Indonesia’s supercharged power plans come unplugged
Premier Joko Widodo has amped up infrastructure development but his grand designs to boost the national power grid have short-circuited
When the history books are written, there is little question President Joko Widodo will have earned his legacy as the “Infrastructure President,” such has been his single-minded focus on a sector that has long been a brake on Indonesia’s economic development.
In Jakarta alone, mass rail (MRT) and light rail (LRT) systems, elevated busways, underpasses and overpasses and newly-dredged waterways may have turned the capital into a traffic-choked construction site, but they are transforming its landscape forever.
Widodo will and should get the credit. But for all the progress being made in land links and communications, it is the power sector where his ambitions have short-circuited. With economic growth below expectations that ultimately may not be such a bad thing.
Adding 35,000 megawatts (MW) to the nation’s 53,000MW generating capacity in the space of five years, in retrospect, was probably never going to happen. In fact, so far only 1,357MW has been commissioned, with another 17,086MW reportedly under construction.
Even that figure, which includes 11,439MW of private power, appears to be inflated by projects where the developers have only signed power purchase agreements. No more than 5-6,000MW, industry experts say, is actually being built.
Under the 608 trillion rupiah (US$46.7 billion) program, 75% of the 35,847MW was set aside for independent power producers (IPPs), with state utility Perusaahan Listrik Negara (PLN) constitutionally-responsible for a planned 62,000 kilometers of new transmission lines.
The expansion would add 20,900MW to the 28,000MW Java-Bali grid and 8,700MW to power-starved Sumatra’s 3,000MW network, much of it from coal-fired stations that already contribute 58% of Indonesia’s total electricity output.
While it has done an admirable job keeping the lights on, PLN is clearly struggling. Its annual 10-year business plan shows it has had to significantly scale down its annual electricity sales forecast and slash 22,300MW in new generating capacity.
In fact, sales have been cut in each of the past three years, with the forecast for 2026 now 31.6% lower than earlier predictions when Widodo was promising 7% growth by the end of his term.
That’s because the Java-Bali grid is at over-capacity, due to improved energy efficiencies, a slowdown in the growth of manufacturing to only 4-5% a year, and the greater use of generators in industrial estates and new economic zones.
Laboring under a US$22 billion debt burden, PLN’s cash flow is also under increasing pressure because of populist policies that include a new uniform fuel price across the country and a tariff freeze until the end of the 2019 election year amid fast rising world oil prices.
A study issued this month by US-based Institute for Energy Economics and Financial Analysis (EEFA) holds little hope of PLN finding enough interest in the US$2 billion worth of rupiah-denominated Komodo bonds it plans to issue this year to finance future development.
Leaving aside cost under-recovery and ever-present regulatory risks, the IEEFA says PLN is “sinking under the weight of a flawed planning process,” with insufficient revenue to offset its huge operating costs, which have averaged US$2.1 billion over the past four years.
In a previous report, IEEFA was critical of Indonesia’s centralized coal-based power strategy, saying it risked wasting US$25 billion over the next 25 years if it did not follow the global trend of shifting to smaller plants and renewable options.
“In years past, international capital markets might have overlooked the company’s coal dependency and its shaky finances, but no more,” says analyst Melissa Brown. “Increasingly global bond investors understand the risks associated with coal lock-in for high-growth countries like Indonesia.”
As an example of the value investors place on the environment, she pointed to the recent success of Indonesia’s US$1.25 billion sovereign green sukuk bond, the world’s first which will go towards renewables, energy efficiency, climate change initiatives and sustainable transport.
Without government subsidies, Brown estimates the utility would have lost US$2.3 billion in 2016 and US$1.47 billion last year. Instead, it was able to book profits of US$591 million and US$321 million respectively from a drip-feed of government assistance that has averaged US$4.7 billion since 2013.
The government has recently capped the domestic coal price for power stations at US$70 a ton until 2020, 30% below the world market price. The Mines and Energy Ministry is also regulating the tariffs of high-cost IPPs.
Transport is a growing issue, too, given the additional 140 million tons of coal – 30% of Indonesia’s total output – that will be required each year, much of it to be moved by ship and barge from Sumatra and Kalimantan to Java.
The problem: Indonesia doesn’t have enough capacity to ship that much extra coal without running afoul of its own 2005 Cabotage Law, under which all ships operating in its waters must be under an Indonesian flag.
The government has instructed state-controlled companies to seek alternative sources of finance as public funding constraints begin to bite, without any sign yet that the infrastructure boom is having a significant impact on economic growth.
PLN finance director Sarwono Sudarto has insisted the company is still in good financial shape, pointing to its ability to use its own resources to finance 60% of the 190.7 trillion rupiah ($14.3 billion) in investments between 2015 and 2017.
But the new business plan suggests otherwise, halving an expected increase in power demand to 4% and raising questions over the utility’s nation-wide electrification target of 95% set out in the state budget.
Although PLN claims 92% of the populace has access to power, ‘access’ is the operative word. Most industry experts say without illegal connections and private power generators PLN’s actual coverage is probably closer to 65%.
There is no PLN transmission, for example, in northeast Lampung at the southern end of Sumatra, site of a 23,000-hectare shrimp pond farm partly run by Thai agri-business giant Charoen Pokapand, which relies entirely on its own generators.
Elsewhere, mining giant Freeport Indonesia supplies all the power (385MW) to its Grasberg mine on the south coast of Papua. So does BP at its Tangguh LNG plant (105MW) in West Papua, Amman Mineral at its copper and gold mine in Sumbawa (242MW) and nickel miner Vale in Central Sulawesi (375MW).
Natural gas currently makes up 24% of the national energy mix, but with the Masela block development apparently stalled and US energy giant Chevron backing off its US$12 billion Deepwater Development in the Makassar Strait efforts to divert more gas for domestic use are limited.
To understand why everything has not been going to script, look no further than Java 1, the planned 1,780MW gas-fired plant on the eastern edge of Jakarta where state oil firm Pertamina is the main joint venture partner and PLN holds the liquefied natural gas (LNG) contract.
The role reversal reflects the bitter decades-old rivalry between the country’s two biggest corporates, with PLN making its own deal to take gas from BP’s Tangguh plant after it determined that Pertamina’s 40-year-old Bontang facility could only supply half of the required cargoes.
Pertamina already has problems of its own, underscored by last week’s abrupt change of management. If its main interest in diversifying into power was to win the contract to supply LNG to Java I’s floating re-gasification terminal, then it appears to have fallen flat.