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Indonesia’s gasification plans could be costly for budget and environment

Coal mining in South Kalimantan, Indonesia.

Coal mining in South Kalimantan, Indonesia.

  • Indonesia has broken ground on a $2.1 billion coal gasification plant, and plans to build 10 more.
  • In supporting coal gasification, Indonesian officials aim to bolster coal production even if export demand diminishes.
  • A new analysis by the Institute for Energy Economics and Financial Analysis concludes that coal gasification will require massive government subsidies to be commercially viable in Indonesia.
  • Advocates for renewable energy say any funds that might be used to support coal gasification would be better spent on supporting renewable energy projects.

In late January, Indonesian President Joko “Jokowi” Widodo participated in the groundbreaking ceremony for a new, $2.1 billion coal gasification plant in Tanjung Enim, South Sumatra. The project, a partnership between Indonesian state-owned coal mining company PT Tambang Batubara Bukit Asam (PTBA) and U.S.-based Air Products and Chemicals, aims to produce a type of liquid fuel called dimethyl ether (DME) from the country’s rich coal stocks, replacing imported liquefied petroleum gas (LPG).

Indonesia is currently one of the world’s top producers and exporters of thermal coal. Coal gasification is seen by proponents as a way to maintain coal production even if export demand decreases. It has also recently been designated a “new energy” source by Indonesia’s government.

Now, a new analysis from the Institute for Energy Economics and Financial Analysis (IEEFA) is raising concerns that the project would require massive subsidies from the government to meet its projections — and that the costs of what amounts to a new fossil fuel subsidy could be borne by Indonesian consumers and taxpayers.

Tanjung Bara coal terminal in East Kalimantan, Indonesia. Image by consigliere ivan via Flickr (CC BY 2.0).

Profit or loss

In January 2022, Indonesian officials announced they had agreed to a fixed price for DME of $378 per metric ton. However, the IEEFA’s analysis found that, assuming a conservative 15% return each for the coal supplier and the DME plant operator, their estimated price for DME would be $601/ton, a price that would, according to the IEEFA, be unprofitable.

The government’s $387/ton calculation assumes the gasification plant will be able to buy coal at $20/ton. However, the current average production cost is $42/ton. The IEEFA also estimates higher processing costs, and higher operator returns, than the government.

Andri Prasetiyo, program manager at Trend Asia, an Indonesian nonprofit that focuses on accelerating the transition to clean energy, said he’s concerned that the government may be putting out figures that make the DME project look more viable than it really is.

“There is a big difference between the government and the IEEFA figures,” he said, adding he finds the latter more realistic. “The government is setting a lower cost because they want to find a way for the coal industry to survive.”

Andri said the government may end up heavily subsidizing DME to ensure its commercial viability, creating a new, de facto fossil fuel subsidy.

Kelanis power station in South Kalimantan, Indonesia. Image by Dominik Vanyi via Unsplash.

Domestic coal used in gasification is already set to be exempted from government royalties, which Andri said amounts to an indirect subsidy. On top of that, he said, Indonesian consumers won’t opt for DME unless it’s cheaper than LPG, which is already widely used for cooking and other purposes. “It needs subsidies,” he said of DME. “Otherwise people choose LPG.”

Andri said he would rather see the government support renewables instead. “Why is the government giving subsidies for another form of dirty energy? Why doesn’t the government redirect the subsidies towards renewable energy?”

According to the IEEFA’s analysis, the only way DME would be market competitive is if LPG prices are high, more than $858/ton, a figure that has only happened for 6% of the last 20 years. Conversely, if prices fall, DME could become costly, quickly.

“When prices fall to the floor, somebody has to bear the losses, but when prices go through the roof, someone has to bear the profits,” Ghee Peh, an energy finance analyst at the IEEFA and author of the analysis, said in a telephone interview.

According to Peh, the way the project is set up means it’s likely the government and taxpayers would pay the costs, while private companies would reap any profits. He said he hopes the IEEFA’s analysis will be used by the government to reassess the viability of its DME plants.

“I hope there is a dialogue between all parties, to know the true cost of the DME,” Peh said, adding that they’ve found the government receptive. “They’re quite open to the fact that we’re putting numbers on the table. We’re just telling you the cost.”

With several more DME plants in various stages of planning, each with a life span of at least 20 years, there’s not much time for Indonesia to prevent the entrenchment of a long, costly, coal-dependent future.

“We need to give more attention to this issue,” Andri said, “because if the government successfully builds the project in South Sumatra, they plan to build more than 10 more.”

Banner image: Coal mining in South Kalimantan, Indonesia. Image by Dominik Vanyi via Unsplash.

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