Floating electricity rates
A rise in the price of electricity, a basic necessity in today's modern world, is always unpopular and could easily become a political volcano. But next month's average 7.68 percent increase in electricity rates, as announced by the minister of mines and energy on Friday, seemed to have been carefully calculated not to adversely effect small households and industry. The system of cross-subsidies is subsidized by charging more for consumptive usage.
However, the most note-worthy aspect of the new rates is the simultaneous introduction of the government policy of floating the electricity tariffs. This policy will enhance the sustainable expansion of power generation.
As Minister I.B. Sudjana explained at the news conference, the 7.68 percent average increase is an annual rate but the tariffs will be reviewed quarterly to reflect changes in the cost of fuel, purchasing private generators, inflation and the rupiah exchange rate. That, we think, amounts to the floating of the electricity rate on the generation cost or the long-run marginal costing. That will make electricity rates much more predictable because the main cost components are clearly defined and their calculation will consequently be made more transparent.
The new tariff policy, we think, is the unavoidable result of the promotion of private investors in power generation and the recent change in the operational characteristics of the State Electricity Company (PLN) that is forcing it to rely more on internal resources and commercial loans than state financing.
Without the flexibility to adjust its prices, PLN will never be able to develop into a corporate entity by proving its credit- worthiness for investment. This is essential to gain access to domestic and international capital markets. Since PLN requires at least US$6 billion of annual investment during the next five years to be able to generate the additional 9,500 megawatts of power required and to allow their transmission and distribution networks access to capital markets within the country and overseas is crucial. Failure to meet this target will affect the economic growth of the country because demand for electricity has been increasing twice as much as economic growth.
Flexible tariffs are also required to secure long-term contracts with private power generators which are expected to provide a generation capacity of 3,500 megawatts during the next five years to help PLN meet the estimated 15 percent increase in power demand. Since investment in power generation are usually very big and have a long gestation period, an adequate pricing formula -- involving the calculation of future costs with numerous variables -- is crucial for investors because bankers and other financial institutions are naturally willing to lend only to commercially viable projects.
We reckon the four cost variables -- fuel, buying power from private generators, inflation and the rupiah exchange rate -- adequately reflect PLN's actual costs. Fuel -- either oil, coal, natural gas, hydropower or geothermal-- obviously accounts for the bulk of generation costs. Given the expected increase in the role of private investors, PLN will also purchase an increasing amount of power from private companies. Obviously, the consumer price index influences general price increases and the rupiah exchange rate is important due to the high imported content of power projects and their heavy reliance on foreign financing.
It is imperative, though, for PLN to reduce its 12 percent power loss, which is relatively high compared to public utilities in other countries. It must also improve its billing system as well as the reliability and quality of its power transmission and distribution systems. A more reliable, high-quality power supply, besides saving industrial users the additional cost of back-up generators, is vital for the business sector which increasingly relies on computers, processor controls and semi-conductor devices.