Indonesia Stakes its Future on Coal

Indonesia's Coal Dilemma


By: Pius Ginting, Head of Research, WALHI/Friends of the Earth Indonesia

In 2014, for the first time in 17 years, Indonesia’s coal production declined. After an average annual increase in production of 14% per year over the past decade, last year’s production fell by 39 million tonnes, or 8% compared to 2013. This decrease was significant, equivalent to the cessation of operations of the third largest mining company in Indonesia.

Reduction in the use of coal for energy is now occurring in the United States and China due to environmental considerations. China has begun to reduce imports of coal and is decreasing coal generation due to air pollution concerns Last year, for the first time ever, coal use in China actually decreased by 1.4% while the economy grew by 7.3%. This decoupling of coal growth with economic growth is hugely significant in the country which has accounted for 80% of global demand growth since 2000.

Analysts such as Tim Buckley of the Institute for Energy Economics and Financial Analysis have pointed to how the massive shifts that are currently happening in China’s energy markets are likely to result in peak coal in China over the next five years, and a steady decrease in imports. This, combined with the changes that are happening in India’s energy markets, point to a structural decline in the seaborne thermal coal market. With the market heavily oversupplied, and coal prices low, continuing to rely on coal exports makes no economic sense for Indonesia.

This is even more apparent when you look at the health impacts of the current coal mining boom in Indonesia. Indonesian coal mining provinces such as South Kalimantan, East Kalimantan, South Sumatra and Bengkulu have reported high numbers of acute respiratory tract infections. Unfortunately, there is an absence of regular reporting on health impacts of coal dust. According to the World Health Organisation, 7 million deaths occur each year due to air pollution. There is evidence in other countries of the health impacts of coal mining on surrounding communities.

Yet instead of addressing these issues, Indonesia’s new President Joko Widodo is staking the country’s future on a massive increase in coal-fired generating capacity. The government has announced plans to add 42,000 MW of new electricity capacity to the grid by 2024, around half of which would be from coal.

Currently, Indonesia is the world’s third largest emitter of greenhouse gases in the world, due to deforestation. However, the National Council on Climate Change has stated that if coal fired generation increases at the rate predicted by the President, greenhouse gas emissions will exceed those from the forestry sector by 2030, threatening to wipe out any gains in the forestry sector.

Luckily, President Jokowi’s targets for expansion of coal fired generation capacity seem completely unrealistic. In 2006, Indonesia’s first “fast track” program to expand capacity by 10,000 MW is still mired in delays, with only 60% completed to date. However, by having an energy policy driven by coal, renewable energy will be hampered in the country, and will send Indonesia in the opposite direction to most of the rest of the world. To achieve its targets, the electricity utility PLN needs $90 billion in investment. Raising this amount of money will not be easy.

In 2015 the government still gives subsidies of $5.2 billion per year to PLN. It is ironic from the environmental perspective that the Jokowi Government has eliminated oil fuel subsidies, but continues to give subsidies for coal plant construction. The government is also supportive of building coal infrastructure such as coal railways in Central Kalimantan and South Sumatra that would open up huge new tracts of land to coal mining.

If the government does indeed increase the share of coal in the power mix from 54% in 2014 to 64% in 2019, then Indonesia will need a total of 200 million tonnes of coal per year, an increase of almost 120 million tonnes per year.

A ray of hope is coming from the Corruption Eradication Commission (KPK), who in 2014 teamed up with the Ministries of Forestry, Environment and Transportation and the Tax Directorate to conduct an investigation of all locally-issued mining permits in 12 provinces of Indonesia, including five provinces with large coal mining operations – South Kalimantan, Central Kalimantan and East Kalimantan, and South Sumatra and Jambi.

The KPK is working with local and provincial governments to investigate compliance surrounding issues such as payment of taxes and royalties, post-mining reclamation, forestry, and the use of legal or illegal ports. As a result, the program has resulted in the revocation of 34 coal mining licenses in East Kalimantan and 58 in South Sumatra. There is also a similar process being undertaken for nationally-issued licenses to the big mining companies, called Coal Contracts of Work.

Exerting government control over the legality of coal mining operations and stopping illegal coal shipments can be a first step towards reduction of coal production and towards sustainable economic development and renewable energy. However, the government must also develop a renewable energy strategy with appropriate incentives to massively scale up investment in renewable energy, to avoid the massive pollution that will inevitably come from a suite of new coal plants.