Event: Aligning international energy finance toward the net-zero economy

With support from the Federal Foreign Office of Germany, the Institute for Essential Services Reform (IESR), Climate Transparency’s partner in Indonesia, conducted a high-level policy dialogue to discuss the recent development of halting international coal financing and collaborative efforts in achieving carbon neutrality. The Indonesian online seminar was held on 25-26 August 2021 and attended by government officials and prominent speakers from Japan, South Korea, and Germany as well as bilateral and multilateral development banks (MDBs), representatives of the private sector and academia.

Summary of the discussion

After the return of the US to the Paris Agreement and  the Climate Leaders’ Summit held in April 2021, G7 countries committed to end new overseas financing of coal power projects by 2021. This decision influenced other countries such as Korea and Japan to join the commitment. As a result, the G7 will increase financial support to accelerate the energy transition and allocate more budget for climate investment funds to reach net-zero by 2050.

Public finance from South Korea and Japan has a major impact on coal power plant projects in developing countries such as Indonesia. Even though South Korea has decided to end funding for new coal projects overseas, the government has not decided on the coal phase-out agenda for domestic consumption. Indonesia as one of the recipient countries from Japan and Korea should prepare for the financial impact regarding their announcement.

Germany has committed to allocate USD 6 million annually to combat climate change, and G7 has declared to decarbonise the power system by 2030. Through its partnership with the World Bank, Germany will support the energy transition, fuel subsidy reforms and will provide financial and technical assistance to Indonesia. The contribution of G7 countries is needed, particularly towards providing funds and investment to drive renewable energy projects in developing countries such as Indonesia. South Korea and Japan, Asia’s leading economies, have not shown firm will or support in financing energy transition projects.

In Indonesia many renewable sources, such as solar energy, are underdeveloped. Currently, solar energy contributes less than 1% of electricity share. Unfortunately, regulations such as local content requirements, high-cost material, low electricity purchase prices and the high risk of projects are the main challenges to attract foreign investment from the private sector.

Currently the Indonesian state budget is inadequate to fund low carbon development and climate resilience. Therefore, Indonesia should attract more investment by engaging the private sector and foreign investors who can invest in energy transition projects.

The role of the government should be strengthened to adopt policies that can attract investment in renewable energy development. In addition, policy reforms are important to support the low-carbon economy, such as promoting a green taxonomy that shifts away from the fossil fuel derivatives industry. The strong commitment of financial regulators and banking sectors will assist in stopping coal financing projects and to avoid the potential of having stranded assets that will damage the Indonesian economy.

Ways Forward

● International pressure and commitments are important to enhance climate action and policies. Strengthening cooperation and commitments with global economies will help emerging economies achieve the goal of carbon neutrality by 2050.

● Foreign financial and technical assistance are the prominent ways of moving away from coal. Developed countries are expected to transfer knowledge and technology to developing countries to accelerate the expansion of renewable energy. With this additional support, Indonesia could create a strong strategy to retire existing coal-fired power plants.

● Indonesia’s G20 Presidency in 2022 makes energy transition a priority. This marks a good momentum to advance the coal-exit commitment and encourage more renewable investment in the G20 developing countries.

● However, shifting to a low-carbon economy should be assisted with the clear implementation of a green taxonomy in terms of categorising green projects. Currently, each institution in Indonesia has its own standard on sustainable business. The upcoming release of a green taxonomy by the Financial Authority Services (OJK) is expected to integrate the private sector’s different perspectives to decarbonise their businesses and ease them to mitigate the upcoming risks.