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Greenflation causes Indonesia and Vietnam to backtrack on renewables

Written by Nikkei Asia Published on   4 mins read

In Malaysia, a weak currency is squeezing financing for decarbonization efforts.

Indonesia’s recent lowering of its renewable energy targets highlights Southeast Asia’s decarbonization challenges, with inflation and financing concerns growing across the region, from Malaysia to Vietnam.

In January, Indonesia’s National Energy Council revealed a plan to trim the target for renewables’ portion in the country’s primary energy mix to 17–19% in 2025 and 19–21% by 2030. The original target that was supposed to have kicked in next year was 23%. While setting a more ambitious goal of 70% renewables through 2060, council executives argued that the original target was simply out of reach. Currently, renewables account for only 13% of Indonesia’s energy sources.

The council’s revelation came not long after Indonesia’s energy ministry said implementing a carbon tax would be further delayed to 2026; the tax was originally set to take effect in 2022.

The cuts indicate the government’s “weak commitment” to energy transition and “rampant interest to preserve fossil fuels,” the Institute for Essential Services Reform (IESR), an Indonesian think tank, said in a news release.

Behind the backtracking is a growing concern over the rising cost of going green.

“Transitioning toward green energy must be done super carefully,” incoming vice president Gibran Rakabuming, son of President Joko “Jokowi” Widodo, said during an election debate in January. “We should not burden the public, the poor people with expensive R&D and transition [costs].”

The comment raised concerns over “greenflation,” which arises when fossil fuels are discarded in favor of more expensive low-carbon technologies.

Malaysia’s energy transition efforts could also be hobbled by greenflation as they hinge on imported parts and components, which are being made more expensive by the stubbornly weak ringgit, Malaysian deputy prime minister Fadillah Yusof told Nikkei Asia.

Malaysia has embarked on a rather ambitious approach to decarbonization, rolling out ten flagship projects alongside a “National Energy Transition Roadmap (NETR)” that is expected to generate an estimated investment of over MYR 25 billion (USD 5.5 billion) by 2030. The construction of renewable energy zones is included in the NETR.

However, Fadillah, who also holds the energy transition portfolio, warned that financing green technologies could become more challenging as investors “may be wary of the risks associated with emerging technologies and the potential impact of greenflation.”

Nik Nazmi, minister of environment and climate change, said Malaysia would need significant investments in clean energy, energy efficiency and sustainable infrastructure to reach its net zero goal by 2050. However, “the ministry realizes that the weaker currency would make it more expensive to import technologies, equipment and expertise needed for large-scale decarbonization projects.”

“Greenflation concerns in Southeast Asia are real,” said Prakash Sharma, vice president of multi-commodity research at energy consultancy Wood Mackenzie, noting that the macro environment has changed significantly during the past three years. “Rising cost of capital, supply chain pressures, cost inflation has affected [the] cost of renewable technologies quite significantly,” he told Nikkei Asia, adding that the situation makes delays in renewable uptakes “unavoidable.”

Oxford Economics, in a February report, said Southeast Asia’s major economies would suffer from a rise in energy costs in the initial phase of decarbonization as carbon taxes are levied on fossil fuels, coupled with higher metal and mineral prices as demand increases for electric vehicle production and other green investments.

“Our modeling suggests the shift to net zero will initially bring adverse economic impacts through higher energy costs, but benefits will accrue eventually from the positive spillovers from investment,” the report says, adding that net energy exporters Indonesia and Malaysia are “likely to face the biggest upfront costs.”

In Singapore, Oxford Economics said the initial cost of decarbonization will be limited. Still, the city-state’s National Climate Change Secretariat (NCCS) has said Singapore faces constraints in looking for green energy sources, since the island nation’s tiny footprint keeps it from tapping sources on a wider scale.

Last month, Singapore’s government also announced a requirement for all flights departing the country to use sustainable aviation fuel starting in 2026, despite concerns of it being more expensive than traditional jet fuel, which could prompt airlines to pass on higher costs to flyers.

In Vietnam, coal imports soared 217% in January year-on-year, according to the customs office’s newspaper, despite the country being Southeast Asia’s leader in terms of solar and wind power capacity with over 19 gigawatts, more than double the capacity of the rest of the region.

With clean energy costs rising, so is Vietnam’s use of fossil fuels. The country is laboring to stave off electricity blackouts, which hit factories like Samsung Electronics last year. Also slowing down the green transition is the difficulty of adding solar and wind projects to an overloaded grid, especially since Hanoi ended an initiative to pay high fees to power generators.

Southeast Asia is one of the most vulnerable regions to climate change. It faces rising sea levels, floods, tropical cyclones, heat waves and droughts. Yet, despite the governments’ net zero carbon pledges and flagship policies like the Thai government’s EV subsidy schemes, nations have been painfully slow in transitioning to renewable energy.

Now questions are being raised over the fate of the Just Energy Transition Partnership, a climate financing scheme backed by developed nations seeking to mobilize a combined $35.5 billion to support Indonesia’s and Vietnam’s energy transitions. The scheme has drawn criticism as it has yet to materialize after being announced in 2022.

Fabby Tumiwa, executive director of the IESR think tank, said the backtracking on renewables would bring Jakarta further from its JETP goal of boosting green sources’ portion of the energy mix to at least 34% by 2030. The lower targets, Tumiwa said, “raise doubts among investors and the international communities on the credibility of Indonesia’s energy transition policy.”

This article first appeared on Nikkei Asia. It has been republished here as part of 36Kr’s ongoing partnership with Nikkei.


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