PLN needs price hike to avoid future power crisis

PLN needs price hike to avoid future power crisis

A'an Suryana , The Jakarta Post, Jakarta

State-owned power utility PT PLN has been suffering from deep
financial difficulties for the past five years. But even before
the company has fully recovered, another crisis is looming: the
possibility of acute power shortages by 2005 if no new
electricity capacity comes on stream.

PLN president Eddie Widiono said in a recent interview that
the company had to adopt tough policies as it was facing critical
years head.

He said that the first important step was to turn the
company's poor financial performance around so to allow it to
finance new investments in power generation and transmission.

Last year, PLN suffered a huge financial loss of around Rp
4.47 trillion (US$502 million).

Eddie explained that the government's decision in 2001 to
permit quarterly 6 percent increases in electricity prices was a
critical part of the effort to bring the company into the black.

"We have no other choice," he said.

This year's electricity price increase coincided with the
government's decision to raise fuel prices by up to 22 percent,
and telephone charges by an average of 15 percent, prompting
strong criticism from various quarters, including street protests
by students and workers who say that the utility price hikes are
unacceptable as the public are still reeling from the economic
crisis.

"The policy is like a bitter pill, but people must eventually
swallow it," Eddie said.

He explained that since the 1998 financial crisis, PLN had
been operating at a loss partly because the government had been
progressively cutting its electricity subsidy.

He said that the subsidy had been reduced from around Rp 800
billion per year prior to the financial crisis to around Rp 200
billion this year.

Eddie explained that the quarterly power price increase policy
was aimed at bringing electricity charges up to the commercial
price level of 7 U.S. cents per kilowatt hour (kWh) by 2005.

He said that the current price level of Rp 488 per kWh was
equal to around 5.42 cents.

"This price is still lower than our production costs," he
said.

The power purchase contracts signed with independent power
producers (IPPs) during the rule of authoritarian president
Soeharto made matters worse.

Under these contracts, PLN must purchase power from the IPPs
at prices that experts say is too high and will eventually
bankrupt the state company. After the financial crisis sent the
rupiah plunging in value against the dollar, PLN was forced to
renegotiate the contracts with the IPPs, which sell their power
at dollar-based rates, while PLN's revenue is in rupiah.

"Therefore, the price hike policy is badly needed so as to
give PLN greater room to maneuver," said Eddie.

According to the company's blueprint, electricity demand in
the country will grow by 8 percent annually. In order to cope
with the demand, PLN needs $28.5 billion in new power generation,
transmission and distribution investment up to 2010.

Without this investment, the country will suffer a power
crisis.

According to the PLN document, some "28 areas outside Java and
several parts of Java island" will face electricity shortages in
2004 or 2005.

Eddie said that PLN was also trying hard to improve its
efficiency so as to overcome the looming crisis.

He pointed out that part of this strategy was for PLN to use
more gas than oil as a source of energy to generate power.

In addition to the lower price of gas, gas-fired power plants
are considered more environmentally friendly.

But Eddie said that constructing gas-fired power plants took
longer -- up to 3 or 4 years -- compared to only 2 years to
construct an oil-fired power plant.

A cheaper source of energy would be coal, although some
criticize its adverse environmental impact.

Out of the 112 billion terra watt hours (tWh) of electricity
to be produced by PLN this year, some 31 tWh will be produced by
coal-fired plants, 27 tWh by diesel and gasoline-fired plants, 20
tWh by gas-fired plants, 9 tWh by hydro plants, and 3 tWh by
geothermal plants. The remaining 22 tWh will be produced by the
IPPs.

Despite the longer period of time needed to construct gas-
fired plants, PLN is determined to employ gas as a major source
of energy in the future.

For example, PLN plans to build the Muara Tawar open cycle gas
turbine power plant in Bekasi, which will have six generating
units, each with a capacity of between 100 and 150 megawatts.

The project is still at the tender stage and is slated to be
completed by 2004.