Indonesia's electricity shortage: Challenges to a lasting solution

John McBeth, The Straits Times, Asia News Network/Singapore

Given the constraints it has been working under, Indonesia's state-run power utility, Perusahaan Listrik Negara (PLN), has done a remarkable job keeping the lights on over the past few years.

But time is fast running out. The Aug. 18 electricity blackout across much of Java has underlined the increasingly precarious supply situation on the Java-Bali grid and the urgent need for an energy road map to avoid a crisis in the next decade.

Unless more private investment can be pumped into the power sector, PLN will never be able to meet the 2,400MW in new capacity that planners say must be brought on line yearly to keep pace with demand as the country strives to return to 6-7 percent growth rates.

Says one worried power executive: "What happened on Aug. 18 will happen again, there's no doubt about that."

In a delicate balancing act, PLN has already curtailed supply to the industrial sector and refused new connections to private homes in a losing effort to maintain a tiny reserve on a grid that has an installed capacity of 18,500MW, but never gets beyond 14,500MW.

In fact, the company's own website has forecast peak demand this year at 16,965MW. And even then, that represents a growth rate of only 7.3 percent, well below the 11.5 percent recorded in 2001 before it began reining in demand.

PLN even calls Jakarta's industrial estates most weekdays and instructs them to use their own generators between 5 p.m. and 8 p.m., just to ensure there is sufficient power during the peak- load period.

Exacerbating the situation has been the seven-year delay in completing the 800km-long southern transmission line to bring much-needed electricity from East Java's giant 3,200MW Paiton complex to the power-starved area of West Java.

Buffeted by contractual, financial and land disputes, the line is finally expected to be completed by the end of the year, helped by new legislation which allows the government to override the opposition of property owners standing in the way.

PLN can currently transfer only 1,600MW from east to west, along its existing northern transmission line; Paiton and other East Java power stations generate 5,800MW between them -- much more than is needed in the east.

Experts say that besides bringing additional power into West Java, the southern line will add stability to the grid, preventing the sort of massive outages that occurred on Aug. 18 when units at Paiton and the Suralaya complex at the opposite end of Java tripped together.

It is not at all clear where the country's future power will come from. Sumitomo's 1,320MW Tanjung Jati B station in Central Java, a second Japanese-financed 730MW station at Cilegon in West Java and a Chinese-funded 600MW station at Cilacap on the southern coast are all due to be commissioned in mid-2006.

But there are still questions over whether Sumitomo, in particular, has secured a domestic coal contract at a time when much of Indonesia's production has been diverted to exports.

With China reducing exports to meet rising domestic demand, Indonesia is now the world's second-biggest coal exporter after Australia. Analysts say more than 70 percent of this year's production of 157 million ton will be exported as big companies like Arutmin and Kaltim Prima Coal ramp up output and foreign buyers seek long-term contracts as a hedge against soaring oil prices. World thermal coal prices have risen sharply from US$24 (S$40) to as high as $43 a tonne over the past three years.

The three new power stations to be opened next year are all being built with public money. But the government's debt burden means it must start attracting more private producers. That will not be easy after what happened during the 1997-1998 financial crisis when 18 power projects were either scrapped or companies were forced to re-negotiate their contracts at lower rates of return.

In the meantime, more thought has to be given to drastically reducing PLN's dependence on fuel oil and diesel, which adds up to 29 percent of the grid's operating capacity and absorbs 60-70 percent of the utility's spending. Oil costs 10 U.S. cents per kilowatt hour against 1.5 to 2 U.S. cents for coal and natural gas -- the main reason why PLN is carrying a $5 billion debt.

In a country rich in natural resources, many of PLN's problems stem from Indonesia's failure to boost refinery capacity, end market-distorting subsidies and develop other energy substitutes. With total reserves of 183 trillion cu ft, natural gas is an obvious choice. Yet, while about 35 percent of its plants are designed for gas operation, only 20 percent are actually using the fuel. The rest are still burning oil, either because of flagging gas supplies or because the projects have not been married to a gas supply.

There are also other factors at play. With gas from offshore fields to Jakarta's two main power stations running out, PLN sprang a surprise last year by electing to build a $400 million liquid natural gas (LNG) terminal, instead of taking gas from a 660km pipeline, now being laid from South Sumatra to Jakarta. Mostly it was about securing a measure of operational independence it has never had. But while the plan may make sense in the longer term, LNG costs 30 percent more than piped gas -- and that is drawing strong government resistance.

Pipeline operator Perusahaan Gas Negara (PGN) is adding 180 new customers to its existing base of 670-strong industrial customers around Jakarta, many of whom are likely to go back to using PLN as a back-up -- just as they did when using private generators guzzling subsidized diesel made more sense than hooking up to the power grid. That may relieve some of the pressure on PLN, but it will also put a dent in the most profitable side of its business.

Signs now are that PLN may have been forced to have a rethink. Industry sources say the utility and PGN are planning to form a consortium to build a new 1,100km, $1.7 billion pipeline from gas-rich Kalimantan to Central Java.

Where it goes from there -- west to Jakarta or east to Surabaya -- is still under discussion.