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Indonesia's power sector gropes in the
dark
By Bill Guerin
Against
the backdrop of the sudden closure of the US Embassy,
violent clashes accompanying the re-election of
Jakarta's widely disliked governor, Sutiyoso, and the
brazen refusal of parliament Speaker Akbar Tanjung to
step down, the Indonesian capital and surrounding areas
were blacked out for long periods on September 12-13.
After the power failure, PT Perusahaan Listrik
Negara (PLN, Indonesia's state-owned electric utility)
president Eddie Widiono said it was up to the public
whether to file a class-action suit "but please also
consider our efforts to always improve our service",
adding that the events were "only" a technical problem.
Other PLN officials claimed kite strings or large tree
leaves could have caused the outages.
Widiono
could hardly have been more insensitive or provocative.
Thousands of electric-train passengers stranded, no
clean water supply, and fires all over metropolitan
Jakarta caused by candles fueled palpable misery and
inconvenience to the city's residents.
Consumers
have little chance of compensation. The state power
monopoly PLN is protected from class actions by a clause
in the new Electricity Law, passed this month after 18
months of deliberations, which only allows for
compensation after three consecutive days of
disruption to power supplies. Two years ago, after a
seven-day blackout in Bogor, PLN paid out a derisory
Rp500 (5 US cents) per user.
An estimated 4.5
million customers felt the pain this time and losses are
estimated at tens of billions of rupiah. The monolith
employs more than 50,000 workers to service almost 29
million subscribers.
The anger and frustration
from small consumers and businesses follow countless
complaints of fluctuating voltage that damages
electronic goods, a string of localized power-outage
incidents day after day without notice, and continually
increasing tariff hikes.
PLN says it lost Rp4.5
billion (US$500,000) due to the first day's blackout
alone, but Goodyear, the giant tire maker, claims more
than Rp1.25 billion worth of lost of production.
Satelindo, one of the country's biggest GSM (global
system for mobile communication) network operators, said
638 of its 1,400 relay stations couldn't function.
Business-wise, this unreliable power supply
means higher costs for investors and constraints on
manufacturers meeting delivery schedules. Business
uncertainty will rise sharply as companies try to reduce
the possible impact of more unplanned blackouts. For
some businesses the costs could be significant.
Businesses cannot work around unplanned blackouts.
Businesses will have to factor greater lead times for
delivery, diversify their supply networks, and/or
stockpile inventory. Such measures represent significant
costs.
Although PLN has been a limited-liability
company since 1994, the government makes it follow
policies that are not compatible with commercial
interests. The government provides much of PLN's
financing through loans from international agencies and,
of course, acts as both policy-maker and regulator for
the power sector.
Expanding supply to the rural
areas in the provinces has been subjugated to government
policy objectives, as has the theory that electricity
would be provided at an affordable price for households.
The new bill, however, means PLN will gradually
lose its monopoly in power generation, transmission and
distribution to mid-size and large users. In theory new
investors will be allowed to enter the sector, though
this is somewhat academic given the backdrop of
countrywide risk factors, such as legal risk, a weak
banking sector and weak capital markets, and several
sector-specific factors that make investment in the
sector decidedly unattractive.
Under the bill,
all producers, including PLN, will have to sell to
distribution companies through a bidding system. The
lowest bidder will be allowed to enter the power grid,
which will be operated by a special agency to be
established by the government. Full liberalization will
be implemented in stages over a seven-year transition
period.
Implementation of the law will be made
gradually through a Power Market Supervisory Agency
(PMSA) that will be set up within a year of the
legislation being implemented.
The PMSA will
determine which provinces are ripe for market
competition and which will remain under monopoly control
and will be tasked with ensuring fair market competition
for mid-size and large consumers and determining power
prices for small users. Five years after the new law
takes effect, the government must have selected one area
for the implementation of free-market competition.
While the power generation and power marketing
sectors will be opened for competition, the government
will continue to control the power transmission and
distribution network. However, in the spirit of free
competition, all licensed companies will be free to
develop power plants and sell their power to the public
by themselves or through agents.
Local
governments will have the right to issue licenses to
private companies to set up power plants or sell power
to the public in their respective jurisdictions.
Financially, PLN is in dire straits. Power
generation costs in rupiah terms have risen steeply, not
simply because of the proven gross inefficiency and
associated corrupt practices of PLN, but mainly as a
result of the meltdown of the rupiah in 1997. Most of
PLN's borrowing is in dollars, while its revenues are in
rupiah. An estimated 80 percent of power cost components
is based on foreign exchange.
PLN currently
sells electricity at 3.5 cents per kilowatt-hour, which
is only 50 percent of the production cost. Electricity
tariffs were increased by an average 6 percent at the
turn of the year and a staggered increase in tariff is
on the cards from which PLN expects to achieve a 16
percent increase in revenue. A further 24 percent
increase in electricity prices is planned for next year
and until 2005, when the rates are expected to reach the
economic level of 7 cents per kilowatt-hour.
Overburdened by mountains of debt, PLN simply
does not have enough resources even to expand its
transmission and distribution networks, let alone build
new power stations.
Indonesia currently produces
about 22,732 megawatts of power annually but will need
about 58,800MW by 2010. This is estimated to require new
investments of up to $37.26 billion.
The world's
largest financial institutions have poured millions of
dollars into independent power producers (IPPs) to help
develop the power sector and, in the early 1990s, PLN
signed power purchase agreements for 27 power-plant
projects, backed by foreign funds, to cope with an
expected surge in demand. These contracts, as a result
of the partial liberalization of the utilities industry,
were all with consortiums of international energy
companies and former president Suharto's family members
and friends.
Some of these are on-stream and the
government in 1997 and 1998 suspended others as
retrenchment measures to cope with the monetary crisis.
The government put on hold many of the projects in late
1997 as part of the retrenchment program to cope with
the economic crisis.
The postponement was first
lauded as proof that the reform movement had, after all,
begun to bite, but later triggered a string of disputes
with the IPPs and arbitration proceedings, resulting in
financial losses for the government.
Since then,
PLN has been trying to renegotiate the power purchase
contracts with those IPPs that are still generating in a
bid to lower the price of their power, while fighting
off legal action by others. The utility estimates that
it would have needed to pay out a massive $133 billion
over 30 years to these IPPs under the original
contracts.
Ten IPP contracts have been
successfully amended, resulting in decreases in power
prices to be paid by PLN from a range of between 6 and 8
cents per kilowatt-hour to a range of between 3 and 4.9
cents. Ten other IPP contracts are at the final stage of
renegotiations, six others were finally canceled due to
their unfeasibility and only one ended up in litigation.
The fact that these IPPs are willing to
renegotiate price terms in their contracts suggests that
they accept the government's view that, though the
contracts inspired by the Suharto regime are holding the
country to ransom and are distinctly unfeasible
commercially, new agreements were a much better option
than costly litigation and public exposure of their
original sins, as it were.
On the other hand,
electricity supplies in Java and Bali and several other
provinces would have been in critical condition now had
it not been for these independent power producers.
However, all is not as it seems with the new
deals.
In July PLN trumpeted a new agreement on
a power purchase deal with PT Paiton Energy at a price
of 4.93 cents per kilowatt-hour for a period of 40
years. But a little-publicized clause means PLN will
also pay $4 million per month to Paiton for a period of
30 years as part of the deal and a "take or pay" clause
agreed to has a capacity factor of some 6.62 cents per
kilowatt-hour.
Though this is a considerable
reduction on the original 1994 price agreed at 8.46
cents per kilowatt-hour, it is way above the rates set
by similar power generating plants in other Southeast
Asian countries. Malaysia's Bunting geothermal power
plant produces at about 3.19 cents per kilowatt-hour and
the Na Duong steam-powered power plant in Vietnam
manages to churn out power at a cost of 4.2 cents per
kilowatt-hour. The cost is also much higher than the
rate set by PLN's own Suralaya steam-powered power plant
in West Java (about 3.7 cents per kilowatt-hour).
If the Paiton deal sets the standard for other
IPP deals, then clearly the taxpayer and the public,
those so shabbily treated by PLN, will end up footing
the bill anyway. Notwithstanding this interpretation,
Siemens-backed Java Power is said to be near to
agreement with PLN on a price of 4.68 cents per
kilowatt-hour and monthly payment of $900,000 for 30
years.
These deals were reached in the hope of
forestalling a major power shortage in the vital
Java-Bali grid. PLN has warned that Java and Bali, which
account for almost 80 percent of electricity
consumption, could see power supply disruptions next
year if no additional capacity comes on stream.
The peak load in the Java-Bali grid is now about
16,000MW, while the PLN installed capacity is only
18,800MW. With an estimated increase in annual demand of
between 10 and 15 percent, at least 1,800MW in
additional capacity is needed by 2004 to maintain a
minimum power reserve margin of 30 percent. A reserve
level lower than this minimum will ensure more periods
of darkness for parts of Java during peak demand
periods.
As PLN has few financial resources,
even for maintenance and expansion of transmission and
distribution networks, any new generation capacity can
only be come from IPPs anyway.
Regular major
power blackouts may lead to social unrest or worse and a
disruption of the economy. More than three decades of
successful development under Suharto means that
electricity is even more vital now to the community. Not
just the industrial sector, but home industries and
small factories, even in the most rural areas, depend on
power. Blackouts and rising costs will hit them hard.
Electricity, like hydrocarbon fuel, is a vital
commercial energy source. Even if the politicians ever
get round to focusing on the economy instead of
themselves there can be no growth without an adequate
power supply, and the price of electricity impacts on
the efficiency of the whole economy.
The issue
boils down to money - income, expenditure and growth
capital. Some $65 billion has been spent so far on
bailing out the banking industry, but the power sector
was being forced to carry the can for past sins of the
government and corrupters, as well as gross
inefficiencies.
Though this year's moves to
resolve disputes with those who in effect own and run
PLN's monopoly power supply network augurs well, the
salvation of PLN needs to become a national priority
sooner rather than later.
Widiono needs to get
charged up for his country and get the widely disliked
national utility plugged into the needs of Indonesians.
(©2002 Asia Times Online Co, Ltd. All rights
reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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