperienced” and to set permissive requirements may undermine the credibility of its taxonomy and forged doubt on the federal government’s local weather commitments.
Financiers who’re topic to varied worldwide requirements could discover the Indonesian taxonomy’s distinctive classifications problematic. This divergence may render Indonesia much less engaging for investments than different jurisdictions as financiers would wish to do further due diligence on the sustainability of their investments, thereby growing their prices or probably main them to choose out of financing altogether.
Furthermore, the end-users of those minerals, particularly these within the electrical automobile, battery, and power storage sectors, are more and more involved concerning the carbon footprint of the supplies they use. This concern is changing into a extra outstanding think about provide chain administration selections.
The lenient method to defining what constitutes sustainable actions introduces extra dangers to those tasks, to the financiers backing them, and finally, to the Indonesian public, ought to the state have to soak up a number of the monetary influence. Regardless of its goals, the brand new taxonomy may in the end not align with nationwide pursuits in the long term. As a substitute, it may result in Indonesia being seen as much less interesting for monetary funding and should not contribute to the specified discount in emissions.
Ramnath Iyer is IEEFA’s Analysis Lead for Sustainable Finance, Asia. IEEFA conducts analysis and analyses on monetary and financial points associated to power and the setting.
