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On February 20, 2024, the Indonesian Financial Services Authority (OJK) updated the “Indonesian Taxonomy for Sustainable Finance” (abbreviated in Indonesian 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 intended to be “interoperable with other taxonomies” and “capable of supporting national interests.” However, as currently designed, TKBI complicates the achievement of these goals and jeopardizes the green certification of Indonesia’s processed metal exports.
On a positive note, TKBI aligns with ASEAN’s taxonomy by classifying activities according to four broad environmental objectives: climate change mitigation, adaptation, ecosystem and biodiversity protection, and transition to a circular economy. I am. This is a departure from the previous Indonesian Green Taxonomy by clearly distinguishing activities into three categories: “green”, “transitional” and a third “substandard” representing activities that do not meet the standard. shows improvement.
Similar to Singapore’s taxonomy, 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 will be significantly undermined by TKBI’s decision to classify financing for new coal-fired power plants as ‘transitional’.
not based on science
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 percent 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. Such a move calls into question Indonesia’s commitment to reduce emissions according to nationally determined contributions under the Paris Agreement.
The Institute for Energy Economics and Financial Analysis (IEEFA) report highlights that the total capacity of captive power plants planned or under construction amounts to 21 gigawatts. This would represent 52 percent of Indonesia’s current total power capacity and increase the country’s coal demand by 17 percent.
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.
Additionally, TKBI requires these power plants to reduce their greenhouse gas emissions by at least 35% in the first 10 years of operation compared to Indonesia’s average CFPP emissions in 2021. Masu. This also translates broadly to the 510gm/KWh level (the International Energy Agency estimates 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 allowed even if it only meets this minimum standard 10 years later, beyond the phase-out period set by ASEAN’s 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 as to why such expectations are unlikely to be realized. 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 the 35 percent reduction target is not achieved using carbon offsets and carbon capture and storage technologies do not advance as expected? According to IEA data: As of 2020, 7% of Indonesia’s operating power generation capacity was 30 to 40 years old. Indonesia’s state-run power company, PT Perusahan Listrik Negara, also appears to be working on the assumption that the operating life of its power plants is 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 a five-year reduction in the operational life of a CFPP reduces the value of the CFPP by USD 70 million per gigawatt, and a decrease of USD 20 million per GW thereafter. It is estimated that additional losses may be incurred. Economic life is curtailed. This reduction in economic life is estimated to be equivalent to an increase in cost of US$1 per kilowatt-hour.
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 US$150 million per gigawatt and increase electricity costs by US$2 per kilowatt-hour. If the power plants shut down in just 10 years, the projected economic loss would jump to US$370 million per gigawatt.
reliability is compromised
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, 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.
Ramnath Iyer is IEEFA’s Research Director on Sustainable Finance in Asia. IEEFA conducts research and analysis on financial and economic issues related to energy and the environment.
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