Deal with power producers<\/p>\n
The government's success in lowering the price that the state
\nelectricity company PT PLN is paying and will pay to 20
\nindependent power producers (IPPs) will go a long way in reducing
\nthe company's financial burden and, at the same time, spur power
\ninvestments while averting a looming electricity crisis.<\/p>\n
In a more positive impact on the investment climate, the
\nsuccessful renegotiations of the contracts with IPPs will send a
\nstrong signal to investors that the government will, in good
\ntimes or bad, honor the sanctity of contracts.<\/p>\n
The encouraging development seems to have been prompted by the
\nrealization on the part of both parties that it would have been
\nbetter, more civil and less costly to renegotiate the prices of
\nthe contracts than resorting to messy, time-consuming and costly
\nlawsuits.<\/p>\n
The IPPs' willingness to renegotiate also implied their
\nacknowledgement that the contracts, which were foisted on PLN in
\nthe early 1990s without competitive bids, were commercially
\nunfeasible as the punitively high prices had been dictated by the
\ncontractors associated with Soeharto's family members and
\ncronies. After all, corruption, collusion and nepotism had then
\nbeen the main hallmarks of major business deals between the
\ngovernment and private investors.<\/p>\n
The contract's revision that reduced PLN's procurement prices
\nto below 5 U.S. cents per kWh from a range of 6 cents to 8 cents
\nas stipulated in the original contracts will not only save the
\ncompany billions of dollars.<\/p>\n
Even more important is the positive impact the contract
\namendments will have on the efforts the government and PLN are
\nundertaking to raise public understanding and support for a
\nsizable increase in electricity rates.<\/p>\n
Both the government and the House of Representatives have
\nagreed that the price of electricity will have to increase 6
\npercent quarterly between 2003 and 2005 to bring it on par with
\nPLN's production cost of 7 cents\/kWh.<\/p>\n
The electricity rate increase is necessary for sustainable
\nproduction and to encourage conservation. Power generation costs
\nin rupiah terms have risen steeply, not largely because of the
\ngross inefficiency of PLN, but mainly as a result of the more
\nthan 70 percent depreciation of the local currency to the
\nAmerican dollar as 85 percent of its cost components are based on
\nforeign exchange.<\/p>\n
The public would understandably never accept any power rate
\nincrease, however economically imperative it might be, if they
\nknew that PLN paid IPPs highly punitive prices. Just witness how
\nstrong public opposition was to the power price increase that was
\nannounced simultaneously with rises in telephone and fuel prices
\nearly this month. The tough measures have subsequently been
\ncorrected.<\/p>\n
Since the exorbitantly high prices, which embodied corrupt and
\ncollusive practices and cost markups, have been reduced by and
\nlarge to international generation costs, the environment for
\ngradually phasing out government electricity subsidies will
\nbecome more conducive.<\/p>\n
The new agreements will jump start the construction of many
\nIPP power plant projects, which have been stalled since the onset
\nof the economic crisis in late 1997. This means that at least
\n8,000 megawatts in additional power generation capacity will come
\non stream within the next two to four years.<\/p>\n
This additional capacity will avert a power crisis that PLN
\nhad predicted to hit within the next two to three years as the
\ndemand for electricity has been rising steadily along with the
\neconomic recovery. In fact, the threat of a looming power crisis
\nhas been cited by most foreign investors as one of the main
\nbarriers challenging new investment ventures in the country.<\/p>\n
Another great benefit of the IPP power plant projects is that
\nnone of them will rely on oil. Most will be fired by coal and
\ngeothermal steam, thereby diversifying our source of commercial
\nenergy away from the present heavy dependence on hydrocarbon.<\/p>\n
Certainly the contract amendments will help restore investor
\nconfidence in the country at a time when PLN, overburdened with
\nmountains of debts caused partly by the rupiah's meltdown, simply
\ndoes not have enough resources to expand its transmission and
\ndistribution networks, let alone construct new generation
\nstations.<\/p>\n
The future outlook of private investment in electricity is
\nforeseen to be much brighter, especially after last September's
\nenactment of the Electricity Law, which will gradually abolish
\nPLN's monopoly of power generation, transmission and distribution
\nto mid and large-scale users.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/deal-with-power-producers-1447893297",
"image": ""
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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