Indonesia Can’t Afford the Luxury of Australia’s Carbon Habit

If you want to understand why Indonesia seems to be turning its back on fossil fuels faster than its richer neighbor Australia, you could do worse than look to the wit and wisdom of David Lee Roth.

“I used to have a drug problem,” the hard-living Van Halen singer is supposed to have once said. “Now I make enough money.”

That’s as much a lesson about fiscal policy as it is about rock ‘n’ roll. Middle-income countries like Indonesia simply don’t have the money to waste on indulging costly habits like supporting a fossil fuel industry on the brink of rapid decline. Richer nations, like Australia, can be more indulgent.

Contrast some of the announcements from the world’s two largest coal exporters in recent months. Indonesia will stop the development of coal power plants except those already financed or under construction, a senior official told a parliamentary hearing Thursday. State utility PT Perusahaan Listrik Negara will close all its own coal plants by 2056, the same hearing was told.

That’s not all. The country is looking at introducing a carbon tax that would apply to motor fuel and major industrial facilities — a far cry from the current situation, which subsidizes carbon by mandating a lower price for renewable power than is paid to coal-fired generators.

A pilot carbon market began operating in March. President Joko Widodo at the start of May laid out plans to cut 2030 emissions by 29% below 2010’s level.

Australia’s situation couldn’t be more different. Within the last month alone, Canberra has announced about A$4.9 billion ($3.8 billion) in new energy spending, including as much as A$2.4 billion to upgrade and guarantee minimum prices for the country’s two remaining oil refineries and A$600 million for a state-owned gas power plant that the market doesn’t need. Just A$69 million of the total will go to projects clearly marked as zero-carbon.

Further cross-subsidies are in the offing. The design of the country’s power market must be changed to encourage coal- and gas-fired generators to remain in operation and guarantee “reliable power” to the grid, Energy Minister Angus Taylor said in a speech Tuesday.

A few hours later, a cascade of events prompted by a fire at the Callide coal station in Queensland state took 3.1 gigawatts of generation offline, affecting 470,000 power users, and closed one of the station’s four generating units for a year. The solution should be yet more coal power, according to former Resources Minister Matt Canavan:

One way of looking at what’s happening is that Indonesia simply can’t prop up its fossil fuel sector as lavishly as Australia. The government pays 6.4% on its 10-year debt, compared to 1.7% in Australia.

After nearly a decade of current account deficits, it’s dependent upon foreign capital to finance major infrastructure — but Japan and South Korea, two of the biggest funders of Indonesian coal power plants, are pulling out of the business.

“The dramatic change of political narrative is really brought about by the realization that fossil fuel financing, especially for coal power plants as well as financing for coal mining, is quickly drying up,” said Adhityani Putri, executive director of local energy-transition lobby Cerah. “All this pressure leveled against coal is starting to be felt within elite circles.”

Furthermore, renewable costs that have for years been among the least competitive in the world are finally starting to undercut cheap domestic coal. The cost of energy from new solar plants will slip below that of new coal generators next year and be roughly a third lower by 2025, according to BloombergNEF forecasts.

By dressing up the collapsing economics of Indonesian fossil power as climate ambition, Widodo can claim a diplomatic win without having to upset many vested interests.

In truth, the two countries are probably closer than they look. Australian politicians’ coal-toting swagger aside, the country’s renewable transition tends to under-promise and over-deliver.

Fossil fuel’s share of electricity generation on the main grid has fallen by about 8.4 percentage points since the current government came to power in 2013, and accounts for less than 2% of the 5.3 gigawatts of committed or expanded generation capacity under way.

Indonesia, meanwhile, tends to over-promise and under-deliver. Of 35 gigawatts of mostly coal-fired power Widodo pledged in 2015 to connect within five years, hardly any has been built. The solid fuel fleet is generating power barely half of the time, levels at which plants struggle to make money.

Without decarbonization plans being written into law, however, there’s no guarantee Widodo’s bold ambitions will hold up in the long term. Indonesia is one of the few places on earth were new coal power can compete on purely commercial terms with renewables as the cheapest source of electricity.

Later this decade, when electricity demand rises to the point that new generation capacity is needed again, there’s no guarantee that coal power doesn’t see a late renaissance, absent concerted international action to support alternatives.

For all the rhetorical differences, both countries are ultimately being pushed in the same direction by raw economics. A business based on mining, hauling and burning heavy rocks to spit out electrons struggles to survive everywhere that fuel-free renewables manage to take root on a large scale. Those hopeful for coal’s long-term future should take note. Even the industry’s most staunch defenders are struggling to keep the flame burning.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Source: Bloomberg