Why are banks involved in Java 9 and 10?

There are significant concerns about public and private banks’ consideration of finance to Java 9 and 10 (Banten Suralaya), a 2,000 MW coal-fired power project in Banten province in Indonesia. Groups from Korea, Southeast Asia including Indonesia and Singapore, and environmental finance groups from across the world sent a letter to DBS’ CEO on 26 February 2019 questioning DBS’ association with the project. Many of the project’s known risks are noted below.

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This 2,000 MW project is expected to use ultrasupercritical technology.

Location: Banten Province

Estimated cost: USD $3.5 billion

Financial close targeted: 2020

Status: Announced

Completion expected: 2024

Who’s involved?

  • Indonesia Power (Indonesia’s state utility – PLN Subsidiary) 51%
  • Barito Pacific 49%
  • Special Purpose Vehicle: PT Indo Raya Tenaga
  • Financial: DBS
  • Legal – Sponsors: Shearman & Sterling
  • DBS
  • Export Import Bank of Korea (KEXIM)
  • Korea Development Bank
  • Korea Trade Insurance Corporation (K-SURE)
  • Hana Bank of South Korea
  • Siemens Bank
  • Bank Mandiri
  • Bank Negara Indonesia
  • Exim Bank of Indonesia
  • Maybank
  • CIMB
  • Bank of China
  • Doosan Heavy Industries and Hutama Karya
  • Siemens (Control system)

Risks associated with the project

Wasted electricity, wasted investment

If built, Java 9 and 10 will do little to help the average Indonesian get access to electricity and will lead to wasted electrical capacity.

The Java-Bali grid, where this project is located, already has some of the highest rates of electrification in the country (99.99%).This has raised questions about whether extra power stations are needed.

According to the latest energy plan (RUPTL), the current reserve margin (excess capacity as a percentage of expected peak demand) in the Java-Bali grid is 28%.Although the Java-Bali grid is required to meet 80% of the Indonesian demand for power, around 40% of the electricity produced was not being used, according to statements by PLN’s CEO in November 2017.

So Java 9 and 10 could be producing electricity that would go largely unused.

PLN’s poor financial health

It’s also clear that this overcapacity could significantly harm PLN’s already poor financial health.

Because of the take-or-pay clauses in power purchase contracts, PLN has been criticised as potentially paying for unnecessary electricity. Even more farcical, as renewable energy becomes cheaper than coal power, (which the Carbon Tracker initiative estimates could happen for solar in Indonesia in less than 10 years) PLN faces the prospect of having to make these astronomical payments to coal power projects although the power sourced from them is more expensive.

PLN is facing financial pressure, even now. In April 2018, the Institute for Energy Economics and Financial Analysis released a further report showing that without government subsidies, PLN would have lost US$2.3 billion in 2016 and US$1.47 billion in 2017.

PLN’s financial viability has serious consequences for the Indonesian state budget.

Negative effect of the Indonesian Rupiah crisis

The weakness of the Indonesian currency also has prompted concerns about the viability of these planned coal projects.

In September 2018, the Indonesian government planned to delay approximately 15GW of coal power projects because of its widening current account deficit. Java 9 and 10 were originally slated to be part of this delay. It is unclear whether the project completion date has been shifted as a result.

Coal power, PLN and corruption in Indonesia

Coal power projects in Indonesia have been recently implicated in corruption.

As stated by Global Witness campaigner Adam McGibbon, “Not only is coal increasingly risky, climate-destroying and bad for air pollution, there is now a huge and underestimated corruption risk.

In May 2019, Hyundai Engineering & Construction admitted to bribing an Indonesian politician in relation to the Cirebon coal-fired power plant construction project in West Java.

In July 2018, the Indonesian Corruption Eradication Commission (KPK) arrested Eni Mulani Saragih (Eni), the deputy chair of the House of Representatives (DPR) Energy Commission and Johanes Bidisutrisno Kotjo (Kotjo). Eni was alleged to have received IDR$4.8 billion from Kotjo, to facilitate a company in which Kotjo was a shareholder to become the sponsor of a coal power project in Indonesia.  PLN subsidiary, Pembangkitan Jawa-Bali (PJB) was also one of the sponsors of the coal power project.

Community concerns and legal challenges

Java 9 and 10 construction site

There is significant pre-existing coal power capacity in the area. Banten Suralaya itself is a 3,400 MW subcritical coal power complex with a proposed 2,000 MW to be added to it.

The area around the project is an industrial area with several coal power projects:

  • 660 MW Banten Serang supercritical coal power project
  • 600 MW Banten Labuan coal power project
  • 945 MW Banten Lontar subcritical coal power project
  • 120 MW Merak Energi coal power project
  • 200 MW PT Krakatau Posco Energy coal power project
  • 400 MW PT Krakatau Daya Listrik coal power project
  • 300 MW PT Dian Swastika Sentosa coal power project
  • 40 MW Cilegon PTIP power station to power the Indorama petrochemical plant
  • 300 MW Asahimas Chemical coal power project
  • 1,982 MW Jawa 7 supercritical coal power plant (projected in service in 2020)

The issues with these projects will only be exacerbated by Java 9 and 10.

Java 9 and 10 also form a part of pending legal action in Indonesia.  In December 2018, the Coalition for the Clean Air Initiative registered their intention to lodge a lawsuit against the President and the governor of Jakarta for failing to address air pollution levels in Jakarta. Pending projects such as Java 9 and 10 have been cited as part of the problem. A 2017 Greenpeace report models the negative impact of the coal-fired power plants that operate within 100 kilometres of Jakarta, and include the impact of pending projects.

What should banks and investors do?

Given these concerns, banks contemplating lending to this project should be considering the risks of Java 9 and 10 as an investment. Investors in the banks or sponsors of Java 9 and 10 should similarly be questioning these companies about the risks inherent in this project.