Loopholes allow multilateral development banks to fund captive coal in Indonesia: Report

Oct 14, 2024

JAKARTA — Publicly funded multilateral development banks (MDBs) like the World Bank might finance a wave of “captive” coal expansion in climate-vulnerable countries vulnerable to climate change, which will speed up global warming.

A new report reveals that the World Bank’s private sector arm, the International Finance Corporation (IFC), has indirectly financed at least one captive coal project on Indonesia’s Obi Island via its financial intermediary client, Hana Bank Indonesia.

The IFC originally invested $5 million in 2007 to support Hana Bank Korea in establishing an Indonesian subsidiary. Then, in 2019, the IFC invested a further $15.36 million to increase its shareholding in Hana Bank Indonesia.

In April 2022, Hana Bank Indonesia, together with other banks such as DBS Singapore and UOB Singapore, provided a total of $530 million in term loans to PT Halmahera Jaya Feronikel (HJF), a subsidiary of nickel producer Harita Nickel.

This loan was used to pay off the company’s debts and to build the first phase of HJF’s nickel smelter on Obi Island, which will be powered by six captive coal units of 150 MW each.

This means that the IFC indirectly financed the smelter and the captive coal units, according to the report, recently published by Recourse, Trend Asia and Inclusive Development International.

Nickel, whose processing in Indonesia is often powered by captive coal, is a key element in the batteries that power EVs and energy storage systems. Captive coal also often powers other metals such as steel and aluminum, which are key resources for renewable energy projects, including solar and wind power.

An IFC spokesperson said that while Hana Bank Indonesia did finance the smelter, this did not automatically mean they also financed the captive coal-fired plant.

However, since the financing arrangements for captive coal units are not made distinct, the developer could use the funds allocated for the smelter to finance the coal unit, or, given that the funds are ultimately interchangeable, receive the funds to finance the smelter while funding the coal unit from its own account.

Therefore, the result is ultimately the same, which is that the indirect lending from the IFC enables the developer to construct the smelter and the captive coal units, the report says.

“At present, the World Bank Group is blind to the risks that captive coal poses to people and planet,” said Daniel Willis, finance campaigner at Recourse. “It would be a great irony if, in the name of financing the production of materials needed for the renewable energy transition, multilateral development banks also financed the rapid expansion of climate-busting captive coal.”

Another IFC financial intermediary, OCBC NISP, an Indonesian subsidiary of Singaporean commercial bank OCBC, has also funded a separate coal-powered nickel refinery project on Obi Island, in the South Halmahera region of North Maluku province.

In 2020, the IFC made a $200 million debt investment in OCBC NISP’s sustainability bond program, comprising green and gender bonds, for the purpose of on-lending to climate projects and women-owned small and midsize enterprises known as SMEs.

The IFC said that higher-risk projects, such as smelters, are not eligible for funding from the IFC’s loan.

But even if the IFC’s own funds are not specifically supporting the nickel refinery project, the investment is still freeing up funds for OCBC NISP to invest elsewhere in its climate portfolio, including in the smelter, the report pointed out.

“Ultimately, this makes the IFC’s investment in OCBC NISP a missed opportunity,” the report says. “While there may be some climate benefits from the subprojects supported by this investment, the IFC should also be using its leverage at the point of investment to encourage financial intermediaries to stop funding all forms of coal. If the IFC is unable to do this, it should commit to stop financing any financial intermediaries engaged in the expansion of coal (including captive coal).”

Like many other publicly funded MBDs, the World Bank has commitments to stop funding coal power projects and shift funds to renewable energy in a bid to tackle climate change.

So how does the IFC end up financing a captive coal project in Indonesia?

It’s because of loopholes in its 2023 commitment to stop funding new coal, which explicitly states that it does not include captive coal, the report says.

This means that IFC clients are free to support captive coal as they please.

“This is why DFI policies seeking to end support for coal should explicitly exclude financing for captive coal power units and for subprojects that are reliant on captive coal,” the report says.

The World Bank and other MDBs such as the Asian Development Bank (ADB) and Asian Infrastructure Investment Bank (AIIB) also published joint plans in June 2023 to stop funding coal mining or coal-fired power plants to align with the climate goals of the Paris Agreement, which is to limit global temperature rise to 1.5° Celsius (2.7° Fahrenheit).

But these joint commitments also don’t cover captive coal units for industrial use.

Elsewhere in the same document, MDBs state that projects related to the “manufacture of components for renewable energy” are considered “universally aligned,” therefore always eligible for MDB financing.

These loopholes allow MDBs like the World Bank to continue financing captive coal power that’s contributing to EV and renewable energy supply chains without technically breaking its climate commitments.

And this could spell disaster for global efforts to phase out coal, the single largest source of global temperature rise, said David Pred, executive director of Inclusive Development International.

“Captive coal power is still coal power, whatever it’s used for, and comes with the same human and environmental costs,” he said. “Neither the plants nor the projects that depend on them can be called green and they shouldn’t be getting backing, directly or indirectly, from the World Bank or any institution that is committed to sustainable development.”

Therefore, the report calls for financial institutions like the World Bank to have strong, robust policies that exclude support for all coal, including captive.

“Without strong policies at these MDBs, there remains a huge risk that public finance will support a new wave of investment in supposedly ‘green’ captive coal,” the report notes.

Failure to do so will ensure that countries that still heavily rely on coal, such as Indonesia, remain addicted to coal, the report says.

In recent years, Indonesia has seen a flurry of new captive coal plants coming online, aimed at supporting industrial processes such as metal smelting or cement production without feeding into the grid.

Captive coal currently represents around half of Indonesia’s total coal capacity.

And there are many more in the pipeline.

Indonesia is set to more than double its captive coal capacity from 14.2 gigawatts to 32.7 GW if the current expansion plans of public and private developers are followed through, according to data from Global Energy Monitor.

This, despite the government’s commitment to cap its coal power emissions and reduce coal capacity that’s connected to the grid from a planned 40.6 GW in 2030 to 24.6 GW in 2045. By 2050, Indonesia aims to completely phase out coal in its electricity grid.

The increase in captive coal capacity, however, will completely offset the reduction in grid-connected coal capacity, with Indonesia’s overall coal capacity set to increase until 2045, the report says.

The majority of these planned captive coal units will support Indonesia’s rapidly growing nickel processing industry. Indonesia is the world’s top nickel producer, as it holds the world’s largest nickel reserves.

The government is banking on its nickel reserves to become an EV powerhouse to capitalize on the growing EV demand.

Industrial parks such as that on Obi Island already account for more than 15% of Indonesia’s coal use, which increased by 33% in just one year between 2021 and 2022.

Companies have been getting permits from the government to build new captive coal plants despite a moratorium on new coal plants that the government announced in 2021.

This is because a 2022 regulation issued by President Joko Widodo stipulates that the coal moratorium contains loopholes, which allow for the development of new coal plants as long as they’re built to supply electricity to industries that will increase the added value of natural resources. This means that captive coal plants built for nickel and aluminum smelters are OK to be developed.

Furthermore, Indonesia’s financial regulator, the OJK, has also categorized captive coal projects that contribute to a low-carbon transition, such as those that power the processing of minerals used for EV and renewable energy, as “green” projects in its new sustainable investment taxonomy.

This move sends a signal to local commercial banks, which often have lenient coal policies, that OJK supports the financing of both captive coal projects and projects that are reliant on captive coal, the report notes. Furthermore, it suggests that captive coal can also be considered an eligible use of proceeds for funds earmarked for climate spending, such as those from climate finance or green bond projects, the report adds.

There should be no room at all for coal in Indonesia’s energy transition in order to meet the Paris Agreement climate goals, according to Novita Indri, energy campaigner at Trend Asia.

“An energy transition process that still leaves room for coal use is not appropriate or equitable,” she said. “More coal use will only bring us to the brink of failing to achieve the Paris Agreement goals and will exacerbate the damage and suffering of the environment and people living around Indonesia.”

Banner image: Captive coal power plant behind a school on Obi Island. Image courtesy of Esa Setiawan/Trend Asia.

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