Why an Integrated Approach Is Needed for the Transition from Coal to Clean

By using a whole-systems approach, Indonesia’s energy transition journey can be a model for other countries wanting to transition off coal.

Indonesia, a country of 270 million people but with a land mass only one-fifth the size of the United States, is one of the top 10 greenhouse gas (GHG) emitters in the world. In 2023, over 60 percent of its electricity came from coal-fired power plants but at the same time Indonesia has significant renewable energy (RE) potential with an estimated 3,600 gigawatts (GW) of untapped RE potential. Although, the country’s GHG per capita emission is far lower compared to top 10 emitters, with rising population and energy demand, the need to switch to clean energy is crucial.

Fortunately, Indonesia is rising to the challenge, and its journey toward decarbonization serves as a compelling case study, offering valuable insights into the complexities and challenges of transitioning away from coal. At the forefront of this endeavor is the Comprehensive Investment and Policy Plan (CIPP), a groundbreaking initiative that sets forth Indonesia’s investment and policy priorities to achieve ambitious emissions reduction targets such as peaking on-grid power generations emissions at 250 MtCO₂ by 2030 and near zero by 2050 under the Just Energy Transition Partnership. The CIPP represents a milestone in Indonesia’s decarbonization efforts, marking a strategic shift toward a cleaner and more sustainable energy future.

Comprised of technical, financial, policy, and just transition sections, the CIPP distinctly addresses the country’s transition through each of those lenses. By delineating clear priorities and pathways, the plan provides a roadmap for navigating the complexities of transition planning. However, it comes along with a series of challenges.

Challenges of Coal to Clean

A critical aspect of Indonesia’s energy transition lies in its grid dynamics, particularly in regions like Java-Bali, where overcapacity and locked-in coal contracts pose challenges to integrating increasing amounts of carbon-free electricity because it creates an inflexible and under-utilized grid. For example, the reserve margin — the difference between the available generating capacity and the peak demand for electricity — in this region in 2022 was 76 percent, more than double that of international standards. To increase the share of renewables in the system while maintaining a reliable and affordable electricity supply, the Indonesian grid needs to operate with more flexibility and efficiency.

Furthermore, the lack of transparency surrounding coal contracts complicates efforts to reduce coal capacity and operate existing plants more flexibly. Decision makers understand that the current coal plant compensation scheme heavily disincentivizes a flexible plant operation, due to the take-or-pay clauses in contracts. Negotiations with independent power producers are crucial .for mitigating the financial burden that the take-or-pay scheme imposes on PLN — the Indonesian state-owned utility and grid operator — obliging PLN to pay for the agreed-upon availability factor regardless of the actual generation. In addition, regulated technical parameters and hurdles, such as the minimum operating load for coal plants defined by PLN and grid stability concerns as the share of variable renewable energy increases over time, further exacerbate the transition process.

Coupled with regulatory barriers, financial considerations loom large in Indonesia’s decarbonization journey, particularly for PLN. Operating within strict financial constraints, PLN faces daunting challenges in financing the transition away from coal. Ensuring the long-term financial health of PLN is paramount to the success of decarbonization efforts, necessitating careful planning and strategic decision-making.

Rethinking Analytical Approaches

The reality is that these issues are interdependent and must be evaluated as a whole, as shown in RMI’s analysis. Further iterations of the CIPP and detailed implementation plans will seek to address these dependencies by answering questions like: What financial mechanisms will alleviate PLN’s financing constraints while lowering the cost of solving technical barriers to clean energy integration? How can policy and regulation play a role in ensuring grid stability and improvement of PLN’s bottom line during the transition, by incentivizing flexible operation of coal plants?

These challenges are not unique to Indonesia but are shared by many countries grappling with coal phaseout, such as South Africa, The Philippines, and Colombia. The interplay between technical, financial, policy, and just transition factors underscores the need for integrated analysis and optimization to develop strategies that are attractive and feasible to all stakeholders. It can do this by balancing economic viability, environmental imperatives, and support to impacted communities.

Embracing an Integrated Analysis

Traditional analytical approaches used in investment planning thus far are not well suited to inform the relationships between financing strategies, techno-economic considerations, and policy options. Generally, analyses performed for investment planning come in two opposite “flavors” that lead to siloing. On one end of the spectrum, there are system-wide high level national studies; and on the other there are detailed plant-level analyses. While each of these has their merits and appropriate uses, they fail to capture the holistic picture necessary for crafting actionable strategies, like those needed to create feasible and attractive investment plans, if they do not consider techno-economic, operational, and financial issues in tandem.

However, system-wide studies often only outline overarching goals and targets, and are either too complex for or lack the specificity needed for practical implementation, especially regarding financing the managed phase-out of coal plants. Conversely, plant-level analyses offer detailed insights on a viable managed phase-out strategy for one plant and its financials, but often overlook its broader implications on the grid and overall decarbonization efforts. There is no one-size-fits-all solution in decarbonizing a grid, and this typical fragmentation results in a gap between theoretical planning and real-world execution, hindering the execution of successful decarbonization strategies.

Enter the “middle of the road” approach — a portfolio-driven strategy that looks at the transition from coal to clean energy sources with a holistic perspective. This approach involves analyzing the aggregate impact of a portfolio of transitioned coal plants, rather than focusing solely on individual plants or on the entire system. The key with this approach is adjusting the boundaries of the analysis. By defining the right scope, stakeholders can more easily incorporate complex considerations of policy, finance, and operations into their decisions. This will lead to a more accurate depiction of the transition landscape than plant-level modeling and a set of more actionable insights than system-level modeling.

Application on the Indonesian Context

So how can Indonesia and other geographies benefit from a “middle of the road” integrated analysis? Transition planning and decision-making is, in essence, an optimization problem. Regulatory frameworks, financial mechanisms, operational conditions, and policy landscapes all play into the constraints of this optimization problem, and if not considered holistically, can lead to suboptimal, undesirable, or infeasible outcomes. Complicated system-wide models make this task difficult to achieve and implementing them only at plant-level analyses is insufficient.

Let’s take a piece-by-piece approach to how this integrated approach can be utilized.

• First, techno-economic considerations come into play. Options like repurposing and flexible operation retrofits or renewable energy can be considered to provide the most cost-effective pathway for the portfolio as a whole, with the aggregate impact to system costs being a key output metric.
• Secondly, grid operations would need to be satisfied for the system as a whole. This could be envisioned in the form of a grid dispatch model that optimizes the system cost while maintaining resource adequacy. For instance, if very expensive resources like diesel are needed to maintain reliability under a certain decision, then that decision is probably not optimal even if it is the cheapest for a single coal plant.
• Thirdly and equally important, the impact to corporate financials of the utility or plant owner will determine the financial feasibility of a pathway. For example, in Indonesia, PLN requires very cautious financial management to stay healthy, so any decision-making process must be carefully crafted to ensure that the solution is financially viable.
• Finally, policy sensitivities that could influence the techno-economic or financial results must be considered, informed by the specific context. For example:
  • Interaction of policies that could affect capital expenditure, power purchase agreement prices, financing needs, or costs of capital
  • Effect of changing the fossil fuel subsidies to energy end uses or to low-income electricity customers (e.g., in Indonesia it could mean establishing an unsubsidized coal price)
  • Modernizing the regulation of the utility’s revenue formulas (to improve cost recovery or incentivize clean energy)

Paving the Way Forward

To advance toward an energy future that keeps the lights on, lowers emissions and costs, maintains a reliable grid, and is feasible and attractive to implement, investment planning must go beyond techno-economics and consider the variety of factors that could affect the outcome of a coal-to-clean transition. By considering techno-economic, operational, financial, and policy factors in tandem, stakeholders can develop robust and implementable strategies for transitioning from coal to clean energy sources.

As Indonesia continues to refine its CIPP and other geographies embark on similar journeys, the importance of integrated analysis cannot be overstated. It is through such holistic approaches that we can pave the way toward a sustainable and resilient energy future. RMI’s work in integrating the effects of finance in techno-economic and operational aspects of transition planning, as well as its developed tools in analyzing coal phase-out and clean energy development could support further iterations of Indonesia’s CIPP and provide continuous assistance to utilities in other emerging markets as they navigate the complexities of an optimal coal-to-clean transition plan.