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In late 2021, Air Products and Chemicals, a Pennsylvania-based company in the US, announced it was planning to invest a staggering $15bn in coal gasification in Indonesia, one of the largest overseas coal investments by a US company ever. The first project, a $2.3bn plant on the island of Sumatra, saw its January 2022 ground-breaking attended by the Indonesian President, Joko “Jokowi” Widodo. The government labelled it a “national strategic project”, which made it eligible for financial and policy incentives.

Less than a year-and-a-half later, in March 2023, Air Products announced it had withdrawn from all of its coal gasification projects in Indonesia – which made up most of its non-China coal gasification portfolio. To Flora Champenois, a research analyst at non-profit Global Energy Monitor, the news was a sign that the financial atmosphere for coal investments has significantly deteriorated.

“Air Products’ quick withdrawal sends a clear signal that coal-to-chemicals projects make no economic sense, in addition to being out of alignment with net-zero commitments and just transition goals,” she says.

Air Products’ challenge in Indonesia: Coal to DME’s worsening financial case

From the moment the Indonesian project was announced, its economic value was questionable, says Ghee Peh, an analyst at the non-profit Institute for Energy Economics and Financial Analysis (IEEFA). Now, it is worse.

“Since they signed the deal in 2021, the US federal funds rate has gone up,” says Peh, noting that interest rates have risen from around 2% to 6%, which would cut into Air Products’ return. “The [$2.3bn] plan was going to cost about $500m more today.”

There was also uncertainty about government support to ensure the uptake of coal-derived dimethyl ether (DME) domestically, which Peh argues would require massive subsidies. DME is a synthetic gas that can be used as an alternative fuel in industrial, chemical or transportation applications.

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By GlobalData

Air Products’ quick withdrawal sends a clear signal that coal-to-chemicals projects make no economic sense, in addition to being out of alignment with net-zero commitments and just transition goals.

Flora Champenois, Global Energy Monitor

Indonesia has already committed to providing coal gasification plants with cheaper, royalty-free domestic coal. However, according to the IEEFA, for DME to be competitive with imported liquefied petroleum gas, an additional government subsidy of at least $354 per tonne would be required, which, it argues, “makes no economic sense to the Indonesian government or taxpayers”.

Air Products declined to be interviewed for this article or to provide more details about its decision, but in its public statement, it says that “the financial landscape for blue and green hydrogen projects has significantly changed in the last year, driving increasing opportunities for Air Products to invest in these energy transition projects [instead] around the world”.

The World Coal Association, an industry group that has been actively pushing coal gasification combined with carbon capture and storage as a sustainable technology, did not respond to interview requests.

Will China take over from the US?

While the Air Products withdrawal is a major setback, there is still one other coal gasification project in Indonesia, in Meulaboh, Aceh, where a $560m plant is planned by Indonesia’s Powerindo Cipta Energy and state-owned China National Chemical Engineering Corporation. In fact, China has one of the largest domestic coal gasification industries in the world, and it is the only country where there is any momentum to continue using this technology.

“There does not seem to be a significant pipeline for new coal gasification projects, with perhaps the exception of China, which already has a developed industry and where new coal investments haven’t slowed,” says Champenois.

The Indonesian Government seems to be hoping that a Chinese company may be willing to take over Air Products’ role and support the development of coal gasification across the country. An official from the Ministry of Energy and Mineral Resources told journalists in March that “there are companies from China that are interested in participating in the project”.

If a Chinese company replaces Air Products, it raises significant concerns. This would be a significant and risky gamble that could lead to harmful consequences.

Andri Prasetiyo, Trend Asia

In May, Luhut Binsar Pandjaitan, Indonesia’s Coordinating Minister for Maritime Affairs and Investment, said that a Chinese investor had been found, and would be announced after the G7 summit. While China’s September 2021 pledge to stop coal financing abroad did not include coal gasification, investments in fossil fuels under the Belt and Road Initiative have been dropping, according to analysis from the non-profit World Resources Institute.

“If a Chinese company replaces Air Products, it raises significant concerns,” says Andri Prasetiyo, a programme manager with Trend Asia, a Jakarta-based foundation focused on accelerating the energy transition. “This would be a significant and risky gamble that could lead to harmful consequences such as undermining decarbonisation, adding massive debt and wasting financial resources on unnecessary subsidies.”

Surya Dharma, founder of the non-profit Indonesia Center for Renewable Energy Studies, says the Indonesian coal industry should stop trying to extend the use of coal and adapt to its decline. “The coal industry must realise that, whether they like it or not, the use of coal for energy purposes may have to be reduced,” Surya told Energy Monitor.

How Indonesia could move on from coal

The news of Air Products’ withdrawal sits alongside a new Just Energy Transition Partnership (JETP) for Indonesia, which promises $20bn in financial support towards the early retirement of its coal-fired power plants and the expansion of renewable energy.

“It has long been clear that Indonesia would not move away from coal without the aid of the international community, so the JETP is a clear breakthrough for the country,” says Champenois.

Both Champenois and Surya believe that the growing attractiveness of clean energy investments in the US, due to legislation like the Inflation Reduction Act, may have also played a role in Air Products’ decision. Indonesia should focus on attracting these kinds of investments, says Surya, because it is increasingly unlikely that using coal will be feasible from either an economic or climate perspective.

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“I think the role of renewable energy will be very large… It can become the backbone to replace fossil energy,” says Surya, noting that Indonesia has large potential for solar, wind, geothermal and small-scale hydropower.

Andri hopes that the government will quickly realise that coal gasification does not make sense and abandon its efforts to find new investors – and the Aceh project. Otherwise, he worries it will be Indonesian taxpayers who end up footing the bill.

“It is not economically viable,” says Andri. “There is a major risk of this project becoming a stranded asset. Investors may not recover the cost of investment, even if this project is fully built and operated.”