Integrated macroeconomic and climate impact assessment of Japan-financed power plants in Indonesia: a cost–benefit and input–output approach

Abstract

Japan has long provided funding to Indonesia, supporting its economic growth through infrastructure investment, including energy-related ones. As representative projects, this study examined the efficiency of past investments in coal-fired and geothermal power plants. Over the past decade, these two technologies have benefitted the most from Japanese public funding. Employing the input–output analysis method, this study evaluated two model projects from the perspectives of both the host and the financing countries. We integrated economic effects across sectors and the associated value-chain impacts of climate change into the cost–benefit analysis framework. The results highlighted that these projects may not necessarily represent efficient resource allocation. Specifically, coal projects were not justified on a cost–benefit basis because of their high climate costs and the low value-added rate of the Indonesian electricity sector. We also found that geothermal projects may be barely viable for Indonesia if the electricity sales price is not sufficiently high. However, the project was justified when aggregated with the net benefit accrued in Japan. Japan substantially benefitted from the export of coal-fired and geothermal power plant equipment. This yielded a benefit-to-cost ratio of over 3.0 for Japan for both projects. These findings underscore the importance of conducting comprehensive overseas project assessments that integrate climate change impacts and economic effects on both host and financing countries. Our analysis framework is also relevant to evaluating recent energy transition projects and can highlight the resource-efficiency perspective in developing Asia and Japan.