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.