The potential of coal – notes on Indonesian gasification policy

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By Achmad Nur Hidayat MPP
By Achmad Nur Hidayat MPP, Public Policy Expert and FEB Lecturer at the National Development Veteran University Jakarta and CEO of the Narasi Institute

IO – Indonesia’s vast coal reserves place it among the top ten supplier countries globally. The Earth’s entire coal reserves are estimated at 1.1 trillion tons, with the top five comprised of the United States (23%), Russia (15.5%), Australia (14%), China (13%) and India (10%). 

Indonesia has an estimated total of 38.8 billion tons of “coal reserves” (3.5% of world reserves) and 143.7 billion tons of “recorded coal resources” (data from the Energy and Mineral Resources (EMR) Ministry, January 2022). 

The EMR Ministry revealed that Indonesia’s coal reserves should be sufficient for 65 years (assuming no new resources are discovered) considering average annual coal production at 600 million tons. This means that, at the rate of current production, Indonesian coal will be depleted by 2087.

Two Indonesian islands hold the bulk of coal reserves: Kalimantan (62.1%) and Sumatra (33.5%), with the remainder spread across other islands (4.4%). Coal mined on these islands should be used wisely and responsibly, for the public welfare. 

As the global trend is inclining towards a green economy, coal use must eventually be phased out, because coal is considered a major pollutant and contributor to global warming. 

This trend has affected the top five countries with the largest coal reserves – the US, Russia, Australia, China and India – to massively downstream solid coal, converting it into other liquid or gaseous products, such as Dimethyl Ether (DME) and Methanol, which are thought to be more eco-friendly. 

Those countries have shifted their coal industries towards coal downstreaming, portraying clean energy products and creating a multiplier effect on the economy. 

Otherwise, the massive coal potential of the planet earth will go unused. The precious resource will remain buried underground and offer no economic benefit to the people. 

Indonesia has pledged that by 2060 there will be no coal power plants, while 2025 is the deadline for the construction of new steam power plants. 

In 2021, it was reported that of the 1,262 gigatons of CO2 emissions produced by Indonesia, 35% came from coal power plants. 

Two Challenges of Responsible Coal Downstreaming 

Indonesia has to learn how to develop its coal industry for a “green economy”, taking a lesson from the five countries with the largest coal reserves.

Two major challenges emerge in future development: mastering eco-friendly coal processing technology and creating economies of scale that can offer economic benefits to the larger community. 

These challenges are enormous, and Indonesia will not be able to solve them on its own. 

The Option of Coal Gasification 

Indonesia has opted for coal downstreaming by transforming coal into DME (gas) and Methanol (liquid). Both are considered environmentally-friendly chemicals and energy sources. 

Dimethyl ether, or DME, is a type of fuel consisting of organic compounds. Some say it could replace liquified petroleum gas (LPG). 

The coal-to-DME policy aims to reduce LPG use, which is still around 77.63%. LPG is an imported product, so it poses a great risk to national energy security and imperils Indonesia’s balance of payments. 

The EMR Ministry revealed that LPG imports in 2020 reached 77.63% of the total national demand of 8.81 million tons. Without coal downstreaming, LPG imports could increase to 83.55% of total demand in 2024 (11.98 million tons). 

Ergo, the Government decided on a coal-to-DME project for the early stage of coal gasification. In mid2021, state coal miner PT Bukit Asam (PTBA), Indonesian energy company PT Pertamina, and American chemical firm Air Products and Chemicals (APCI) signed an agreement for a coalto-DME gasification project. 

The agreement between the three companies is fairly aggressive, with a plan to commence operations two years from now, or in 2024. The project will be located in Tanjung Enim, South Sumatra. It aims to produce 1.4 million tons of DME per year. The project is currently in a stage of study finalization and devising DME schemes for LPG subsidies. 

To support the gasification program, the Government will provide incentives, such as a 30-year business permit for coal gasification projects and a guarantee for business license renewals (Law No. 3/2020), reduction in coal royalty rates exclusively for zero-percent coal gasification (Job Creation Law of EMR Cluster) and special coal pricing for gasification project (the policy is still being worked out). The three benefits are offered to secure investors’ commitment to accelerating coal downstreaming. 

Challenges of Coal-to-DME Gasification 

In a nutshell, coal gasification uses a technology that chemically converts coal into natural gas or a synthetic liquid. 

However, it presents two grave challenges. First, coal gasification actually yields more CO2 than conventional coal power plants. A study by Duke University in the United States reveals that synthetic natural gas produces seven times more greenhouse gases than natural gas, and almost twice as much carbon as a coal generator. The second issue is water use. Coal gasification is one of the more water-intensive forms of energy production, an issue which will eventually threaten local aquifers. 

The two problems can however be resolved with cutting-edge technology. 

Air Products and Chemicals owns technology to overcome these problems, that is, by using Carbon Capture, Utilization, and Storage (CCUS). The CCUS technology could reduce CO2 emissions from coal combustion. According to the EMR Ministry, CCUS is technically feasible to be developed in Indonesia, based on a 2015 study by state-owned electricity company PLN and the World Bank. 

Yet, the CCUS investment has not been included in the initial project agreement; thus, critical notes need to be added to the coal gasification policy. 

Important Notes for Coal Gasification 

First and foremost, 2021 was a year full of difficulties and inconsistencies of the Indonesian administration regarding its energy policy: national policy seemed to be fragmented, and is thus no longer considered “holistic”. 

Examples include the coal supply crisis and the export ban imposed on 34 coal companies. The Government has established a 25% domestic market obligation (DMO) policy. But, due to weak governance, coal producers continue to pursue their exports, because of the high price gap in the DMO (USD 70/ton) and exports (USD 180/ton). 

This inconsistency needs to be addressed and corrected by formulating a comprehensive energy policy. LPG dependence on imports should no longer be an issue if the Government takes the completion of the mammoth gas project in Blok Marsela, Maluku, more seriously. The project should have been up and running several years ago, but because of many interests at play, Blok Marsela was abandoned by investors. Until now, the Indonesian people have not received any benefits from the giant project. 

If a comprehensive energy policy is to be implemented and supported by a clear energy command line in the EMR Ministry, the imposition of LPG imports could be overcome through Blok Marsela instead of investing in coal-to-DME gasification that, regrettably, still requires subsidies.

Second, the benefits and costs of investing in coal gasification need to be reconsidered. From fiscal, monetary and upstream industry aspects, a coal gasification policy must be recognized as an important and strategic solution. In the budgetary part, the Government’s calculations should show that coal gasification will positively impact energy subsidies in the state budget. In the monetary aspect, coal gasification should offer the potential to improve the trade balance by reducing LPG imports. From a coal industry aspect, gasification should provide coal producers options to diversify their investments. 

Alas, the economic aspect of the investment in the coal gasification project poses an obstacle in the gasification policy. If the DME and Methanol products produced are not competitive enough, they need to be settled by the state budget and subsidies. In general, the gasification project depends on the ability of product prices to compete. 

Third, CCUS investment should be compulsory for coal gasification. Since extracting solid coal into gas inevitably produces gross gas emissions, CCUS technology becomes vital to reduce emissions from the gasification. 

Unfortunately, the CCUS investment has not been included in the agreement between Bukit Asam, Pertamina and Air Products. The fact is: this technology is expensive. Therefore, Government support is particularly vital to substantiate the CCUS technology. The question remains: can the state budget guarantee the CCUS investment? 

If these three important notes are taken aboard, the gasification policy will be a breakthrough towards responsible coal downstreaming, while offering high economic benefits for the community. Fingers crossed.