Energy Talk Series VII| Overview of Sustainable Energy Financing: Challenges and Opportunities

Uploaded by Prakarsa Jaringan Cerdas Indonesia | 2 Maret 2021 Script Writer : Miftahus Salam

Editor : Nisma Islami Maharani & Cecilia Novia

Indonesia is committed to achieve of 23% Renewable Energy in 2025's National Energy Mix as part of to fulfill the National Energy Policy Target and Paris Agreement. To achieve this target, Renewable development focusing in renewable energy resources which are fast in development and construction also have the competitive prices (low cost production). To get maximum funding to develop renewable energy, we need to know the challenges and opportunities in finance sector of renewable energy.

From 2012 until now, the green and sustainable bond market have a rapid growth and transforming the debt capital markets. The growth is more than 1000% from 31 billion USD to 457 billon USD

This situation shows that renewable energy development get a lot of attention and support from finance sector. This situation happens because global pressure in climate change and the trend of green and sustainable living.

Indonesia should be able to take advantage of this situation. But in reality Indonesia can't take this advantage because of several reasons, i.e :

Indonesia's supply situation
Unsustainability of energy retail pricing
Policy inconsistency
Lack of infrastructure
Failure of Planning
Land acquisition problem
Technology-specific
PLN cost recovery

In the other side, Indonesia is still able to accelerate the renewable energy financing. This acceleration can happens with few things, i.e :

Establish a technically capable regulator
Ensure regulatory transparency
Provide for public participation
Remove BPP price caps & require reverse auctions
Require system planning on an economic basis
De-Risk projects in advance of tenders, e.g. land acquisition
Relax foreign investment & local content restrictions
Provide loan, subsidies and/or credit enhancements
Separate single buyer/system operator functions from PLN
Introduce new system planning tools
Introduce balanced PPAs in line with international practice
Streamline procurement & negotiations
Introduce modern grid management practices.

But we can't just look at the Indonesian side if in finance sector. We also need to look the global or Asia's green and sustainable bond landscape. We need to understand that in green and sustainable bond landscape there was market drivers and strategic challenges.

Market Drivers

Growth markets: energy transition, COVID response
More sustainable energy solutions advancing in key markets: Vietnam, India
Motivated DFIs (development finance institution)
Investors hungry for yield

Strategic Challenges

Not all early movers are seen as leaders
Too much focus on meeting minimum standards; too little attention to investor motivations
Short-term funding pressures can encourage short-term thinking about market positioning

The most important thing from investation is who is the investor. The investor can be :

Private Bank
Global Bank
Private Company
Etc.

Other than investor, There are multiple and ever expanding financing options.

To ensure the investor make the investment, we need to know what does the lead pack of green bond investors want.

Investor want

Focus is shifting away from project bonds to sustainability-linked bonds that align with transition
KPIs Expect more focus on Net Zero Asset Owners Alliance, Science-Based Targets, and transparent decarbonization pathways
Credible messaging about social impacts of clean energy choices

In Asia, one of country that has well-positioned to benefit from sustainable finance is India. India has done some changing in market fundamentals. Fundamental market changes will be followed by investment by investors. These changes are :

Clear policy direction
Scalable market opportunities
Grid upgrades

These changes Support innovative finance and investors that take market risk.

If Indonesia want to follow India, Indonesia need to do some of this action

Be Strategic - Because the market is evolving fast, smart issuers need to separate short-term funding pressures from strategies that will advantage long-term market positioning
Transition Matters - It’s not just about projects. The policy settings and regulatory performance will define the market opportunity RUPTLNDC
Build Reporting Capacity - Investors cannot be expected to take risk on bad data. Identify the KPIs that matter to investors and build credibility
De-Risk Transition With Grid Investments - Grid investments that improve resilience and reduce curtailment risk are well-aligned with system needs and investor goals
Governance Sets the Tone - Investors are allergic to greenwashing and have long memories!