The Indonesian government recently reaffirmed its commitment to relocate Indonesia’s capital from Jakarta to East Kalimantan. On January 18, 2022, the Indonesian parliament passed the IKN Bill or the capital city bill into law laying out the legal framework to relocate the capital which will be named Nusantara.
While the initial plan was delayed due to the outbreak of Covid-19 in 2020, the relocation expected to be completed by 2024 and will see the administrative functions of the government move to Kalimantan, while Jakarta will continue to be the main commercial and financial hub of Indonesia. The new capital will be built across 56,000 hectares of land.
Notably, the new capital’s ESG-aligned urban planning and construction is expected to serve as a blueprint in smart city development for other cities in Indonesia and the region. Thus, the move would have a multiplier effect and stimulate economic growth in the region given that the ambitious project comes with a development price tag of US$33 million.
With the government looking to increase the standard of infrastructure in the new capital, the relocation move would lead to more infrastructural investments in the capital city and surrounding areas. Specifically, higher infrastructure spending will have positive trickle-down effect for the steel and cement industries. For instance, focus on green housing in the new capital will act as an impetus for the cement industry. Low carbon residential buildings are expected to see strong demand as the capital city works towards building a smart metropolis.
Development of energy-efficient infrastructure and green buildings can bode well for green cement players. According to estimates, the new capital city is expected to house nearly 1.5 million people with around 75 per cent green space allocation will be maintained for environmental balance.
Power projects, especially those based on renewable energy are also expected to be another important end-use opportunity for steel players in the new capital city. As per estimates, the new capital city will need additional power plants with a capacity of 1,555 MW. To meet these requirements, low carbon technologies would play an important role because Kalimantan currently relies heavily on fossil fuels including diesel and coal for on-grid power, and diesel generator sets for off-grid power. Hence, lowering overall electricity generation costs, which are higher in eastern Indonesia, would be important besides capitalizing on the huge renewable energy potential of the region estimated to be 20 GW.
The Indonesian government and the state utility, PLN are already planning the development of a large-scale hydro power project in the province of East Kalimantan to provide some of the baseload power requirements. A key project in the pipeline is the Mentarang Induk Hydroelectric Plant (MIHEP) on the Mentarang River, which is proposed to be located approximately 35 kilometres upstream of Kota Malinau in Malinau Regency, North Kalimantan Province, Indonesia with an installed capacity of 1,375 MW. Dam construction is expected to commence in 2022 and the project has the potential to provide a sustainable supply of clean and more affordable power for nearby communities and to improve the security of electrical supply to the new Indonesian capital.
The government is also looking at building up huge solar parks, to capitalize on the huge solar irradiation potential of the eastern region. In the West Kutai regency in East Kalimantan, around 1 GW of projects are expected to be developed. Another project in the pipeline is the PT Bukit Asam Solar PV Park III, a 200MW solar PV power project in East Kalimantan for which project construction is likely to commence in 2023. These projects are expected to spur demand for key raw materials like steel. Renewable energy structures like wind turbines, solar panels, all of which use steel will stimulate demand for the steel industry players. In addition to these power generation projects, there are also plans to upgrade the power transmission grid in the new capital. A circular smart grid with plenty of storage connected to high, medium and low voltage networks using underground cables has been proposed as more generation capacity gets added to meet the power demand of the new state capital.
The share of green transport in Indonesia’s new capital city is also set to increase. The government has reportedly said that it wants public and private transportation in the new capital city to use only autonomous and electric vehicles. The design plan for the new city includes electric vehicles, monorails, and drone taxis as part of the clean city. As per the plans shared by the government, all vehicles in North Penajam Paser and Kutai Kartanegara in East Kalimantan, will be EVs, and non-EVs from surrounding cities such as Samarinda and Balikpapan would be prohibited from entering. Also, the government has proposed to build lithium battery-production facilities in the new capital city to ensure the availability of power for the EVs. Steel will thus be essential to meeting the green transport needs and related infrastructure such as roads, bridges, ports, stations, airports, etc in the new capital city, presenting yet another increased demand opportunity both for steel and cement players to grow and attract potential investors.
A key concern, however, remains the country meeting its emission reduction targets while successfully relocating its capital. As one of the world’s top greenhouse gas emitters, Indonesia has pledged to reduce emissions by signing an agreement to end deforestation by 2030 during the COP26 summit in Glasgow. Overall, while it will take significant migration over the long term for the new city to be fully functional, the new capital city relocation project is what Indonesia needs to stimulate the economy given its rising debt-to-GDP ratio. This is a great opportunity for the Indonesian government to demonstrate that it is capable of building a climate-proof city using sustainable technologies and materials.
