Indonesia’s Energy Transition: Will It Benefit Everyone and Leave No One Behind?
By Ferdian Yazid, Transparency International Indonesia
The Energy transition has become a buzzword in Indonesia in recent years. The high profile of the term stemmed from Indonesia’s G20 Presidency in 2022, where the “Sustainable Energy Transition” was stated as one of the thematic issues to discuss. These discussions resulted in the publication of the “Bali Compact” during the G20 meetings. Viewed as a legacy from the Indonesian Presidency, the Bali Compact outlines nine core principles for accelerating the energy transition, with the goal of benefiting everyone and not leaving anyone behind(Ministry of Energy and Mineral Resources. (8th November 2022). Bali Compact, Legacy Indonesia dalam Forum Transisi Energi G20). The principles are focused on issues of energy security, energy supply, energy efficiency, innovative and affordable technology, and research & development to accelerate the energy transition.
As a product of a global economic forum, the Bali Compact did not skip the importance of inclusive and sustainable investment. In addition to that, it also called for the mobilisation of all sources of funding to reach the Sustainable Development Goals (SDGs) 2030 agenda and the Paris Agreement. As a result of these efforts, G7 countries and others such as Norway, have committed USD 20 billion in funds for the energy transition acceleration in Indonesia under the Just Energy Transition Partnership (JETP) initiative (Tempo. (6th December 2022). Pendanaan JETP 310 triliun ditindaklanjuti pada 2023, Airlangga: Terima Kasih Amerika dan G7). Projects covered under the JETP include: the early retirement of coal-fired power plants (CFPP), the development of new infrastructure such as renewable power plants, improvement of grid/transmission, renewable energy supply chain, and energy efficiency (Ministry of Energy and Mineral Resources. (16th February 2023). Sekretariat JETP Terbentuk, Siap Realisasikan Kerja Sama Pendanaan Transisi Energi).
As is the case with renewable energy projects globally, the development of renewable power plants and renewable energy supply chain projects covered under JETP, will increase demand for so-called transition or critical minerals. These are the minerals required to enable the establishment of clean energy technologies, and whose demand is increasing rapidly. In fact, the International Energy Agency (IEA) has estimated that the mineral demand for clean energy technologies globally will quadruple by 2040 (IEA. Critical Minerals: The Role of Critical Minerals in Clean Energy Transition). The IEA predicts that Indonesia will profit from the global clean energy transition as total revenues from critical minerals in 2030 are projected to be nearly three times higher than in 2022. (IEA. (2022). An Energy Sector Roadmap to Net Zero Emissions in Indonesia. Page 133).
A Huge Influx of Climate Funding: Will It Become Another Opportunity for corruption?
Following this funding announcement, the Government of Indonesia faces a considerable task in deciding which projects will be worthy of being covered by the JETP initiative—often called a JETP Comprehensive Investment and Policy Plan (CIPP). With such a large fund, the government will face a grand challenge to ensure that high standards of governance tackle any corruption risks. The size of the climate funds will also compound existing issues in the country. Concentrated decision-making power, conflict of interests, a weak rule of law, and lack of transparency, accountability, and participation mechanisms in policy-making processes in Indonesia could pose an increase in corruption risks for the JETP project (Transparency International Indonesia, 2017. Corruption Perception Index, Indonesia).
Governance indicators, for example, provide a concerning outlook. Indonesia’s Corruption Perception Index (CPI) score has dropped significantly in 2022, from 38 to 34, making it Indonesia’s worst score reduction since the reformation era that began in 1998. The post 1998 – present era is known for more open political conditions and stronger pro-democratic sentiment. The biggest factor in the worsening of these scores is the perception of conflicts of interest between public officials and businesspeople (Ibid).
The ubiquity of Politically-Exposed Persons (PEPs) in the energy and extractives sector can also be considered a red flag for corruption and conflict of interest (The Jakarta Post. (22nd April 2021). Coal-Fired Power Plant Companies Knee Deep in Lobbying With Little To No Transparency: TII). When the presence of PEPs is not sufficiently regulated in the energy and extractive sector, the risk of undue influence and policy capture in the policy-making process is significantly increased. Moreover, inadequate regulation to prevent conflict of interest, such as revolving door policies and lack of protection toward whistle-blowers, can worsen known corruption risks (Transparency International Indonesia & Indonesia Corruption Watch. (2023). Strengthening Anti-Conflict-of-Interest Policy: Case Study of the Businessmen in the Energy Sector). In this context, energy transition acceleration projects—not limited to JETP—have the potential to benefit only a few corrupt actors.
Increased Demand for Critical Minerals: What Are the Benefits for the Mining-Affected Communities?
The clean energy transition will drive a greater demand for minerals like nickel globally. In fact, it is projected, that by 2040, demand for nickel will grow 60-70% (IEA (2022), The Role of Critical Minerals in Clean Energy Transitions, IEA, Paris). Indonesia is the largest nickel producer (around 37% of global production in 2021) and has the world’s largest reserves of battery-grade nickel (22%) (IEA. (2022). An Energy Sector Roadmap to Net Zero Emissions in Indonesia). As such, the investment opportunities created by the growing nickel demand have increased significantly. The government has imposed an export ban on unprocessed nickel ore since January 2014 to encourage investment in nickel smelters. Consequently, it has successfully attracted Chinese companies’ investment with a total investment of USD 30 billion (Center for Strategic and International Studies. (8th December 2021). Indonesia’s Nickel Industrial Strategy). This policy option—banning raw material export and improving the downstream nickel industries at the national level—is considered a reference and would be followed by other commodities such as tin, copper, and bauxite—other critical minerals (Cabinet Secretariat of the Republic of Indonesia. (30th January 2023). Presiden Jokowi Apresiasi Rampungnya Peta Jalan Hilirisasi).
While the Indonesian government argues that its policies regulating the nickel industry are best practice to increase state revenue, negative impacts due to nickel mining and the nickel smelter industry should be considered. Many provinces with huge nickel mining areas are experiencing a high rate of deforestation (Forest Digest. (10th May 2022). Ironi Penambangan Nikel). The connection between nickel extraction and deforestation highlights the complexity of the energy transition; the need for these critical minerals must be consistently be weighed against the environmental impact of mining for the minerals themselves.
The nickel mining industry also has the potential to leave mining-affected communities behind. The latest Indonesian mining law (Law No 3, 2020) did not include the Free, Prior, and Informed Consent (FPIC) principle for coal and mineral extraction projects (Primi Suharmadhi Putri (2022): Local communities and transparency in Indonesian mining legislation, Journal of Energy & Natural Resources Law, DOI: 10.1080/02646811.2022.2136336). The principle of FPIC is a right of indigenous communities, enshrined in the United Nations Declaration on the Rights of Indigenous Peoples. It suggests that any activity that may affect the ancestral lands, territories and natural resources of indigenous communities, should require the Free, Prior and Informed Consent of these communities prior to the activity (such as natural resource extraction) (Food and Agriculture Organisation of the United Nations (FAO) (2016): Free Prior and Informed Consent: An indigenous peoples’ right and a good practice for local communities, FAO). Without these safeguards, local communities are at a significant disadvantage in consultation or negotiation processes with government and mining companies throughout the licensing stage of a mine.
Ensuring a just energy transition in Indonesia will be challenging. Although the government of Indonesia has committed to a just energy transition, the reality seems contradictory. Given the considerable size of the JETP initiative and the impact it will have in shaping Indonesia’s energy transition, it is key to ensure high standards of governance are maintained throughout the entire extractive sector. The donor countries need to take extra measures to ensure that the energy transition projects they will fund will not increase environmental and social problems. Increasing transparency, accountability, and participation mechanisms to prevent vested interests from influencing the policy-making processes connected to the energy transition is crucial to avoid them benefitting only a few and ensuring that no one is left behind.