Indonesia has mandated a target of 23% for renewable energy towards the energy mix by 2025, as per the Nationally Determined Contribution (NDC) and National Energy Policy. It has also directed a cutback of 29% in the emissions of greenhouse gas by 2030 to combat climate change. The targets were reallocated towards social assistance, healthcare, and small businesses in the wake of the negative impacts of the COVID-19 pandemic.
In the latest study of Climate Policy Initiative (CPI), “Accelerating renewable energy finance in Indonesia: The potential of municipal green bonds,” presented the use of sovereign bonds (municipal green bonds). This will support positive environmental and climate benefits which will help in addressing the country’s energy transition outlay gaps. The report depicts the feasibility of executing such bonds, while also mentioning how large-scale projects which are built on government assets are relevant to attract private investments and achieve scale in the long run. There are projects planned by municipalities including West Java, Central Java, and Jakarta. The project focuses on installing solar panels on public schools and municipal government buildings but there is inadequate financing.
Associate Director at CPI, Tiza Mafira stated, “Despite their potential, Indonesia’s capital market is yet to see the issuance of municipal green bonds due to multiple challenges. Complex bureaucratic procedures in the subnational regions as well as the lack of adequate finance stood out as the core hurdles in our study, despite recent efforts in the Omnibus Law to erase the need for parliamentary approval of municipal bonds. Indonesia’s energy transition target, the existence of local governments with high fiscal capacity to issue bonds, and the rising appetite for green bonds in local governments and markets are the key overarching reasons why municipal green bonds are a good idea for Indonesia, especially in the long run. It is worth mitigating the barriers.
“We also found that provinces like DKI Jakarta and West Java are the market favorites given their strong fiscal capacity, professional human resources, and more potential projects,” she further added.
The study also identifies few execution barriers for the municipal green bonds which are:
- Complicated eligibility criteria and issuance process
- Investors are mainly driven by commercial interest which demands for high credit ratings
- Technical and regulatory obstacles, Insufficient profitable projects, little green awareness in the market, and additional costs. These all factors demotivate investors to comprise green bonds in their yearly portfolio.
“Bond market participants we surveyed in the study reveal that bond ratings, issuers’ reputation, bond tenor, and bond market liquidity/depth in Indonesia are crucial for their decision to invest in municipal green bonds. Market participants were also not convinced about the local government’s readiness in issuing municipal green bonds due to the limited number of profitable renewable energy projects, inexperienced bureaucrats, and the additional costs to increase green awareness in the industry,” said Albertus Siagian, Analyst at CPI.
“However, if the local government successfully sells the bond to large institutions (such as Badan Penyelenggara Jaminan Sosial – BPJS) or even foreign parties (if allowed), then local market participants would be motivated to follow behind,” he added.
This study also comprises suggestions for policymakers to boost municipal green bond issuance which are:
- Simplifying issuance criteria and process
- Clearly defined and consistent policies from the national government on renewable energy to influence local investors for considering endorsing municipal green bonds
- Selling green municipal bonds to non-government institutions from Local governments
Vikram Widge, CPI’s Senior Advisor, said that “Municipal green bonds have huge potential and are critical for Indonesia to remain on track and achieve its national energy transition goals. Like we mention in the report, ensuring clear and consistent policies on renewable energy, simplifying the issuance requirements and procedures, and facilitating the sale of green municipal bonds to quasi-government institutions would be key to their success.”