Restructuring power sector for the better

Restructuring power sector for the better

By Meirios Moechtar

This is the second of a two-part article on restructuring in
the energy sector.

JAKARTA (JP): To solve problems of surplus generation capacity
and to secure electricity demand in the Java-Bali system, there
should be rationalization of old and inefficient generation
facilities of PLN, the state-owned electricity firm, and captive
power producers (CPPs) or self-generators burning coal and
petroleum.

If the diesel fuel subsidy which supported the independent
power producers (IPPs) is abolished, the energy source for power
generation will shift to natural gas, as the demand for natural
gas is potentially high. There are also the economic advantages.

Coal captive power producers will use natural gas for their
own power generation or will buy electricity from PLN. However,
even though electricity may be supplied by PLN, they will not
rely on PLN as the constant electricity supplier, and
consequently they will adopt a more economically efficient co-
generation system.

However, a more thoughtful measure must be initiated on the
delicate issue of the unfortunate but inevitable fuel and
electricity rate hikes. Both its time frame and mechanism must be
carefully devised; one way could be modeled on the establishment
of the above proposed funds for electricity.

The "hard" approach of rationalization of diesel or marine
fuel oil (MFO)-fired generations, measures for captive power
producers which have more generations than PLN and are
independent in a smaller/medium size, are crucially important.

Phasing out the fuel subsidy should involve reevaluation of
both PLN and captive power producers with generation capacity of
2,890 MW and 6,300 MW respectively, in diesel/MFO fired
generation. In the transitional period, it is important to think
how diesel/MFO fired generations operated by PLN and captive
power producers should be rationalized.

Among coal-fired power generations in the Java-Bali system,
there are a lot of timeworn dust collection controllers, and many
inefficient generation plants due to perpetual troubles of coal
conveyers and ash disposal facilities. Furthermore, those
generations are operated under conditions that are far below the
environmental standards on the emission of sulfuric oxides,
nitrogen oxides and soot.

The fundamental solution is a conversion of power fuel.
However, as the coal price is very low, there is less incentive
as fuel conversion is anticipated and no such conversion schedule
is put into practice. This conversion program should be applied
to diesel/MFO fired generations as well. Those generations would
be reborn as a clean generation.

Despite the electricity supply surplus due to the economic
crisis affecting the Java-Bali system, imbalance of generation
capacity with transmission and distribution capacity has
disrupted the electricity supply. Therefore, it is critical for
the Java-Bali system to strengthen the network of transmissions
and substations immediately in the main transmission trunk line.

In addition, electricity demand in Bali has been met
adequately by its supply of gas turbine/diesel generation with
capacity of 360 MW, and also by submarine transmission lines,
which have been disabled many times by accidents. It is essential
to ensure a stable supply of electricity for Bali through the
construction of an overhead transmission line from Java with
capacity of 500 MVA. A similar solution may be needed for
submarine transmission lines between Madura and Java, which also
were frequently affected by accidents.

Regarding financial support, the Export-Import Bank of Japan
(JEXIM) and Asian Development Bank (ADB) each pledged to provide
US$400 million for the power sector program loan in 1998.
However, $780 million of $800 million was provided as adjustment
financing for social safety net expenditures in Indonesia. The
remaining $20 million was allocated for technical assistance,
which includes a power regulatory regime, information technology
and software, an electricity rate mechanism to reflect costs and
a competitive power market.

In exchange for a loan, ADB claims a condition that power
sector reform should be implemented no sooner than 2003, so that
early wins privatization could be realized. However, it seems
that not enough time is available as a transitional period of
three years to five years would be needed.

Regarding a natural gas pipeline project in the government's
proposal, the Overseas Economic Cooperation Fund (OECF) special
loan would promote its pipeline construction between South
Sumatra and West Java, and its feasibility study is now under way
at OECF. This pipeline project is a key for power sector reform,
and an early loan agreement with OECF is expected.

The government has requested financial bailouts of the three
troubled ongoing projects from Japan, including a coal-fired
power generation project of Paiton One, a coal-fired power
generator of Tanjung Jati B, and an ethylene plant of Chandra
Asri with total sums of about $3 billion. The government will
likely request a loan condition similar to a special yen loan.

The writer is a researcher on energy affairs at the Agency for
the Assessment and Application of Technology. He is also a member
of the Tokyo-based Asia Pacific Energy Forum.