Mon, 16 Oct 2000

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.