Competitive market benefits power consumers, but how?
\nJP\/6\/SUJA<\/p>\n
Competitive market benefits
\npower consumers, but how?<\/p>\n
Nengah Sudja
\nJakarta<\/p>\n
I do fully agree, in relation to David O'Brien's article
\nentitled Competitive market benefits power consumers in this
\npaper on Sept. 1. That piece says there is little appreciation
\nfor the fact that the production and delivery of electric power
\nremains close to a crisis point and the current system will not
\nstop the lights from going out.<\/p>\n
Actually, the system is already in crisis in many areas
\noutside Java, Madura and Bali (JMB), and JMB itself is close to
\ncrisis. But we still do not have the urgently needed solution to
\nsolve the crisis. In fact, it is the the decision-makers who have
\na lack of appreciation for the impending crisis, and therefore
\nare doing little to change things.<\/p>\n
The main long-term issue over electricity in this country,
\nsince its independence, still must be addressed: Firstly,
\nimproving financial independence and secondly increasing
\nefficiency to be able to meet the electricity demand. Greater
\nclarity of expenses and rates is a key to ensuring that the rates
\nare at a level that enables the costs to be covered and a fair
\nreturn is earned.<\/p>\n
If we agree and can admit the present problems we are facing,
\nwhy not solve them by allowing an increase in the price, which at
\nthe same time obliges state-owned electricity company, PLN, to be
\nmore efficient so that it can generate more money to be able to
\nfinance its expansion.<\/p>\n
Subsidies are given only to small consumers. Increasing the
\nprices they pay will decrease demand and will minimize shortages
\nof supply. And if shortages still occur, perhaps PLN may need to
\nstop new connections to forestall the crisis and to protect the
\nexisting consumers.<\/p>\n
O'Brien's article stated that Law No. 20\/2002 on electricity
\nforesees little change to the supply chain. The transmission and
\ndistribution are to remain in the government's hands as monopoly
\nassets, while generation and retail sales will be subject to
\ncompetition.<\/p>\n
These things will only be applied in areas that meet the set
\nof seven criteria for entering full-market competition. These
\ncriteria exist to ensure that any competition initiated will
\nbenefit consumers.<\/p>\n
The Electricity Law is introducing what is called a system of
\nmultibuyer-multiseller (MB-MS), which is much more advanced and
\nmore complex than the single buyer (SB) system, in which the
\nbuyer is responsible for the security of supply. But in SB
\nsystem, competition is open to competitors who are able to
\ngenerate electricity cheaper than the single buyer.<\/p>\n
This is the latest trend agreed upon by most in the field,
\nthat the single buyer system with long-term contracts, not the
\nMB-MS with spot pricing, is more appropriate for a developing
\ncountry, with high demand growth like Indonesia.<\/p>\n
Centralization and decentralization, monopoly and competition
\nare options of doing business. There is no doubt that competition
\nhas been applied successfully in the food industry and other
\ncommodities, in which the market tends to be a near \"perfect
\ncompetitive market\".<\/p>\n
In the electricity supply business, which is capital
\nintensive, requiring high technology, a long duration to develop
\npower projects, long-term life time of the plants and thus, a
\nlimited number of suppliers. There also is no substitute for
\nelectricity.<\/p>\n
Electricity can only transmitted through wires, while
\ncommodities can be delivered in many ways. Food has many options,
\nrice can be substituted by other things like wheat, potatoes,
\netc. The price-demand of electricity is inelastic.<\/p>\n
Therefore, under an MB-MS competitive market, a shortage of
\nsupply condition will lead to higher prices. An example of a
\nshortage of supply in a MB-MS market, took place in California in
\n2000. The prices increased fourfold to the peak load without a
\ncap. With limited suppliers, the market is difficult to control
\nand can easily be manipulated.<\/p>\n
As proposed in the law, the independent regulatory body, the
\nso-called Bapeptal has no means to control the market during a
\ncrisis. In fact, Bapeptal has no power infrastructure to fulfill
\nthe supply gap if there is a condition of shortage of supply or
\nif the power investment is not sufficient to meet the growing
\ndemand; although one of its responsibilities, according to the
\nlaw is to ensure the electricity supply.<\/p>\n
How will they ensure the supply of power in this case?<\/p>\n
Law No. 20\/2002 does not mention at what level the prices are
\nsupposed to be set at to enable cost recovery and a fair profit
\nbefore competition can commence.<\/p>\n
PLN's corporate and financial overall rate of return (ROR) is
\n8 percent, but the capital-hungry generation business would
\nrequire ROR of more than 17 percent, which the government would
\nallow in order to attract foreign investment. However, ROR for
\ntransmission and distribution was suggested at 6 percent and 3
\npercent respectively, as it is considered more mature for
\nbusiness, both of which would remain state-owned. Is this
\nsupposed to be fair?<\/p>\n
Increasing efficiency, such as gradually reducing overall
\nlosses from a level of 16.45 percent in 2002 to the level of 10
\npercent (for Malaysia 8 percent losses in 2000) can save a lot of
\nmoney. With a total energy sale of 108,36 billion kWh in 2002,
\nlost reduction to the level of 10 percent, would save $340
\nmillion, calculated with the electricity price of Rp 448 per kWh
\nat the exchange rate of Rp 9,200 per dollar.<\/p>\n
Recently, a lack of availability of primary energy resources
\nsuch as natural gas and coal has forced PLN to substitute it with
\nmore expensive oil. Competition in the primary energy market has
\nto be set first before competition in the power sector commences.
\nBut since the primary energy resources are controlled by limited
\nsuppliers, the price of electricity is difficult to control. A
\nshortage of supply of natural gas in California in 2000\/2001 has
\ncaused electricity prices to increase fourfold.<\/p>\n
Experience of competitive market in an era of electricity
\nshortages, where demand for electricity is growing at a high
\nrate, can create a situation of supplier-market. The growth rate
\nof electricity demand of 3 to 5 percent in California in 1999 and
\n2002 led to an energy crisis in the state. Believe it or not,
\nCalifornia -- the richest state in the richest country -- was not
\nable to protect its consumers and hold market players
\naccountable.<\/p>\n
The California experience surely suggests that a reversible
\nregulatory reform is a safe alternative to an irreversible market
\nreform. Appreciation of setting the right prices and encouraging
\nefficiency improvement are solutions to the present problem of
\nelectricity supply in Indonesia, not the Law No. 20\/2002.<\/p>\n
The writer is an independent energy consultant, based in
\nJakarta and can be reached at nsudja@indo.net.id<\/p>\n
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