Indonesia’s Captive Coal Dilemma: Funding the Transition to Cleaner Energy
Two workers navigate the opening phase of an alumina refinery in Ketapan, western Indonesian Borneo, in 2016 (Image: Xinhua / Imago / Alamy)
In recent years, international funding efforts have surged to support Indonesia’s decarbonisation. The Just Energy Transition Partnership (JETP), initiated in 2022, attracted pledges amounting to USD 20 billion from developed nations, a figure that has continued to grow despite the United States pulling back from its commitments.
However, when it comes to transitioning away from captive coal power, the funding is noticeably lacking. Captive coal power, heavily used in Indonesia’s industrial sector, consists of off-grid power stations fueled by coal—posing a significant challenge to the country’s decarbonisation goals.
The barriers to funding extend beyond mere availability. The lack of conducive policies, effective financing mechanisms, and attractive investment opportunities are critical hurdles. Blended finance, which combines public and concessional funding with commercial capital, emerges as a potential solution to mitigate investment risks and draw in private investors. Yet, challenges related to policy and project readiness continue to deter blended finance in Indonesia.
The Expanding Financial Gap
Experts have emphasized the need to understand Indonesia’s substantial financing gap to effectively address its industrial decarbonisation. According to a 2025 report by JETP, the captive power sector will demand an estimated USD 31 billion between 2025 and 2030, escalating to USD 92 billion by 2050.
Just Energy Transition Partnerships (JETP)
These partnerships assist developing nations in transitioning to cleaner energy sources, with a focus on equitable solutions. Initial funding contributors include countries such as Canada, Denmark, and Germany. The first JETP was dedicated to South Africa at COP26 in 2021. Since then, similar partnerships have been formed with Indonesia, Vietnam, and Senegal.
The nickel industry holds the largest investment requirement, averaging USD 2.5 billion annually, nearly half of the total capital expenditure by 2030. The aluminium sector follows, requiring over USD 1 billion annually, comprising 14% of the cumulative investment need. Other industries such as pulp and paper, mining, and steel complete the picture.
As of February 2026, JETP’s commitments had reached USD 21.8 billion, primarily focusing on the grid power sector. This reflects an increase of USD 1.8 billion since 2022. However, JETP’s initial roadmap failed to address captive coal restrictions, and even later plans overlooked coal plants essential for national strategic projects—exempt from new coal plant regulations. A report by the Centre for Research on Energy and Clean Air highlights that this exclusion underestimates the true power demand.
JETP acknowledges that its commitments are insufficient: “As the JETP funds represent only a fraction of the total investment needs, realising the outlook depends on mobilising much greater funding from diverse sources of capital,” it stated in the 2025 report. Publicly disclosed state funding estimates for the transition from captive coal remain absent, leaving private investment and other mechanisms to fill the gap.
Exploring Funding Solutions
International institutions like the Asian Development Bank (ADB) and International Finance Corporation (IFC) play crucial roles in supporting Indonesia’s energy transition. These entities back diverse projects from renewable energy deployment to agroforestry loans.
Domestically, capital sources such as Danantara Indonesia, a sovereign wealth fund established in 2025, are emerging. Danantara collaborates with Indonesia’s state-owned electricity utility, PLN, the Japan Bank for International Cooperation (JBIC), and Chinese battery materials producer GEM on various initiatives.
While these initiatives don’t directly target captive coal retirement, Danantara identifies renewable energy as a “priority investment sector”. Nonetheless, Tiza Mafira, director of the non-profit Climate Policy Initiative, identifies obstacles such as limited public financing and a lack of investment-ready projects, hindering blended finance. She cites ADB’s Energy Transition Mechanism (ETM) project for early retirement of the Cirebon-1 coal plant as a model for blending concessional and commercial capital, but the government later reversed the decision due to the plant’s long remaining lifespan.
Ongoing Challenges to Overcome
The technical complexity of transition projects poses a significant barrier to financing industrial decarbonisation. Factors like location, heat requirements, and renewable energy access are crucial for investors to consider, states Mafira. Simpler projects, such as those in textiles or ones with large unused land for solar panels, present easier financing opportunities.
If the government has determined what the industrial decarbonisation roadmap will look like and what incentives will be provided, foreign institutions will be much more confident about investing
– Adinova Fauri, researcher, Center for Strategic and International Studies
However, mining operations and economic zones on remote islands face challenges due to limited space and renewable energy capacity, increasing financing costs. Mafira suggests that once a project’s technical details are clear, financing generally follows if investors are confident in its execution potential.
Adinova Fauri from the Center for Strategic and International Studies underscores the necessity for clear policy direction. “Many foreign institutions are interested in financing this transition, but there needs to be legal and policy certainty from the government,” he told Dialogue Earth.
A 2025 Climate Policy Initiative report identifies barriers like state fossil fuel spending and regulatory uncertainty, highlighting the mismatch between long-term decarbonisation needs and shorter-term funding horizons. Recommendations include strengthening sustainable finance taxonomy, developing transition finance frameworks, and improving climate-related disclosures. Mafira concludes that while there is ample global interest in investing in Indonesia’s decarbonisation, the investment climate must be made genuinely attractive.
Original Story at www.reccessary.com