Floating electricity rates
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.