Addicted to coal

As the rest of the world moves away from fossil fuels, Indonesia is reacting to a drop in its coal exports by ramping up local production, putting the country’s health, environment and economy in danger

Nithin Coca
June 13, 2016
Addicted to coal
Testing: an Indonesian worker takes a piece of coal as a sample at the Bukit Asam coal mine in South Sumatra, Indonesia

Last year was rough for one of Indonesia’s top exports: coal. Just 12 months earlier, the country was the world’s biggest exporter of the fossil fuel, shipping 410 megatonnes of coal to its power-hungry neighbours, most notably India and China. This created an economic windfall, but with global prices falling and Beijing shifting to domestically produced fuels and clean energy, Indonesia’s coal production is in turmoil. Shipments to China alone were down 49% last year and the outlook for 2016 is even worse. Already, coal-mining companies are asking for public subsidies or shutting down operations entirely.

“The short-term outlook for coal is fairly bleak,” said Hiran Bhadra, global mining industry leader for KPMG. “I honestly do not know when the gross oversupply [of coal] will be sucked out of the market.”

The Indonesian government has come up with a simple, but potentially devastating response: replace this foreign demand with local consumption. It is planning the construction of 117 new coal-fired plants throughout the country, which would create 10,000MW in total power-generation capacity. The contrast is clear – while much of the world is shifting away from fossil fuels, Indonesia is doubling down. This plan would make the archipelagic nation one of the last places in the world pushing forward on coal energy, to the alarm of local environmental activists.

“If the government continues down this path of kowtowing to coal interests our beautiful country will be turned into a poisoned wasteland, producing a resource that fewer and fewer want to buy,” said Arif Fiyanto, an anti-coal campaigner for Greenpeace Indonesia.

Coal mining

The cost of the Indonesian coal boom can be seen in the primary coal-mining region, the province of East Kalimantan, situated on the Indonesian side of the richly forested island of Borneo. To remain a step ahead of competitors in Australia and India, Indonesian producers have relied on cheap, non-unionised labour – often drawing migrant workers from other parts of the country – and used environmentally degrading open-air, strip-mining techniques. This has poisoned waterways across the province, destroyed vast agricultural regions and means the regional capital, Samarinda, is highly prone to flooding due to increased water runoff from the surrounding tree-stripped hills. 

If the government scheme goes ahead, it would spread this destructive practice to other regions, advancing the country’s historical reliance on natural resources for economic development despite evidence that this single-minded focus leaves it highly vulnerable to changing commodity prices and shifts in global demand.

“During the resource boom, the growth of investment and skill-based manufacturing stagnated [in Indonesia], resulting in a process of de facto de-industrialisation,” said Indonesian academic Zulfan Tadjoeddin, a natural resources expert at the University of Western Sydney. “Diversification away from resource dependence has not yet taken place.”

Additionally, a study by Harvard University released last year found that the health impacts of the government’s coal push could result in an additional 21,200 lives lost every year, on top of the estimated 6,500 premature deaths caused by pollution from existing coal plants in the country.

“The human health cost from this rising coal pollution should be considered when making choices about Indonesia’s energy future,” said Shannon Koplitz, lead researcher for the project at a press conference to release the report. “Planned coal expansion could significantly increase pollution levels across Indonesia.”

This coal push is closely tied to President Joko Widodo’s ongoing infrastructure drive. As with public infrastructure, energy access remains a major issue in Indonesia. According to the Renewable Energy Policy Network’s 2015 Global Status Report, 22% of Indonesians – or nearly 50 million people – lack reliable access to electricity. Coal is the obvious choice to fill that gap.

“If a developing country like Indonesia wants to reach [a] higher electrification rate… we will need to continue looking at coal,” Indonesian Coal Mining Association chief Bob Kamandanu told consultancy firm Oxford Business Group. “Coal is still the cheapest resource for power generation.”

Increasing coal production could help the country achieve a greater degree of energy independence. Currently, half of Indonesia’s energy comes from oil, and it has swiftly become one of the world’s major oil importers. Replacing even some of that imported oil with domestically produced coal would, the government argues, help increase energy security.

There are economic risks, however, to further outlays on coal. A joint report released in March by NGOs including the Sierra Club, Greenpeace and CoalSwarm estimates that, on current projections, almost $1 trillion in global coal investment could become stranded if expected action on climate emissions, as agreed upon by Indonesia and 191 other countries at last year’s Paris Climate Talks, goes forward.

Meanwhile, the increasing cost parity of renewables – which are gaining traction worldwide – means the more environmentally friendly energy source will continue to eat into coal’s share of electricity generation. This is, partly, what has gouged Indonesia’s export market.

“Worldwide, additions of wind and photovoltaic [solar] capacity exceeded coal in 2015 by a factor of three to two,” said CoalSwarm director Ted Nace. “As costs of renewables continue to fall, the move away from coal is likely to accelerate, and both investors and business leaders need to reduce their exposure to coal as quickly as possible.”

Coal industry

Unfortunately, Indonesia is not yet part of this renewables wave, according to Carl Pope, a global energy expert and principal advisor at Inside Straight Strategies. “Renewables in the rest of Asia, including Indonesia, cost twice as much as they do in either India [or] China,” he said. “They cost more because they don’t have the right policy context.”

There is another facet that contributes to Indonesia’s pro-coal stance. These policies are closely intertwined with the cosy, often-corrupt connections between the coal industry and politicians and bureaucrats. “It is common knowledge in Indonesia that politicians at all levels have ties with extractive industries, from palm oil to coal mining,” said Greenpeace’s Fiyanto.

In the 2014 presidential election, two of the front runners in the first round, Prabowo Subianto and Aburizal Bakrie, were multimillionaires whose companies both had substantial holdings in coal mining. There is a strong personal incentive for many politicians, at various levels of the government, to sustain the coal industry, despite its detrimental impact on the national economy and environment.

This has led the country’s most trusted institution, the Corruption Eradication Commission (KPK), to investigate the sector. Earlier this year, it found that 3,900 coal mining companies are not “clean and clear”, and recommended that the relevant provincial governments revoke their permits, giving a glimmer of hope that coal’s stranglehold can be broken.

“Corruption is a chronic problem in the Indonesian natural resources industry, including in coal,” said Fiyanto. “The KPK must make corruption in the natural resources sector its top priority.” Greenpeace wants the central government to step in if regional governments fail to act on the KPK’s recommendation.

Indonesia does not have to look far to see how to move away from coal, as several of its neighbours are already on this path. Earlier this year, Vietnam announced that it was abandoning its previously ambitious coal power plant plans in favour of “accelerated investment in renewable energy”. This was followed by the news that India’s coal imports dropped by 35% last year due to massive oversupply and a faster than expected expansion in renewables.

India’s shift was particularly surprising, as the country faces similar challenges to Indonesia. It is also a densely populated country with a growing economy and huge energy demands, yet it is moving toward renewables quicker than anyone expected, driven by proactive renewables investment by the government.

Indonesia – with its extensive geothermal, solar, micro-hydro and biomass potential – could make such a shift even faster than India. But this seems highly unlikely for the time being in a country where coal resolutely remains king.

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