Averting a power crisis

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.