Indonesia’s Last Stand for a Coal Industry in Peril
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.
The archipelagic island country may feel the weight of the world pressing against its attempts to keep its coal industry thriving. Hanging in the balance is the health of Indonesia’s people and rainforest, as well as its commitment to reduce carbon emissions by 29 percent from projected 2030 levels.
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).
China’s coal imports briefly spiked toward the end of 2016, but that was not indicative of a trend, said Dan Klein, managing director of consultancy PIRA Energy Group.
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.
Beijing has now lifted its cap on domestic production, so Indonesia can expect to see a steady decrease in its exports to China. The think tank Institute for Energy Economics and Financial Analysis (IEEFA) also reports that India, historically the second largest coal importer in the world, is on track to effectively cease coal imports altogether in the next year or two.
China and India are motivated partly by a simple wish to boost their domestic coal industries and rely less on imports, but also partly by climate goals. China has bid to reduce greenhouse gas emissions by up to 65 percent from 2005 levels.
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.
Reports on supply and demand coming from China are “opaque,” according to a report on the mining industry by consultancy Deloitte, titled “Tracking the Trends 2016.” While the expectation is that, by and large, Indonesia’s coal business with China will take a major hit in years to come as it has in the past few years, the extent of that impact remains unclear.
Other factors have hurt Indonesia’s coal exports, from piracy on a main trading route to the Philippines to competition with Australia’s higher calorific coal.
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.”
Similarly, Tim Buckley, director of energy finance studies at IEEFA said of Indonesia’s coal industry in a statement last year: “With exports taking 80 percent of total coal mined at its peak, this transition to the domestic market will take a long time, and will be held back by the corruption undermining the billions of dollars of foreign investment required to build out domestic coal rail freight lines and electricity power transmission assets.”
Whether Indonesia’s coal is to be exported or stay at home, the obstacles to its mining operations could be a problem. Such obstacles have recently included the corruption mentioned by Buckley and a crackdown on illegal coal mining. A potential shortage of reserves may be another to hit the industry in the next 10 to 15 years.
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.
On the other hand, Ted Nace, director of the anti-coal project CoalSwarm, said that Indonesia could run out of coal in a little over a decade at the current rate. PriceWaterhouseCoopers also reported last year that Indonesia’s reserves could be depleted by 2033.
“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.”
Nace co-authored a report with Sierra Club and Greenpeace researchers in 2016 showing that some $1 trillion in coal investments could be stranded worldwide if global carbon reduction goals set in the Paris Climate Agreement push forward.
“There is pressure on a lot of the commercial banks, especially Japanese, Korean, and Chinese commercial banks that are really bankrolling a lot of the coal power projects and also coal mining projects in Indonesia,” said Yulanda Chung, IEEFA energy finance consultant. American and European financiers have also been active in Indonesia, she said, and are also feeling pressure from environmental advocates.
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.
BankTrack, a network of NGOs that monitors the financing of activities with negative environmental impacts, has called on the World Bank and the Japan Bank for International Cooperation to cease financing the Batang coal power project in Indonesia, for example.
French bank Société Général planned to help finance Tanjung Jati B-2 coal plant in Central Java, but has reportedly withdrawn its support due to carbon emission concerns, and BankTrack has reported on foreign financiers pulling out of projects in other Asian countries like Bangladesh. It also reported that major banks, such as the Bank of America, have unveiled new policies in the past year to reduce exposure to coal mining companies.
Environmental concerns are now combined with economic incentives to build on renewables instead of coal, said CoalSwarm’s Nace. He noted that since 2009, solar prices have dropped by 62 percent due to technological improvements and mass production of solar panels. In some parts of the world, solar power is already cheaper than coal.
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.
Even where the financial cost is cheaper for coal, there are other costs. Harvard and Greenpeace released a study last month showing that new coal power development in Southeast Asia, Japan, and Korea could cause 50,000 deaths per year by 2030 due to air quality impacts.
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.”
This article was originally published on Mongabay.com