Indonesia on 1st May 2014 kicked off its most recent round of electricity tariff hikes carried out to curb the nation’s soaring energy and power subsidies. Imposed on industrial consumers already contending with a rise in minimum wage, this price increase has local businesses concerned for their competitiveness in the lead up to ASEAN economic integration as well as re-evaluating their outlook for the immediate future.

A shock to the system

As mandated by the Ministry of Energy and Mineral Resources (MEMR) Decree No.9/2014, medium to large scale industries are for the remainder of 2014 to be subject to rising electricity tariffs, levied in increments every two months. The magnitude of the price hike detailed in this decree depends upon the company’s classification as either an I-3 industrial consumer (using more than 200 kilovolt amperes) or an I-4 industrial consumer (using in excess of 30,000 kilovolt amperes).

Those that fall within the I-3 category are to experience a 38.9% total increase in electricity tariffs, beginning with an 8.6% jump imposed on 1st May. The price increase for I-3 classified companies only applies for those that are publically listed – a move that limits its impact to businesses well enough positioned to absorb the hit and pass on costs to customers. A downside to this caveat is its potential to discourage medium sized companies from carrying out IPOs, but such has been Indonesia’s concerted drive to deepen its capital market (See Indonesia Market Watch: IPOs in 2014) that this is not expected to be a major disincentive to firms already planning to go public.

Large scale I-4 industries are subject to a 64.7% increase in electricity tariffs that will be levied in full by the end of the year, following a 13.3% hike imposed in May, July, September and November. Unlike I-3 industrial consumers, all companies with a power capacity above 30,000 kilovolt amperes (kVa) will need to adhere to the higher electricity price, irrespective of status as a private company.

Hit the hardest

Sentiment towards a rise in electricity prices within the Indonesian business community prior to this decree was by and large one of begrudging understanding – subsidies on power and fuel currently provided by the government are widely acknowledged as unsustainable and the proposed hike is projected to save upwards of 8 trillion IDR. The point of contention instead revolved around the implementation time frame, with industry leaders requesting that the price increase take place even more gradually over the course of a three year period.

Among those most vociferously advocating for a relaxation of the price hike policy are representatives from sectors most adversely affected, namely:

• Textiles: Domestic textile manufacturers expect production costs to jump by approximately 15% as a result of Indonesia’s electricity tariff hike, according to General Chairman of the Indonesian Textile Producers Association (API), Mr Ade Sudradjat Usman. As reported in his interview with local media outlet Antara News, electricity accounts for 20-35% of total production costs for textile companies and a rise in its price is expected to test the local industry’s competitiveness. Upstream producers are to be the most affected, with attempts to offset the larger electricity tariff by increasing product prices to be met by a move towards importing textile materials on the part of downstream garment manufacturers. Speaking on behalf of Indonesia’s 1,200 textile companies (See Indonesia’s Textiles and Clothing Industry), Mr Usman cited a potential 100% increase in textile imports.
• Steel: Indonesian steel manufacturers expect to contend with a rise in imports as downstream players look abroad for a more cost competitive source of smelted iron. Electricity costs account for between 15 to 20% of total production costs in the steel manufacturing industry, and the Indonesian Iron and Steel Industry Association (IISIA) has intimated that a 64.7% increase in electricity tariff levied against the larger smelters categorised as I-4 companies could force several of them to cease operations. At the same time, steel consumption in Indonesia is projected to reach 14.7 million tonnes in 2014, up by 8% from last year, and as the current smelting industry stands only 65% of total demand is being met through domestic production. The decision to increase the electricity tariff has thus been described as further driving a wedge between upstream and downstream companies and exacerbating the former’s ongoing challenge in meeting the latter’s swelling demand.
• Cement: Companies in Indonesia’s cement industry – for whom electricity accounts for 30% of total energy costs or approximately 11-14% of total production costs – are projected to increase prices to offset the rising electricity tariff. Initial reports suggest that local cement manufacturers will need to raise prices by 4-6% to maintain profitability (Deutsche Bank); an assertion corroborated by Holcim Indonesia’s announcement on 6th May 2014 that it would increase its selling price by up to 5% prior to the end of the year. Having struggled in the past to successfully pass on higher costs from earlier hikes to the electricity tariff, the cement industry in the short term is to be met with a challenging environment but should maintain its positive long term outlook given the country’s low per capita consumption and ongoing infrastructure drive (See Indonesia’s Building & Construction Materials Sector).
• Petrochemicals: Local petrochemical companies will need to adjust to the dual impact of a higher electricity tariff directly imposed upon them and an increase in gas prices from industrial suppliers also looking to lessen the blow of a rise in electricity costs (PT. Aneka Gas Industri, for example, have included in their contracts the right to pass through 60% of total electricity costs to customers). Room for growth among local businesses within this field remains high, with Indonesia's trade deficit in petrochemicals in 2013 reaching $10 billion USD, but the industry’s immediate prospects are to be hampered by downward pressure on profit margins.

Powering through

In addition to increasing selling prices as a means of mitigating the impact of the electricity tariff hike, companies in industries particularly hard hit are to set about improving energy efficiency. For some, this is to involve the construction of on-site mini power plants which offer the added benefit of consistent power generation while the country persists in its attempt to limit blackouts and boost the still low nationwide electrification rate (See Indonesia’s Electricity and Power Generation Sector). Opportunities are thus available to companies able to offer power generation infrastructure such as steam turbines and boilers catered to small-scale projects and installed within manufacturing complexes.

Recent initiatives to establish on-site power generation facilities include the construction of a 200 MW gas waste power plant in an integrated steel mill complex in Cilegon, Banten. Developed via a joint venture between South Korea’s Posco Energy and PT Krakatau Daya Listrik (a subsidiary of Indonesia’s largest steel maker Krakatau Steel), the plant is powered by gas emitted as a byproduct of steel manufacturing processes and as of early 2014 was the only facility of its kind in South East Asia. Similar opportunities to develop eco-friendly plants to power industrial sites are substantial, given Indonesia’s untapped potential in renewable energy for electricity generation (See Renewable Energy in Indonesia – A Sleeping Giant).

From an investor’s perspective micro hydro power plants are an area to be explored further. Designated as a sector to be developed in line with Indonesia’s creation of industrial clusters across the archipelago, micro hydro power plants are set to benefit from the government’s concerted efforts to increase total capacity to 2,846 MW by 2025. In an attempt to draw investors and offer a quicker breakeven point, the MEMR in May 2014 imposed a new higher tariff for electricity purchased from micro hydro power plants, raising the price from 656 IDR per kilowatt hour (kWh) to 1,075 IDR per kWh.

Outlook: No flash in the pan

Indonesia’s decision to increase the electricity tariff for large industries and medium sized public companies takes place amidst a growing movement away from subsidies on energy. Faced with fuel subsidy spending projected to reach 285 trillion IDR in 2014 (exceeding its previous allocation by 74.3 trillion IDR), Indonesia has sought to gradually scale back its subsidisation programs – a course of action that is likely to be continued by the new government after the presidential election in July. Both presidential candidates have presented plans to reform energy subsidies as core tenets of their election platform, albeit putting forward different ways to curb costs.

The removal of subsidies on electricity is by no means limited to Indonesia within the ASEAN. Malaysia earlier in the year hiked its power tariffs by an average of 15% in response to increasing prices for liquid petroleum gas, the main power generation fuel source for most ASEAN countries (ANZ). Moreover, ongoing political uncertainty and diplomatic tension in Thailand and Vietnam respectively, continue to position Indonesia as one of the most stable bases for manufacturing in the region. Concerns related to the electricity tariff hike and its impact on competitiveness for Indonesian companies entering a period of greater regional integration should thus be taken with a pinch of salt; manufacturers across South East Asia are expected to experience increases in the cost of electricity.

Adjusting the price of electricity for industrial consumers needs also to be interpreted for its potential long term impact on the realisation of infrastructure projects. As noted by the Ministry of National Development Planning (Bappenas), a further $550 billion USD worth of investment is required to fill gaps in the funding of infrastructure projects between 2015 and 2019. Cutting subsidies should enable the government to account for a larger portion of the necessary investment, including that which could go towards improving Indonesia’s electricity infrastructure. A more stable supply of power for businesses and lessening of costly blackouts will over time open up new parts of the archipelago for commercial development.

Global Business Guide Indonesia - 30th May 2014

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Indonesia Energy Snapshot

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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