Indonesian coal industry risking a tough transition as demand declines, report says

Indonesia, the world’s largest thermal coal exporter, is at a crossroads as global demand for coal slows and the transition to clean energy accelerates. A recent report by the Institute for Energy Economics and Financial Analysis (IEEFA) warns that the Indonesian coal sector could face significant financial and structural challenges in the coming years, as major markets pivot away from fossil fuels.

Coal Sector’s Vulnerability in the Energy Transition

The IEEFA report highlights that Indonesia’s heavy reliance on coal exports—particularly to China and India—poses a serious risk in a world increasingly prioritizing decarbonization. “Indonesia is staring at a future where its largest customers are investing aggressively in renewable energy and reducing their coal dependency,” said Elrika Hamdi, energy finance analyst at IEEFA and lead author of the report.

As of 2024, coal accounted for over 60% of Indonesia’s electricity generation and nearly 15% of the country’s total export earnings. However, global sentiment is rapidly shifting. China has pledged to peak carbon emissions before 2030 and achieve carbon neutrality by 2060. India, too, is pushing forward with ambitious solar and wind energy projects.

“These developments are not abstract risks. They are material and imminent,” Hamdi warned.

Declining Demand and Price Pressures

Global coal prices have softened significantly from their 2022 highs, when geopolitical tensions and post-pandemic demand spikes temporarily propped up the market. The Newcastle coal benchmark has dropped over 40% in the last year, weighing heavily on Indonesian miners.

Data from the Indonesian Ministry of Energy and Mineral Resources show coal exports dipped 8% year-on-year in Q1 2025, and domestic consumption failed to compensate for the decline.

“Margins are being squeezed, and smaller players are especially vulnerable,” said Dwi Nugroho, a Jakarta-based energy sector consultant. “Many operators that expanded aggressively during the price boom are now struggling to manage debt.”

High Financial Exposure

Indonesia’s coal industry is also exposed to financial risk due to its deep entanglement with the banking sector. According to the IEEFA, Indonesian banks have extended over $12 billion in credit to coal-related businesses, a figure that could spell trouble if asset values decline sharply.

“There is a systemic risk here. If coal becomes a stranded asset, financial institutions will bear the brunt,” noted Hamdi.

The Indonesian Financial Services Authority (OJK) has acknowledged the growing risk and is urging banks to reevaluate exposure to carbon-intensive sectors.

Government Policy in the Spotlight

Despite growing concerns, Indonesia has continued to support its coal industry. In 2024, the government extended production quotas and relaxed export regulations to protect revenues and employment in mining regions.

However, critics argue this approach is shortsighted. “These policies may provide short-term relief, but they delay necessary reforms,” said Bhima Yudhistira, director at the Center of Economic and Law Studies (CELIOS).

He added that a more strategic pivot toward renewables, backed by a clear roadmap, is critical for energy security and long-term economic sustainability.

Transition Challenges and Opportunities

Transitioning away from coal will not be easy. The industry directly employs over 250,000 people, and several regions—particularly in Kalimantan and Sumatra—are economically dependent on mining operations.

However, the IEEFA report also sees opportunity. With abundant solar potential and growing investor interest in green energy, Indonesia can reposition itself as a regional clean energy leader.

“The longer Indonesia waits to diversify, the more painful the transition will be,” Hamdi emphasized. “With the right policy incentives, a just and equitable energy shift is achievable.”

Investor Outlook

The shifting dynamics have not gone unnoticed by investors. While large players like Adaro Energy and PT Bukit Asam remain profitable for now, analysts say long-term prospects are increasingly tied to diversification strategies.

“Companies that are moving into renewables, like solar, green hydrogen, or battery storage, will be seen more favorably by institutional investors,” said Michelle Tan, an ESG investment strategist at a Singapore-based asset management firm.

Global ESG funds have already begun reallocating capital away from fossil-fuel-heavy portfolios, and Indonesia’s coal stocks have underperformed the broader Jakarta Composite Index (JCI) by 12% in the past six months.

Indonesia’s coal industry is facing a defining moment. As global momentum toward clean energy intensifies, the country must confront the financial, social, and environmental implications of its reliance on coal.

Without a clear transition plan, the risks—from stranded assets and financial instability to unemployment and regional economic downturns—could outweigh any short-term gains.

However, with proactive policy reform and investment in renewable energy, Indonesia can not only mitigate these risks but emerge as a leader in Southeast Asia’s green energy transformation.