The decision means Jakarta will not lay out a path to shut the so-called captive coal power plants in its comprehensive investment and policy plan (CIPP) that it needs to secure $20 billion in funding pledged under the Just Energy Transition Partnership (JETP).
The plan is due to be published on Wednesday for public feedback.
JETP, a financing scheme made up of equity investments, grants and concessionary loans from members of Group of Seven (G7), multilateral banks and private lenders, is aimed at helping developing countries shift to cleaner energy in the power sector.
Coal-fired power plants operated by industries were being excluded from the plan because authorities needed more time to work out how to protect the nickel smelting sector, said one of the sources, who declined to be identified, adding that the exclusion would be temporary.
The exclusion will make it more difficult for Southeast Asia's largest economy to meet its JETP target to cap power sector emissions at 290 million metric tons of CO2-equivalent by 2030 because the public sector will now be saddled with a greater share of the reduction burden.
Captive coal power stations with 13.74 gigawatt (GW) of capacity are operating in the Southeast Asian archipelago and 20.48 GW are being planned. The recent surge is due to the expansion of the metal processing sector, according to a July report that the Asian Development Bank commissioned.
Indonesia has pledged to stop commissioning new coal power plants but still allows new ones for smelters.
Indonesia's decision not to include the industrial coal plants in its plan follows complaints from officials that the JETP financing terms were not as expected, with high interest on loans and only a small portion in grants. Half of the JETP commitments come from private lenders.
Indonesia is not the only country facing problems in implementing a JETP deal.
G7 members offered Vietnam just 2% of its total $15.5 billion JETP financial package in grants, while the biggest chunk of its loans will carry market-determined interest rates, documents reviewed by Reuters showed.
There have also been questions over the inaugural JETP deal with South Africa, which is facing rolling blackouts. South Africa secured a $8.5 billion financing pledge.
'GOOD DECISION'
Experts have said ensuring the success of Indonesia's JETP is important not just because it is the biggest deal but it is also seen as a test of G7 commitment to work with developing nations.
Fabby Tumiwa, executive director of the Institute for Essential Services Reform think tank, part of a JETP technical working group, said it was better to exclude the coal-fired plants for now rather than delay the plan.
"If we wait for the analysis for captive power, we're afraid JETP will not move forward. I think this is a good decision, so we can start with the information that we have," Tumiwa said.
The International Partners Group of donors and lenders, with which Indonesia is making the agreement, has approved of the decision to focus on decarbonisation by the state utility, provided that the carbon reduction targets will remain unchanged, said the source who declined to be identified.
The utility operates a grid with 69 GW power generation capacity, at the end of 2022, half powered by coal.
Indonesia has also said it is concerned about the extent of compensation from Western countries to shut coal power plants early to make way for renewable energy.
The CIPP will show only $2.5 billion of JETP funding is earmarked for closing coal plants, said Pradana Murti, a director at PT Sarana Multi Infrastruktur (SMI), a state-owned financing company managing energy transition funds.
Tumiwa said the plan would show Indonesia needs $95 billion until 2030 to reach JETP goals, while the first source said the figure could reach $120 billion.
