Chapter 3_31May2023_final problem tree and analysis

Chapter 3

1. Chapter 3 Problem Tree, Strategies, Theory of Change and Monitoring Framework

2. 1. APPROACH AND METHODOLOGY

3. 3. Formulating Objectives

4. 3a. PROBLEM TREE: ROOT CAUSES AND EFFECTS The main problem being addressed by the hydrogen strategy stems from the current business-as-usual scenario with respect to meeting Indonesia’s international commitment related to climate change Without a deliberate intervention, Indonesia’s pledged NDC target will not be achieved technology options for energy transition will be limited economic opportunities associated with hydrogen development will not be realised The root causes of this includes Lack of green business development in the country Weak energy sovereignty, and Export oriented industries are carbon intensive As a consequence The country could miss its SDG targets Industries are dominated by fossil fuel-based industries Fossil fuel remains dominant fuel for energy generation and long-range transport

5. 3 a. PROBLEM TREE: ROOT CAUSES AND EFFECTS ROOT CAUSES EFFECTS

6. 3b. OBJECTIVE TREE: OBJECTIVES AND RESULTS The national hydrogen strategy therefore aims to establish a hydrogen economy that Contribute to reducing green house gas emissions by utilizing country’s abundant RE potential Accelerate decarbonization effort for energy transition, and Spur economic growth through hydrogen development considering the geographic potential as maritime country The strategy will Create green business opportunities Strengthen energy sovereignty, and Hydrogen export industry established As a result The country’s environmental quality will improve Green manufacturing industries will be developed Energy supply will be diversified with increasing share of clean fuels

7. 3b. OBJECTIVE TREE: OBJECTIVES AND RESULTS RESULTS OBJECTIVES

8. 3c. KEY CHALLENGES Key challenges in establishing a hydrogen economy in Indonesia include: Supply uncertainty . At present, there is no available low carbon hydrogen in Indonesia. Demand uncertainty . There is a very limited use of green hydrogen in the country. Regulatory uncertainty . The current lack of a long-term policy and regulatory framework for low carbon hydrogen deter investors from switching to hydrogen. Lack of market structure . There is no currently regulated market for low carbon hydrogen. Infrastructure barriers . Hydrogen production plants require infrastructure to transport hydrogen to the end users. They may also need hydrogen storage infrastructure to help balance hydrogen supply and demand. Insufficient investment in the infrastructure will limit entries on the production side.

9. 4a. Hydrogen Hierarchy

10. 4a. SCOTLAND HYDROGEN HIERARCHY

11. 4a. INDONESIAN HYDROGEN HIERARCHY Feedstock for industries, energy exports Shipping, aviation and heavy road fuels, steel production High temperature heat processes, long term energy storage for grid support Coal co-firing, natural gas co-firing Offsite power generation, long distance rail Low temperature industrial heat, short distance maritime Short term energy storage, light road fuels Best market opportunity Uncertain market opportunity

12. 4b. SWOT Analysis

13. 4b. HYDROGEN ECONOMY SWOT ANALYSIS ANALYSIS OF THE REGION       S trengths Export market Existing O&G export supply chain Existing product export supply chain Progress on discussions to export to Singapore Strong maritime sector Domestic market CCUS regulations under development Evidenced developer interest in the region Pre-existing skills of working with gases from the O&G and fertilizer industry Existing domestic market for hydrogen Energy sovereignty Natural gas reserves Abundant renewable energy resources Depleted O&G gas wells for hydrogen storage and CCS Good water availability on some islands

14. 4b. HYDROGEN ECONOMY SWOT ANALYSIS ANALYSIS OF THE REGION     W eaknesses Export market Product export infrastructure not equipped to receive hydrogen Not all low-carbon products (EU definition) exported by Indonesia Domestic market Limited hydrogen infrastructure in development Limited regulatory environment Businesses reliant on fossil fuels for operations Energy sovereignty Dispersed geothermal, hydropower and wind resources Renewable energy not experiencing low cost potential High carbon intensity grid Mini-grids reliant on diesel supply chain

15. 4b. HYDROGEN ECONOMY SWOT ANALYSIS ANALYSIS OF THE REGION     O pportunities Export market Singapore within pipeline trading distance Japan and South Korea signalling as hydrogen importers EU CBAM providing value to low-carbon products Shipping and aviation markets for transport fuels that will require sustainable CO 2 Domestic market Transport market closest to becoming economical Fixed routes such as ferries offer ideal infrastructure starting points Growing oleochemical industry Hydrogen feedstock industry offers largest decarbonisation opportunity Energy sovereignty Decouple from volatile international energy markets Avoid being reliant on an international supply chain Capture surplus renewable energy and accumulate energy reserves Opportunity to develop renewable energy supply chain

16. 4b. HYDROGEN ECONOMY SWOT ANALYSIS ANALYSIS OF THE REGION       T hreats Export market Australia is a strong competitor in the region Tightening of international emissions standards a risk to blue hydrogen Domestic market Hydrogen not economical without subsidies or carbon taxes Blue hydrogen not fully compliant with the principles of Net Zero Slow speed of renewables hindering cost decreases Energy sovereignty High solar pathway presents risk of wasted surplus energy Overuse of hydrogen could lead to energy inefficiency Utilisation of geothermal resources for hydrogen will lock them out of decarbonising the power sector

17. 4c. Hydrogen strategy

18. Objectives and strategic outputs Indonesia will reduce its dependence on fossil fuels, especially imports, to ensure its energy sovereignty and security Indonesia will progress towards decarbonisation targets by developing a domestic hydrogen market Indonesia will export into the global hydrogen and hydrogen-derivative market by leveraging the uniqueness as an archipelago country Achieving NDC and NZE targets 4c. Objectives and strategic outputs

19. Objectives and strategic outputs Indonesia will reduce its dependence on fossil fuels, especially imports, to ensure its energy sovereignty and security Indonesia will progress towards decarbonisation targets by developing a domestic hydrogen market Indonesia will export into the global hydrogen and hydrogen-derivative market by leveraging the uniqueness as an archipelago country Accelerate renewable energy implementation Plan for reliable and efficient use of hydrogen Support universal energy access Create a comprehensive regulatory environment Develop an industrial hydrogen hub Support hydrogen refuelling infrastructure Develop a low-carbon product export hub Develop low-carbon fuels for export commodity Develop bi-lateral agreements Achieving NDC and NZE targets 4c. Objectives and strategic outputs

20. 4c. Objectives and strategic outputs Indonesia will reduce its dependence on fossil fuels, especially imports, to ensure its energy sovereignty and security Indonesia will progress towards decarbonisation targets by developing a domestic hydrogen market Indonesia will export into the global hydrogen and hydrogen-derivative market by leveraging the uniqueness as an archipelago country Power transmission Hydrogen transmission Manufacturing supply Deep water ports CCS infrastructure Proactively plan enabling infrastructure Achieving NDC and NZE targets

21. 4c. Objectives and strategic outputs Indonesia will reduce its dependence on fossil fuels, especially imports, to ensure its energy sovereignty and security Indonesia will progress towards decarbonisation targets by developing a domestic hydrogen market Indonesia will export into the global hydrogen and hydrogen-derivative market by leveraging the uniqueness as an archipelago country Accelerate renewable energy implementation Plan for reliable and efficient use of hydrogen Support universal energy access Create a comprehensive regulatory environment Develop a hydrogen hub Support hydrogen refuelling infrastructure Develop a low-carbon product export hub Develop low-carbon fuels for transport Develop bi-lateral agreements Proactively plan enabling infrastructure

22. Indonesia will reduce its dependence on fossil fuels, especially imports, to ensure its energy sovereignty and security

23. Accelerate renewable energy implementation Indonesia has access to a wide diversity of renewable energy resources. Currently these resources are starting to be developed in line with Indonesia’s strategy to decarbonise the power grid. Mass implementation drives down costs for renewables. Alongside renewables to decarbonise the power grid, additional renewables will be required to provide power directly to green hydrogen sources. The grid will also serve as a back-up supply for green hydrogen production during times of resource intermittency or maintenance. The carbon intensity of the grid directly relates to the volume of energy that it can provide. Implementing grid-connected renewables will lower grid carbon intensity. Having abundant low cost renewables will keep green hydrogen costs low for the benefit of the nation. GoI to accelerate deployment of renewables GoI will review renewables implementation impact on grid carbon intensity on strategic islands Energy sovereignty Source: PT Pertamina

24. Plan for reliable and efficient use of hydrogen 1/2 Hydrogen supports system reliability in a high-renewable future by storing surplus energy. This supports Indonesia’s energy sovereignty by: Balancing the power grid by hydrogen generators acting as peaking plants Securing national energy reserves by storing energy Disconnecting from global energy commodity prices and stabilising energy prices Decentralising and diversifying energy sources to protect from points of failure The geological formations that are best suited for hydrogen storage need to be determined in order to find the best candidates that will be able to support the future energy system. Extra transmission or pipeline infrastructure may need to be constructed to enable them. GoI to identify geological storage for hydrogen GoI investigate the role hydrogen will play in long term power planning Energy sovereignty

25. Plan for reliable and efficient use of hydrogen 2/2 Green hydrogen is an inefficient energy vector and can hinder energy sovereignty if utilised unnecessarily. In many cases electrification is more efficient than hydrogen. Electrolysis has a conversion rate of approximately 70% where as electrification is often much higher Electrification also opens up efficiency opportunities within industrial equipment by reducing waste heat. For example; electrification in the glass-making process can deliver a 35% efficiency boost over gas. This would make electrification require 50% less electricity than green hydrogen. GoI to ensure industrial strategy considers electrification in parallel to any hydrogen solution Energy sovereignty Source: IRINA

26. Support universal electricity access Hydrogen can support mini-grids by capturing curtailed renewable energy production. It will convert it to hydrogen, store it locally and reutilise it through a generator or fuel cell when it is required. A hydrogen mini-grid will support energy sovereignty by being entirely self-sufficient and not rely on oil supply chains. This provides energy sovereignty for the benefiting community and provides a reliable and scalable solution. Pilot programmes allow the electricity sector to test and validate the concept. Additionally there will be data and learnings that can be built on to develop new policies around the technology, create new components to increase system efficiency and lower cost, and implement processes to ensure safety. GoI will support pilot programmes to demonstrate the feasibility of hydrogen for mini-grids. GoI will examine & explore to demonstrate the feasibility of hydrogen for utility-grids. Energy sovereignty Source: Tiger Power

27. Indonesia will enhance its industrial and economic competitiveness by creating new green business opportunities, generating new jobs and promoting technological innovation

28. Create a comprehensive regulatory environment 1/3 A clear regulatory environment is an essential to encourage the growth of a low-carbon hydrogen market. Clear regulations provide certainty and stability to industry players and investors and create a level playing field for all participants in the market. Regulations that provide value recognition and support open market principles include: A definition on the greenhouse gas emissions thresholds for hydrogen production to qualify as low carbon Monitoring reporting and verification programmes to track progress against strategic targets A certification scheme to provide hydrogen value differentiation and accounting Hydrogen gas quality standards Upstream gas emissions monitoring regulations Pipeline pressure and operation standards to support future interconnectivity Safety standards GoI will review the above and either create new regulations or align with existing international frameworks GoI to determine regulatory authority for the hydrogen sector Create new green business opportunities Source: CertifHy

29. Create a comprehensive regulatory environment 2/3 Supporting fiscal policies reduce investment risks, encourages capital flow into the sector, and stimulates innovation and competition. They could come in the form of: Tax discounts/exemptions Income tax holidays Import/export taxes Innovation competitions with progress monitoring programmes GoI to investigate supportive fiscal policies GoI to investigate funding sources to enable them (e.g. ETS, Crude Palm Oil Fund (CPO), Renewable Enery funds and others) Investment frameworks Development expenditure (grant) Capital expenditure (grant) Operating expenditure (subsidy) Create new green business opportunities Source: Climate strategies

30. Create a comprehensive regulatory environment 3/3 The implementation of a carbon tax or Emissions Trading Scheme (ETS) is a key driving policy for disincentivising fossil fuels and encouraging uptake of low-carbon alternatives. For most use cases fossil fuels are likely to always be a more economic energy source than hydrogen. This fiscal policy gradually levels the playing field. Money made from a tax or ETS is reinvested into enabling low-carbon solutions. GoI to investigate expanding the carbon market from power sector to other sectors (e.g. industry & transport) Create new green business opportunities Source: PT Pertamina

31. Develop a hydrogen hub Hydrogen hubs are geographic areas where various hydrogen stakeholders are co-located and plan for infrastructure integration. Shared pipeline networks are a significantly lower-cost hydrogen transportation method to connect the entire value chain. Prioritising development in industrial zones allow for economies of scale and a greater decarbonisation impact. The Indonesian Industrial Strategy 2015-2035 identified a number of Special Industrial Zones that serve existing industry and aim to attract new investment. Aligning these hubs with the identified will allow for new and existing industrial developments to utilise hydrogen to make low-carbon products for domestic use or export into international markets. GoI will identify a portfolio of potential hydrogen hubs for development GoI will designate one or more zones to become hydrogen hubs and actively support their development Source: PT Pertamina

32. Support hydrogen refuelling infrastructure Hydrogen vehicles require purpose built refuelling infrastructure. Ideally a refuelling network will be built to serve the needs of and of multiple services including road vehicles, rail and ferries. The start of a network would aim to support commonly used fixed routes or a large fleet through back-to-base refuelling. The network would then grow to strategically enable more long-distance routes and enable more hydrogen vehicles to be adopted. GoI to support the development of a hydrogen-refuelling network through strategic planning Source: Asia Pacific Infrastructure

33. Indonesia will play an active role in the global hydrogen and hydrogen-derivative market by optimising the uniqueness as a maritime/archipelago country

34. Develop a low-carbon product export hub Europe has released the Carbon Border Adjustment Mechanism (CBAM) policy that creates a market for low-carbon products including: Fertiliser Iron & steel Cement Aluminium Electricity Hydrogen More carbon intensive products are expected to be added and more nations are likely to create equivalent policies to protect their decarbonised industries and decarbonise their scope 3 emissions. GoI will implement decarbonisation into the industrial strategy with a focus on their leading relevant export industries: Fertiliser Iron & steel Source: PT Pertamina

35. Develop low-carbon fuels for transport International shipping and aviation are hard to decarbonise sectors that will require specialist fuels to facilitate long distance travel. Indonesia is well placed to take advantage of a growing ammonia market. The country is also well placed to be able to create high-value synthetic hydrocarbon fuels such as methanol, kerosene and methane. Some studies show that these fuels will be traded in an equivalent quantity to ammonia and shipped hydrogen. The EU has indicated that, from 2041, only synthetic hydrocarbon fuels made from sustainable carbon feedstocks qualify as renewable fuels. GoI will investigate the national potential for sustainable carbon feedstocks from: Bioenergy production Natural geothermal venting Direct air capture utilising waste heat sources Source: World Hydrogen Council Source: BRIN

36. Develop bilateral agreements Develop international collaborative agreements with nations to progress hydrogen related opportunities. Agreements could be any of the following Technology collaboration Knowledge exchange Project development Offtake agreements Green shipping corridors For example: The existing collaboration with Singapore should aim to align supply and demand, mitigate offtake risks, align standards and regulations, attract investment and promote economic cooperation. GoI will continue to develop bilateral agreements with nations Source: IRINA

37. Covering all objectives

38. Proactively plan enabling infrastructure Hydrogen transmission pipeline infrastructure to interconnect supply with demand Carbon sequestration infrastructure to support carbon capture projects and prepare for future carbon removals Power transmission infrastructure to connect and transmit renewable energy to hydrogen production locations Deep water ports to export low-carbon products at scale GoI will develop strategic infrastructure plans that enable multiple market players and further the hydrogen economy Local manufacturing will support cost reductions in renewable energy by simplifying supply chain

39. Initial Recommendations Energy sovereignty GoI to accelerate deployment of renewables GoI will review renewables implementation impact on grid carbon intensity on strategic islands GoI to identify geological storage for hydrogen GoI investigate the role hydrogen will play in long term power planning for utility-grids GoI to ensure industrial strategy considers electrification in parallel to any hydrogen solution GoI will support pilot programmes to demonstrate the feasibility of hydrogen for mini-grids Domestic market GoI will review the above and either create new regulations or align with existing international frameworks GoI to determine regulatory authority for the hydrogen sector GoI to investigate supportive fiscal policies GoI to investigate funding sources to enable them (e.g. ETS, Crude Palm Oil Fund (CPO), Renewable Energy funds and others) GoI to investigate expanding the carbon market from power sector to other sectors (e.g. industry & transport) GoI will identify a portfolio of potential hydrogen hubs for development GoI will designate one or more zones to become hydrogen hubs and actively support their development GoI to support the development of a hydrogen-refuelling network through strategic planning Export market GoI will implement decarbonisation into the industrial strategy with a focus on their leading relevant export industries: Fertiliser Iron & steel GoI will investigate the national potential for sustainable carbon feedstocks from: Bioenergy production Natural geothermal venting Direct air capture utilising waste heat sources GoI will continue to develop bilateral agreements with nations

40. KEY CHALLENGES AND MEASURES Barriers Measures and Activities 1. Supply Uncertainty Accelerate renewable energy implementation ( Energy Sovereignty ) Accelerate massive deployment of renewables Identify potential clusters / strategic islands for H2 production site from RE/ Blue Hydrogen (location, capacity, cost) Review renewables implementation impact on grid carbon intensity on strategic islands Identify current domestic production capacity of hydrogen in Indonesia

41. KEY CHALLENGES AND MEASURES Barriers Measures and Activities 2. Demand Uncertainty Plan for reliable and efficient use of hydrogen (Energy Sovereignty) Investigate the role hydrogen will play in long term power planning Ensure industrial strategy considers electrification in parallel to any hydrogen solution Identify and assist the low-hanging fruit industries to transition to low-carbon hydrogen (i.e. fertilizers industry) Support pilot programmes for co-located low-carbon hydrogen use in industrial clusters Identify geological storage for hydrogen Support universal electricity access (Energy Sovereignty) Support pilot programmes to demonstrate the feasibility of hydrogen for mini-grids Develop low-carbon fuels for transport ( Export Development ) Investigate the national potential for sustainable carbon feedstocks from: bioenergy production, natural geothermal venting, direct air capture utilising waste heat sources Develop bilateral agreements ( Export Development ) Develop international collaborative agreements with nations to progress hydrogen related opportunities

42. KEY CHALLENGES AND MEASURES Barriers Measures and Activities 3. Regulatory Uncertainty Create a comprehensive regulatory environment ( Green Business Opportunities ) Create regulations or align with existing international frameworks ultimately on: 1) Emission standards on H2 production, 2) Certification scheme on H2 production, 3) HSE standards for production, transport & utilization Introduce supportive fiscal policies to encourage investment for pilot and implementation of H2 technology Implement carbon pricing schemes (cap-trade and tax) to accelerate massive RE deployment

43. KEY CHALLENGES AND MEASURES Barriers Measures and Activities 4. Lack of Market Structure Develop a hydrogen hub ( Green Business Opportunities ) Identify a portfolio of potential hydrogen hubs for development Designate one or more zones to become hydrogen hubs and actively support their development Develop a low-carbon product export hub ( Export Development ) Implement decarbonisation into the industrial strategy with a focus on their leading relevant export industries: fertiliser, iron & steel

44. KEY CHALLENGES AND MEASURES Barriers Measures and Activities 5. Infrastructure Barriers Proactively plan enabling infrastructure ( Cross-Cutting Outcome ) Develop strategic infrastructure plans that enable multiple market players and further the hydrogen economy Hydrogen transmission pipeline Power transmission infrastructure Carbon sequestration infrastructure Deep water ports Support hydrogen refuelling infrastructure ( Green Business Opportunities ) Support the development of a hydrogen-refuelling network through strategic planning

45. 5 Theory of Change and Design and Monitoring Framework

46. Theory of Change and Monitoring Framework The Theory of Change approach was used to visualize the hydrogen economy and as a strategic framework to develop a framework for monitoring the progress in implementing this hydrogen strategy. The key activities discussed earlier (in another slide) collectively represents our national strategies in establishing a national hydrogen economy. The results of these actions (outputs) will introduce changes in the economy in the short and medium terms (outcomes). These strategic outcomes and outputs are the following: Strategic Outcome 1: Energy Sovereignty Strengthened Output 1.1: renewable energy development accelerated Output 1.2: off-grid energy systems supplied with green hydrogen Output 1.3: enabling infrastructure established Output 1.4: hydrogen utilization efficiency improved Strategic Outcome 2: Green Business Opportunities Created Output 2.1: regulatory and business framework introduced Output 2.2: hydrogen infrastructure and local supply chain developed Output 2.3: a cluster of hydrogen activities (hub) is established

47. Theory of Change and Monitoring Framework Strategic Outcome 3: Hydrogen Export Industry Established Output 3.1: low carbon hydrogen and its derivatives exported Output 3.2: increased renewable generation for hydrogen exports Output 3.2: Export and CCS infrastructures developed Among the desired long-term effects of the strategy are the following: Reduction of greenhouse gas emissions and contribution to achieving the country’s net zero targets Achieving universal energy access complying the SDG 7 criteria of clean energy Green jobs created High foreign investments in green industries High penetration of renewable energy in the energy supply mix Green hydrogen/ammonia exports increased

48. Theory of Change and Monitoring Framework

49. Theory of Change and Monitoring Framework To monitor the progress of the implementation of the strategy, a set of indicators and metrics against outcomes will be prepared in the short term. Data will be further collected, and the indicators and metric will be refined as the hydrogen economy gradually develops.

50. Theory of Change and Monitoring Framework Strategy Outcome Potential Indicators and Metrics Identified Institution involved/ In-charge Strategic Outcome 1: Green Business Opportunities Created Output 1.1: Regulatory and business framework introduced Number of policies, regulations and standards issued (number), number of businesses involved in production, consumption and trading (number) Output 1.2: Hydrogen infrastructure and local supply chain developed Number of production installations (number), electrolyser capacity (kW), number and capacity of storage facilities (number and kgs), length of pipelines (km), number of companies involved in the manufacturing of hydrogen technologies (number and volume of production), transport of hydrogen by land and shipping vessel s (number of trucks and ships, storage capacity in kgs, volume/tonnage of hydrogen/ammonia transported) Output 1.3: Cluster of hydrogen activities (hub) is established Number of clusters (number), number of businesses involved in production, consumption and trading by cluster (number), hydrogen production capacity by cluster (kgs, kW for electrolysers), hydrogen consumption by cluster by subsector (kgs), renewable energy capacity by cluster (kW), renewable energy generation by cluster (kWh), electrolyser capacity by cluster (kW)

51. Theory of Change and Monitoring Framework Strategy Outcome Potential Indicators and Metrics Identified Institution involved/ In-charge Strategic Outcome 2: Energy Sovereignty Strengthened Output 2.1: Renewable energy development accelerated With reference to baseline, Incremental renewable energy capacity (kW), incremental renewable energy generation (kWh) Output 2.2: Off-grid energy systems supplied with green hydrogen number of isolated grids (number), number of households supplied (number), electrolyser capacity (kW), fuel cell capacity (kW), hydrogen production/consumption (kgs), renewable energy capacity (kW), renewable energy generation (kWh) Output 2.3: Enabling infrastructure strengthened Length of transmission and distribution network (km) and substation capacities (kVA), length of pipelines (km), CCS infrastructure (storage capacity), deep water ports (number of vessels and volume/tonnage of hydrogen transported) Output 2.4: Hydrogen utilisation efficiency improved number and consumption of hydrogen end-users by industry/sector (number and kg consumption)

52. Theory of Change and Monitoring Framework Strategy Outcome Potential Indicators and Metrics Identified Institution involved/ In-charge Strategic Outcome 3: Hydrogen Export Industry Established Output 3.1: Green hydrogen and its derivatives exported Green hydrogen/ammonia exports (kgs), electrolyser capacity (kW) Output 3.2: Increased renewable generation for hydrogen exports renewable energy capacity (kW), renewable energy generation (kWh), electrolyser capacity (kW) Output 3.3: Export and CCS infrastructure developed deep water ports (number of vessels and volume/tonnage of hydrogen transported), number of CCS infrastructures (number and storage capacity),

53. Theory of Change and Monitoring Framework