Lighting the way for Indonesia’s energy transition
As the largest country in ASEAN, Indonesia accounts for around two-fifths of the region’s energy consumption. While energy demand across the country’s more than 17,000 islands could increase by up to 80 per cent in the coming decade, its electricity needs in particular could surge further, tripling between 2015 and 20301.
Fulfilling these requirements could prove problematic: on one hand, the archipelago nation is committed to reaching carbon neutrality by 20602; yet on the other hand, it currently sources about 60 per cent of its energy from carbon-intensive coal3. The road ahead therefore requires a rethink of Indonesia’s energy mix4.
Solar’s role
Solar power can play an important role in this transition. Once deemed too expensive compared with conventional coal power, solar energy today is 82 per cent cheaper than a decade ago5, largely due to technological advancements in photovoltaics (PVs).
“Solar is now very cost-competitive, and one can no longer say that coal is cheaper,” explains Przemek Lupa, Head of APAC at Masdar and President Director of Masdar’s affiliate PT Pembangkitan Jawa Bali Masdar Solar Energi (PMSE), the developer of Indonesia’s first floating PV installation. “There is enormous potential for renewable energy sources in Indonesia; this also includes waste-to-energy [WTE] projects that will combat Indonesia’s growing waste problem as well.” Access to adequate levels of financing will be key to unlocking the country’s renewable energy potential.
Overcoming roadblocks
Indonesia aims to have 48 per cent of its electricity generated from renewable sources by 20306. At present, 11.5 per cent of the country’s power demands are met through hydropower, geothermal energy, WTE and other renewables7. But potential roadblocks threaten to derail the nation’s clean energy plans.
Access to land is a noteworthy challenge. Renewable energy projects have to compete with other pressing needs such as food, housing and rainforest preservation. About 31 per cent of Indonesia’s land is allocated to agriculture8, which is increasingly straining to meet the nation’s growing food needs9. Furthermore, 52 per cent of Indonesia’s land comprises rainforest10 – a proportion the nation is keen to maintain or grow. Urban development accounts for most of the remaining 17 per cent.
Acquiring land for energy projects is a lengthy and complicated process that typically involves multiple authorities at national, regional and local government levels11. Given the nation’s plan to become carbon-neutral within 40 years, and in light of today’s land constraints, what solutions might facilitate Indonesia’s progress towards cleaner power?
Choosing Standard Chartered was an easy selection. Past experience of financing renewable energy projects was an important consideration. The bank worked closely with our teams to understand all risks and overall potential of the project.
Floating good news
For one, businesses and government-linked organisations could draw inspiration from PMSE’s Cirata Floating PV Power Plant. The 145-megawatts (ac) facility is located on a 250-hectare plot on the 6,200-hectare Cirata reservoir in West Java12, and once completed in 2022, it will be Southeast Asia’s largest such facility. The project will power about 50,000 homes, create more than 800 jobs13, and offset 214,000 tonnes of carbon dioxide emissions14. It will also supply electricity to PLN at a fixed tariff of US cents 5.81 per kilowatt-hour (kWh)15 as part of a 25-year Power Purchase Agreement. This price is comparable with the price of coal power in 2020, which stood at US cents 4.50 per kWh16; and is significantly cheaper than most other renewables, which are priced between US cents 14.5 per kWh and US cents 25 per kWh17.
“In countries like Indonesia, floating PV plants will be one of the preferred solutions,” explains Lupa. “Not only have they proved to be as competitive as ground-mounted facilities in land-scarce countries, their yields are high due to the cooling effect resulting from their close proximity to water.”
The plant’s developer, PMSE, is a joint venture between United Arab Emirates (UAE)-based renewable energy company Abu Dhabi Future Energy Company PJSC (“Masdar”) and Indonesian energy investment company PT Pembangkitan Jawa Bali Investasi (“PT PJBI”), a subsidiary of PLN18.
Offsetting the risks
The project faced several challenges. Unlike their ground-mounted peers, floating installations must look to anchoring and mooring to stabilise the facility and hold it together. On top of that, such facilities attract an array of wildlife, which frequently interfere with its PV cells and supporting structures.
Floating PV facilities also hold many unknown factors for financiers. The technology is relatively new, which means there are limited precedents to serve as guidance when seeking regulatory approvals and obtaining licenses. In addition, accurately assessing the abilities of all involved parties to perform can be tough – as their respective track records typically lie across other types of projects.
Recognising its potential, Standard Chartered Indonesia has nonetheless partnered with PMSE to co-finance the Cirata project. A USD112 million 16-year project finance facility was issued, alongside two other lenders. Standard Chartered is the project’s interest rate hedging bank, and is also acting as onshore and offshore account bank and green loan coordinator for the deal.
Climate-positive innovations
Choosing Standard Chartered was an easy selection, Lupa recalls. The bank worked closely with PT PJBI and PLN in Indonesia and Masdar in UAE to understand all the risks – including credit, environment, social, reputational and regulatory risks – as well as the potential of the project. Its appreciation of local requirements was also well-received by PMSE.
Past experience of financing renewable energy projects was an important consideration. For instance, in 2020, Standard Chartered arranged and priced a five-year fixed rate USD750 million green sukuk bond for the Government of Indonesia. The proceeds are being used to finance expenditure directly related to green projects19.
A continued commitment to Indonesia by the bank could prove critical for the country’s future renewable power plans. The Republic is planning to build 60 more floating PV installations, with lenders like Standard Chartered well-positioned to play a key role in their development. Indonesia reportedly uses less than 0.1 per cent of its solar potential. And it’s not just local communities who benefit from such projects. According to Lupa, the Cirata project will create opportunities for Indonesian manufacturers of modules, floaters, and anchoring and mooring systems. Over time, their involvement should lead to an improvement in the quality of locally made technologies and equipment.
“The Cirata Floating PV Power Plant sets a precedent for similar projects in Indonesia and the wider Asian region, and further cements Standard Chartered’s position as a global leader in sustainable financing,” says Andrew Chia, Cluster CEO, Indonesia and ASEAN Markets (Australia, Brunei and Philippines), Standard Chartered.
“The deal is testament that generating returns for shareholders and doing good can go hand in hand,” Chia adds. “Sustainable trade and project finance will be a key growth driver for countries like Indonesia as they transit from carbon-intensive to carbon-neutral energy sources in the coming decades.”
1 https://www.irena.org/publications/2017/Mar/Renewable-Energy-Prospects-Indonesia
2 https://www.eco-business.com/news/coal-phase-out-scheme-gets-pushback-in-power-hungry-indonesia/
5 https://www.irena.org/publications/2020/Jun/Renewable-Power-Costs-in-2019
7 https://www.thejakartapost.com/news/2021/01/18/indonesia-misses-green-energy-mix-target-in-2020.html
8 https://www.cia.gov/the-world-factbook/countries/indonesia/
10 https://www.cia.gov/the-world-factbook/countries/indonesia/
15 https://www.pv-magazine.com/2021/08/05/work-begins-on-145-mw-floating-solar-plant-in-indonesia/
16 https://www.statista.com/statistics/1092956/indonesia-cost-of-electricity-generation-from-coal-2018/
17 https://www.iea.org/policies/6335-solar-feed-in-tariff-of-indonesia-2016
18 https://www.reuters.com/business/energy/indonesia-begins-work-southeast-asias-largest-floating-solar-plant-2021-08-03/