Lessons for the World Bank: Building a More Inclusive Electrification Project in Indonesia

The World Bank has recently approved a $628 million Investment Project loan (from a total project volume of $2.1 billion which includes a Program for Results and Technical Assistance) for the Indonesia Sustainable Least-Cost Electrification Project-2 (ISLE-2). The project is managed by Indonesia’s state-owned electricity utility, Perusahaan Listrik Negara. It has been designed to expand access to renewable energy by deploying 540 MW of solar and wind power capacity, as well as extending electricity infrastructure to 3.5 million people, particularly in underserved regions such as Kalimantan and Sumatra. The project’s goals are to reduce generation costs, decrease greenhouse gas emissions, and foster inclusive economic growth through the expansion of clean energy value chains.

ISLE-2 should be implemented in a way that takes into consideration the design and implementation of ISLE-1 to better achieve climate and energy objectives. Both projects aim to improve electrification and promote renewable energy in underserved regions of the country. BIC and partners urge the bank to implement measures to prevent funding from being used to expand fossil infrastructure and to better align with Indonesia’s just energy transition goals. 

Bank officials in Indonesia have so far been reluctant to engage in dialogue with BIC and Trend Asia to discuss the project’s risks and better understand how the projects fit within the country’s energy transition commitments.

1. Fossil Lock-in and Transparency Gaps. Although ISLE-1 and ISLE-2 are presented as projects that will expand renewable energy and modernize transmission systems, much of the funding is directed toward infrastructure, such as transmission lines for electricity generation, which is already heavily reliant on fossil fuels. According to project documents, in 2018, 88% of Indonesia’s installed capacity came from coal, gas, and diesel, creating a high risk that upgrades to electricity infrastructure will reinforce fossil fuel use rather than accelerate a shift to renewables. The reliance on hybrid renewable-diesel systems to modernize existing diesel generators also raises concerns. Without a clear strategy to phase out the use of fossil fuels, these systems could prolong diesel dependency instead of replacing it. In addition, while the Climate Assessment Sheet reports that 88% of ISLE-2 qualifies as climate finance, neither this document nor other project documents provides analyses behind greenhouse gas estimations on subprojects.

2. Rising Coal Dependence and Risks of Energy Surplus. Coal currently accounts for approximately 61% of Indonesia’s electricity generation, the highest level on record, and is expected to continue growing. The country’s Just Energy Transition Partnership (JETP), launched in 2022 as a major international initiative to decarbonize Indonesia’s power sector, in which MDBs, including the Bank, were expected to provide much of the financing and technical support for the decarbonization of Indonesia’s energy sector. However, the program has shown limited progress since the release of the Comprehensive Investment and Policy Plan (CIPP) in 2023.(1) The ISLE-2 project documents make no explicit reference to the JETP or the CIPP processes, and this lack of alignment could, in practice, mean a lost opportunity. CSOs have expressed concerns that an energy surplus from renewable energy expansions promoted by ISLE 1 and 2 could fail in their goal of replacing fossil-based electricity, leading to increased electricity exports instead. In October 2024, for example, the Government of Indonesia signed a deal with Singapore to export its power oversupply.

3. Reliance on fossil gas. The ISLE 1 and 2 projects are presented in the project documents as a means to implement Indonesia’s National Power Supply Plan 2021-2030 (RUPTL). However, the RUPTL heavily relies on fossil fuels, noting that natural gas is one of the bases for future energy supply. Gas should not be considered an option for greenfield energy projects in the country or globally, as the International Energy Agency (IEA) has called for a halt to new natural gas exploration and the phase-out of existing projects to limit global warming. IEA recommends that fossil fuels be gone from the global electric grid by 2050 to achieve net-zero GHGs.

4. Risks of Deforestation from Biomass Cofiring. The RUPTL sets targets for biomass use (fuelwood), including biomass co-firing at dozens of coal-fired power plants, which requires tens of millions of tons of feedstock annually. As the Environmental Paper Network points out, the burning of fuelwood is often misframed as a sustainable solution, yet it carries significant environmental impacts and risks. Weak sustainability controls could drive large-scale deforestation and forest degradation, particularly in ecologically valuable and high-carbon ecosystems, such as mangroves, peatlands, and tropical rainforests. Without specific forest protection measures, controls, ISLE-2 may increase demand for fuelwood, which will undermine the conservation and sustainable use objectives.

5. Gaps in Stakeholder Engagement: Project consultants of ISLE 2 have conducted consultations with PLN, government officials, local businessmen, and academics, which are described as “stakeholder engagement” in the Environmental and Social Systems Assessment (ESSA). However, according to project documents, no consultations were conducted with local communities and IPs. Such consultations are indispensable to promote good project design, equitable distribution of project benefits, reduce implementation costs, minimize negative externalities, and prevent social conflicts or complaints surrounding the project’s operations. The Stakeholder Engagement Framework (SEF) notes that “since the project locations are yet to be determined, a framework-level approach is prepared to guide the preparation of a SEP for each subproject,” which in practice means that no stakeholder engagement plans have been published yet as part of the project.

6. Lack of Cumulative Impact Assessments: According to the ESSA, the project area (Sumatra and Kalimantan) includes extensive Key Biodiversity Areas and is home to over 800 Indigenous Peoples groups. The ESSA identifies significant risks related to biodiversity, land acquisition, and resettlement. However, no environmental or cumulative impact assessments are publicly available on the Bank’s website, leaving key gaps in understanding the project’s long-term implications for people and ecosystems at a landscape and regional level. In other projects monitored by BIC, we have identified that the lack of cumulative impact assessments has promoted the large-scale transformation of landscapes, exacerbating biodiversity loss and conflicts over land and resource use. The ESSA also notes that the client has not provided evidence to demonstrate that the project will not harm the livelihoods of local communities. Project documents claim ISLE 2 “will exclude any E&S high-risk subprojects,” but it is unclear which criteria the Bank uses to screen projects. With plans for 2,000 kilometers of transmission lines, energy substations, and 540 MW of solar generation, the potential land and ecological impacts are substantial.

7. Weak verification and monitoring: The ESSA mentions an Independent Verification Agency (IVA) responsible for compliance monitoring, but details on its role, independence, and oversight are lacking, raising concerns about effective project accountability.

(1)The CIPP is a strategy document under Indonesia’s JETP, serving as the roadmap for investments and policy reforms to accelerate a just and decarbonized transition of the country’s power sector. It was developed by the Government of Indonesia, with support from international partners, and included workshops with civil society organizations.

$628 million IPF loan. The ISLE-2 Operation reaches $2.1 billion, encompassing a Program for Results component, an Investment Project Financing and Technical Assistance.

Trend Asia

1. Disclosure of project-level climate information. The project should disclose detailed, subproject-level reporting on how climate finance is calculated, including transparent methodologies for greenhouse gas accounting, Paris alignment assessments, baselines, and assumptions used in energy intensity and emissions reduction metrics.
2. Linking Renewable Expansion to Fossil Fuel Phase-Out. All program components should align with Indonesia’s just energy transition goals, promoting that short-term electrification gains also support long-term decarbonization. Renewable energy additions under ISLE-2 should be linked to the JETP/CIPP process, in line with concrete plans for decommissioning coal and diesel plants, including clear conditions and timelines for phasing out diesel use. It is crucial that Bank-financed energy projects are tied to strong government commitments to fossil fuel divestment, to prevent renewables from simply adding to overall generation.
3. Adopt measures to avoid indirect financing of fossil fuels in implementation. ISLE-2 should include explicit measures to prevent funds from supporting fossil fuel infrastructure and require that hybrid systems are structured around a diesel phase-out strategy. Greater transparency is needed through detailed, subproject-level disclosure of climate finance classifications, allowing for the verification of reported contributions. The Bank should adopt a clear position stating that fossil gas cannot be funded by the project or by financial intermediaries that may be involved in the operation.
4. Exclude Financing that Promotes Deforestation. The project should adopt binding restrictions that bar financing that directly or indirectly promotes deforestation or forest degradation in connection with biomass or wood co-firing. ISLE-2 should explicitly exclude biomass feedstocks for its hybrid systems.
5. Strengthen Local and IP Consultations. The project should require that local communities and IPs are meaningfully consulted through concrete stakeholder engagement plans for each subproject, with published strategies guiding inclusive participation and equitable benefit distribution.
6. Conduct Comprehensive and Transparent Assessments. The Bank should require detailed environmental and social impact assessments, including cumulative and biodiversity-specific studies, to be conducted and publicly disclosed before implementation. Assessments should address land acquisition, impacts on Indigenous Peoples, and interactions with other existing or planned projects to fully capture long-term implications for both communities and ecosystems.
7. Embed Just Transition Principles. ISLE 2 should integrate the four pillars of a Just Energy Transition —recognition justice, distributive justice, procedural justice, and restorative justice —into project design and implementation to support a socially equitable and sustainable energy transition.
8. Clarify and Strengthen Monitoring Mechanisms. The role and independence of the IVA should be clearly defined, with detailed monitoring processes established to verify compliance with exclusion criteria and maintain robust project oversight.