Floating electricity rates<\/p>\n
A rise in the price of electricity, a basic necessity in
\ntoday's modern world, is always unpopular and could easily become
\na political volcano. But next month's average 7.68 percent
\nincrease in electricity rates, as announced by the minister of
\nmines and energy on Friday, seemed to have been carefully
\ncalculated not to adversely effect small households and industry.
\nThe system of cross-subsidies is subsidized by charging more for
\nconsumptive usage.<\/p>\n
However, the most note-worthy aspect of the new rates is the
\nsimultaneous introduction of the government policy of floating
\nthe electricity tariffs. This policy will enhance the sustainable
\nexpansion of power generation.<\/p>\n
As Minister I.B. Sudjana explained at the news conference, the
\n7.68 percent average increase is an annual rate but the tariffs
\nwill be reviewed quarterly to reflect changes in the cost of
\nfuel, purchasing private generators, inflation and the rupiah
\nexchange rate. That, we think, amounts to the floating of the
\nelectricity rate on the generation cost or the long-run marginal
\ncosting. That will make electricity rates much more predictable
\nbecause the main cost components are clearly defined and their
\ncalculation will consequently be made more transparent.<\/p>\n
The new tariff policy, we think, is the unavoidable result of
\nthe promotion of private investors in power generation and the
\nrecent change in the operational characteristics of the State
\nElectricity Company (PLN) that is forcing it to rely more on
\ninternal resources and commercial loans than state financing.<\/p>\n
Without the flexibility to adjust its prices, PLN will never
\nbe able to develop into a corporate entity by proving its credit-
\nworthiness for investment. This is essential to gain access to
\ndomestic and international capital markets. Since PLN requires at
\nleast US$6 billion of annual investment during the next five
\nyears to be able to generate the additional 9,500 megawatts of
\npower required and to allow their transmission and distribution
\nnetworks access to capital markets within the country and
\noverseas is crucial. Failure to meet this target will affect the
\neconomic growth of the country because demand for electricity has
\nbeen increasing twice as much as economic growth.<\/p>\n
Flexible tariffs are also required to secure long-term
\ncontracts with private power generators which are expected to
\nprovide a generation capacity of 3,500 megawatts during the next
\nfive years to help PLN meet the estimated 15 percent increase in
\npower demand. Since investment in power generation are usually
\nvery big and have a long gestation period, an adequate pricing
\nformula -- involving the calculation of future costs with
\nnumerous variables -- is crucial for investors because bankers
\nand other financial institutions are naturally willing to lend
\nonly to commercially viable projects.<\/p>\n
We reckon the four cost variables -- fuel, buying power from
\nprivate generators, inflation and the rupiah exchange rate --
\nadequately reflect PLN's actual costs. Fuel -- either oil, coal,
\nnatural gas, hydropower or geothermal-- obviously accounts for
\nthe bulk of generation costs. Given the expected increase in the
\nrole of private investors, PLN will also purchase an increasing
\namount of power from private companies. Obviously, the consumer
\nprice index influences general price increases and the rupiah
\nexchange rate is important due to the high imported content of
\npower projects and their heavy reliance on foreign financing.<\/p>\n
It is imperative, though, for PLN to reduce its 12 percent
\npower loss, which is relatively high compared to public utilities
\nin other countries. It must also improve its billing system as
\nwell as the reliability and quality of its power transmission and
\ndistribution systems. A more reliable, high-quality power supply,
\nbesides saving industrial users the additional cost of back-up
\ngenerators, is vital for the business sector which increasingly
\nrelies on computers, processor controls and semi-conductor
\ndevices.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/floating-electricity-rates-1447893297",
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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