RI power supply hinges on PLN talks with IPPs

RI power supply hinges on PLN talks with IPPs

By Berni K. Moestafa

JAKARTA (JP): Java and Bali could suffer a power crisis in
2003, says state electricity company PT PLN president Kuntoro
Mangkusubroto.

PLN cites 21 regions as likely to suffer from power shortages
in the near future, including Aceh, Bangka, Bengkulu, Jambi,
Pontianak, Balikpapan, Irian Jaya, Ambon and Lombok.

Kuntoro said the only solution to avoid a nationwide power
crisis was to build new power plants.

"At this very instant, the government must chose how to
finance more power plants, either from its own coffers or from
private investment," he said during a seminar on independent
power producers (IPPS) last week.

The seminar was held to discuss problems with IPPs as a result
of the government's decision to renegotiate their power
contracts.

According to Kuntoro, PLN is prioritizing the completion of
renegotiations with the IPPs and winning back foreign investors
to avoid a power crisis.

He said that even with the presence of independent power
plants Paiton I, Paiton II and Tanjung Jati B, power supply for
the region of Java and Bali was not enough.

By 2003, Kuntoro said, installed capacity of existing power
plants in Java and Bali would reach 19,697 megawatts (MW), with
demand already reaching 17,167 MW.

He said that at that point, the power reserve margin was only
14.7 percent instead of the minimum 30 percent; a condition that
could be called a power crisis.

Kuntoro said that to raise power supply by 1,200 MW the
country needed investment of about $1.4 billion.

Estimating that another 3,000 MW would be needed by 2005,
Kuntoro said that Indonesia must invest an additional $4.2
billion to stave off a power crisis.

"With the condition of our national power industry like this,
do foreign investors still have any interest?" Kuntoro said.

Indonesia signed 27 IPP contracts in the early 1990s to
anticipate a higher demand growth as a result of the then high-
paced growing economy.

However, while construction was still underway, the economic
crisis struck and forced then president Soeharto to halt several
power plant projects.

During the crisis, power demand dropped, the rupiah fell
sharply against the U.S. dollar, thus raising the price of power
sold by IPPs to PLN.

PLN, according to the contracts, is required to buy
electricity from IPPs at an average of 6 U.S. cents per kWh
(about Rp 680 at the current exchange rate), as compared to its
average selling price of Rp 240 per kWh.

Indonesia has since been negotiating with the IPPs to reduce
their U.S. dollar dominated prices for power sold to PLN.

Kuntoro said that the main goal of renegotiations with already
operating IPPs was to reduce their power prices.

Thus far, he said, PLN had managed to reach a long-term
agreement with PT Amoseas Indonesia, which operates the
geothermal fired Darajat power plant in West Java.

Under the new agreement, PLN will buy power from Darajat at
2.72 cents per kWh instead of the contracted 4.54 cents per kWh.

Kuntoro said that PLN would save $277 million throughout the
30-year contract with Amoseas.

Furthermore, he said, PLN negotiated the termination of its
contract with PT Tanjung Jati Power Company, developer of the
$1.6 billion worth Tanjung Jati A power plant.

PLN, he said, had also reached an interim agreement with PT
Paiton Energy that would cut the rates of power sold to PLN to
below PLN's own production cost.

Under a 1994 signed contract, PLN has to buy power from Paiton
at 8.4 cents per kWh during the first six years and 5.4 cents for
the remaining 18 years.

He said he had hired international consultant firm Lavalin
Study to appraise the cost of IPPs' power plants.

"We know how much their power plants really cost ... it gives
us some leeway during negotiations," Kuntoro said at the seminar.

He noted that the prices of some power projects apparently had
been marked up, which would explain why the IPPs' power prices
were so high, but he added that PLN would avoid seeking court
solutions where possible.

"Why seek a court solution now, if a commercial solution is
possible? If everything fails we can always go to court," Kuntoro
said.

Nevertheless, further danger is eminent if PLN fails to reach
amiable solutions with the IPPs.

Indonesia's contracts with 27 IPPs resulted in the inflow of
billions of U.S. dollars in investment by international lenders
to finance the power projects. Their investments now depend on
the current negotiations with PLN.

Kuntoro warned that a court settlement with the IPPs would put
at risk Indonesia's relations with international creditors.

"Contracts with IPPs involve many parties such as export
agencies under the Paris Club, political insurance agencies like
Hermes, MIGA IFC and OPIC as well as sponsor companies," Kuntoro
said.

According to him, the government must maintain good relations
with international creditors so as to minimize the affect on the
country's overall investment climate.

Grouped under Paiton Energy alone are the United States Exim
Bank, the Japanese Export and Import Bank, Japan's Ministry of
Trade and Industry and political risk insurance firm Overseas
Private Investment Corp (OPIC), all of which lent a total of $2.5
billion.

Prominent economist Sri Mulyani warned that international
financial institutions would bring up the IPP issue in every
meeting where Indonesia was seeking foreign loans.

"They have many teeth, and they use them all," Sri said.

According to her, Indonesia now is unable to allocate budget
spending without being scrutinized by international lenders.

Based on PLN data, the 30-year contracts with the 27 IPPs
would result in electricity bills totaling $133 billion for PLN.

"Who is going to absorb the $133 billion, this isn't only
PLN's problem anymore. We are talking about this country's
sustainability," Sri said.

She said PLN's negotiations demand at least the same priority
as the Indonesian Bank Restructuring Agency's (IBRA), which is
restructuring assets of only about Rp 600 trillion (or $68
billion).

"We have 27 contracts worth $133 billion and we don't know how
they (the contracts) are being renegotiated," Sri said.