Indonesian banks’ funding of coal industry contradicts climate efforts
Five national banks that include state-owned lenders Bank Mandiri, Bank Negara Indonesia, and Bank Rakyat Indonesia, as well as private lenders Bank Central Asia and Bank Permata (PermataBank), decided to finance Adaro Energy Indonesia’s construction of a coal-fired power plant and an aluminum smelter. The decision drew scrutiny from environmental activists and economists because it is out of step with both the global energy transition commitments, which Indonesia is party to, and with the trend of banks worldwide ceasing their funding of the coal industry.1
In total, the five banks lent around US$1.75 billion to Kalimantan Aluminum Industri and Kaltara Power Indonesia, respectively Adaro’s smelter and coal-fired power plant subsidiaries, according to environmental activist Market Forces. Those loans are only for the first phase of those projects’ development, which is estimated to cost US$2 billion. Market Forces claimed foreign banks refrained from funding the 1.1-gigawatt (GW) power plant project.2
In the first and the second phase, the project will use the electricity produced by the coal-fired power plant, and then transition to using power from a hydroelectric plant in the third phase. However, Market Forces doubts that this shift will occur, considering that coal-fired power plants can have a lifetime of 30 to 60 years. They estimate that the plant would produce 5.2 million tons of carbon dioxide (CO2)-equivalent emissions annually.3
As long as its operation duration is capped at 35 years after the commercial operation date (COD), and since it will be built before Dec. 31, 2027, the coal-fired power plant meets the requirements for Amber T3 rating in the ASEAN Taxonomy for Sustainable Finance’s framework, provided that the plant uses what could be regarded affordable, accessible and reliable technology that can be implemented in a reasonable timeframe.4
However, the Institute for Energy Economics and Financial Analysis (IEEFA) sees the Amber tiers, also known as the “yellow rating”, as permissive. The standard allows the funding to escape the “red rating”, but by doing so raises local lenders’ and investors’ risk of holding more carbon-intensive and future-stranded assets, increases domestic investors’ climate risk exposure, hinders the country’s decarbonization commitment efforts and hampers long-term financial resilience.5
Furthermore, as the plant is being built to power a smelter, it is also in line with Presidential Regulation (PP) No. 112/2022 on the acceleration of renewable energy development for electricity supply, which ironically permits captive coal plant development provided that it is attached to an industrial facility.
A revision of the regulation, as well as the requirement in the ASEAN Taxonomy, is a necessity if Indonesia seeks to accelerate energy transition by preventing banks from funding coal-fired power plants. Otherwise, funding coal-fired power plants will not be considered breaking the law or not meeting standards, and banks would operate business as usual.
At present, no bank in Indonesia is a member of the Net Zero Banking Alliance (NZBA). Of the environmental, social and corporate governance (ESG) based requirements to join NZBA as outlined in the Glasgow Financial Alliance for Net Zero (GFANZ), banks in Indonesia must fulfill the reduction of cash usage and use renewable energy to power their operations. However, they have difficulties in fulfilling the requirement to ensure low emissions across the entire credit chain.6
In response to the concerns expressed by economists and environmental activists regarding their financing of the coal industry through the Adaro projects, Adaro corporate communication head Febriati Nadira stated that the financing is in line with the Indonesian government’s “down streaming” initiative, which intends to expand the country’s control over its natural resources’ upstream and downstream industries. She also noted that the smelter would be powered by renewables once the power plant’s transition is complete.7
Meanwhile, several experts and observers doubted Indonesia could reach its 23 percent target for the portion of renewables in the national energy mix by 2025, let alone the 34 percent by 2030 Just Energy Transition Partnership (JETP) target. They remain unconvinced because the realized portion of renewables in the national energy mix only reached 12.3 percent by the end of 2022. Moreover, Indonesia needs to add 12 GW by 2025, but currently only has plans to add less than 2 GW in capacity.8
According to several sources, the green financing road map released by the Financial Services Authority (OJK) is moving further away from the original goal. Before the establishment of the OJK, several deputy governors of Bank Indonesia (BI) had initiated green financing, including former BI deputy governor Muliaman Hadad, who later became the chairman of the OJK's Board of Commissioners.
However, since Muliaman left the OJK, the road map has been executed half-heartedly, with funding for coal retirement projects abandoned. The commitment of banks to the green financing road map is limited by the values as measured by environmental, social and governance (ESG) reports.
The road map became neglected and was not updated for years. When it was finally updated, its contents lacked substance. It is understandable that national banks feel no obligation to move away from financing dirty energy.
Reductions in the energy sector has been projected to have the largest contributions after land use in achieving the government's target of carbon neutrality. Yet, the role of financial institutions in green energy remains limited. "New and renewable energy projects find it difficult to obtain funding from banks," said an energy-based technology (EBT) industry player.
In one example, Bank Mandiri had committed not to finance businesses or projects that harm the environment, as stated in its 2020 financial report. However, Bank Mandiri continued to provide loans to several coal companies, such as Indika Energy, Petrosea, Dian Swastatika Sentosa and Delta Dunia Makmur until 2021. The same goes for BCA, BNI, and BRI.
Another source stated that the financing provided by Himbara banks for Adaro projects in the Indonesian Green Industrial Zone in North Kalimantan is closely related to the national strategic projects, which were officially inaugurated by President Joko “Jokowi” Widodo. The draft of the New and Renewable Energy Bill provides an opportunity for exceptions to the early retirement of coal-fired power plants for national strategic projects.
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