Managing risk for Indonesia’s conventional power sector in a decarbonising economy

Conventional generators face uncertainty from fuel markets, system operations, and physical conditions.

Indonesia’s conventional power sector is under pressure to do two things at once: Keep pace with fast-growing electricity demand, and support the country’s commitment to reduce emissions over the coming decades. As carbon policies, investor requirements, and technologies evolve, the risk landscape for coal and gas generators is becoming more complex, interconnected, and time-critical.

Three broad risk categories stand out: transition risk, operational and supply chain risk, and reputation and stakeholder risk.

Transition risk
Tightening emissions standards, emerging carbon pricing mechanisms, and evolving market rules are reshaping the economics of conventional power. Plants may face higher compliance costs, unplanned capital expenditure for emissions control, or shorter than expected operating lives. Indonesia’s long-term ambition to reach net zero emissions by 2050 raises emissions reduction targets greater than previous commitments.

At the same time, global and domestic lenders are aligning portfolios with net zero targets. This can mean shorter repayment periods, stricter loan conditions, and reduced appetite for long-life coal projects. Conventional assets risk becoming partially stranded if their original financial and operating assumptions no longer hold true. Changing power purchase arrangements and lower dispatch as more renewables enter the system can further weaken cash flows.

For boards and investors, these are no longer distant concerns. They affect valuations, refinancing options, and balance sheet resilience in the near- to medium-term.

Operational and supply chain risk in a changing system
Operationally, Indonesia’s conventional generators face greater uncertainty from fuel markets, system operations, and physical conditions.

Exposure to coal and gas market volatility, coupled with domestic supply and policy controls, makes fuel planning more challenging. As the grid absorbs more variable renewable energy, conventional plants need to become more flexible and resilient. More frequent ramping and cycling can accelerate wear and tear on conventional assets, heighten outage risk, and demand new maintenance strategies.

Natural physical risks are also rising. Floods, earthquakes, and more intense storms can threaten plant sites, transmission infrastructure, and logistics routes, leading to more frequent and severe business interruption events.

Reputation and stakeholder risk
Communities, regulators, and investors are placing conventional power under greater scrutiny. Concerns about local environmental and health impacts, as well as broader climate objectives, can translate into delays and tighter conditions on permits and extensions.

Investors and lenders are increasing their environmental and social governance (ESG) criteria into their decisions. Weak ESG performance or limited transparency can restrict access to capital and increase financing costs. For operators, reputation and stakeholder satisfaction are now directly linked to financial flexibility and long-term feasibility.

Managing these risks requires a shift from traditional, siloed risk management to an integrated, forward-looking approach that links risk, capital, and strategy. Utility companies, IPPs, and investors must quantify transition risks arising from regulatory changes, insurer preferences, and financing terms to better inform board decisions.

Additionally, they must consider updating risk transfer programs, including property, liability, business interruption, and construction, to address new technologies, operating models, and ESG standards. Boosting resilience requires conducting scenario analyses, stress testing policies, and assessing climate-related physical risks for critical assets. At the same time, aligning workforce and safety strategies with digitalisation, revised maintenance processes, and evolving skills requirements is essential.

As Indonesia advances its energy transition, conventional power will remain essential for grid stability and security of supply. The winners will be operators who treat decarbonisation not only as a compliance issue, but as a strategic risk and opportunity agenda.