Just Energy Transition Partnerships: Early Successes and Challenges in Indonesia and South Africa

The principle of a “just transition” is anchored in the 2015 Paris Agreement. But only in recent years has the principle been fully recognized as an enabler and accelerator of power decarbonization efforts by integrating measures that aim to mitigate the direct, indirect, and induced adverse impacts of the transition on workers and communities that depend on the fossil fuel value chain.

Just Energy Transition Partnerships (JETPs) are a novel plurilateral and long-term approach to supporting climate actions in carbon-intensive developing countries at risk of a carbon lock-in. Funded by the International Partners Group (IPG), JETPs are large finance packages to support country-led just power sector decarbonization strategies that reflect enhanced climate ambition and related national development priorities, including expanding energy access and developing low-carbon energy value chains. The launches of the US$8.5 billion JETP for South Africa in 2021 and the US$20.0 billion JETP for Indonesia in 2022 provided momentum.

JETPs have attracted broad stakeholder interest and been hailed as a blueprint for long-term and collaborative climate action. In a new paper, we explore key elements of these first two JETPs to identify innovations and good practices for future JETPs and to highlight risks that may obstruct the transition progress. This note summarizes the paper's finding.

JETPs offer a chance to significantly accelerate progress to net zero

Indonesia and South Africa are highly vulnerable to the effects of climate change, but their cumulative carbon dioxide emissions from fossil fuels and industry represent just 0.9 percent and 1.2 percent, respectively, of the world’s total since the beginning of industrialization. Yet, both countries are highly dependent on coal for their power supply, and demand dynamics put them at risk of a carbon lock-in with potentially significant increases in carbon emissions by mid-century.

The power sector decarbonization strategies to be supported by the JETPs in both countries are a step-change in the speed and scope of their ambition to phase-out coal and deploy renewable energy sources. South Africa aims at installing 6 gigawatts of renewable electricity capacity—equivalent to the capacity it installed over a decade—every year for at least the next 10 years. That would enable the country to decommission two-thirds of its unreliable and dilapidated coal assets, which have largely reached the end of their useful economic life, by 2035. If implemented as planned, South Africa’s JETP will allow the country to reach its lowest emission level as included in its enhanced Nationally Determined Contribution (NDC).

Indonesia aims to achieve early peaking of CO2 emission by 2030 and climate neutrality of its power sector by 2050, 10 years ahead of its original target included in its NDC by ramping up its renewable electricity generation in its generation mix to a share of 34 percent by 2030 from 23 percent today, retiring its relatively young coal fleet (with average age of 12 years) while overcoming overcapacity in its main grid.

Early successes of these first JETPs will be important to maintain momentum, garner longer-term support from the IPG, and mobilize interest from other countries.

Both South Africa and Indonesia face challenges related to their limited transition readiness

The legacies of fossil fuel-based power systems and modest renewable-energy deployment, significant regulatory gaps, fragile sector governance, and a fragmented climate finance landscape present key challenges that could obstruct progress of the transition in South Africa and Indonesia. Obstacles in areas of political economy, policy alignment, investment, and finance strategy, and just transition could further delay progress. Here are some of the challenges:

1. Countries must balance cost efficiency with speed, scope, and a just transition

Even if South Africa’s just transition measures are fully implemented, the risk of loss in embedded energy is high, and with it the risks of opposition to the transition and stalled progress.

In Mpumalanga province of South Africa, where coal mines and coal fired power plants are concentrated, the local coal value chain in some districts represents up to 40 percent of value addition and more than 50 percent of employment. The measures that aim at mitigating direct and indirect adverse impacts of the transition in the province are in line with good practices of other regions that transitioned from coal, such as in Poland and Germany. But just transition efforts will be challenged given the general high level of unemployment of 36 percent and inequality in South Africa. The absorption of coal workers with relatively low skills level but with above average salaries into the general work force will be highly challenging. In addition, the coal transitions in Poland and Germany took decades to accomplish. In contrast, South Africa aims to achieve the bulk of the transition within just 15 years. Both Poland and Germany faced massive opposition during initial efforts to implement the phaseout within a much-compressed period.

Targeted incentives to develop renewables where coal assets are decommissioned can mitigate the adverse impacts of the transition, create jobs commensurate to those lost, and help to bridge potential delays in the transition due to long lead times in upgrading power grids to absorb large-scale variable energy sources. Countries might need to prioritize renewable power plant development where grid assets are available, rather than at locations with the countries’ best resource potential. On the flip side, necessary grid infrastructure is available where coal assets are closed, supporting a redeployment of workers in the development of renewables.

2. South Africa could learn from Indonesia’s JETP, which is innovative in its financing and private capital mobilization

Public funding of the IPG is only seed funding to get the decades-long transformation on the way; heavy lifting must come from private finance.

South Africa and Indonesia both emphasize that the success of their JETPs will depend on the scale and availability of concessional finance, including grants from relevant sources. Notwithstanding the importance of concessional resources, it is also the financing instruments used and the deployment of concessional funding which will determine the effectiveness of JETP financing in unlocking private capital investments for the transition. The share of grants and the scale of concessional financing alone will not determine whether the plan can be fully financed and implemented. 

South Africa intends to deploy the 4 percent of the IPG’s funding in grants for just transition efforts, studies, and policy advisory services. Public finance of IPG partners is expected to mobilize additional multilateral and bilateral development finance institution funding at a ratio of 1:1.17. The funds will be deployed in strategic investments to remove grid constraints and improve the enabling environment, which, in turn, are expected to mobilize private capital investments in renewables. Since the publication of South Africa’s JETP Investment Plan, the government noted that without grants for blended finance solutions, it would be difficult for the country to mobilize private finance required.

In contrast, Indonesia’s JETP showcases innovative approaches to private finance mobilization. These include a commitment by private-sector financial institutions, who are strongly committed to align their financing with a net zero future, to deliver 50 percent of the funding pledge, bringing a progressive dynamic to the partnership. With their funding commitment, private financial institutions become more than just financing partners; they become knowledge partners. This is also urgently needed. The route from financing pledge to actual financing of the coal phaseout starts by establishing strong standards for transition finance that eliminate greenwashing risks and are both acceptable to market participants and practical.

To deliver the volume of finance required, Indonesia’s JETP must deliver greater leverage than one-dollar of private-sector funding for one-dollar of public funding. Here again, the Indonesian JETP offers an innovation. JETP partners recognize the central role of MDBs as mobilizers of finance and make use of the Energy Transition Mechanism platform established through Indonesia’s collaboration with the ADB. It is a scalable, public-private catalytic financing facility that aggregates contributions from traditional and new donors to offer blended finance solutions for the transition. This funding platform creates a new quality of catalyzing private financing.

Yet, the strategy to refinance coal plants with a blended finance package with a lower cost of capital that allows for an early retirement of coal assets will be challenging in the current high interest rate environment compared to low interest rates that prevailed during the time the majority of the plants were established. The amount of grants required to retire a substantial share of coal assets might not be forthcoming.

3. Both Indonesia and South Africa will be challenged to attract private sector investments in renewables at competitive tariffs

The JETPs in South Africa and Indonesia aim to supercharge the countries’ transitions and accelerate the deployment of renewables through independent renewable energy independent power plants. Yet, in both countries the business ecosystems for private investments in renewables are still nascent and investors face significant off-taker risks. Both countries will be challenged to attract the scale of private sector investments required or will only be able to do so at high premiums commensurate to their investment risk. To date, tariffs for renewable energy IPPs in Indonesia are the highest compared to its Southeast Asian and South Asian peers,

Countries such as Pakistan or Vietnam have demonstrated that it is possible to rapidly attract private investment in the renewables sector despite sector challenges similar to those in South Africa and Indonesia. However, tariffs commensurate with investor risk were far higher than in countries that introduced competition in the market and underwent sector governance and tariff reforms before the transition. When Vietnam reduced its feed-in tariff to levels equivalent to other countries in Southeast Asia, it failed to attract investors. Hence, there is another tradeoff between the speed of the transition and cost efficiency given the unfinished reform agenda.

There is no way around sector reforms. Basic rules of energy transition cannot be circumvented. Countries need to get electricity tariffs right, price carbon emissions adequately, establish sector governance effectively to overcome fragile financial viability of the vertically integrated utilities. These sector reforms take time.  

An interim guarantee mechanisms could be adopted to keep realized tariffs low and the transition affordable. A good practice example is India’s payment guarantee scheme through its Solar Energy Corporation of India.

4. Much of the discussion about the JETPs focuses the supply-side transition from coal-based to renewables-based power systems. But the just energy transition is much more—it’s a long-term whole-in-economy transition

The imperative of cost efficiency requires that coal phaseout is buttressed with well-established decarbonization mega-strategies for the energy sector to achieve net zero by 2050, notably, enhancing energy conservation and energy efficiency, electrifying the transport sector, decarbonizing hard-to-abate sectors through indirect electrification, and abating emissions with carbon capture and sequestration. All these strategies need to be deployed, and energy conservation and efficiency continue to be the first fuel.

The JETP plans should transparently disclose how the coal phaseout aligns with other energy and environment policies. 

Beyond alignment of energy and environment policies, cost efficiency and speed of the transition depend on broad-based policy alignment across different sectors and levels of government. This is particularly important in Indonesia, given the overcapacity in its main grid and need for vast amount of concessional finance. To rapidly increase the share of renewables in its energy mix, Indonesia will need a big demand push for renewables such as through accelerating a parallel shift to a green hydrogen economy.

The institutional set-up for the JETPs’ design and implementation will determine their effective policy alignment. The leadership and governance structure of South Africa’s JETP is designed to involve key stakeholders and foster cross-sectoral policy alignment, and, hence, to support a whole-in-economy transition. In contrast, the leadership of the JETP in Indonesia is more narrowly driven by energy and finance ministries. While focus group discussions were held in Indonesia, no institutionalized committee ensures the cross departmental policy alignment.

5. Long-term commitment to the rapid transition will only be realized with support from the population and businesses in recipient countries

The energy transitions are projected to deliver a boost to both Indonesia’s and South Africa’s low-carbon growth and create quality green jobs. In South Africa, in particular, the JETP offers an opportunity to overcome the country’s current power crisis and restart its economy, which has been stifled by loadshedding, which reached an unprecedented 200 days in 2022.

Yet, the transition is also likely to drive up energy prices and add to inflationary pressures. With projected rate hikes and increased electricity tariffs driven by large-scale investments, heightened carbon taxes, and the elimination of subsidies, the South African and Indonesian governments risk opposition to the transition from their populations and businesses. Without efforts that mitigate direct adverse impacts on workers and coal-dependent communities, opposition from voters could derail the process.

The MDBs and the IMF have decades of experience in supporting power sector and tariff reforms in developing countries. They have a large toolbox of good practices in tariff reforms, including strategic awareness-raising and communication campaigns and cash transfer programs to cushion the effects on low-income households.

Good governance requires the disclosure of JETPs’ full costs and (co-)benefits along with an in-depth assessment of risks; this is crucial in ensuring value for money. Transparent and sustained communication about the benefits, costs, and risks that meaningfully engages with all affected groups and stakeholders throughout the process will make the difference whether the partnership continues to garner support from the population and businesses.

6. Indonesia’s and South Africa’s long-term commitments to their JETP will depend on the IPG’s effective support to the implementation of their economic diversification strategies and targeted establishment of local clean energy value

Indonesia and South Africa with their rich endowment in critical minerals are well placed to benefit from the global green transition. Both countries aim at maximizing local value addition to spur export led growth. Their integration into green global value chains can help to compensate for their lost export and tax revenues from their coal value chains and contribute to the creation of quality jobs.

Indonesia and South Africa aim to leverage their JETPs to support their local clean energy value chains. Proposed measures to develop the value chains must be backed with adequate funding, which to date is not the case for South Africa. More than 85 percent of financing needed for the developing new energy vehicles and green hydrogen value chains, as included in the included in the JETP Investment for South Africa, remain unfunded. Partners from the IPG should demonstrate earnest efforts to support their partners also in this endeavor, not only the just coal transition part.

They could do it by developing strong trade partnerships and technology cooperation. This will strengthen recipient countries’ long-term commitment to their JETPs.

While the JETPs for South Africa and Indonesia appear to deliver blueprints in their specific contexts, we find barriers, risks, and gaps that raise questions as to whether the goals set out in these plans can be delivered at the pace and scale planned. Given uncertainties relating to numerous key issues in the JETPs for both South Africa and Indonesia, it becomes even more imperative to closely track and transparently disclose progress. The actual strengths of these partnerships may well be that they lay the foundation for extreme teamwork across countries and facilitate the form of collaboration and mutual learning that is required to address climate change.