On February 20, 2024, the Indonesian Financial Services Authority (OJK) updated the “Indonesian Taxonomy for Sustainable Finance” (abbreviated in Bahasa language as TKBI). Ideally, such a taxonomy makes it easier to understand how finance is used in an environmentally sustainable way. However, the revised TKBI could confuse things and cause confusion among investors and financiers. Additionally, it will be difficult to harmonize with sustainability standards set by other countries and regions.
TKBI says the standard is “interoperable with other taxonomies” and is intended to “support national interests.” However, as currently designed, TKBI complicates the achievement of these goals and jeopardizes the green certification of Indonesia's processed metal exports.
The good thing is that TKBI is working with ASEAN. (Association of Southeast Asian Nations) TaxonomyThis is done by categorizing activities according to four broad environmental goals: climate change mitigation, adaptation, ecosystem and biodiversity protection, and transition to a circular economy. This is based on the previous Indonesia Green Taxonomy by clearly distinguishing activities into his three categories: “green”, “transitional” and a third “substandard” representing activities that do not meet the standards. It shows an improvement from.
Similar to Singapore's classification, the TKBI includes financing provisions aimed at accelerating the closure of coal-fired power plants (CFPPs). This approach supports Indonesia's efforts to phase out coal-fired power plants in line with the Just Energy Transition Partnership (JETP) and Energy Transition Mechanism (ETM) plans, despite limited progress to date. The purpose is to
However, these benefits are significantly undermined by TKBI's decision to classify its loans. new Coal-fired power plants are in a “transitional period.”
Calling new coal-fired power plants transitional assets is a huge stretch.
TKBI classifies CFPP financing as a “green” activity if the power plant falls under a sector involved in the processing or mining of minerals deemed critical to the energy transition. OJK seeks to justify this inclusion by highlighting the end uses of these minerals in advancing the energy transition, such as electric vehicles and battery storage systems. Additionally, these power plants are required to close by 2050 and emissions to be reduced by 35% by 2030 compared to the Indonesian average in 2021. Captive power plants established by 2030 are considered eligible.
Classifying new CFPPs as “transitional” is an approach that has no standard or scientific basis, especially when paralleled by efforts to accelerate the closure of existing grid-connected coal-fired power plants. Contributions determined by countries based on the Paris Agreement.
The IEEFA report highlights that the total capacity of captive power plants planned or under construction amounts to 21 gigawatts (GW). This represents 52% of Indonesia's current total power capacity and will increase the country's coal demand by 17%.
Furthermore, the technical specifications and standards set are either too lax or too aspirational. A power plant activity qualifies as an interim activity if it emits less than 510 grams per kilowatt hour (gm/KWh) of carbon dioxide over its lifecycle. In the ASEAN Taxonomy, such a level is classified as Level 3. This is the category with the highest emissions and the least desirable levels. It is important to note that while the ASEAN Taxonomy plans to phase out this category by 2030, the TKBI does not specify an end date for this category.
In addition, TKBI will require these power plants to reduce greenhouse gas (GHG) emissions by at least 35% in the first 10 years of operation, compared to Indonesia's average CFPP emissions in 2021. I am requesting that. This is also broadly converted to 510gm/KWh. (The International Energy Agency estimated the power sector emissions intensity to be 750gm/KWh in 2022). In other words, under the TKBI, coal-fired power generation will continue to be accepted even if it only meets this minimum standard after 10 years, beyond the phase-out period set by the ASEAN Taxonomy.
There also seems to be hope that carbon capture technology and the entire transport and underground storage infrastructure chain that will need to accompany it will be developed within this decade, allowing for significant reductions in emissions.
However, IEEFA provided reasons about Why are such hopes likely not to be fulfilled? TKBI also appears to implicitly recognize this possibility by allowing the use of carbon offsets to meet this requirement. This also runs counter to science-based emissions reduction targets.
What are the likely consequences if carbon offsets do not meet the 35% reduction target and carbon capture and storage (CCS) technology does not advance as expected? According to IEA data , as of 2020, 7% of Indonesia's operational power generation capacity was between 30 and 40 years old. old. Indonesia's state-owned power company, PT Perusahan Listrik Negara (PLN), also appears to be working on the assumption that the operating life of the power plant is his 30 years.
In this context, the question arises: Will power plants be decommissioned after 10 years of construction? If so, who will bear the economic losses: the power plant owners, the public, or the financiers?
A recent joint study by McKinsey and the Monetary Authority of Singapore (MAS) found that reducing a CFPP's operating life by five years reduces its value by $70 million per GW, with an additional $20 million lost per subsequent economic life. It is estimated that this may occur. will be reduced. This reduction in economic life is estimated to correspond to an increase in cost of 1 US cent per kilowatt hour (USc1/KWh).
Considering these estimates, a captive power plant that starts operating in 2029 will have an effective economic life reduced to just 21 years if it meets the 2050 closure deadline. According to a study by McKinsey and his MAS, this could result in an economic loss of $150 million per GW and increase electricity costs by 2 cents per kilowatt hour (USc2/KWh). If the power plant shuts down in just 10 years, the projected economic loss would jump to $370 million per GW.
Revised Indonesian taxonomy is unlikely to meet the requirements of financiers and end customers
Indonesia's efforts to contribute to the green transition and its intention to increase the value of its mineral resources to benefit the economy are noteworthy. But the decision to classify new coal power as “green” and set acceptable standards could undermine the credibility of the classification and call into question the government's commitment to tackling climate change.
Financial entities subject to various international standards may find the Indonesian taxonomy's unique classification problematic. This discrepancy makes Indonesia more competitive than other jurisdictions, as it requires financiers to conduct extra due diligence on the sustainability of their investments, which can increase costs or lead to them exiting finance altogether. may become unattractive for investment.
Additionally, end users of these minerals, particularly those in the electric vehicle (EV), battery and energy storage sectors, are becoming increasingly concerned about the carbon footprint of the materials they use. This concern is becoming a more prominent factor in supply chain management decisions.
A liberal approach to defining what constitutes sustainable activities would mean that these projects, the financial institutions that support them, and ultimately This poses further risks to Indonesians. Despite its aims, the new taxonomy may ultimately not be consistent with the national interest in the long run. Rather, Indonesia may be seen as less attractive for financial investment and may not be able to contribute to the desired emissions reductions.
