S African coal phase-out lesson for Indonesia, Vietnam

Indonesia and Vietnam should build on South Africa's successes and steer clear of its failures when phasing out coal-fired power, write Prethika Nair and Elaine Mills

The challenges South Africa has faced in its Just Energy Transition Partnership (JETP) deal could guide the way for fellow recipients under the scheme Indonesia and Vietnam — two emerging economies similarly reliant on coal-fired power generation. But success will depend on the amount and nature of funding available.

JETP is a financing mechanism led by the International Partners Group (IPG), formed of various donor countries, and the Glasgow Financial Alliance for Net Zero, a coalition of major financial institutions. JETP aims to help coal-reliant countries accelerate their transition to more renewable energy, with funding provided in the form of grants, loans and investments. South Africa signed the first JETP deal in 2021, receiving $8.5bn in public and private finance over 3-5 years, with additional funding of almost $3.5bn. This was followed by JETP deals for Indonesia and Vietnam in 2022, for $20bn and $15.5bn, respectively, also over 3-5 years.

South Africa's coal-fired power generation makes up 85pc, or 42GW, of its power mix. Since the announcement of the JETP, the country has introduced several electricity sector reforms, such as removing licensing thresholds for embedded generation, offering incentives for rooftop solar power and advancing the restructuring of state-owned power utility Eskom. It has also announced investments in the country's transmission grid and for repurposing end-of-life coal power plants.

All but two of Eskom's 15 coal-fired power plants are due to retire over the next three decades. The closures would reduce Eskom's coal fleet capacity to around 29.3GW by the end of 2030 and cut South Africa's coal demand for electricity generationby nearly half, to 55mn-60mn t in 2030 from 113mn t in 2021 — although these plans could be set back as the government seeks to prioritise energy security ahead of next year's general elections.

Indonesia this month released its draft Comprehensive Investment and Policy Plan (CIPP) — a framework for realising its JETP targets. Over 65pc of Indonesia's 82GW of installed generation capacity is coal-fired. Renewable energy currently makes up 14.5pc of the mix, but Indonesia plans to increase this to 34pc by 2030 and 100pc by 2060, through the early retirement of coal plants, lowering capacity utilisation, and switching the role of coal-fired plants from base load to ancillary units supporting renewable energy generation, according to the CIPP.

Falling at the first hurdle?

But Indonesia's CIPP has been revised from previous plans, and only 1.7GW of coal-fired power generation is now set to be retired by 2040, with $1.3bn of funding set aside for this up to 2030. "The elimination of the plan to retire early 5GW of coal-fired power plants before 2030 due to the lack of funding support is regrettable," think-tank Institute for Essential Services Reform executive director Fabby Tumiwa says. "It is necessary to end 8.6GW of coal-fired power plants by 2030" to achieve Indonesia's peak emission target of 290mn t of CO2, Tumiwa says.

Vietnam's rising coal-fired capacity — currently around24-25GW — accounts for a third of its total power generation capacity. Under the JETP, the country aims to cap coal-fired capacity at a peak of 30.2GW by 2030 from a previously expected peak of 37GW in 2030. The country aims to reduce peak power emissions by up to 30pc, to 170mn t of CO2 equivalent, and bring forward its peaking date by five years to 2030, while increasing the share of renewable energy in its power mix to 47pc by 2030 — up from a previous target of 36pc.

All three countries have identified the importance of upgrading their transmission grid infrastructure so that they can fulfil more of their electricity needs using renewable energy. For South Africa, widespread support for coal-fired generation and multiple vested interests are making it challenging for policy makers to effectively implement the JETP. The country faces an electricity supply crisis, and while this should encourage its transition to renewable energy, it is instead being used as a justification to extend the life of coal-fired plants and possibly build more. The ruling ANC party has recommended that Eskom delays decommissioning its ageing coal-fired power plants to minimise load-shedding. "Whether the slower decommissioning will affect the funding under the JETP depends on how South Africa presents its case at the UN Cop 28 climate summit," presidential climate change commissioner Mac Chavalala says.

South Africa's JETP design process has been criticised for not including the people most affected by it. A lack of civil society consultations before it published its implementation plan (IP) has prompted pushback from the local communities whose livelihoods depend on coal mining and coal-fired power plants.

Indonesia and Vietnam should ensure more transparency and consultation at the design stage. Indonesia — a large archipelago with significant economic disparities between its islands — acknowledges this requirement in its CIPP. "Labour force and social protection interventions need to be tailored towards communities in the areas where coal-fired power plants are being phased out." The CIPP suggests reskilling and vocational training programmes for those affected.

Concessionary financing essential

The $11.9bn in funding pledged to South Africa is a fraction of the 1.48 trillion rand ($81bn) needed over a five-year period to implement the JETP, according to South Africa's 2022 IP. Grants and technical assistance make up a mere 4pc of funding, concessional loans 63pc, commercial loans 18pc and guarantees 15pc, according to a report by the International Institute for Sustainable Development (IISD).

Establishing the on-grid power sector in Indonesia entails developing transmission lines, the early retirement and managed phase-out of coal power, and developing renewable energy, for which an estimated $96bn will be required over 2023-30 and $580bn over 2023-50, according to Indonesia's CIPP. The country could need as much as $12 trillion over 2022-50 to move away from coal, its government says.

All three countries should make sure that financing comes in the form of concessional loans and grants rather than more expensive commercial loans, which would only hamper the growth of these emerging economies. Countries in the Association of South East Asian Nations received $2.24bn in official development assistance (ODA), or international public climate finance, for renewable energy generation projects in 2012-21, according to the National University of Singapore's Energy Studies Institute senior research fellow Kim Jeong Won. Indonesia and Vietnam received the bulk of these investments, with 44pc and 34pc respectively.

Substantial private-sector financing is also necessary. But private capital tends to be elusive as many of the energy transition projects on the table have not crossed the threshold for bankability, Monetary Authority of Singapore managing director Ravi Menon says. The solution for this could lie in blended financing, where ODA, government funding and private-sector financing is structured in a way that supports private-sector investment in the renewable energy sector, consultancy PwC Singapore's Asia-Pacific infrastructure leader, Jennifer Tay, says.

"A blended finance scheme can be used to select projects where risk and returns could be balanced by combining the two sources of JETP financing. Projects that are traditionally low-yielding or deemed high risk could be financed through concessional financing," Indonesia's CIPP says. The IISD report adds that Indonesia and Vietnam should consider the financing principles set out in South Africa's IP, including technology transfer and additionality — where pledged funds must be earmarked for climate initiatives, in addition to any ODA.