Financing the Energy Transition in Indonesia

In Partnership with Bloomberg Media Studios

In the race to net-zero, it’s easy to think of the energy transition as a zero-sum game: the green companies shunning fossil fuels versus the polluters setting back hard-won progress, pushing our global carbon budget to the brink.

But decarbonisation is not binary. In the shift toward a greener economy, the energy industry holds a crucial key. And for many conventionally coal-reliant industries, the path to net-zero requires a transition in phases.

“We cannot leave behind fossil fuel-based companies. We know they have an oversized impact – not only in terms of generating emissions, but also in reducing emissions once they successfully transition to lower-carbon pathways,” notes Kevin Tanuwidjaja, Executive Director of the Institutional Banking Group at DBS Indonesia. “The question then becomes: how do we meaningfully engage them while taking into account their existing operations?”

Many eyes are on Indonesia, the world’s biggest exporter of coal by weight.¹ In this emerging economy, where coal accounts for at least 60% of power generation capacity,² shedding coal in the short term is unfeasible – especially as domestic energy demand rises,³ and with thousands of livelihoods at stake. But forward-thinking companies like Indika Energy, a leading diversified investment company with a key focus on developing new sustainable businesses through its strategic investments, are increasingly balancing business growth with long-term sustainability.

"Indika Energy is in the process of transitioning to the path that is aligned with sustainability,” says Azis Armand, Vice President Director and Group CEO at Indika Energy. “Our journey started with the simple goal of providing the power to help Indonesia grow. Today, our goal remains the same, but we’ve taken the position that this commitment to national and human development must also be sustainable.”

With that, Indika Energy has started balancing its revenue streams between the coal and non-coal sectors by investing in low- and no-carbon initiatives spanning renewable energy, nature-based solutions and electric vehicles. It aims to diversify at least 50% of its revenue into non-coal streams by 2025 – an intermediate step toward its longer-term goal of achieving net-zero greenhouse gas emissions by 2050 or earlier.⁴ Indika Energy develops its sustainable portfolio through strategic investments in the areas of energy, green businesses, minerals, digital ventures, logistics and infrastructure.

 
Energizing Indonesia’s Green Transition

When exploring ways of bringing the Group another step closer to net-zero, Indika Energy’s subsidiary company, Indika Nature, found a highly localized solution through its asset company Jaya Bumi Paser (JBP). Tapping into Indonesia’s large forestry industry and abundance of biomass, JBP set its sights on developing a 23,590-hectare biomass plantation in East Kalimantan. Calliandra trees would be turned into wood pellets as a renewable fuel for biomass power plants – a cost-effective, interim way of reducing emissions before the eventual retirement of coal plants.⁵

But JBP faced several challenges. “For the technology to take off, a key hurdle was getting all stakeholders over the line: figuring out whether the market would be receptive to this product, the best practices in terms of producing the woodpile, as well as incentives for consumers to adopt this lower-carbon alternative,” explains Armand. “All these considerations require buy-in at multiple levels, along with significant amounts of investment. DBS was the right partner to help.”

Through DBS Indonesia’s $27.5 million loan facility, consisting of both short- and long-term funds, JBP was able to finance its vision of transforming wood pellets into a new and renewable biomass energy source. From mapping and planting to harvesting and production, JBP strives for each stage of the project to be in line with the gold standards of responsible forest management, like the FSC, PEFC and other leading certifications, ensuring the pellets are not only sustainably produced, but also optimized for energy production.

“Where Indonesia stands, transition finance is a hugely important theme. Indika Energy is a very good case study for other energy companies that are actively supporting Indonesia’s pledge to unconditionally reduce its national emissions by 29% by 2030. Hopefully the more we can replicate deals like this, the more we can transition as a nation," says Tanuwidjaja.

Accelerating Asia’s Sustainable Finance

As a major advocate for the energy transition, DBS has made its own commitment to achieving net-zero financed emissions by 2050. Its interim decarbonisation targets for 2030 span seven wide-ranging sectors across aviation, shipping, real estate, power and beyond, and represents one of the most comprehensive sets of decarbonisation targets in the global banking industry – as well as Southeast Asia’s first.

Beyond Indonesia, DBS is the first banking group to capture Asia’s growing demand for transition finance through the launch of its Sustainable and Transition Finance Framework and Taxonomy in mid-2021, with opportunities in six markets, notably Singapore, India, Indonesia and China. Its completed deals have since exceeded $52 billion and enabled more than 100 ESG-driven companies to finance the costly transition to progressively sustainable business models.

More of these are on the horizon. As Tanuwidjaja notes, “We can only achieve net-zero in two ways: either we stop banking carbon-intensive customers or we help them transition toward low carbon. We believe the latter is critical and essential, and definitely much more beneficial in the long run.”

And from a borrower’s perspective, the benefits of transition finance are just as clear. “The energy transition is not only limited to finding alternative sources of power, but taking care of all the stakeholders in the value chain: the employees, surrounding communities and upstream and downstream parties,” adds Armand. “Bringing together all these people and ensuring the accessibility, availability and affordability of low-carbon alternatives will be a crucial piece of the energy transition.”

Click here to find out more about DBS Catalysts of Sustainability

1. IEA
2. BloombergNEF
3. Bloomberg
4. Indika Energy
5. Nikkei