SHARM EL-SHEIKH, Egypt (Reuters Breakingviews) – A promise of emissions-cutting cash for Indonesia, from foreign sources, is an unambiguous reason to cheer at a time when the global outlook is miserable. The question is how loudly.
Delegates at the world’s premier climate change conference, COP27, spent most of this year’s gathering in Egypt’s Sharm el-Sheikh fretting that geopolitical stresses and economic strains would lead to reduced decarbonisation ambitions. The outcome of the two-week-long summit remains in the balance, but one key area offers grounds for optimism.
Arguably the biggest issue in climate finance is how to direct more of the $470 trillion in global financial assets towards the developing world, which the International Energy Agency estimates will supply most of the growth in global emissions over the next two decades.
Unless annual foreign investment in those regions rises 10-fold to $1 trillion by 2030, climate expert Nicholas Stern reckons global warming may rise above the 1.5 degrees Celsius threshold, beyond which much more severe climate change could occur. That’s where the private sector comes in, and why Just Energy Transition Partnerships (JETPs) are a potential game changer.
The first, announced last year at COP26 in Glasgow, saw Britain, the European Union, the United States and multilateral development banks pledge $8.5 billion to South Africa to help the fossil fuel-reliant state retire its coal power plants early. Indonesia, the second JETP, is a bigger deal in multiple ways.
President Joko Widodo has committed to closing down coal power plants that make Indonesia the ninth-largest carbon dioxide emitter, to ensure his country’s power sector emissions peak by 2030. To support that effort, a group of rich nations are promising $10 billion over three years. More significantly, seven international banks, including HSBC,, Citigroup and Bank of America, have promised to match that amount.
On the face of it, the numbers look like token gestures. According to the IEA, Indonesia needs to increase annual spending on renewable energy alone from $2 billion in 2020 to $38 billion by 2026. The annual bill through 2030 for the whole transition, which includes retiring coal plants and compensating redundant workers, could exceed $150 billion, based on Indonesia’s own estimates.
Yet this understates the ambition of the Glasgow Financial Alliance for Net Zero, the umbrella body set up by ex-Bank of England boss Mark Carney last year ahead of COP26 to compel companies to set decarbonisation targets. GFANZ now encompasses lenders and insurers representing around $150 trillion of assets, and its vision is for Indonesia to use the $10 billion of public funds as a hook to secure multiples of that number in private capital. International Finance Corporation figures show that “concessional” finance extended by public bodies at below-market rates can often attract 10 times its own level in private finance.
The exact level of Indonesian public-private leverage hinges on how much of the initial $10 billion is grants and cheap loans. Right now, neither Jakarta nor its foreign lenders are saying. But bankers at COP27 have a rough idea how it might get deployed.
One of the main reasons investors avoid funding early-stage emerging market infrastructure projects is the difficulties of identifying the right ones and negotiating permits. A big chunk of the $10 billion could go towards streamlining these processes, emboldening investors to take the plunge. Or the cash could protect international lenders against losses if the Indonesian rupiah crashes or if governments are unable to pay agreed prices for electricity generated by new solar plants.
Unlike South Africa, which took almost a year to turn its JETP into a plan, Indonesia starts with some ready-made projects including one looking at shuttering 660 megawatts of coal capacity. The idea is to incentivise owner Cirebon Electric Power to close a key plant 15 years early. The details aren’t yet confirmed but cheap loans from the Asian Development Bank could, in schemes like these, provide 20% of the capital to pay off the project’s senior debt, with private sector money supplying the rest. The combination of cheaper financing and higher leverage would allow the company to make the same return in a shorter time.
Still, it’s noticeable that many of the private banks involved are those with a large local presence: there is a strong incentive for companies to support official initiatives in a country where business is often state-led. The real goal is to get GFANZ members who don’t already invest in Indonesia to play ball.
Lenders will have to look past a lot of problems. The JETP branding and public cash are powerful incentives, but beneath it all Indonesia is a country ranked a lowly 96 on Transparency International’s 2021 Corruption Perceptions Index. The GFANZ working group will need to ensure Jakarta is sticking to its side of the decarbonisation bargain. It will also need to work out how to compensate up to 465,000 Indonesian coal workers.
Banks will also have to convince their own green-minded investors to get comfortable with new projects operating dirty coal plants. The short-term returns could be attractive, but there are easier and cleaner returns to be made by lending elsewhere. The United States, for example, is offering hefty subsidies to renewable energy companies.
JETPs are a great idea. But flagship schemes to get investment into developing countries can be scarring experiences: just ask China, which lent $1 trillion over a decade via its Belt and Road initiative, and wound up with tens of billions of dollars of losses. Indonesia, South Africa and potential future JETP countries Vietnam, Senegal and India do at least have strong incentives to make their decarbonisation schemes work. But sceptical suppliers of foreign capital will still need to look beyond the shiny sticker.
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Indonesia’s Just Energy Transition Partnership (JETP) will mobilise $20 billion over the next three to five years, world leaders announced at a meeting of G20 leaders in Bali on Nov. 15.
The partnership will be a long-term agreement between Indonesia and the International Partners Group, comprising the United States and Japan as joint leads, along with the UK, Germany, France, the European Union, Canada, Italy, Norway and Denmark.
The JETP will involve $10 billion of public money, mobilised by IPG members, and at least $10 billion of private finance via a newly formed working group of the Glasgow Financial Alliance for Net Zero. The GFANZ group includes Bank of America, Citigroup, Deutsche Bank, HSBC, Macquarie, Mitsubishi UFJ Financial Group and Standard Chartered.
“With collective ambition by all parties, including using public financing catalytically to crowd in private finance, the initial $10 billion commitment by the public sector has the potential to generate significantly more in private finance,” GFANZ said in a statement.
(Editing by Una Galani and Oliver Taslic)
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