Averting a power crisis

The resumption of several major private electricity-generation projects, as announced by chief economics minister Dorodjatun Kuntjoro-Jakti last week, should be welcomed as a crucial step to avert a national power crisis that most analysts have predicted could be two to three years down the road.

The State Electricity Company (PLN) is indeed racing against time to prevent major supply disruptions because no new generating capacity has been built since 1996. In fact, several provinces outside Java have been suffering rotating power blackouts, while PLN does not have adequate financing even to expand its transmission and distribution grids, let alone investing in new power stations.

The revival of private power projects that were suspended in 1997 after the economic crisis is exceptionally good news amid the damaged public confidence in Indonesia's law enforcement system.

The encouraging development would be made possible by a breakthrough in the renegotiations of power purchasing agreements with foreign independent power producers (IPPs) which were foisted on PLN without competitive bids in the early 1990s. The way in which the government has been handling what has widely been perceived to be collusive, punitive contracts between PLN and IPPs, most of which were initially connected with former president Soeharto's family members and his cronies, is indeed a good balancing act.

Too much emphasis on investigations and legal actions against IPPs would only bring a looming energy crisis closer to reality because there would be little time to revive the IPP projects. The government has wisely opted for renegotiations of the prices PLN will have to pay for the IPP electricity. That is quite a strategic move because it is the punitively high prices that embody all the collusive, corrupt practices and cost markups allegedly made by the IPPs.

The willingness on the part of the IPPs to renegotiate is an implicit acknowledgement that the terms of their contracts, especially the prices, which the corrupt Soeharto regime forced down PLN'S throats, were indeed commercially unfeasible. The IPPs seemed to realize that their contracts would bleed Indonesia for decades and if they stubbornly defended the sanctity of their unusually expensive contracts, both parties would end up in messy, costly litigation.

PLN said the government had successfully amended 10 IPP contracts, resulting in decreases in power prices to be paid by PLN from a range of between 6 and 8 U.S. cents per kWh to a range of between 3 cents and 4.9 cents. Ten other IPP contracts are at the final stage of renegotiations, six others were finally canceled due to their unfeasibility and only one ended up in litigation.

The state power monopoly has warned that Java and Bali, which account for almost 80 percent of electricity consumption, could see power supply disruptions in 2004 if no additional capacity comes on stream. As PLN has barely any financial resources, even for maintenance and the expansion of transmission and distribution networks, a new generation capacity can only be expected from IPPs.

The peak load in the Java-Bali grid is now about 16,000 megawatts (MW), while the PLN installed capacity is only 18,800 MW. With an estimated increase in annual demand of between 10 and 15 percent, at least 1,800 MW in additional capacity is needed in 2004 to maintain a minimum power reserve margin of 30 percent. A reserve level lower than the minimum could plunge parts of Java into darkness during peak demand periods.

Additional generation capacity is even more urgent in anticipation of a prolonged dry season that could lower the water levels in dam reservoirs and reduce supplies from hydropower stations.

The final closing of renegotiated power purchasing contracts with several major IPPs within the next few weeks will jumpstart the resumption of suspended projects, especially in Central and East Java. And this will go a long way in preventing the looming power crisis because at least some of the projects are near completion.

However, since it usually takes between five and seven years to build a major power station, several greenfield projects should also start early next year to meet the demand, which will certainly increase at a higher rate as the economy gains a more robust recovery.

Most important too is that the resumption of major power projects, which are long-term investment ventures, could be a catalyst for a new wave of capital inflow to the country.

That is also a very positive signal to potential investors. Not a single investor will consider investing in a country that is on the verge of a power crisis because inadequate electricity supplies will exact additional capital costs for building captive power units.