Globe Asia - June 2010
People in Indonesia, particularly those living outside the highly populated Java island, for the past few years, have been accustomed to electricity brownouts or blackouts which occur on an almost daily basis. This has happened due to an insufficient power supply, caused by a lack of investment in generating capacity over the past several years.
Despite efforts to accelerate the development of additional capacity, the fact remains that a large number of Indonesian households do not have access to reliable electricity networks, with the electrification ratio at only 65%. This condition has mainly resulted from delays in the completion of several power generation plants, which was primarily caused by difficulties in obtaining financing for the projects.
As a large investment is required to overcome the issue, the Indonesian government is fostering private investor participation in the sector. With this landscape in mind, the government has recently issued a new electricity law, which is expected to alleviate some of the issues preventing private sector participation in the sector.
At the moment, Indonesia has an installed generating capacity of approximately 29 GW from different sources of energy. The vast majority of the installed capacity, or 76 percent, is installed on the Java – Bali grid. Independent Power Producers (IPPs) contribute only about 4 GW on the Java – Bali grid, which mostly comes from coal-fired power plants. Whilst outside the Java – Bali grid, the total generating capacity is only about 7 GW, which covers the rest of the vast archipelago. The total electricity generated from IPPs outside the Java – Bali grid is less than 1 GW.
The development of the country’s power supply has not displayed any significant progress in the last five years. In 2004, the total capacity was around 24 GW – 21 GW from Perusahaan Listrik Negara (PLN) and 3 GW from IPPs. Hence, the additional capacity for the last five years is only 5 GW, or about 4.5 percent compounded annual growth. The contribution of IPPs to the total capacity from 2004 to 2008 averaged about 12 percent.
One of the key initiatives to accelerate the development of power capacity is the fast track program by developing an additional 10,000 MW (“10,000 MW phase 1). This program was launched by PLN in 2006, and covers 10 projects in the Java – Bali grid and 25 projects outside the Java – Bali grid. As of late 2009, the additional capacity coming into the system is estimated at 600 – 900 MW. In 2010, the additional capacity resulting from the completion of power plants currently in the pipeline is expected to be around 3,000 MW; whilst the remaining projects will be completed in 2013.
A second phase of accelerated program for an additional 10,000 MW (“10,000 MW phase 2”) has been rolled out in early 2010. This program promotes the usage of coal and geothermal as the energy sources. Total planned additional capacity from this program is 10,043 MW, consisting of 5,118 MW under PLN projects and 4,925 MW under IPP projects.
In terms of relative consumption, Indonesia’s annual electricity consumption per capita is relatively low (0.55 mWh) compared to other countries in the region, and in particular below Vietnam (0.70 mWh), Thailand (2.28 mWh), and the Philippines (0.64 mWh). The average annual electricity consumption per capita in the region is around 4.56 mWh.
Hence, with the assumption of economic growth of 6%, the national electricity demand is estimated to grow at approximately 9 percent in the next 10 years; which is mainly driven by a combination of industrial needs and household consumption. This growth rate is one of the highest in the region, together with China (7 percent) India (5 percent) and Vietnam (8 percent). The average growth rate in this region is about 4.8%.
It is targeted that the percentage of households with electricity will grow to 91% by 2019. In this regards, additional capacity of 81 GW for generating plant, primary gate (Gardu Induk) of 100,000 MVA and transmission network of approximately 40,000 km is required. To realize the potential growth in electricity demand in the future, significant additional investment will be needed.
The total investment to develop the electricity sector from 2010 – 2019 is estimated at around US$66 billion or $6 billion a year. For the next five years, the investment will comprise $31.4 billion for generation, $7.3 billion for transmission and $5.3 billion for distribution – or a total planned investment of around $44 billion. According to the 2010-2019 PLN Plan, about 50% of the total needed investment for generation will come from IPP investors; while the remaining will be developed by PLN.
However, there are a few challenges faced by investors to develop the power sector. The first issue relates to financing the projects. Many IPPs are currently in the financing phase and/or PPA negotiation phase. The potential for delay is approximately 13 GW. Most of the second generation IPP projects (i.e. those without government support) failed in getting the necessary financing. Meanwhile many of the projects in the construction phase are struggling with increases in project costs. In the financing stage, one of the biggest constraints is how developers can meet the lender’s requirements amid lack of experience.
Secondly, Law No. 30/2009 on Electricity still needs further implementing regulations. The Indonesian Government acknowledge the importance of private investor participation to accelerate the country’s electricity development. One of the key issues preventing sufficient private investor participation, however, is the different perception between the Government and private investors in how risks should be allocated between the Government and private investors.
The new electricity law creates a framework for future risk sharing allocation (as stipulated in the PPA) between the Government and private investors. The law also offers some improvement in the regulatory framework, in particular by providing a greater role for the regional government and other entities to participate in this business. However, many of the finer points in the Law need to be stipulated in the implementing regulations, which are suppose to be issued within one year of the effective date of the new law. It will take some time to determine whether the new law can achieve the objectives to overcome the shortage in electricity supply in Indonesia.
William Deertz is former Technical Advisor and Agung Wiryawan is a Director at PricewaterhouseCoopers Indonesia*