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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

DRAFT MARKET READINESS PROPOSAL: INDONESIA 3

Overview

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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

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MRP Development Process

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

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MRP Development Process

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Market Readiness Proposal

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• 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.

DRAFT MARKET READINESS PROPOSAL: INDONESIA 9

• 1. Policy Context and the Big Picture

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.

DRAFT MARKET READINESS PROPOSAL: INDONESIA 10

• 1. Policy Context and the Big Picture

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

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• 1. Policy Context and the Big Picture

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.

DRAFT MARKET READINESS PROPOSAL: INDONESIA 12

• 1. Policy Context and the Big Picture

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,

• rganic 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

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• 1. Policy Context and the Big Picture

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 Presidential Regulation 71/2011 National GHG Inventory Periodic updated information of emissions and emissions reduction All sectors Presidential Regulation 5/2006 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

• ptions and management

Energy users >6000 TOE/y

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• 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

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Indonesia highly considers further utilization of market instruments.

Multilateral carbon market Bilateral and regional carbon market Domestic carbon market

• Depends on UNFCCC negotiation
• utcomes
• 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
• ffset scheme
• Start from facilitating voluntary
• ffset (the NCS)
• Developed and traded in Indonesia
• Simple yet robust
• Could be linked to wider

mechanisms

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

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• 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.

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

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

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Due to uncertainties in UNFCCC-led market mechanism(s), discussions and works

• n market mechanisms at bilateral and regional levels becoming more impor-

tant to scale-up mitigation actions in developing countries.

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

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• 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.

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

Current works on NCS:

• Website is online,

http://skn.dnpi.go.id

• Second draft of the general rules

& requirement and SD guidelines

• nline 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:

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

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• 2. MRP Target Areas: Assessment and Rationale

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
• f a market instrument make the

activities sustainable? 10.Initial investment: Does it have its

• wn initial capital investment or

expect private sector participation to fund the activity?

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• 2. MRP Target Areas: Assessment and Rationale

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:

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• 2. MRP Target Areas: Assessment and Rationale

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

DRAFT MARKET READINESS PROPOSAL: INDONESIA 23

• 2. MRP Target Areas: Assessment and Rationale

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

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• 2. MRP Target Areas: Assessment and Rationale

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

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• 2. MRP Target Areas: Assessment and Rationale

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.

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• 2. MRP Target Areas: Assessment and Rationale

Overview of Power Sector

Energy Mix of Power Sector  Use of coal will inevitably increased.  Ways to incentivize clean energy are continuously sougth.

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: 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

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• 2. MRP Target Areas: Assessment and Rationale

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.

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• 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.

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• 3. Core Technical and Institutional Readiness Components,

including Regulatory Components

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.

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• 3. Core Technical and Institutional Readiness Components,

including Regulatory Components

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.

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• 3. Core Technical and Institutional Readiness Components,

including Regulatory Components

Determine risks/incentives for misrepresenting data Identify potential ways to address misrepresentation Discuss different options for

• versight/verification

Capacity building for verifiers, oversight

• rganisation

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

• bligations, incentives & sanctions,

institutional mandates Revision of regulation – if required

Envisioned Works in Governance Track

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• 3. Core Technical and Institutional Readiness Components,

including Regulatory Components

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.

Parties Responsible for the Activities

• MEMR, MoI, DNPI.

DRAFT MARKET READINESS PROPOSAL: INDONESIA 34

• 3. Core Technical and Institutional Readiness Components,

including Regulatory Components

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

DRAFT MARKET READINESS PROPOSAL: INDONESIA 35

• 3. Core Technical and Institutional Readiness Components,

including Regulatory Components

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. Parties Responsible for the Activities

• MEMR, MoI, DNPI.

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• 4. Planning for a Market-based Instrument

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

DRAFT MARKET READINESS PROPOSAL: INDONESIA 37

• 4. Planning for a Market-based Instrument

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). Parties Responsible for the Activities

• MoF, DNPI.

DRAFT MARKET READINESS PROPOSAL: INDONESIA 38

• 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.

DRAFT MARKET READINESS PROPOSAL: INDONESIA 39

• 6. Roadmap, Schedule and Budget

Market Readiness

NCS

• ffset

scheme MBI Study MRV System

Other Related Policies

New Market Based Financial System for Climate Change Mitigation Action

DRAFT MARKET READINESS PROPOSAL: INDONESIA 40

• 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-4 PMR Activities

Sectoral Readiness Understanding

• f MBI Options

Market Readiness

DRAFT MARKET READINESS PROPOSAL: INDONESIA 41

Terimakasih !