In just two decades, Indonesia has evolved from a small Asian coal producer to the world’s largest thermal coal export market. But domestic demand for coal is also increasing and is expected to almost double by 2015 to120 m tonnes to supply up to 13 GW of new coal-fired generation. Consequently the government faces a future policy choice; either it adopts a ‘free coal market’ approach that places no major restrictions on exports that would enhance Indonesia’s economic and political influence in the region, or it adopts a more protectionist market approach that views coal resources as limited and to be used primarily for development of the domestic economy.
Some would argue there is a third choice that finds some middle ground between the two policy choices, and the current market approach tends to follow such a path. Indeed the new mining legislation that came into force in September 2009 is suggestive of this middle ground, with an emphasis on supporting foreign investment in the country’s mining industry. Yet recent developments suggest the government is leaning more towards domestic protectionism over free market exports.
In May the government announced a two-year moratorium on land use for mining purposes. From 23 September it will require all coal exports to be priced in line with the government-set Indonesian coal reference price (HBA) and the government is planning to set, in 2014, a coal quality threshold for exports.
For a country that is dependent on fossil fuels for generation, with coal forecast to contribute 60% by 2025, and with an economy that strongly benefits from mining, contributing 11.2% of GDP in 2010, Indonesia seemingly had an environmental epiphany in 2009 with the government promising to become a world leader in reducing greenhouse gas emissions and president Susilo Bambang Yudhoyono committing to a 26% reduction in greenhouse gas emissions below business-as-usual levels by 2020. Of this reduction, 14% will have to come from reducing emissions from deforestation or forest degradation (REDD+), with external investments in REDD+ expected to raise total emission reduction from 26% to 41%.
Perhaps unsurprisingly, with progress on ongoing international negotiations to agree rules for REDD+ being painfully slow, the Indonesian and Norwegian governments signed a letter of intent in May 2010 under which Norway would provide Indonesia with $1bn to assist it in setting up a REDD+ system that also addresses peatland emissions. And in May 2011 Indonesia formally implemented a moratorium that enforces a two-year suspension on all new concessions for conversion of peat and natural forest.
The moratorium effectively provides the government with a two-year window to determine longer-term policy with respect to forestation, and an opportunity to tidy up the current mining concession mess with numerous coal concession areas overlapping and barely 10% of all coal concessions registered as ‘clean and proper’ on the central government database.
One school of thought is that the government will not offer any new mining exploration concessions from April 2013, when the moratorium expires, while others believe it will introduce new environmental benchmarks and will revoke existing mining land permits that fail to meet the new standards. For all the uncertainty in the detail, what does appear certain is that in seeking to reinforce its environmental integrity the government will introduce some mining restrictions and the costs of coal production will almost certainty increase.
Of more concern to the coal industry is the government’s protection of its domestic supply. Under the 2009 Mining Law the government already sets a Domestic Market Obligation that stipulates the minimum production volume that may not be exported and thus is made available for domestic supply. Since its introduction the DMO has set at around 25%, but with the government currently in a fast-track coal-fired generation investment programme this level is expected to sharply increase in the medium-term with some forecasts that it will reach at least 30% by 2015.
But it seems the government wants more domestic market protection than that provided by the DMO. Earlier this year it proposed an export limit for all coal with a gross calorific value of 5600 kcal/kg or less from 2014. The proposal, if enforced, would have removed at least 60m tonnes of export business, and the government rightly backtracked in the face of strong industry opposition. Now, the government is drawing up a regulation to ban the export of coal below 5100 kcal/kg from 12 January 2014.
Collectively, the moratorium, together with its expected environmental constraints, and the further protection of domestic coal supply will push up Indonesian coal prices. Most forward curves already forecast the HBA at $130/t by 2015, compared to $117/t today, and these forecasts may well be conservative given the current and expected infrastructure constraints in South Africa and Australia that will increase export pressure on Indonesia. And the Indonesian government could argue that it is because of growing coal demand in Asia that it needs to protect its domestic supply market.
Of the two policy directions open to the government it would seem that further domestic market protection is the favoured approach; and it would be the wrong approach. The government cannot preach about environmental integrity through stricter forestry protection while at the same time supporting rapid growth in coal-fired generation.
Under government forecasts, gas and coal will provide 83% of generation capacity by 2025, with renewables providing just 13%. Yet Indonesia is almost as rich in renewable resources as it is in minerals. The country’s hydro potential is estimated at 75 GW, of which at least 50% can be economically exploited, with geothermal potential estimated at 19 GW and wind power at 10 GW. And, somewhat ironically, around 60% of Indonesia’s renewable potential is located in Kalimantan, which is also the coal producing centre of the country.
Indonesia has to develop both its mineral and renewable resources, and the effective export development of the former, particularly coal, can enable the progressive development of the country’s renewable potential. Just as the 2009 Mining Law opened up Indonesia’s mining sector to more foreign participation, bringing in both capital and expertise, the current moratorium provides the government with an opportunity to develop and enhance its environmental integrity.
A policy that protects domestic coal supply will both undermine renewable development and constrain economic growth. Consequently Indonesia has to look outwards, not inward, on coal.
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