Competitive market helps power consumers

Nengah Sudja, Jakarta

I do fully agree, in relation to David O'Brien's article entitled Competitive market benefits power consumers in this paper on Sept. 1. That piece says there is little appreciation for the fact that the production and delivery of electric power remains close to a crisis point and the current system will not stop the lights from going out.

Actually, the system is already in crisis in many areas outside Java, Madura and Bali (JMB), and JMB itself is close to crisis. But we still do not have the urgently needed solution to solve the crisis. In fact, it is the the decision-makers who have a lack of appreciation for the impending crisis, and therefore are doing little to change things.

The main long-term issue over electricity in this country, since its independence, still must be addressed: Firstly, improving financial independence and secondly increasing efficiency to be able to meet the electricity demand. Greater clarity of expenses and rates is a key to ensuring that the rates are at a level that enables the costs to be covered and a fair return is earned.

If we agree and can admit the present problems we are facing, why not solve them by allowing an increase in the price, which at the same time obliges PLN to be more efficient so that it can generate more money to be able to finance its expansion.

Subsidies are given only to small consumers. Increasing the prices they pay will decrease demand and will minimize shortages of supply. And if shortages still occur, perhaps PLN may need to stop new connections to forestall the crisis and to protect the existing consumers.

O'Brien's article stated that Law No. 20/2002 on electricity foresees little change to the supply chain. The transmission and distribution are to remain in the government's hands as monopoly assets, while generation and retail sales will be subject to competition.

These things will only be applied in areas that meet the set of seven criteria for entering full-market competition. These criteria exist to ensure that any competition initiated will benefit consumers.

The Electricity Law is introducing what is called a system of multibuyer-multiseller (MB-MS), which is much more advanced and more complex than the single buyer (SB) system, in which the buyer is responsible for the security of supply. But in SB system, competition is open to competitors who are able to generate electricity cheaper than the single buyer.

This is the latest trend agreed upon by most in the field, that the single buyer system with long-term contracts, not the MB-MS with spot pricing, is more appropriate for a developing country, with high demand growth like Indonesia.

Centralization and decentralization, monopoly and competition are options of doing business. There is no doubt that competition has been applied successfully in the food industry and other commodities, in which the market tends to be a near "perfect competitive market".

In the electricity supply business, which is capital intensive, requiring high technology, a long duration to develop power projects, long-term life time of the plants and thus, a limited number of suppliers. There also is no substitute for electricity.

Electricity can only transmitted through wires, while commodities can be delivered in many ways. Food has many options, rice can be substituted by other things like wheat, potatoes, etc. The price-demand of electricity is inelastic.

Therefore, under an MB-MS competitive market, a shortage of supply condition will lead to higher prices. An example of a shortage of supply in a MB-MS market, took place in California in 2000. The prices increased fourfold to the peak load without a cap. With limited suppliers, the market is difficult to control and can easily be manipulated.

As proposed in the law, the independent regulatory body, the so-called Bapeptal has no means to control the market during a crisis. In fact, Bapeptal has no power infrastructure to fulfill the supply gap if there is a condition of shortage of supply or if the power investment is not sufficient to meet the growing demand; although one of its responsibilities, according to the law is to ensure the electricity supply.

How will they ensure the supply of power in this case?

Law No. 20/2002 does not mention at what level the prices are supposed to be set at to enable cost recovery and a fair profit before competition can commence. However, it was suggested by some consultants, that a different rate of return will be required for generation, transmission and distribution businesses.

PLN's corporate and financial overall rate of return (ROR) is 8 percent, but the capital-hungry generation business would require ROR of more than 17 percent, which the government would allow in order to attract foreign investment. However, ROR for transmission and distribution was suggested at 6 percent and 3 percent respectively, as it is considered more mature for business, both of which would remain state-owned. Is this supposed to be fair?

Increasing efficiency, such as gradually reducing overall losses from a level of 16.45 percent in 2002 to the level of 10 percent (for Malaysia 8 percent losses in 2000) can save a lot of money. With a total energy sale of 108,36 billion kWh in 2002, lost reduction to the level of 10 percent, would save $340 million, calculated with the electricity price of Rp 448 per kWh at the exchange rate of Rp 9,200 per dollar.

Recently, a lack of availability of primary energy resources such as natural gas and coal has forced PLN to substitute it with more expensive oil. Competition in the primary energy market has to be set first before competition in the power sector commences. But since the primary energy resources are controlled by limited suppliers, the price of electricity is difficult to control. A shortage of supply of natural gas in California in 2000/2001 has caused electricity prices to increase fourfold.

Experience of competitive market in an era of electricity shortages, where demand for electricity is growing at a high rate, can create a situation of supplier-market. The growth rate of electricity demand of 3 to 5 percent in California in 1999 and 2002 led to an energy crisis in the state. Believe it or not, California -- the richest state in the richest country -- was not able to protect its consumers and hold market players accountable.

Market restructuring along the lines of the models adopted in California, Norway, Alberta, Canada or the UK is almost certain to fail in a country with rapid growth, limited generation sites, and no indigenous fuel (e.g. Israel and Hongkong).

More importantly, electricity market reform is highly risky and irreversible. Once the power plants owned by the formerly integrated utilities are divested, it is very difficult, if not impossible, to turn back.

The California experience surely suggests that a reversible regulatory reform is a safe alternative to an irreversible market reform. Appreciation of setting the right prices and encouraging efficiency improvement are solutions to the present problem of electricity supply in Indonesia, not the Law No. 20/2002.

The writer is an independent energy consultant, based in Jakarta and can be reached at nsudja@indo.net.id