Huge Grid Infrastructure Financing Gap as Investors See Unattractive Returns: Indonesia’s Utility Company | News

As per the revised power master plan viz Currently under government review, PLN plans to add 33.2 gigawatts (GW) of renewable capacity between 2024 and 2033, based on local media reports. The remaining planned 47 GW – almost a third of the additional capacity – will be fueled by gas, Satria said.

PLN, which has a monopoly on the country’s energy and network infrastructure, receives all electricity produced by independent power producers through power purchase agreements (PPAs), which guarantees a return to the private sector.

But a “completely different story” is in transmission, where the return on investment is “not as good” as the return on power generation, Satria said. The result is investment in transmission assets – which are also usually more geographically dispersed compared to power plants and carry higher environmental and social risks – largely fell to the public sector.

Innovative financial tools are therefore needed to successfully develop this new transmission infrastructure, Satria said. So far, blended finance mechanisms aimed at mobilizing more private investment using concessional capital have mainly been used to support Indonesia’s transition from coal to renewables, with questionable success.

Nearly two years since the mobilization of $20 billion through the wealthy-nation-backed Just Energy Transition Partnership (JETP) and more than $4 billion through the Asian Development Bank’s (ADB) Energy Transition Mechanism, Indonesia has yet to finalize the first deal under the plan earlier phasing out coal, which Satria says will reduce carbon dioxide emissions by almost 2 billion tons.

As the world’s largest coal exporter, Indonesia still relies on fossil fuels to cover 60% of its electricity needs. A sustainable finance taxonomy published earlier this year also drew criticism for classifying new private coal plants that supply power to industrial facilities such as nickel mines and aluminum smelters as consistent with the country’s transition to a low-carbon economy.

“Our plan does not envisage an early retirement of coal. It will just be a normal phase-out of coal, so everything will go smoothly,” said Satria, who stressed the importance of ensuring reliable energy supplies.

“But if innovation occurs, where Indonesia can achieve the world’s first early coal retirement, it will be a good achievement for Indonesia that can be replicated around the world.”

“We also try to find the best model in terms of financing. It’s really difficult. Retiring coal is not attractive to business… because we just want to accelerate the depreciation of a particular asset, which increases costs,” Satria said.

Indonesia uses a cost-plus-margin model, in which the government compensates state-owned enterprises, for example in Polish zloty, with a percentage markup on the costs incurred in implementing a financially unviable public project. Therefore, any increase in the cost of electricity supply will be borne by the government, he explained.

Green supergrid ambitions

PLN estimates that the construction of an interstate network connecting renewable energy sources throughout the country will cost USD 25 billion, because reported by Indonesian daily The Jakarta Post last week. When completed, the total length of these transmission lines will be greater than the circumference of the Earth.

It also plans to expand the supergrid to neighboring Singapore and Malaysia, which could help realize a power grid spanning the entire Southeast Asia.

The discussion, first mentioned almost three decades ago, involves utilities, investors and multilateral banks long calling for an Asian power grid to scale up the use of renewable energy sources in the region.

““In my opinion, one of the most important ‘hows’ holding us back from deploying renewables in Southeast Asia is actually the lack of planning and implementation of grid infrastructure,” said Wong Kim Yin, group chairman and chief executive of Singapore-based energy supplier Sembcorp, which also has a broad portfolio of renewable energy sources in China and India.

“Everyone knows perfectly well the financing of wind farms, photovoltaic farms and even batteries. But I don’t hear that much (about) funding for network infrastructure. Without grid infrastructure, renewable energy sources simply cannot be deployed. We’re seeing this in Vietnam, Indonesia, and I’m sure it’s happening in the Philippines and many other countries,’ said Wong, who spoke on a separate panel at the same conference.

Lim Wee Seng, group head of energy, renewables and infrastructure at Southeast Asia’s largest lender DBS, who spoke on the same panel as Wong, added that policymakers in the region may need to consider public-private partnerships and privatizing its national networks to increase private sector money flows.

“We’re seeing a lot more deals emerging in long-term storage, batteries, pumped storage and hydrogen, so we think there’s another wave coming that policymakers need to prepare for to stabilize the grid,” Lim said.

The idea of privatizing network systems in Southeast Asia was also floated by the vice president of BlackRock chairman Philipp Hildebrand at the annual Ecosperity Temasek summit. ANDin April, said aabandoning a market-based approach to energy markets, as the Philippines has done, would attract more private capital to modernize grids and battery storage – clean energy infrastructure that typically receives less funding than renewable plants.

Coal regeneration on the cards?

A recent white paper from the international non-profit Repower Initiative, supported by HSBC, proposed retaining and repurposing valuable infrastructure such as grid connections from the region’s existing coal fleets to reduce some of the upfront costs associated with the transition from coal to clean energy.

Indonesia, one of the countries included in the initiative, has adopted the concept of “repowering” coal assets, which it has incorporated into its national energy policy. While this could help overcome the challenge of grid integration for banks financing the region’s energy transition, ADB Regional Director Jackie Surtani stressed that it is important to first reduce the life of coal-fired power plants in the region – which are, on average, much younger compared to those in the US and Europe, where the concept has already taken hold.

“Once you do that, you can talk about renewable energy,” Surtani said. However, after reaching this stage, he noticed that Asian governments usually prefer to conduct a separate, competitive process for the use of renewable energy rather than involve the current owners of a coal-fired power plant in its modernization.

“I’m not saying it’s impossible, but I’ve seen some good examples of this happening in other parts of the world. Perhaps this is what we need to offer to governments and we are pleased that we, as ADB, can work with the likes of HSBC and the (Repower Initiative) to do this.