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As it seeks to improve the quality of living for its people and support industrialization, Indonesia needs more investment in electricity systems. Power consumption is outpacing production, with the effect that households and businesses commonly experience insufficient or unreliable electricity supply and sometimes rolling blackouts. The Java-Bali grid, which consumes the vast majority of Indonesian electricity, is troubled by a lack of reserve capacity which has also led to reliance on costly temporary power sources. Less developed regions of the archipelago are witnessing nothing short of a power crisis and can only get by with the help of rental power diesel generators. Without determined action to simultaneously improve power generation and distribution, Indonesia's electricity infrastructure will get in the way of economic progress. National electricity company PT Perusahaan Listrik Negara (PLN) is working on both fronts, but its resources are limited. Unless private players step up to the plate, Indonesia will be hard-pressed to meet its development targets.
Well aware of this situation, the government has been inviting independent power producers (IPP) to build plants and feed electricity into the public grid. It has also recently refined regulations on public-private partnerships (PPP) (See Indonesian Infrastructure: Tremendous PPP Opportunities) and land acquisition in a bid to attract more private-sector interest. Considering Indonesia's abundance of suitable electricity feedstock, such as coal, natural gas, geothermal energy (See Re-energised: Opportunities in Indonesia’s Geothermal Sector) and hydroelectric potential, the country is punching far below its weight.
Indonesia's electrification ratio stands at around 80%, up from just over 60% in 2005. The government has set a goal of 99% of the population to be connected by the end of 2020. In the country's easternmost province of Papua, a majority of the population still lacks access to grid power. PLN's mid-term projection (RUPTL), which has been adopted by the government, forecasts that national electricity needs will rise at an annual rate of more than 8% from 189 terawatt-hours (TWh) in 2013 to 387 TWh in 2022. Areas outside of the Java-Bali system are expected to see the greatest increase as the electricity networks are expanded to formerly disconnected regions.
Total installed electricity generating capacity at the end of 2013 stood at around 47 GW. By 2022, according to PLN's estimates, Indonesia will require an additional 60 GW in capacity, in addition to the replacement of decommissioned power plants. By 2050, installed capacity is seen to rise to 430 GW. At the same time, inadequate transmission and distribution networks – particularly in eastern regions of the country – need to be extended and modernized to reach new customers and boost reliability. New interconnections shall improve transmission between the major islands and across national borders. More than 50,000 km of new transmission lines will be needed by 2022, according to the official projection, in addition to 400,000 km of new distribution lines that carry power to consumers.
As of mid-2013, Indonesia produced more than half of its electricity from coal, a quarter from gas, 13% from oil and the modest rest mainly from hydro and geothermal power. PLN provided almost three-quarters of generating capacity, while IPPs provided some 22% and private power utilities added another 4%. The role of the private sector is on the rise as IPPs are seen to account for an increasing share in power production.
Sources: PLN, Ministry of Energy and Mineral Resources (*2014 - 2022 are estimates)
The energy projections issued by Indonesian authorities tend to be based on optimistic GDP growth trajectories. With slower economic development, the anticipated increase in power use could be somewhat less dramatic than anticipated. Also, it is unclear whether energy conservation has been adequately taken into account. In any case, the additional generation and transmission capacity to meet Indonesia's future electricity demand is no doubt a task of enormous proportions with plenty of opportunities for private investment. A total of $125 billion will be required in the 2013-2022 period, according to the RUPTL projection. The state-owned utility is banking on IPPs to contribute the lion's share of $54 billion for power generators, while PLN would invest $37 billion in plants. Some $19 billion are needed for transmission lines and substations and another $15 billion for distribution. Aside from IPPs, private players can engage in PPPs or engineering, procurement and construction (EPC).
To address the impending electricity crisis, the government in 2006 initiated what it called the Fast Track programme, which consists of power projects totalling 10 GW. A second Fast Track programme, aimed at adding another 10 GW to national generating capacity, was launched in 2010. The first programme relies on coal-fired plants to quickly boost output the way PLN knows best. The second includes mostly geothermal energy projects, with hydroelectric power, coal and gas coming into play as well.
This second programme is of greater significance to the private sector as it is geared towards IPP investment. It holds particularly interesting opportunities for foreign investors in renewable energy, an industry where Indonesian companies often lack experience (See Renewable Energy in Indonesia – A Sleeping Giant). Both Fast Track programmes have fallen far behind schedule due to a lack of investment interest in the designated IPP projects or because of funding problems and delays blamed on administrative issues (such as land acquisition and permits for forest use). It will take until at least 2020 for the last plant to start up. Some IPP projects are also offered to investors outside of the Fast Track programmes.
Coal will remain the most import source of electricity for Indonesia in the foreseeable future, as most new power plants and those under construction use this fuel. In fact, government plans aim for coal-fired plants to produce two-thirds of national electricity by 2022, while the use of oil and other fuels will be reduced to less than 2%. The motivation behind this is to limit costly fuel imports and rely instead on a resource that of which Indonesia, the world's largest thermal coal exporter, has enormous reserves. The law also requires that domestic sources be prioritized for energy production (See The Coal Sector in Indonesia).
Indonesia is now one of the most appealing markets for coal-fired electricity generation, including at mine mouth power plants. Southern Sumatra holds most of the national coal reserves, and its proximity to the industrial heartland of western Java makes it an interesting prospect for power producers. Indonesia also holds huge natural gas reserves, and while the proportion of gas in Indonesia's future electricity mix is targeted to fall slightly, given the overall increase in electricity consumption, gas-fuelled power generation too requires lots of investment.
Despite being endowed with approximately 40% of global geothermal resources, Indonesia has been slow to tap this and other clean sources of energy. Even though the government has improved regulations and investment incentives (including feed-in tariffs) for renewable energy projects, the target of satisfying 23% of its overall energy needs from renewable sources by 2025 looks unrealistic now. The archipelago also has lots of untapped potential in hydroelectric power, both for large and small-scale plants. Other renewables, such as biomass and photovoltaic solar, also offer enticing opportunities for experienced investors.
Government-mandated prices keep power tariffs in Indonesia artificially low for consumers to the detriment of the industry. With production costs exceeding retail prices, PLN required more than $9 billion in government subsidies in 2013 to make ends meet. The rapid increase in demand and the mounting subsidy bill have convinced the government to begin lifting rates. Prices rose by an average of 15% over the course of 2013 in quarterly increments and are set to rise further (See Indonesia’s Subsidies on Electricity Powered Down). This gives PLN greater leeway to offer higher prices for the power it purchases from IPPs.
While Law No. 30 of 2009 on Electricity officially ends PLN's monopoly on power supply, the state-owned company is still the principle buyer of electricity owing to its distribution network, which gives it significant pricing authority and can put IPPs in an uncomfortable position. To mitigate the risks for investors and hence improve the bankability of projects, the government can explicitly guarantee PLN's ability to honour power purchase agreements (PPA) in what is known as a Business Viability Guarantee Letter, based on a presidential regulation from 2011.
Rising prices and government guarantees, in addition to the improved PPP framework and land acquisition legislation alleviate what used to be some of the major factors keeping potential investors at bay in Indonesia's electricity sector. It remains to be seen what additional steps President Joko Widodo's new administration may take to boost power output, but bearing in mind the importance of reliable energy for national development, the power sector should become more open rather than closed to private and foreign participation. Placed in an increasingly integrated and energy-hungry region, Southeast Asia's largest economy is definitely one to watch for electricity investors.
Global Business Guide Indonesia - 2014
Contribution to GDP: 3.44% (2016)
Oil & Gas Imports: $1.22 billion USD (Jan 2016)
Proven Oil Reserves: 3.69 billion barrels (2016)
Proven Gas Reserves: 2.85 trillion cubic metre (2016)
Proven Coal Reserves: 28 billion tonnes total reserves (2015)
Proven Potential in Geothermal Energy: 27 GW
Proven Potential in Hydropower: 75 GW
Other Energy Sources: Coal Bed Methane, Biomass, Waste, Ocean Current, Solar, Wind.
Current Energy Mix: Petroleum 41%, Coal 30%, Natural Gas 23%, Renewables 6% (2014).
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