News | Indonesia, Vietnam show ambition in coal phaseouts but face strong challenges in electricity reforms

Source: IHS Markit

18 November 2021 Max Tingyao Lin

Indonesia and Vietnam, two of the world's 10 largest coal-power generating nations, are winning praises from some energy experts for pledging to stop using electricity from the most carbon-intensive fossil fuel in less than three decades.

But others suggest the two Southeast Asian countries need to expedite renewable installations and retirement of coal plants, improve their power grids, and reform power markets to induce foreign investments to fulfil their promises—all of which could be daunting tasks.

During the COP26 climate summit earlier this month, Indonesia and Vietnam both signed the Global Coal to Clean Power Transition Statement that commits them to phase out unabated coal power in the 2040s.

UN scientists believe developing countries have to end coal power by 2040 to limit global warming to 1.5 degrees Celsius. Still, some reckon the two nations are taking an important step with their massive coal power fleets.

"Encouragingly, COP26 has seen some important new announcements. Vietnam and Indonesia became the first major emerging coal countries in Asia to commit to end coal power," London-based Ember said 17 November.

The think tank's data showed Indonesia was the No. 7 coal power nation globally, with 168 TWh generated in 2019. Vietnam ranked No. 9, with 141 TWh last year.

Seoul-based non-profit Solution for Our Climate described the two countries' pledges to phase out coal power as a major development, saying unabated coal plants there could soon become stranded assets.

Moreover, Vietnam promised to stop building and permitting unabated coal power plants, although those that have secured financing are still expected to be completed.

Ember said this commitment is significant as Vietnam has a pipeline of 19.4-GW coal power projects—the third largest in the world. With China withdrawing from overseas coal finance, some of the planned projects in Vietnam that had Chinese investment could be cancelled, according to the think tank.

The coal phaseout is supposed to help Vietnam reach net-zero emissions by 2050, but Prime Minister Nguyen Hong Dien stressed during COP26 that the target can only be reached with technology transfer and investment from rich nations.

Vietnam's renewables ambition
Following Vietnam's coal pact, state-owned news agency VNA reported Denmark-based Ørsted proposed to build a $13.6-billion offshore wind project with a capacity of 3.9 GW off Hai Phong.

But some experts said the country must upgrade its power grid after rapid expansion of solar power in recent quarters.

Supported by favorable feed-in tariffs, the installed solar capacity in Vietnam expanded by 16.5 GW in 2019-2020. This growth concentrated in southern Vietnam and resulted in curtailments, affecting income of the renewable projects.

Joo Yeow Lee, associate director of climate and sustainability at IHS Markit, said how quickly the issues can be resolved will be a key determinant to investor confidence in future Vietnamese renewable projects.

Also important is "the structure of future renewable power purchase agreements," Lee told Net-Zero Business Daily, suggesting that project developers would want a tariff mechanism that can share curtailment risks.

While Vietnam has opened up the power generation market to private investors, state-owned EVN still has a monopoly over electricity transmission and sales.

According to IHS Markit, the installed renewable capacity reached 21 GW in the country as of end-2020, or 25% of the total. Hydropower's share was 30% and coal's was 32%.

The Vietnamese government is still finalizing its eighth Power Development Planning (PDP8), and a draft released in February suggested a national target for renewable capacity of 45 GW by 2030 and 127 GW by 2045.

"As the bulk of the power will be procured by EVN, through mechanisms set by the government, the procurement method and procurement size will determine whether the [proposed] target can be met," Lee said.

An analysis on Vietnam's power market by IHS Markit in June concluded that the 2030 target can be met due to continued solar additions. However, the 2045 goal is forecast to be missed as wind power expansion is likely to fall short.

Indonesia's development
While Indonesia formed a partnership with the International Renewable Energy Agency to develop decarbonization pathways during COP26, observers said the country's determination in phasing out coal power appears weaker.

State-owned utility Perusahaan Listrik Negara (PLN) only committed to halting the construction of new coal plants after 2023, and the government predicted in the latest Nationally Determined Contribution that many coal plants still be operating in 2050 with carbon capture and storage (CCS) technology.

Rich in natural resources, Indonesia has included CCS in its abatement strategy as it hopes to continue producing and using fossil fuels. During the climate summit, state-owned energy firm Pertamina signed a Memorandum of Understanding with ExxonMobil to identify potential subsurface CO2 storage location in Indonesia. Indonesia, one of the world's top 10 GHG emitters, has set a net-zero target by 2060.

According to Indonesian energy firm MedcoEnergi, coal accounted for 31% of the country's power capacity mix as of end-2020, while natural gas made up 39%. Renewables' share was 11% when large hydropower projects were included.

Despite falling costs of solar and wind power equipment, Institute for Energy Economics and Financial Analysis (IEEFA) Energy Finance Analyst Elrika Hamdi said their penetration has been slow in Indonesia due to government policies.

"There has not been enough and consistent procurement of renewables… Solar and wind have not soared in Indonesia," Hamdi said. "The prices of coal and gas in Indonesia have been made artificially low by the government through policy intervention."

In October, Jakarta published a National Electricity Supply Business Plan to play the catch-up game, targeting an addition of 21 GW of renewables by 2030, including 14 GW of hydropower and geothermal plants, 4.7 GW of solar power, and 597 MW of wind. Of them, the government wants 11 GW to come online by 2025.

Indonesia plans to generate 23% of the country's electricity from renewables then, versus around 15%-16% last year.

IHS Markit has tracked only about 2 GW of capacity under construction as of last month, mostly from hydropower and geothermal. Lee said Indonesia will likely miss the 2025 target.

Hamdi also believed Indonesia will struggle to meet the goal, with PLN having locked itself into long-term contracts with coal plants on the main Java-Bali and Sumatera grids while domestic power demand has been lackluster.

"PLN needs to provide a playing field for the renewables to come in, but it's been really hard… Unless there's a willingness for PLN to either defer, delay, or cancel some fossil fuel contracts, and then proceed with aggressive procurement of renewables, renewable uptake in Indonesia will remain small," he added.

Challenges and opportunities
Indonesia and Vietnam are also expected to face challenges in retiring their coal plants, many built only in recent years.

Coal plants have normal lifespans of 40-50 years. However, IEEFA data shows that 65.6% of the installed coal power capacity in Indonesia and 83.8% in Vietnam are no more than 10 years old.

Asia Development Bank is seeking to team up with private investors to set up multi-billion-dollar funds under the Energy Transition Mechanism, which could eventually acquire half of the coal plants in Indonesia, Vietnam, and the Philippines for early retirement over the next 10-15 years and replace them with renewable power. But some have doubted the proposal's financial feasibility.

In a research report published in October, the Asia Investor Group on Climate Change (AIGCC) said the two countries can lower CO2 emissions and electrical system costs by canceling new coal plants and expediting renewable installations in the next decade.

Indonesia still expects to bring another 13.8 GW of coal power capacity online by 2030 under its national plan. Vietnam's draft PDP8 also points to a coal addition of 17 GW in the same timespan.

The AIGCC, whose members manage $26 trillion in assets, argued that the plans should be revised because the levelized cost of energy (LCOE) for solar has been cheaper than coal in the Association of Southeast Asian Nations since 2020 and is expected to fall more. The LCOE for onshore and offshore wind power are both expected to fall below that of coal by 2025, according to its research. Detailed figures for individual countries are not provided.

The AIGCC believes 30 GW of solar power and 4-12 GW of wind can economically enter the power system in Indonesia, and that 40 GW of solar and 41-45 GW of wind can do the same in Vietnam, by 2030.

To attract green investors for the aggressive expansion, it said the governments will need to establish a stable and transparent regulatory framework for renewables investment and work with multilateral organizations to align with international practices and retire coal plants.

Moreover, the AIGCC said Indonesia and Vietnam need to remove fossil fuels subsidies, provide non-discriminatory grid access to all generators, unbundle transmission and distribution assets from power sales, and allow tariffs to be independently set by future retailers.

"For many Asian markets, the discussion is now transitioning from ambition to implementation. Attracting private capital into green industries and infrastructure with strong domestic policy settings will be critical to achieving many countries' climate goals," AIGCC CEO Rebecca Mikula-Wright said 14 November.

_________________________________________________________________________________________________________________________________

Source: IHS Markit