Coal is king – for the time being?
Coal domination in Indonesia is hard to dispute. The commodity is abundant in the country, accounts for 10% of total exports – making it a significant source of foreign exchange – and is seen as key to fuel growing energy demand and hence boost economic growth. As a major source of revenues for the producing provinces and, ultimately, the country itself, the coal industry is tightly linked to political elites at local and national levels. These realities make a transition away from coal politically challenging.
We met with two companies in the coal mining industry to discuss their exposure to, and management of, climate change-related risks and opportunities. The companies, whilst aware of the potential impacts to their businesses from a shift away from coal, are at the very early stages of developing a strategic response to these risks. We expressed our concerns about their strategy to diversify into the construction and operation of coal-fired power plants, which could bring about new stranded asset risks.
Our meetings confirmed our view that the Indonesian coal industry remains bullish on coal’s prospects domestically and across increasingly important export markets in Southeast Asia: Indonesia’s 2018-2027 electricity procurement plan is heavily reliant on coal, and coal demand across the ASEAN region is projected to rise steadily over the coming decades.
We challenged this view by stressing how the coal industry worldwide is facing ever stronger headwinds from mounting climate change concerns, both from policymakers and the public; from increasing challenges in securing financing, with over 100 major financial institutions having limited their financing to coal projects; and, critically, from the cost of renewable energy decreasing to record lows. Meanwhile, a number of countries in Southeast Asia have started to embrace a shift away from coal. In 2019, countries including Vietnam and Thailand announced sweeping energy development plans focusing on zeroemission domestic energy sources. The Indonesian government, itself a staunch supporter of coal, has begun to timidly signal shifts in energy policy.
We therefore strongly encouraged the companies to develop and implement a strategic response to climate change risk that is aligned with the goals of the Paris Agreement and can help position their businesses better against future carbon-related regulation, shifting energy policy positions and energy transition. Going forward, we will continue our engagement with both companies by leveraging the Climate Action 100+ collaboration.