Competitive market helps power consumers

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