FY2017

GCF Feasibility Study in introducing low-carbon storage

system to off-grid area

Final Report

March, 2018

Nomura Reseach Institute, Ltd.

⽬次

I． Background ..................................................................... 3

1． Background and purpose .................................................................................... 3

2． Reason for Selection of Indonesia .......................................................................... 4

3． System proposed in the project ............................................................................. 4

4． GCF project suitability ...................................................................................... 5

5． Coherence of the Government of Indonesia policy and this project ..................................... 6

5.1 Outline of Indonesia’s goals against global warming ................................................... 7

5.2 National goals of renewable energy ...................................................................... 7

5.3 National goals in combatting rural areas without electricity supply ................................... 8

5.4 National goals of industrial development ................................................................ 9

II． Discovery of GCF Options ................................................. 10

1． Site Research Outline...................................................................................... 10

2． NRI hypothesis on prospect selection .................................................................... 11

3． Prospect selection outline ................................................................................. 12

4． Prospect affinity with GCF ............................................................................... 15

4.1 Critical factors to NDA .................................................................................. 15

4.2 Critial factors to AE ...................................................................................... 16

4.3 Most promising candidates .............................................................................. 16

III． Recommendation toward GCF application ............................ 18

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I．Background

1．Background and purpose

Japan participates in international negotiations under the United Nations Framework Convention on Climate Change to settle the global climate change problem and participates in the 21st Conference of Parties (COP) held in Paris from November to December 2015 COP 21, then Paris Agreement, which is an international framework after 2020 where all countries participate, was adopted. In this Paris Agreement, not only developed countries but all countries including developing countries are required to periodically submit and update reduction targets, and from now on, aggressive emission reduction measures will be implemented even in developing countries. On the other hand, developing countries do not have sufficient capabilities so that various assistance including financial support will play an important role in implementing emission reduction measures. In the context of fulfilling capabilites of developing country, the Cancun agreement adopted at COP 16 in 2010, the establishment of a green climate fund (hereinafter referred to as GCF) was decided as the administrator of the financial mechanism of UNFCCCC. For this GCF, it is hoped that the global contribution of 10.3 billion dollars is expressed, including expressing a contribution of 1.5 billion dollars from Japan, and that these funds will be effectively utilized. The specific operation method and adoption of the project are discussed at the GCF Executive Board, and eight projects were adopted at the 16th GCF Executive Committee held in April 2016 and adopted so far 43 completed projects and the total amount of support is about 2.2 billion dollars. As a result of negotiations under the UNFCCC, the transfer of technology and funding to developing countries is going to be promoted through GCF, but there are no projects in which that Japanese companies are participating in the current adoption project of GCF. In formulating GCF projects, it is essential to coordinate with the governments of developing countries that approve project proposals, the certification executing agencies that are expected to participate, other stakeholders, etc., The coodination takes a lot of cost so that additional funding for the prepararation is needed from international socirties. Moreover, from the viewpoint of Japan, the transfer of excellent environmental and energy technologies of Japan into developing countries will be desired. In this project, based on the background above, NRI investigated and seeked emission reduction projects enable to adopt GCF in developing countries and examined the

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possibility of Japanese companies' contribution to this project.

2．Reason for Selection of Indonesia

Remote islands in Indonesia have off-grid areas without electricity distribution

networks where are based on the high cost, gas oil power production due to its easier transportability. Diesel generators often need reserved power sources including backup support to adjust demand imbalances in the rural areas without efficient operation.

Also, multiple Japanese companies are already in Indonesia off grid energy market conducting tests, and they are creating the basis of sales and maintenance. Based on these, we selected Indonesia with possibility of effective support in this business.

3．System proposed in the project

The project utilizes combination of lithium-ion battery (LIB), solar PV, and energy management system (ESS) provided by Panasonic to partially substitute diesel power generation, which enable to save fuel consumptions in the disadvantaged villages lack of stable electricity access (20% of the whole country population).

Image1 : Energy solutions by Panasonic

Source: Panasonic

Image2 : Project Effect

Typical operation adjusting to peak demand ESS peak shifting or load reduction

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Source: Panasonic

4．GCF project suitability

CGF is recently receiving the increased number of project applications and has started

to put more importance on mitigation projects with “(innovative) paradigm shift potential” and “amount of CO2 reduction”. Projects lack of this suitability can be rejected, and the example was observed in Bangladesh this year. As is stated, technology in this project satisfies following requirements:

Innovative solutions with fundamental change in social infrastructure paradigm of

the off-grid areas Indonesia has a long-term goal in PT PLN to implement universal electrification nationwide by 2027. The absence of power storage system causes social situation to unavoidably choose planned blackouts or reliance on diesel electricity, which could suppresses technology development in such areas in longer period. When the solutions proposed in this project are generally accepted, even off-grid areas can secure stable power supply same as central cities, and paradigm of the social infrastructure drastically improves, which can be considered as innovative solutions.

Strong project appeal as effective mitigation solutions (80% fossil fuel reduction)

Panasonic had advanced ahead of other companies and implemented a

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demonstration experiment with this technology at a telecommunication station in one of the remote islands of Indonesia. The performance showed 80% fuel save of the existing diesel power. Therefore, high mitigation result can be expected from the solutions.

Also this system is not only innovative for each elements, but it had been already

demonstrated and verified in Indonesia in a past.

Image3 : Demonstration test in 2015

Source: Panasonic

5．Coherence of the Government of Indonesia policy and this project

The project proposes low-carbon technology system, and it can be regarded as one of the efficient and effective measures to accomplish the government targets of Indonesia. The strategic coherence of the project is hereby explained in following four key points: 1. Outline of Indonesiaʼs goals against global warming 2. National goals of renewable energy 3. National goals in combatting rural areas without electricity supply 4. National goals of industrial development

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5.1 Outline of Indonesiaʼs goals against global warming

Indonesia produces GHG as much as 1.453 GtCO2 according to the 2016 government report, and the energy sector shares 34.9% of the total emission. The reduction in this sector is one of the biggest issues in the country. (Figure: Indonesiaʼs GHG emission baseline by sector)

Source: Developing Indonesian Climate Mitigation Policy 2020-2030 through RAN-GRK Review

The submitted NDC targets voluntarily commitment to 26 % reduction of national GHG

emissions by 2020, and up to 41% with international support. At the national level, this commitment had been formalized and announced by Presidential Regulation No.61/Year 2011 and Presidential Regulation No.71/Year 2011 on National Action Plan for Greenhouse Gas Emission Reduction (RAN-GRK).

Indonesia also submitted its INDC to UNFCCC in September 2015 as the 2030 mitigation target, and it is committed to a reduction in GHG emissions of 29% (41% reduction with international support) below BAU emissions by 2030.

Source: Developing Indonesian Climate Mitigation Policy 2020-2030 through RAN-GRK Review

5.2 National goals of renewable energy

To reach the commitment mentioned above, energy sector promotes renewable energy in power production and expects that share in the power mix would reach 16% in 2024 in the Fair Scenario. However, hydropower or existing power plants currently represent the largest renewable source, and the prospect of new type of renewable energy

Image4: GHG Emission Estimation

Image5：GHG Emission Synario

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expansion such as wind or solar source is unpredictable. Technology system proposed in this project provides options including solar energy; it contributes to growth of the production capacity based on such new type of renewable solutions.

5.3 National goals in combatting rural areas without electricity supply

More importantly, achieving electricity access to rural and disadvantaged regions is an urgent priority in Indonesia, and it is a major issue to prepare stable transmission and distribution networks as well as power capacity expansion. The current electrification ratios vary among provinces, and large-scale investment is required to reach the government target of almost 100% electricity access by 2027.

Off-grid regions consequently need to build renewable energy power stations. However, current state of social infrastructure forces to implement rolling blackouts in case of absence of energy storage system and requires electricity supply measures not to hinder GDP growth of 20% population in Indonesia.

Source: Ministry of Energy and Mineral Resources of Indonesia

According to the 2016－2025 Electricity Supply Business Plan (Rencana Umum Penyediaan Tenaga Listrik – “RUPTL”) announcement of the Minister of Energy and Mineral Resource, Indonesia aims to achieve an electrification ratio of 99.7% by 2025, and the RUPTL indicates adding at least 80.5GW of power plants. In the remaining capacity other than constructed by PLN, which accounts for 62GW, solar allocation is not expressly specified as of yet. Therefore, the current national standpoint requires specific project investment of power generation system mainly in solar plants, and technology system proposed in this project is considered to exactly fit to the requirement. Source: PWC

Image6：Electricification Synario

Image7：Energy Mix Synario in RUPTL

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5.4 National goals of industrial development

Indonesia tries to improve energy efficiency in industry sector setting development indicator as of 1.1% reduction of energy intensity per year from BAU by 2030. We consider that technology system proposed in this project helps to implement high-efficient operation of existing power production equipment and that industry sector is consequently able to reduce energy consumption and increase unit energy output.

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II．Discovery of GCF Options

1．Site Research Outline

At first, we explored the possibility of Indonetia Project with Sunseap Ltd., IPP located in Singapore. However, Sunseap management decided not to apply for GCF immediately after they made the request. Because of this, we searched in Indonesia for prospects that are compatible with off-grid energy solution that fit the criteria for the project. At the site, we first visited government agencies such as BAPPENAS and Ministry of Finance (NDA). We contacted the prospects that was suitable to our project from their introduct. On the last day of our visit, we moved to Bali from Jakarta and visited Panasonicʼs local clients. The following is the outline of the meeting and interviews of that time.

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Image8：Research Outline

2．NRI hypothesis on prospect selection

In order to achieve meaningful result with this business, we conducted the research

focusing on below perspective: Select the prospects that can work with PT. SMI which is the only direct acesss AE. Select the prospect that already made progress with the discussion for higher

possibility of contract. The first point entails the following: We can expect to realize GCF fund in short term skipping the complicated selection process of GCF compared to other AEs. Additionally, although receiving no objection letter, it can result in competition with other Indonesia AE, the possibility was high that Indonesia NDA would prioritize PT.SMI prospects that

Day Time Location Interviewee MTG contents

Nov. 6

10:00 BAPPENASDeputy Director for Electricity: Yusuf Suryanto

Request fo be introduced to PT.PLN and introduction of BAPPENAS

15:30~16:00 MEMRMEMR Energy Policy Advisor: Mr. Mochiki

MEMR presentation, request for introduction

Nov. 7 10:30~12:00 PT.SMI PT.SMI: GCF contact (Mr. Andy) Outline of AE, project prospect

Nov. 8

08:30~10:00 MCAIMCAI : Muhammad Ridwansyah, Chief Economist of Economic and Monitoring & Evaluation Unit

Introduction of MCAI

11:30~12:30 MoFMoF: Pak Kindy Deputy Director for Financial System Surveillance

Verify GCF situation in Indonesia, and introduction of NDA policy

Nov. 9

14:00~15:00 MEMRDeputy Director for Renewable Energy:Vice Director General

Discussion about sharing MEMR prospects

14:00~15:00 PT.PLN Department of Renewable EnergyExistence of Off-Grid Energy PT.PLN prospects

17:00~18:00Local EPCHeadquator

Project contact: CEO, Director, Project manager

Discussion to share project prospects

Nov. 10

09:00~10:00 MoFMoF：Pak KindyDavestama: Pak Maryadi (Consultant for Governor of South Sumatra)

Discussion to share project prospects

10:00~11:00 MCAI Independent consultant: IchsanDiscussion to share project prospects

12:00~13:00 WinrockWinrock: Michael Naleid (Country Manager), Fetriza Rinaldy (Program Associate)

Discussion to share project prospects

10:00The Hotel Sovereign Bali

Local EPC: CEOGCF presentation, Discussion to share project prospects

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NDA (MoF) selected for the purpose of improving the country ownership. Also, PT.SMI has limited resources which means their readiness of receiving the fund is not making much progress, resulting further in lack of manpower to prepare concept note. This makes collaboration with NRI a win-win solution. For the second point, since it takes time even if earlier prospect was the FS candidate, the fact that the site has already been approved and recognition/approval has already been received by the local government were important point in making our decision.

3．Prospect selection outline

We found the prospects through local hearings based on the hypothesis of 2.

Image9： Prospects List

Source: Compiled by NRI based on interviews

The following is our analysis on each project. 【Project ①】

PT.SMI, PLN and Global Green Growth Institute (hereafter called GGGI) are planning with the state of Papua for solar electricity project. Currently, they are taking the steps to create concept note to secure the readiness support by GCF. The project site final decision has not yet been made, and the decision making process is not moving

Project ID Details

① Papua State Island Energy Project which international GGGI and PT.SMI are considering

② Lonbok Island project. Implement off grid solar/wind powered electricity for the school and the community

③Sumba Island planning to impletement solar panel to provide electricity to 25 schools and KIOSK (convenience store). Set up with IPP to sell electricity to PLN at 1 to 3 MW.

④ Approximately 1MW solar project to be implemented in Jambi region lead by private sector

⑤Micro Grid Project to be implemented in 5 villages in Sumba Island. Total of approximately 0.5MW solar panel to be installed.

⑥Plan to install off grid solution in a part of development project in Tanjari Api Api region (special economic zone)

⑦ Community IPP initiative in North Kalimantan region. Plan to install approximately 0.3MW solar panels.

⑧ Project by private EPC located in Bali to install off grid solution for isolated island resort hotels.

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forward. The provider for solar panel and capacitor for this project has not been selected. 【Project ②】

Project lead by Winrock, an international NPO based in the US. They are attempting to install off grid solar and wind generator as energy project for schools and community on Lombok Island. They are working with ODA and ABD in certan advanced coutries for financial support outside of GCF. The size of the project is 10MW solar power, with additional biogas power using Palm oil mill effluent: POMI from the local palm oil mill. Cobenefit of this project is the sustainable palmoil farming that causes deforestation. 【Project ③】

Windrock project as same as 2 planned on Sumba Island. It is an IPP project approved by IPTKE which is local entity of Ministry of Energy and Mineral Resources (MEMR), and they plan to sell 1 to 3MW to PLN. PLN will retail electricity to 25 schools and KIOSK (convenience store). Winrock is providing technological F/S, and other public consulting company is providing financial F/S. At KIOSK, consumers will charge their mobile phones and lanterns. Beside these uses, the television will set for viewings by local residents, which will vitalize the local economic activities. RESCO is the implementing agency that does not have juditial power, but they train the local people for electricity business maintenance. Technological supplier is nearly selected, and it will be difficult to change this at this time. 【Project ④】

Jambi project is to sell a total of approximately 1MW electricity to a number of remote island communities. Detailed F/S has already been completed, and stakeholder MTG has also been completed. They have the approval by 5 local government involved with this project. Private sector that handles waste treatment is the project owner, and their subsidiary company acts as EP contractor. There are solar PV device supply candidates, but stable availability of electricity by capacitor is attractive, and Panasonic solution has the chance to win this project. 【Project ⑤】

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This is a project to replace the existing diesel electricity with PV within five villages on

Sumba Island (Tarimbang、Praimundi、Bangga Watu、Pamburu、Kuruwaki). Public sector in the village has been conducting pre F/S since 2016. The cost of the fuel was high with 35,000 to 50,000 Indonesia rupee per liter, and the diesel device could only run between 4 to 8 hours per day ro provide electricity. In order to keep the energy cost low, they made the dicision to replace this with PV that has low life cycle cost. Although this is a collection of small villages that does not even provide PLN, they found that tariff payment of approximately 4,000 rupee per kWh is possible by the local people, which enabled the further consideration for this project. A variety of entities beside the village public sector such as private business, charity organizations and associations. 【Project ⑥】

It is a project to install PV farm as a part of large scale investment project to Tanjung

API API regions which is State of South Smatra. On one hand, it is a large scale economic development, and on the other hand, it aims to create “clean energy infrastructure” that will project the number of mangrove and other forests within South Sumatra. Although clean energy infrastructure plan is specified for the master plan of Tanjung API API, details has yet been decided, which means that private business can offer proposal freely. 【Project ⑦】 This is a plan to install approximately 0.3 MW solar panel in community IPP business in North Kalimantan region. This is one of available renewal energy projects that BAPPNEAS contracted to a private business in Indonesia until 2016, but because they could not bring in the fund to execute it, they are searching for a new fund. This is a difficult project to increase the capacity to go over 0.3 MW since the vicinity already has electdricity. This project is expected to run as business, but because the tariff amount to sell the electricity is set low, they can not find any investor. 【Project ⑧】

This project is run by private EPC in Bali to install off grid solution to resort hotels on Mojo Island. EPC and Panasonic already begun business discussion, and they are currently

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considering other solutions than Panasonic. The other proposal gives option to obtain load by diesel, which treats capacitor as one of accessories. Therefore, Panasonic proposal is in the better position from the perspectives of cutting down CO2 and life cycle cost. The resort is located in one of the national parks. Because of deforestation regulation, creating the compelling story is easy, and the the possibility is higher to receive GCF assistance rate compared to the competitorsʼ renewal energy proposals. On the other hand, in order to apply for GCF, despite the stronger story based on communityʼs economic development, with distance from off grid villages to the resort, providing electricity to outside of the resort will be difficult to achieve.

4．Prospect affinity with GCF

4.1 Critical factors to NDA

At site research, we had two meetings with Pak Kindy, Deputy Section Manager of

NDA, and conducted detailed discussion online using other text massages (WhatʼsApp). As result, we found two below critical points that Indonesia holds in releasing their No-Objection Letter: The project scale must be large It must not only create relief, but offer variety of applications

GCF application war has already started at developing countries all over the world. As result, the amount for each project are beginning to be limited, and relief project grant is becoming difficult to win. Because fair GCF resource must be spread out over several hundreds of developing countries, we must balance the project adaptation period to avoid projects being concentrated in a particular country. It seems as result of this effort, currently, we are avoiding the situation that the multiple projects run concurrently in one nation. Another words, from NDAʼsa perspective, we naturally want to use our valued resources used in projects that are as large scaled as possible. Also, relief projects are as rule either energy creation or energy savings projects, which can stand as business base compared to application projects. As result, relief projects are expected to run on private funds as main resource, and it is becoming mainstream that GCF is merely a chance to return the fund back.

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In reality, NDA would prefer to win client rather than to make investment, and we plan to increase the grant win rate as we set up projects that would achieve both relief and application.

4.2 Critial factors to AE

Indonesia Direct AE is PT.SMI. As result of meetn with PT.SMI, we discovered that

theyare focusing on assistance with small scaled energy projects in community bases. Additionally, for NDC such as RAN-GRK and NDC relief master plan within Indonesia, they specify investment to East Indonesia, and they also approve of east of Jakarta possible sites. Moreover, the hypothesis initially created by NRI differed with PT. SMIʼs position. Usually, finantial institution is supposed to focus on business realization, but projects that can be realized in business base was outside of PT.SMIʼs interest. Specifically with IPP project which was considered at the start, even if they were to provide support as AE, it would remain within the framework of financing, and they would not apply for GCF grant. This standing is not aligned with NDAʼs position that focus on size and grant rate. Although PT.SMI is NDA which is auxillary organization of the Ministry of Finance, we found that they are not aligned with the Ministry of Finance in the matter of GCF.

4.3 Most promising candidates

The most promising candidate is Project 5 which covers the most important points to

the local stake holders in 4.1 and 4.2. Sumba Island aims to achieve 100% electricity by 2025 under the program, “SUMBA ICONIC ISLAND,” but they are trying to achieve that using mostly renewal energy. They are planning to position this place as a pilot island where they can repeat the case in other Indonesia islands. They are promoting the renewal energy as a nation, and besides MEMR, BAPPENAS and others, they are collaborating with multiple stake holders such as Hivos, ADB, AfD to make their plans.

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Image10：Concept of Sumba Iconic Island

Source）Sumba Iconic Island HP

In other words, within the island, both the local government and private sector are positive about installation of renewal energy system, and there is potential to expand this outside of 5 villages in Project 5. Perhaps it might be ossible to build projects that goes beyond one island since there are many island that are off grid in the vicinity of Sumba Island. Additionally, although we may not be able to avoid a part of forest being destroyed with set up of electric network on Sumba Island, with the usage of Panasonic solution, each community can have their own independent power system, which can create compelling story. For these reasons, we can say they have the potential to fulfill NDA expectations. In regards to the wishes of PT.SMI, it aligns with their wish to have community based energy project. On the other hand, if it is to support NDAʼs aim to achieve large scaled result, since it goes beyond the size of project (small: under 500M USD) possible for PT.SMI to apply for GCI, usage of other AE will be needed.

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III．Recommendation toward GCF application

From the framework and history of existing international development finance such as World Bank and Asian Development Bank, GCF is an additional source of funding for developing countries.

Moreover, since the project with a high grant rate was adopted at the beginning of the operation, many private enterprises are paying much attention for GCF in addition government agencies.

In particular, Japan is the world's largest donor country for GCF in March 2018 and has energy conservation technologies which lead in the world. It was expected that the abundant funds could be utilized to solve the problems of developing countries as well as Japanese companies to expand overseas.

In addition, in other international development finance, Japan is the second largest donor country after the United States, but it is rare case for Japanese companies to enable to contract the projects in international competition by MDBs. In that sense, GCF was thought as a new financial scheme one step ahead.

Now three years have passed since the start of operation, the following three

problems have come to be clear. 1. Time schedule of private enterprise's procurement do not match GCF's time

schedule 2. GCF competition principle has been as severe as other international organizations 3. GCF is difficult to apply to private-sector projects As for 1, the GCF takes a lot of time in its procedure. The first dozens of projects

adopted in FY 2015 have implemented F / S for many years, and it can be said that they adopted GCF as additional "seasoning finance" at the final stage of their realization. Even in Indonesia, there are adaptation project pipeline by UNDP has been considering for three years, but even No Objection Letter has not been issued yet.

As for 2, as a result, AE which is currently the most funded in the world is UNDP.

International institutions such as UN and global financial institutions such as Deutsche Bank etc. are favorable in the GCF process. In other words, when Japanese entitiesʼ to acquire GCF, they have to overcome the same competitive principle (mainly price competition) similar to existing international finance (especially MDBs and UN).

In short, seeds that can not compete in ordinary international business can not reach GCF finally.

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With regard to 3, Most of grant can be distributed for adaptation projects. As a result,

small-scale projects such as capacity building of rural areas become main candidate for grant, and major Japanese companies that will bring out technologies falls outside the scope.

In other words, it is important to recognize once again that GCF is not a hammer of

launch, wiping out optimistic expectations for GCF. In the future, two exits are possible. To face the reality of GCF as a multilateral finance, to expand bilateral efforts

such as JCM Supporting Japanese companies that have internationally competitive seeds and

are constantly communicating with AEs of GCF. The latter half would be focused here. There are few Japanese companies that have succeeded in financing from IFC and

ADB and other MDBs. They are major trading companies as “shousha” said. In the current GCF, almost no grant is given to commercial projects, and not all of the loan can be covered by GCF. So main fund resources other than GCF must be prepared.

In other words, an entity have an excellent business model with their own finance resources or with the ability to withdraw project finance from financial institutions is suitable for acquiring GCF.

In that sense, in acquiring the GCF, project executors like shousha is more suitable than makers, such entities should be supported.

Finally, as UNDP is trying in each developing country, if we aim to utilize funds raised by GCF (target sites / projects that are not finalized, but the resources have been refunded to AE) It might be possible to form a project along with rapid schedule of private entities.

（様式２）

頁 図表番号7 47 58 68 7

17 10 Sumba Iconic Islandのコンセプト

タイトルGHG排出量の実績および推計

GHG排出シナリオ今後の電化計画

RUPTLにおける発電種別IPPs

二次利用未承諾リスト

委託事業名:平成29年度二国間クレジット取得等インフラ整備調査事業（GCFに関する実現可能性調査）

報告書の題名:無電化地帯への低炭素ストレージシステム導入におけるGCF活用検討調査

受注事業者名:株式会社野村総合研究所