World Bank recommends Indonesia cut coal subsidies amid green transition

A local rides a motorbike on a road near geothermal power station unit (PLTP) owned by PT. Geo Dipa Energi (Persero) at Dieng mountain area in Banjarnegara, Central Java, Indonesia, November 15, 2020. REUTERS/Willy Kurniawan

JAKARTA, Dec 16 (Reuters) - The World Bank has urged Indonesia to drop a policy forcing miners to supply a set amount of subsidised coal to its state power company, which it said has encouraged the use of the dirty fuel in electricity generation.

The recommendation is part of a report released on Thursday intended to encourage more private investment in renewable energy in Indonesia to help the country achieve a target of becoming carbon neutral by 2060 or sooner

The Southeast Asian country is the biggest exporter of thermal coal globally and among the top ten green house gas emitters.

Indonesia has a so-called Domestic Market Obligation (DMO) policy whereby coal miners must supply 25% of annual production to state utility Perusahaan Listrik Negara (PLN), at a maximum price of $70 per tonne, well below current market prices.

The policy has effectively subsidised coal-fired power plants, the bank said.

"It incentivises more consumption of carbon, which sends distorted price signals, which discourages a transition away to cleaner sources of energy," Habib Rab, the bank's lead economist for Indonesia, told reporters, adding it also reduced private investment into renewables.

The bank also recommended changing rules on minimum local content requirements for energy projects because this had increased project costs and impeded competition. For solar panels, Indonesia has a 40% minimum local content requirement which is expected to be raised further in the future.

Under World Bank simulations, more private investment would ensure the energy transition had a greater impact on economic growth and job creation.

However, the bank also said poor and vulnerable households needed to be protected during key transition phases, when the government is expected to gradually raise power tariffs to give PLN the revenue to finance its investments.

PLN in September announced a plan to increase Indonesia's renewable power capacity to 25% of its energy mix by 2030 by no longer commissioning new coal projects and investing in solar and hydro power, among others.

Renewables currently make up around 12% of Indonesia's energy sources, while coal contributes roughly 60%.

Reporting by Gayatri Suroyo and Fransiska Nangoy Editing by Ed Davies

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