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The gasification plans for Indonesia could prove costly for the environment and budget.

The gasification plans for Indonesia could prove costly for the environment and budget.

Indonesias gasification plans could be costly for budget and environment
  • Indonesia has opened a $2.1 million coal gasification plant. Ten more are planned.
  • Officials in Indonesia are supporting coal gasification and aiming to increase coal production despite a decrease in export demand.
  • A new analysis by Institute for Energy Economics and Financial Analysis concluded that coal gasification in Indonesia will require huge government subsidies to become commercially viable.
  • Renewable energy advocates argue that any funds that could be used to support coal-gasification would be better spent supporting renewable energy projects.

Late January saw the participation of Indonesia’s President Joko Jokowi Widodo in the It was a groundbreaking ceremonyA new $2.1 billion coal gasification facility in Tanjung Enim, South Sumatra. The project is a partnership of PT Tambang Batubara Bukit Asam (an Indonesian state-owned mining company) and U.S.-based Air Products and Chemicals. The goal is to produce a type a liquid fuel called dimethyl ether, which will replace imported liquefied petroleum gaz (LPG).

Indonesia is currently one of the world’s top producers and exporters of thermal coal. Proponents view coal gasification as a way of maintaining coal production, even if the export demand for it decreases. It has also recently been designated a “new energy” source by Indonesia’s government.

The new version is now available AnalyseThe Institute for Energy Economics and Financial Analysis, (IEEFA), raises concerns about the project’s need for massive government subsidies to meet its projections. Additionally, the cost of what amounts essentially a new fossil fuel subsidy could be borne entirely by Indonesian taxpayers and customers.

Tanjung Bara coal terminal in East Kalimantan, Indonesia. Image by consigliere Ivan via Flickr (CC BY 2.0).

Profit or loss

In January 2022, Indonesian officials declared that they had agreed on a fixed price for DME at $378 per ton. However, the IEEFA’s analysis found that, assuming a conservative 15% return each for the coal supplier and the DME plant operator, their estimated price for DME would be $601/ton, a price that would, according to the IEEFA, be unprofitable.

The government’s $387/ton calculation assumes the gasification plant will be able to buy coal at $20/ton. However, the current average production costs are $42/ton. The IEEFA estimates that processing costs and operator returns are higher than those of the government.

Andri Prasetiyo (program manager at Trend Asia), an Indonesian nonprofit that works to accelerate the transition to clean energies, expressed concern that the government may be making the DME project seem more viable than it is.

He said that there is a significant difference between the IEEFA and government figures. He also stated that he believes the latter is more realistic. Because they want the coal industry to survive, the government is setting a lower price.

Andri stated that the government could end up heavily subsidizing DME in order to ensure its commercial viability. This would create a new, de facto subsidy for fossil fuels.

Kelanis power station, South Kalimantan in Indonesia. Dominik vanyi via Unsplash.

Andri stated that indirect subsidies are being provided by government royalties for domestic coal used in gasification. On top of that, he said, Indonesian consumers won’t opt for DME unless it’s cheaper than LPG, which is already widely used for cooking and other purposes. “It needs subsidies,” he said of DME. “Otherwise people choose LPG.

Andri said that he would prefer for the government to support renewables. “Why is the government giving subsidies for another form of dirty energy? Why doesn’t the government redirect the subsidies towards renewable energy?”

According to IEEFAs analysis DME will not be competitive if LPG costs are high, above $858/ton. This is a figure that has only occurred for 6% in the last 20 year. DME could quickly become expensive, however, if prices drop.

Ghee Peh, an energy finance analyst at IEEFA and author, said that prices fall to the floor. But, prices rise to the sky, and someone has to shoulder the losses.

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According to Peh, the way the project is set up means it’s likely the government and taxpayers would pay the costs, while private companies would reap any profits. He expressed hope that the government will use the IEEFAs analysis to reassess the viability its DME plant.

I hope there is a dialogue between all parties, to know the true cost of the DME, Peh said, adding that they’ve found the government receptive. They are open to the fact they have numbers on the table. We’re not telling you how much it will cost.

Indonesia is in a hurry to build many more DME plants, each with a lifetime of at least 20+ years.

Andri stated that we need to pay more attention to this matter because, if South Sumatra’s government succeeds in building the project, they plan to add 10 more.

Banner image: Coal mining in South Kalimantan, Indonesia. Dominik vanyi via Unsplash.

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