Despite a doubling of its total electricity generating capacity in the past decade, Indonesia still has a low electrification rate compared to countries with similar income levels. In 2014, about 84% of Indonesia's population had access to electricity compared to less than 68% in 2010, according to state electric utility firm Perusahaan Listrik Negara (PLN). Despite this increase, this ratio is still below the average of other countries in Asia, which was 99% in Malaysia, Thailand and Vietnam and 100% in Singapore and Brunei. President Joko Widodo has had his sights set on boosting the electricity sector since taking office and is targeting the development of 35 GW by 2019; this is considered to be an ambitious target and not ambitious enough by some critics. The ninth economic policy package was a further signal of the government’s commitment to improving the investment climate for electricity and to woo the private sector into investing in a notoriously challenging industry in which even high profile projects have failed to get off the ground.
Indonesia aims to achieve nearly complete electrification of the country by 2020. In recent years, electricity capacity additions have not kept pace with electricity demand growth, leading to power shortages in grid-connected areas. Inadequate infrastructure as a result of insufficient investment and regulatory hurdles contribute to lower electrification rates, primarily in eastern Indonesia.
During the APEC CEO Summit in Beijing, President Widodo therefore announced his crucial goal: to boost Indonesia’s electricity production and distribution to facilitate economic growth. He laid out his ambitious infrastructure project plans and pledged to allocate most of his resources in the immediate term to facilitate infrastructure development.
This led to Indonesia’s ninth economic stimulus package announced in late January 2016. This package states that the government will issue a presidential decree (PERPRES) to accelerate electricity infrastructure development. Currently, the government has a nationwide target of 53 MW installed power capacity, and annual electricity sales of 220 TWH. For the electricity ratio, the Indonesian government plans to increase the ratio to 97.2% by 2019 from the current 87.5%. Assuming 6% annual GDP growth, infrastructure development is required to grow by 8.8% pa, assuming elasticity of electricity development to economic growth of 1.2x. To achieve those targets, the government will provide state-owned electricity company (PLN) with a capital injection, supporting PLN’s initiatives on primary energy sufficiency, renewable energy development, regulation easing and land clearing (See Indonesia’s Land Acquisition Laws; On Paper Only?). This stimulus package drew positive responses as it was seen as a breakthrough in accelerating the development of power projects.
PLN, which is the only permitted legal entity for supplying electricity to the public, was tasked by President Widodo to establish power plants with a total capacity of 35 GW within the next five years. With PLN responsible for 17 GW, new opportunities open up to the private sector to undertake the remaining 18 GW. Private parties will create a consortium and operate as an independent power plant (IPP). For this programme, the Indonesian government targets coal to be the main energy source comprising more than 60% of the energy mix. This is an ambitious and challenging goal and will determine the new cabinet’s ability to deliver its infrastructure development promise.
PLN has been tasked with similar projects in the past, namely Fast Track Programme (FTP) 1 and 2. FTP 1, with a target capacity of 10,000 MW has realised 63% of the total planned capacity by end of 2013, and was targeted for completion by 2015, a delay from the original scheduled completion in 2010. FTP 2, with a target capacity of 17,900 MW, was scheduled to be completed by 2016. However, it is yet to be in operation and various projects are estimated to only begin operation in 2016 at the earliest. These delays are due to licensing issues, land clearing, financing, delays in government-backed loans, construction and various technical difficulties (See High Stakes for Indonesia’s Infrastructure Push).
PLN is committed to implementing the 35 GW programme as reflected through their concurrent plan to construct approximately 46,000 km of transmission lines and 103,000 MVA of electrical relay stations across over 1,000 locations in the country. Currently, PLN has 44 GW installed capacity which supports 54 million subscribers, or an 8.4% increase compared to the previous year. By 2022, Indonesia is expected to have a 98% electrification ratio across the country, with IPPs taking a significant part of this growth.
Therefore the government is seeking to stimulate foreign investment in the power sector by mandating PLN to offer guaranteed power purchase agreements (PPAs) for independent power producers (IPPs) as part of its supply portfolio. The government projects that IPPs will construct nearly 60% of the power capacity in the latest government programme to add these 35,000 MW of power by 2019. Numerous investment deals have been inked for up to 17,300 MW by the end of 2015 illustrating investor enthusiasm in the initiative, yet realisation of such projects is another matter.
For foreign investors, most opportunities will lie in renewable energy. PLN is planning to keep increasing the utilisation of new renewable energy to generate power despite the challenges encountered so far. According to PLN data, around 55.7% of electricity generation in 2015 was fueled by coal, 25.3% by gas, 8.2% by diesel fuel, 5.9% by hydropower plants and around 4% by geothermal energy (See Re-energised: Opportunities in Indonesia’s Geothermal Sector). The country is struggling to meet its target of 23% renewable energy utilization. PLN’s target is slightly higher at 25% by 2025 and will depend heavily on further developing the country's geothermal and hydropower resources (See Renewable Energy in Indonesia – A Sleeping Giant).
In order to achieve that, the Energy and Mineral Resources Ministry is planning to establish another entity like PLN to handle renewable energy specifically. Under the plan, the new entity will be a buffer in the purchasing of electricity from independent power producers, selling the power to PLN at a price threshold that will not burden the state-owned firm.
Despite the abundance of coal resources, Indonesia faces high transportation costs in shipping coal across the country (See The Coal Sector In Indonesia). This challenge is one of the causes that has sparked the government’s initiative to create a more efficient and cost-reduced electricity production while still fulfilling electricity needs across the country. One of the means of doing so is through the planned installation of a high voltage direct current (HVDC). The HVDC will link and transport electrical currents from mine mouth power plants to load centers. The HVDC is proposed to be installed in Sumatra, where the vast majority of coal is located, all the way to Java, where electricity for economic support is mostly needed. This HVDC will allow transmission of sustainable electricity while reducing costs. With government cuts on oil subsidies and tariffs, the realisation of HVDC is more feasible.
In February 2016, the Ministry of Energy & Mineral Resources announced its plans to reduce the monopolistic grip of PLN on electricity transmission for regional state owned enterprises and the private sector. In six key regions with the lowest electrification ratio, namely West Nusa Tenggara (NTB), East Nusa Tenggara (NTT), Papua, West Papua, Maluku and North Maluku; PLN will be released from its obligation to supply electricity as per the Electricity Law. While localised, this is a significant test in the opening up and restructuring of the electricity sector, provided that it is approved by PLN.
The restructuring of the Indonesian electricity market is imperative. The resulting tangible benefits will include reduced generation costs, more competitive electricity prices, more sustainability and enhanced national competitiveness as a result of the improved standard of living that Indonesians will embrace. Unfortunately, the monopolistic structure of PLN will not be changed radically anytime soon in areas outside of those specified, however the government has an opportunity to change how investors interact with PLN as a buyer to make long-term utility investment an attractive prospect in Indonesia. Therefore, what remains to be seen is how structural changes to improve persistent issues that have continued to short-circuit investment in the sector can be effectively tackled to spark new life into the industry.
Global Business Guide Indonesia - 2016
Indonesia’s electrification ratio still remains low relative to the rest of the region and a key area of focus for the country’s infrastructure development. This article looks at the electricity sector in depth and the opportunities available to investors, particularly within renewable energy.
Contribution to GDP: 11% (Q3 2015)
Oil & Gas Imports: $22.8 billion USD (Jan-Nov 2015)
Proven Oil Reserves: 3.7 billion barrels (2015)
Proven Gas Reserves: 101 trillion cubic feet (2015)
Proven Coal Reserves: 28 billion tonnes total reserves (2015)
Proven Potential in Geothermal Energy: 29 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).