Japan Indonesia EPA Part 2 - Energy Trade and Cool Earth 50

Japanese Prime Minister Shinzo Abe and Indonesian President Susilo Bambang Yudhoyono signed a bilateral free trade agreement or the EPA on Monday, August 20, 2007 which will take effect next year. This is the sixth EPA for Japan with ASEAN economies after Singapore, Malaysia the Philippines, Thailand and Brunei.

I understand that one of the most important issues in this EPA is the tariff and barrier in trading sector. Unfortunately, I have less interest to talk about this issue. In short, any FTA always aims to create a better trading environment by reducing restrictions and barriers. I would say this is a classic premise while the evidences show tough, hard and complicated rounds in most of FTA negotiations and implementations. We need more evidences to see whether this tariff and barrier issues could improve the trading sector between two countries in coming years.

On my view, energy trading and environmental issues are more important considering the fact that Indonesia is the 11th largest trading partner for Japan and the biggest liquefied natural gas (LNG) supplier which accounts for around quarter of total Japan’s LNG import. Indonesia is important for Japan in its role for sustaining Japan's energy supply and due to its geographical position to support Japan’s energy supply route security as 90% of Japan's oil imports pass through the Malacca Straits.

LNG contracts, the development of coal-fired power plants in Indonesia and environmental issues

Most of LNG contracts between these two countries will expire in 2010 and the government of Indonesia (GoI) has showed its preference to place priority on the supply of natural gas to its domestic market as the impact of increasing demand of energy in domestic market and acute power problem. In the other side, the GoI also decided to continue implementing its national program ’10,000 MW’ by constructing (most of it) coal-fired power plants in several areas of Indonesia.

There is a strong interest from many related parties in Japan regarding the LNG contract asking the Japanese government to anticipate the status of LNG contract renewal. I believe that one of the major reasons for Japan to push the signing of this EPA is to get a better assurance regarding the status of its LNG supply. That is why Japan is very interested to support Indonesia in developing its alternative energy as this will reduce the incremental demand of LNG in Indonesia thus would give both countries a better position to renew its contract.

The GoI’s decision in developing its energy source is to use the coal-fired power plant. The coal-fired power plant is notorious in creating pollution and we can easily find the proof of environmental damage caused by coal mining. In simple words, coal pollutes when it is mined, transported to the power plant (through in-land, river and sea), stored, and burned. The worst thing having this power plant project is the fact that it will use low calories coal only!, simply because it is cheap and giving a large cut of firing cost. As a comparison, many developed countries still use coal-fired power plant with high calories (note: very expensive and scarce) coal that cause insignificant pollution during burning process.

So, what would be the best role for Japan to support Indonesia in term of the development of alternative energy source? I do hope that Japan will not support Indonesia by financing this low rank coal-fired power plant project. I read about the project of coal quality improvement factory in South Kalimantan sponsored by Japan, however I remain feeling skeptical about the commercial feasibility. Too expensive, slow progress, limited capacity and old technology. I strongly recommend Japan to support Indonesia in coal bed methane (CBM) exploration and exploitation research as its alternative energy source. Once the CBM becomes economically extract and transfer to energy, there would be less dependence of LNG in Indonesia and Japan may secure its LNG supply.

Second thing is about “Cool Earth 50” an initiative taken by Japan to promote halving global greenhouse gas emissions by 2050 from recent levels. As a new framework after Kyoto Protocol, I honestly say this is a great step in order to reduce emissions. Both leaders agreed to use Cool Earth 50 as an umbrella for bilateral cooperation in environmental issues.

How one country with thousands MW low rank coal-fired power plant would participate in a movement of global emission reduction? (note: 500 megawatt power plant needs at least 1.4 million tons of high rank coal per year). Let’s see!