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DRAFT MARKET READINESS PROPOSAL: INDONESIA

Draft Market Readiness Proposal (MRP) Presentation

Country: Indonesia Responsible agency: Indonesia National Council on

Climate Change (DNPI) Date of submission: May 13, 2013

DRAFT MARKET READINESS PROPOSAL: INDONESIA 2

Overview MRP Objective(s) and Focus

MRP Development Process

Market Readiness Proposal 1. Policy Context and the Big Picture

2. MRP Target Areas: Assessment and Rationale

3. Core Technical and Institutional Readiness Components, including Regulatory Components

4. Planning for a Market-based Instrument

5. Organization, Communication, Consultation and Engagement

6. Schedule and Budget

Outline of Presentation


Overview


MRP Objectives

The Long Term Goal: The establishment of new market mechanisms or market based instruments to scale-up mitigation actions in Indonesia based on country-specific conditions and international carbon market situations.

The Objectives: To understand and determine the type and scope of appropriate market-based instruments; to prepare supporting draft regulation as needed; to design and establish market infrastructures; to build required capacity of participating institutions and individuals.

The objectives will be achieved through inclusive process to secure political support and commitment; and to enhance knowledge, competence, and intellectual contribution of key line ministries and other stakeholders.

MRP Focus Core Technical and Institutional Readiness Components in Power and Industry Sectors:

• Emission profile and baseline setting

• MRV system development and piloting

Planning for a Market-based Instrument:

• Technical assessment and policy consultation on market instrument

• Piloting the instrument



Indonesia’s MRP has been developed from intensive and extensive consultation process involving key stakeholders to ensure consensus and commitment for future implementation.


Market Readiness Proposal


1. Policy Context and the Big Picture

Archipelago of 13,700 islands, of which 2,000 islands inhabited and 81% of total area is sea: enourmous challenges to support people’s mobility and goods distribution.

237.6 million population with >50% population live in Java island and electrification ratio 73%: efficiency vs equality issues in development.

Geographical and demographical conditions present unique climate challenges.



Source: WRI

2011 GDP: USD846 billion with income per capita of USD3,500

Average economic growth: 6%

Energy elasticity: >1

Economic and GHG emissions growth are still coupled.



Source: Second National Communication

Historical Projection

2005 GHG emissions: 1,791 MtCO2e

2020 emissions projected to reach 2,950 MtCO2e

LUCF and peat major sources of emission until 2020

Energy-related emissions will be the fastest-growing



Source: BAPPENAS

Emissions reduction commitment in 2009 devised from LULUCF and energy mix policies, setting targets of 26% with own resources and additional 15% with international support, by 2020 against BAU scenario.

Key emissions reduction areas:

1. Sustainable peat land management 2. Reduction of deforestation and land

degradation 3. Carbon sequestration development 4. Promoting energy saving 5. Alternative and renewable energy

resource development 6. Solid and liquid waste reduction 7. Shift to low-emission transport

modes

Reduction beyond unilateral and supported NAMAs is possible to be credited.



The 26-41% targets have been translated into an indicative list of activities in the Presidential Regulation on National Action Plan for GHG Emission Reduction (the RAN-GRK).

Sector

Emission Reduction

(MtCO2eq.) Activities Responsible

Ministry(ies) Unilateral Supported

Forestry

and Peat-

land

672 1,039

Forest and land fire control, network system management and water

management, forestry and land rehabilitation, HTO (Industrial Plantation

Forest), HKm (Community Forest), illegal logging eradication, deforestation

prevention, community empowerment, etc.

MoFor, MoPW

Agriculture 8 11 Introduction of low emission paddy varieties, irrigation water efficiency,

organic fertilizer use, land use optimization, waste utilization, etc.

MoA, MoPW

Energy and

Transport 38 56

Bio-fuel use, engines with higher fuel efficiency standard, improvement in

TDM (Transportation Demand Management), quality improvement of

public transport and road, demand side management, energy efficiency,

renewable energy development, post-mining replanting, etc.

MEMR, MoT,

MoF, MoT,

MoSOE, DKI,

MoPW

Industry 1 5

Process modification and clean technology implementation, energy

management in energy-intensive industries e.g. cement, ozone-depleting

substances eradication, etc.

MoI

Waste 48 78 Waste management by 3R, and urban integrated waste water

management

MoPW

TOTAL 767 1,189



Various policies have been issued to support GHG emissions reduction targets and low-carbon development.

Policy Name Targeted Outcome Applicability

Presidential Regulation 61/2011

National Action Plan on GHG Emissions Reduction (the RAN-GRK)

26%-41% emissions reduction below 2020 BAU

Various sectors


National GHG Inventory Periodic updated information of emissions and emissions reduction

All sectors


National Energy Policy Optimal energy mix (17% new and renewable energy) and <1 energy elasticity in 2025

Energy sector

Government Regulation 70/2009

Energy Conservation Energy management and conservation Energy users >6000 TOE/y

MoI Regulation 12/2012

Roadmap of CO2 Emission Reduction in Cement Industry

2% voluntary and 3% mandatory reduction in 2011-2015 and 2016-2020 below 2009 emission intensity

All cement producers

MEMR Regulation 4/2012

Electricity Purchasing Price of Small-medium Renewable Power Plant and Excess Power

Energy security and encourage renewable energy development

Power sector

MEMR Regulation 14/2012

Energy Management Clear guideline on energy conservation options and management

Energy users >6000 TOE/y


1. Policy Context and the Big Picture: Role of Market Instruments

Market instruments, e.g. CDM, proved to be effective to spur emissions reduc-tion by industries.

• Total 212 CDM projects approved by Indonesia DNA,

• 128 projects registered, mostly of methane avoidance projects, and

• 28 CDM projects issued their CERs worth 7.9 million ton CO2, mostly of geothermal.

• 11 VCS projects have been developed, including 1 REDD+ project in Central Kalimantan,

• Six of them have already produced 2,2 million ton VER.

Clean Development Mechanism

Increasing opportunity from voluntary carbon market


Indonesia highly considers further utilization of market instruments.

Multilateral carbon market

Bilateral and regional carbon

market

Domestic carbon market

• Depends on UNFCCC negotiation outcomes

• Need balance between robust and flexible methodology

• Require international environment and SD criteria

• Between Indonesia and developing countries, e.g. JCM with Japan

• Could be an international carbon offset scheme

• Start from facilitating voluntary offset (the NCS)

• Developed and traded in Indonesia

• Simple yet robust

• Could be linked to wider mechanisms



Market-based approaches are to enhance the effectiveness of climate change/low carbon development policies.

Development of market readiness, including market elements and infrastructure, aimed to encourage adoption of market approaches to scale-up implementation of existing/future mitigation activities.


Building readiness

Map policies and actors

Develop market elements

Develop market infrastructure

Establishing instruments

Options identification, assessment and review

Policy consultation

Test instruments

Establish regulatory framework

Implementation

Start with domestic instrument

Continuous review and improvement

Seek international linkage

Vision of Market Instrument Development


Due to uncertainties in UNFCCC-led market mechanism(s), discussions and works on market mechanisms at bilateral and regional levels becoming more impor-tant to scale-up mitigation actions in developing countries.


• Bilateral agreement is under finalization

• A mechanism to support emission reduction targets in both countries and strengthen bilateral investment cooperation

• 57 Feasibility Studies already conducted by Japan in Indonesia

Joint Crediting Mechanism Indonesia - Japan

• An initiative led by New Zealand

• Provide a discussion forum for possible market cooperation among Asia Pacific countries

Asia – Pacific Carbon Market Roundtable


The Nusantara Carbon Scheme (NCS) is an example of market element now under development.

NCS is a domestic voluntary GHG reduction certification and registration scheme based on SNI ISO 14064/14065.


Current works on NCS:

• Website is online, http://skn.dnpi.go.id

• Second draft of the general rules & requirement and SD guidelines online for public comments

• Six methodologies on RE, EE, A/R, Waste, are now under review

• Guidelines for V/V and LULUCF projects under drafting

• Pilot project is planned this year

• Provide GHG offset to interested parties

• Raise market awareness

• Encourage local capacity improvement in carbon management

• When linked to wider policy, e.g. sector-wide, will serve as “damper” as well as bridging with ER activities outside the sector

Envisioned role of NCS:



11 GoI initiatives of low-carbon development identified having potentials for scaled-up implementation if supported by market instruments. Criteria applied for further selection:

1. Existing Laws, Policies and Regulations: Are they capable of sustaining a market instrument?

2. Potential for GHG emission reductions: Is there significant potential for GHG emission reduction in the activity?

3. Replicability: Is the emission reduction mechanism transferable across sectors?

4. Technology: Does it employs proven technology; not a technology being developed?

5. Return on Investment (ROI) for cost savings.

6. Industrial and Stakeholder Supports 7. Experience in MRV: Does the

entities covered in the initiative has experience in MRV or data management ?

8. Existing standardized methodology for calculating the GHG emission reduction

9. Sustainability: Would the presence of a market instrument make the activities sustainable?

10. Initial investment: Does it have its own initial capital investment or expect private sector participation to fund the activity?



No Sector I II III IV V VI VII VIII IX X Total

Score

1 Biofuel 5 3 5 5 3 3 3 5 5 5 42

2 Renewable Energy 5 5 5 5 5 5 5 5 5 1 46

3 Energy Conservation 5 5 5 5 5 5 3 5 5 3 46

4 Flaring 3 5 1 5 5 1 5 1 3 1 30

5 Cement 5 5 5 5 5 5 3 1 5 3 42

6 Solid Waste 3 3 1 3 1 1 1 1 5 3 22

7 Liquid Waste 3 1 1 3 1 3 1 3 5 1 22

8 Peat land 5 5 1 3 1 3 1 1 3 1 24

9 Palm Oil 5 5 3 5 5 3 5 3 5 3 42

10 Air Transportation 1 5 1 5 5 1 5 5 5 1 34

11 Land Transportation 3 3 1 5 1 5 1 1 5 1 26

Scoring results:



Further process in assessing target areas:

• NCM 2:

Established five important criteria for final selection of activities:

1. GHG emissions reduction potential, 2. Industrial and other stakeholders support, 3. Methodology for calculation of GHG emission

reduction, 4. Initial investment requirement, 5. Government regulation and policies.

• NCM 3 and subsequent consultations:

Regrouped into two broader classifications considering that energy conservation policy covers both the power and the cement sectors as energy-intensive industries and that the renewable energy contribution to energy provision will mostly be materialized in the form of electricity.

Three initiatives selected:

1. Renewable energy

2. Energy conservation

3. Cement production

Two target areas:

1. Power sector

2. Energy-intensive

industries



Overview of Energy Sector

FOSSIL ENERGY TYPE RESOURCE RESERVE PRODUCTION PRODUCTION/ RESERVE RATIO

(YEAR)

Oil 86.9 billion barrel 9.1 billion barrel 387 million barrel 23

Gas 384.7 TSCF 185.8 TSCF 2.95 TSCF 62

Coal 58 billion ton 19.3 billion ton 132 million ton 146

No NEW/RENEWABLE ENERGY RESOURCES INSTALLED CAPACITY IC/RS RATIO

1 Hydro 75,670 MW 6,654.29 MW 8.79%

2 Geothermal 29,038 MW 1,226 MW 4.22%

3 Mini/Micro Hydro 769.69 MW 228.983 MW 29.75%

4 Biomass 49,810 MW 1,618.40 MW 3.25%

5 Solar 4.80 kWh/m2/day 22.45 MW -

6 Wind 3-6 m/s 1.87 MW -

Fossil energy reserve is limited!

There is room to improve renewable energy utilization!

Source: Blueprint PEN - MEMR



Overview of Energy Sector

Presidential Regulation 5/2006 mandated RE portion to 17% of energy mix

The 2025 energy vision requires more RE and EE

Source: MEMR



Overview of Power Sector

Electricity consumption grows 7.4% per year in the last 5 yrs.

Estimated emissions from power sector is 74 MtCO2e in 2005.

Industrial electricity demand is projected to increase 9.1% per year between 2010-2030.



Overview of Power Sector

Energy Mix of Power Sector

Use of coal will inevitably increased.

Ways to incentivize clean energy are continuously sougth.


: Existing transmission line

: Planning transmission line

: Power generation

• INSTALLED CAPACITY : 44,346 MW • TRANSMISSION LINE: - 500 KV : 5.052 kms - 275 KV : 1.510 kms - 150 KV : 26.282 kms - 70 KV : 4.457 kms • DISTRIBUTION LINE: - MV : 294.167 kms - LV : 396. 568 kms

SUMATERA : • Power Generation : 7,420 MW (17%) • 275 kV : 1.028 kms • 150 kV : 8.597 kms • 70 kV : 332 kms • MV : 79.472 kms • LV : 88.024 kms

JAMALI : • Power Generation: 31,609 MW (71%) • 500 kV : 5.052 kms • 150 kV : 12.977 kms • 70 kV : 3.474 kms • MV : 143.941 kms • LV : 237.297 kms

Nusa Tenggara: • Power Generation: 514 MW (1%) • MV : 8.468 kms • LV : 8.362 kms

KALIMANTAN : • Power Generation: 1,949 MW (4%) • 150 kV : 3.028 kms • 70 kV : 528 kms • MV: 24.384 kms • LV : 23.382 kms

SULAWESI : • Power Generation: 2,318 MW (5%) • 275 kV: 482 kms •150 kV : 2.988 kms • 70 kV : 528 kms • MV : 24.925 kms • LV : 27.284 kms

PAPUA : • Power Generation: 251 MW (0,6%) • MV : 2.718 kms • LV : 3.637 kms

MALUKU : • Power Generation: 286 MW (0,6%) • MV : 4.813 kms • LV : 2.718 kms

Status: May 2013

2. MRP Target Areas: Assessment and Rationale : Pilot Area-1

The Java-Madura-Bali or JAMALI grid is the biggest interconnected electricity system in Indonesia, and comprises more than 60 power plants including 38 coal-fired power plants. Estimated emission generation from the JAMALI grid is 86.9 MtCO2 (2010) or around 20% of the year’s national energy-related emissions.

JAMALI Grid



Overview of Industry Sector

Process-related-emissions is 48 MtCO2e in 2005, 60% of it is from cement production.

Estimated energy-related-emissions is 32 MtCO2e in 2005.

Cement production consumes around 15% of industrial energy consumption (excl. grid electricity).

Ways to incentivize clean energy are continuously sougth.


2. MRP Target Areas: Assessment and Rationale: Pilot Area-2

Currently there are 14 plants of 9 cement companies in Indonesia. GHG emissions is projected to increase from 37 MtCO2e in 2009 to 60 MtCO2e in 2030. Cement is the first sector in Indonesia that has GHG emissions reduction policy, i.e. 3% under 2009 emission intensity in 2020.



Emission Profile and Baseline Setting

Objectives

• To estimate the emission reduction potentials and abatement cost of mitigation actions in the target areas.

• To calculate/review/estimate baseline emission of the target areas.

Deliverables

• A comprehensive carbon abatement cost curve in the two target areas.

• Calculated, reviewed or estimated sectoral baseline emissions of the target areas.

Parties Responsible for the Activities

• MEMR, MoI.



MRV System Development and Piloting

The objectives of MRV are to:

Support GHG reporting, management, and ultimately mitigation

Improve data accuracy, quality and consistency

Support related policies, programs, and strategies

Provide information to stakeholders

Support implementation of market-based instruments.

Serve as a benchmark for other sector.

The MRV system will be implemented at both the level of individual installations and the level of governance (i.e., the policy framework for installation level activities). Thus the development works will be divided into Governance Track and Piloting Track. This MRP proposes to develop and pilot MRV systems for: electricity generation – with the JAMALI

interconnected grid as the pilot sector; and energy intensive industries – with cement

production as pilot sector.



Determine risks/incentives for misrepresenting data

Identify potential ways to address misrepresentation

Discuss different options for oversight/verification

Capacity building for verifiers, oversight organisation

Identify data access, confidentiality, management issues

Select appropriate verification and data management approach for Indonesia

Development of data manage-ment/storage/tracking system

Discuss incentives for compliance/sanctions for non-compliance

Decide on sanctions for non-compliance

Development of regulation to establish obligations, incentives & sanctions,

institutional mandates

Revision of regulation – if required

Envisioned Works in Governance Track



Objectives

• Discuss and develop rules, regulations and procedures on MRV, which will cover monitoring procedures and guidelines, validation and verification procedures and guidelines, incentives and disincentives, reporting period etc.

• Discuss and develop institutional set up for MRV, which includes institutions overseeing MRV and its mandates, scope of work and obligations, institutions for implementing validation and verification, aggregated data management, etc.

• Increased capacity and awareness of MRV system stakeholders. Deliverables • Rules, regulations and procedures on MRV. • Institutional set up for MRV. • Capacity building and awareness raising activities.


• MEMR, MoI, DNPI.



Envisioned Works in Piloting Track

Determine applicability of existing protocols for Indonesia and need for adjustments

Compare existing monitoring protocols for identified purpose

Mapping MR(V) activities in Indonesia

Define data that need to be gathered by MR(V) system

Industry review of data requirements

Development/establishment of monitoring & reporting rules

Development/establishment of a reporting template

Industry consultations on monitoring rules & templates

Revision of reporting template (if necessary)

Capacity building with industry on implementing an installation-level monitoring & reporting system

Testing of MR(V) system

Review of MR(V) rules and practices

Revision of monitoring & reporting rules and templates

Adaptation of installation-level MR(V) systems



Objectives • Map MRV activities in Indonesia, including coverage, protocols, verification requirements,

etc., especially within the target areas. • Determine applicable monitoring protocols for the pilot areas. • Establish data management systems at the installation level. • Piloting MRV systems in the power sector and cement sector.

Deliverables • Map of MRV activities at the installation level of the pilot area • Monitoring protocols that will be developed by comparing and assessing existing protocols,

making them applicable to Indonesian conditions where necessary and by developing monitoring rules and templates.

• Data management system at the installation level.

• GHG emission data and review on the MRV system at both the installation and the aggregated data management level.


• MEMR, MoI, DNPI.



Envisioned Works in Planning for MBI

Conduct gap and cost/benefit analysis

Further assessment for short-listed market options

In-depth technical assessment of market options

Select priority market options

Preliminary design of MBI (type, coverage, incentive/disincentive, etc.)

Consultation with wider stakeholders and industries

Design and set-up the necessary institutional framework, including draft policies as needed

Capacity building for involved parties

Pilot the instrument(s) in smaller coverage

Summarize lessons learned and formulate action plan toward full implementation

Policy consultations with key line ministries

Mainstreaming market options into mitigation actions/policies



Objectives

1. Review of existing regulatory approach, MBI and their implementation for GHG mitigation in various countries;

2. Selection of MBI that is suitable for Indonesia;

3. Review various aspects that need to be considered for a proper implementaion of MBI;

4. Selection of sector for pilot study;

5. Gap analysis in general and for selected sector toward implementation;

6. Concept design of suitable MBI for Indonesia;

7. Action plan and road map for MBI implementation, which includes development of required policies and institutional arrangements, and other required aspects for successful MBI implementation.

Deliverables

1. A comprehensive assessment report on MBI options for Indonesia.

2. Design of selected market-based instruments for the selected sector.

3. Draft policy(ies) required for the establishment and implementation of MBI.

4. Piloting of the designed instrument(s).


• MoF, DNPI.


5. Organization, Communication, Consultation and Engagement

Objectives • To integrate all activities in the MRP implementation phase into a seamless program toward

MBI implementation. • To communicate results to stakeholders. • To engage stakeholders during all stages of the implementation phase of the MRP.

Deliverables • PMR implementation report, that contain of policy direction and decision, guidelines for

implementation, organizational structure, time schedule, and budget among others. • Stakeholder consultations and capacity building reports.


6. Roadmap, Schedule and Budget

Market Readiness

NCS offset

scheme

MBI Study

MRV System

Other Related Policies

New Market Based Financial

System for Climate Change

Mitigation Action


6. Roadmap, Schedule and Budget

Profiling Emissions

A comprehensive carbon abatement cost curve in the

two target areas.

A calculated / reviewed / estimated sectoral baseline

emission of the target areas

MRV System Development (Gov't Track)

Rules and regulations on MRV

Institutional set up for MRV

Capacity building and awareness raising activities

MRV System Development (Piloting Track)

Map of MRV activities at the installation level in

Indonesia

Monitoring protocols

Data management system at the installation level

GHG emission data and review on MRV system at

installation level and at aggregated data management

level

Framework for MBI

A comprehensive assessment report on MBI options

for Indonesia

A design of selected market-based instrument for

selected sector

Draft policy(ies) required for the establishment and

implementation of MBI

Piloting the market-based instrument in the selected

sector

Year-1 Year-2 Year-3 Year-4PMR Activities

Sectoral Readiness

Understanding of MBI Options

Market Readiness


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