Power shortage looms

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.