Jakarta, August 26th, 2020
MIGA Board of Directors
OPEN LETTER: PLN LOAN GUARANTEE WARNING
We write regarding MIGA’s forthcoming consideration of a guarantee for a syndicated loan facility to Perusahaan Listrik Negara (PLN), the power sector state-owned enterprise in Indonesia (project ID 14660). We understand that the proceeds of the Facility will be used by PLN to make payments under existing Power Purchase Agreements to eligible Independent Power Producers (IPP). We understand that eligible IPPs do not include coal-fired or nuclear power stations and include a number of geothermal projects and one small hydropower project that are operational and were supported by Development Finance Institutions.
We write to urge the MIGA Board of Directors to refuse a guarantee for this syndicated loan due to the ongoing support at PLN for the development of new coal-fired power stations, and for ongoing financial liabilities at PLN linked to the continued pursuit of new coal-fired IPPs despite overcapacity in the power system1 and the growing dependency of PLN on Ministry of Finance subsidies.
We believe MIGA’s support for such a loan facility sends a poor signal to the financial markets about the bankability of PLN and its commitment to the energy transition. While we understand that the proceeds of this loan will not be going towards ongoing IPP payments for coal-fired power stations, the reality is that this loan will free up other resources to enable continued payments to coal IPPs and enable ongoing development of new and unnecessary coal-fired capacity.
A report by IEEFA in April 2020 outlined the scale of the crisis facing PLN, with the following key findings:
* The Ministry of Energy and PLN have consistently exaggerated demand growth forecasts, leading to unnecessary and costly investments in new generating capacity. The president director of PLN stated that this year, electricity demand is likely to fall by 9.7% due to the Covid-19 pandemic.
* This year, even before the pandemic, the reserve margin for PLN on Java was expected to be 41.5% according to Ministry of Energy’s Director General Rida Mulyana
* In 2021 IEEFA estimates that the subsidy from Indonesian government could jump to IDR 199.8 trillion ($7.2 billion)
* IEEFA expects power purchase payments to IPPs to be PLN’s largest operating expense by 2021. This includes a doubling of IPP payments since 2017.
* If economic growth in 2020 and 2021 is -.4% in 2020 as predicted by Sri Mulyani as a worst case, and if 2021 was just 4.3% growth as estimated by Moody’s, then the required subsidy from government to PLN would increase by IDR 20.5 trillion ($1.2 billion) over the period on top of the IDR 200.1 trillion (US12.1 billion) of subsidies that are already forecast to be paid by GOI.
Yet despite the financial crisis facing PLN, PLN is continuing to support the development of three new and unnecessary coal-fired power stations on the island of Java. The most imminent project to be approved and start construction is the massive 2 GW Java 9 and 10 projects others are the PLN-proposed Indramayu project (2 GW) and the Cirebon 3 project (1 GW). There is absolutely no justification for any of these projects to proceed, they will only add to ongoing overcapacity, debt and financial stress at PLN. Meanwhile, with its very strong preference for coal, PLN will instead increasingly stymie the energy transition and renewable energy progress, hindering reforms that actually pave the way for increased investment in renewable energy for Indonesia.
Furthermore, PLN continues to support the development of new coal-fired power stations in the islands of Sumatra, Sulawesi and Kalimantan, amongst others, with the Global Energy Monitor Global Coal Plant Tracker showing 20 GW of new coal in the pipeline for Indonesia.
If MIGA and the World Bank Group are serious about supporting the Paris Agreement, then it should adopt the same test as many private financial institutions are adopting: no new financing should be provided to any entity developing new coal fired power stations, and any entity receiving financing must have a plan to phase out support for operating coal by 2030 for OECD countries and 2040 for the rest of the world. The only exception to this should be provision of project finance for specific renewable energy projects. A guarantee such as the one envisioned by MIGA does not meet these criteria, indeed as noted above it indicates MIGA’s ongoing comfort in providing support to a utility that continues to develop new coal-fired power stations and continues to stymie the development of new renewable energy in the country.
We urge you to reject a guarantee for this loan facility and instead send a strong signal to financial markets and PLN that MIGA and the World Bank group will be unable to support continued investment in PLN until the company has committed to 1). Stop developing new coal power plants and 2). Has developed a transition action plan for phasing out operating coal by 2040 towards clean and reliable renewable energy.
Indonesia environmental and social justice organizations signing this letter are:
2. Trend Asia
3. Enter Nusantara
5. JATAM Kalimantan Timur
6. Yayasan Lembaga Bantuan Hukum Indonesia
7. LBH Semarang
8. Auriga Nusantara
9. Kanopi Hijau Indonesia
10. Yayasan Srikandi Lestari
11. Anak Padi
12. Koalisi Perempuan Indonesia, Wilayah Sumatera Utara 13. Atap Hijau Indonesia
14. Cahaya Perempuan WCC Bengkulu
15. Gerakan Cinta Desa
16. LBH Pekanbaru
17. FITRA Riau
18. LBH Padang
19. Fossil Free Palembang
20. WALHI Jawa Barat
21. WALHI Kalimantan Selatan
22. Pena Masyarakat
23. Sajogyo Institute
24. Greenpeace Indonesia
25. Transparency International Indonesia
26. LBH Bandung
27. LBH Yogyakarta
28. Koalisi Rakyat Untuk Keadilan Perikanan
30. 350.org Indonesia
31. Eksekutif Nasional WALHI
32. Indonesia Corruption Watch
33. KRuHA Indonesia
34. Koaksi Indonesia
35. Perkumpulan Prakarsa
36. Koalisi ResponsiBank Indonesia
38. Perkumpulan Pembela Lingkungan Hidup (P2LH) Aceh
39. Lembaga Tiga Beradik Jambi
40. Hutan Kita Institut (HaKI)
1 With the take-or-pay system, PLN has an obligation to pay IPP for a predetermined amount of electricity capacity, even though the electricity is not used. This could increase PLN's operational burden which would lead to a deterioration in PLN's finances and therefore the need for additional subsidies.
2 The Java 9 and 10 CPP projects received various protests from the community, for example see:
3 Recently, Wahana Lingkungan Hidup Indonesia or WALHI sent a letter of objection to the environmental permit for Java 9 & 10 project to the Governor of Banten: https://www.marketforces.org.au/wp- content/uploads/2020/08/20200803-WALHI-Objection-Letter-Jawa-9-10.pdf
4 For example see BNP Paribas’ coal policy at https://group.bnpparibas/en/press-release/bnp-paribas-announces- timeframe-complete-coal-exit-raises-financing-targets-renewable-energies,