Power shortage looms

While President Abdurrahman Wahid is resorting to every kind of trick to cling to power, a power crisis, which would be no less detrimental than the present economic and political leadership crisis, is looming over the horizon, because investment in that sector has stopped since 1997.

Most analysts and top officials at the Ministry of Energy and Mineral Resources have warned that, without new investment soon in the electricity sector, the country might suffer a severe power crisis a few years from now. Power shortages would be even more imminent in Java if the state electricity company (PLN) did not make new investment soon in the construction of new transmission and distribution lines.

But, without a significant increase in government-fixed electricity rates and a sensible solution to the protracted disputes between PLN and several independent power producers (IPPs) already onstream, not a single cent of new investment is likely to enter the power sector.

The 17.5 percent average increase in electricity rates imposed on Sunday is part of the program to strengthen PLN's financial capacity. But, similar to the recent 30 percent increase in fuel prices, the move is only a small step toward the big goal of enabling PLN to sell electricity at its real economic cost.

Even after the latest increase, the third since 1998, PLN will still suffer a deficit of Rp 4.7 trillion (US$416 million) this year, because the power rates for small users, who account for about 70 percent of the company's customers, will remain subsidized.

The government decision last month to reschedule Rp 5.3 trillion of PLN debts to 20 years and to convert its remaining debts of Rp 28.8 trillion into equity is another part of the program to improve the company's financing capacity. This would restore its creditworthiness and access to new commercial credit lines and the capital market. Without this capacity, PLN would not be able to carry out even minimum routine maintenance work, let alone expand its power grid to serve new customers.

However, this program by itself will not be enough to prevent power shortages within the next few years. New investment should start soon to expand power capacity. Given the state budget constraints, PLN's financial woes and severely limited access to new foreign loans, foreign investors seem to be the only option available.

PLN has estimated that at least $18 billion in new investment is required for power generation and grids within the next 10 years to keep up with increasing demand caused by economic growth. But no foreign investment will be attracted to the power sector if the current disputes between PLN and several IPPs that already supply PLN are not resolved satisfactorily.

However, achieving the final objective of enabling PLN to sell electricity at its real cost -- thereby making the sector feasible for new investment -- would be like shooting at a moving target, if the rupiah exchange rate against the U.S dollar does not eventually stabilize within a range commensurate with the economic fundamentals. This is because, as with fuel, more than 70 percent of power production costs are specified in foreign exchange.

When the dollar was worth only about Rp 2,200 in early 1997, the power rate charged by PLN was already around seven cents per kilowatt-hour (kWh), which is similar to its production cost at present. But at the Rp 11,300-to-the-dollar rate today, the seven cents are already equivalent to Rp 805, as against the Rp 300 per kWh actually charged by PLN.

The warning of a power crisis should not be seen as an exaggeration, as most estimates currently put PLN's reserve capacity margin at less than 30 percent. This is the minimum level necessary to protect against a sudden surge in demand, or a major plant closure, either for maintenance or due to low water levels in dam reservoirs. Even now, businesses in several provinces outside Java have complained about the difficulty of getting new connections or additional power.

Moreover, the gestation period of a power plant is quite long, a period of at least 5 years, meaning that a power station could only go onstream five years after the start of its construction.

It is needless to reiterate how vital electricity is to society and the economy: as the fruits of development over the past 30 years have made the economy and way of living of the people, even those in most rural areas, more dependent on power, one cannot imagine the social chaos and disruption to economic activities that would occur in the event of major power blackouts.