Indonesia’s coal industry is trying to grow in a hostile climate. As the world moves to cut carbon emissions following the 2015 Paris Climate Agreement, the global coal industry is feeling the squeeze.
Financial institutions in the developed world have started pulling out of coal investments. The rapidly dropping price of renewables, combined with the environmental stigma around coal, have encouraged even rapidly developing Asian countries to cut back on coal use for power generation.
These trends have called into question the future financial viability of the coal industry. The new economic pressures, as well as the environmental concerns that have long dogged it, have put the industry in peril.
Indonesia is the world’s second largest exporter of thermal coal, recently replaced by Australia as number one. With its two biggest customers, India and China, drastically reducing coal imports, Indonesia’s government is looking to keep its coal industry afloat by boosting the domestic market.
Though Indonesia has also made climate commitments, it is nonetheless looking to expand its domestic use of coal with 117 new coal-fired power plants by 2019.
It will face resistance from environmental advocates who say Southeast Asia could blow the whole world’s carbon budget if it continues to rely heavily on coal. Such advocacy can impact the foreign financing of coal projects in Indonesia and in the countries that import its coal. The global prices of other energy sources will also impact the economic appeal of coal in Indonesia.
Export Avenue Blocked
China is the world’s largest coal consumer, but it has steadily decreased its coal imports over the past few years, with a decrease of 30 percent in 2015 alone, according to the International Energy Agency (IEA).The Chinese regime put limits on its domestic coal production in early 2016 to curb what it thought would be an oversupply. But it turned out that those limits had gone too far, Klein said, and China suddenly found itself in need of more coal than it had produced. So it opened the door to an unusually large flow of imports, particularly from Indonesia.
Some question whether China will realistically cut back on coal to that extent.
Almo Pradana, energy and climate manager for World Resources Institute (WRI) Indonesia, said he expects coal demand to remain strong in China for years to come because it is the cheapest way to power the grid. In his opinion, China will still have to rely heavily on imports.
A boost to Indonesia’s domestic market may not be enough to make up for export losses.
“I know there are plans to build out a lot more coal-fired generating capacity [in Indonesia], and how quickly that comes on is really the main question,” said PIRA’s Klein. “I don’t think they will be going from a massive net exporter to [exports being] a non-factor.”
Domestic Coal Supply and Demand
Indonesia is the largest consumer of energy in Southeast Asia, and with some 40 million Indonesians still lacking access to electricity, energy use is expected to increase by 7 percent per annum, CEO of the World Coal Association Benjamin Sporton said.“This means the country needs to look at all available energy sources in order to meet the population’s demand. Coal happens to be plentiful, affordable, powerful, and reliable,” he said.
“Indonesia is one of the two largest coal exporters but only 14th in the world in terms of the size of its reserves,” Nace said. This fact, combined with the decline in the cost of renewables, makes Indonesian coal projects a poor investment, he said. “At this point, to start planning a coal plant that might start operations after 2020 would be a reckless waste of investors’ money.”
Foreign Financing After Paris Climate Talks
As the coal industries in these other countries contract, coal developers there are looking to expand abroad—to places like Indonesia where coal remains relatively strong. These developers are looking to export their equipment and expertise to Indonesia, and thus hope to promote coal power there, Chung said.Commercial banks and export credit agencies in these countries provide loans and support for coal projects in Indonesia, but they too are increasingly being targeted by activists in both host and recipient countries. “Following the climate agreement in Paris, we have seen a lot of civil society organizations pressuring both the export credit agencies and the commercial banks to pull out of coal power and coal mining projects,” Chung said.
Indonesia is working on building its renewable portfolio, but progress has been slow and coal remains the cheapest form of energy in some parts of the country, Chung said. In other parts of the country, though, diesel is the most widely used fuel. Setting up renewable energy in those places is cheaper than continuing to use diesel, she said.
Nace said: “Indonesia’s massive open pit coal mines, so large that they can be viewed from space, are among the most environmentally destructive human actions on Earth.
“Rather than destroying its own unique resources through this short-sighted and highly damaging activity, the country should recognize that both economics and environmental interests point toward a rapid pivot toward renewable energy.”