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The Message Behind Indonesia’s Coal Export Ban

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The Message Behind Indonesia’s Coal Export Ban

The move was less about coal shortages than about reminding Indonesia’s private sector who is in charge.

The Message Behind Indonesia’s Coal Export Ban

Coal is transported by barge on the Mahakam River in East Kalimantan, Indonesia.

Credit: Depositphotos

In January, Indonesia announced a month-long ban on the export of thermal coal. The reason was because PLN, the state-owned electric company which generates the majority of the country’s power and relies heavily on fossil fuels, said its stock was running critically low. This comes amidst a larger global squeeze on energy supplies which has sent the cost of natural gas, coal, and crude oil skyrocketing.

The odd thing about this situation is that Indonesia has very large domestic coal reserves, so it doesn’t really make sense for PLN to be running low. Historically the country produces far more coal than can be consumed domestically and exports the surplus. It can keep producing at this volume for decades, since the absolute supply of thermal coal in Indonesia is nowhere near close to being exhausted. With that much coal production there should always be enough for domestic consumption. So what happened in January?

There may have been some pressure on the country’s distribution system, although state-owned rail operator KAI has invested heavily in recent years in expanding its freight network in coal-rich South Sumatra, so I don’t think that is the main explanation. In my opinion the export ban was more about the state demonstrating its power to tame the interests of private companies and the market. At the moment, there is a divergence between the strategic interests of the state and the economic interests of coal miners and traders, and slapping a ban on all exports is a bit of a flex by the state to show who’s really in charge.

In order to control the retail price of electricity, the government forces coal miners and traders to supply domestic power plants at a fixed price. Currently that is capped at $70/ton. And this works, insofar as the goal is to keep electricity bills low even as energy markets the world over are being turned on their heads. It’s an arrangement that works for the government, and for Indonesian consumers.

But at the moment, it’s not really working for the coal industry. The price of a ton of coal on the export market has fallen from its October 2021 peak but is still currently in the $160/ton range, owing to the aforementioned global supply crunch. Imagine you are the owner of a coal mine in Indonesia, or a trader. If you are a rational economic actor motivated by profit, you would be crazy not to chase big margins on global markets and instead supply domestic power plants at an artificially low rate.

Looked at in this way, the export ban is the state’s way of telling these companies they really have no choice but to leave those profits on the table and make sure the domestic market is supplied first, even if it goes against their own economic self-interest. They can chase exports later. And I guess they feel the message was delivered, because within a matter of days the export ban was partially lifted.

Export bans are blunt instruments, and they can backfire by upsetting trade partners and having unintended economic consequences. But they can also be effective when targeted at specific ends. Indonesia has increasingly been using them as a tool in line with an overall turn toward resource nationalism, whereby they leverage control over raw resources to achieve certain policy goals. In this case the ban was aimed at holding down electricity prices for Indonesian consumers, but a similar export ban on raw nickel ore has helped push billions of dollars of investment toward the domestic refinery industry. These export bans, in other words, may be blunt instruments but they are basically working as intended, for the moment.

This has important implications for Indonesia’s clean energy ambitions as well as industrial policy more generally. It is an immensely powerful tool for any government to have the ability to control the price of electricity even in the midst of a global energy crunch. Indonesia can do that, and it can bring private companies and market forces to heel, precisely because the coal is in Indonesian ground so the state, when it chooses to, can exert tremendous control over it. Any serious path toward a lower-carbon future must engage with this reality and come up with an answer for why the state would be willing to give up such a power, and what it will get in return if it does.