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Indonesia surprises on delivery of energy initiatives

Indonesia surprises on delivery of energy initiatives
Published 2 Mar 2016 

Less than a year from the launch of Indonesia's 35,000 megawatt (35 gigawatt) electricity expansion project, state-owned electricity company PLN has already contracted with private sector providers to meet nearly half the target.

The rapid progress of the project has surprised observers. Many had greeted Indonesian President Joko Widodo's announcement of the five year expansion with scepticism about the ability of the perennially over-promising and under-delivering nation to meet yet another stretch infrastructure goal.

Speaking at the Asia Conference of the International Association of Energy Economists in Perth in February, Dr Agung Wicaksono, vice chairman of the Indonesian Government's Project Management Office for the 35 GW expansion, briefed the audience on its implementation. Private and public sector generation capacity totalling 17.3 GW is set for installation in the next five years. A further 15.5 GW is planned to be contracted in 2016. To give an indication of scale, Australia's installed electricity generation capacity is just over 50 GW.

President Joko Widodo (popularly known as Jokowi) has made energy a key priority, committing to reduce budget-sapping energy subsidies, lift capacity of electricity systems by around 50% from 72 GW to 107 GW in five years, and increase oil and gas production.

Aided by low oil prices, Jokowi's Administration has successfully wound back automotive fuel subsidies, releasing US$15 billion a year for spending on infrastructure and services. Subsidy reform of LPG and electricity is planned for implementation during 2016, Dr Wicaksono told the conference. 

However, the reduction of these subsidies, which will lead to higher prices for many consumers, is likely to attract opposition from the emerging middle class. There are proposals to shield the poor, including more than 30 million Indonesians still living below US$2 a day. [fold]

Lifting oil and gas production remains a major hurdle: many currently producing fields are mature and exploration must step out into technically high-risk regions of eastern Indonesia. Problematic government policies have also deterred foreign investment.

Procurement of new capacity of 7 GW was already in train when the President announced an additional 35 GW in May 2015. With demand estimated to rise by 8.5% a year in the medium term, President Widodo plans to increase the proportion of the population with access to electricity — currently around 85% — to 98% by 2022.

The expansion will involve construction of 291 generation plants, 47,000 kilometres of new transmission and distribution lines, and 1375 new substations.

Total capital cost of the 35 GW project is estimated by the Indonesian Government at US$93 billion (AU$130 billion), with state-owned company PLN investing US$50.5 billion and the private sector US$40.5 billion. PLN will provide the bulk of transmission and distribution infrastructure, though the proportion of PLN's generation investment could be reduced from an originally proposed 10 GW to 5 GW, with the private sector providing a total of 30 GW of capacity.

Such a high level of private sector engagement by the government, through its monopoly power company, is unprecedented. It acknowledges the reality that, not only is the government unable to fund and construct such massive new capacity on its own, but also that Indonesia needs a high proportion of investment to come from foreign sources. 

If the Jokowi Government is to continue to make progress on delivering energy to this under-served nation, it must overcome major challenges to keep the electricity project on track. These include the need for PLN to transform from its current business model of operating as a fully-integrated, monopoly electricity provider to being a facilitator of private sector investment and principally a transmission and distribution services company, plus retailer. The varied experience of transforming state-owned electricity monopolies in the UK, Australia and elsewhere is being studied in Indonesia.

The letting of a generation and transmission contract of course does not guarantee delivery. Indonesia's notoriously labyrinthine approval processes have delayed many major infrastructure projects, including state-sponsored ones. President Widodo has committed to implementing expedited approvals and licencing, aided by the land acquisition law passed by the Indonesian Parliament in 2012. 

It remains to be seen how the new 'one stop service' coordinated by the Indonesian Investment Promotion Board handles the needed timely approvals for the slew of new electricity infrastructure.

While new generation contracted to date is 63% coal fired, the government is aiming for 50% coal, 25%  gas and 25% renewables. The aim is to better enable Indonesia to meet its new climate change commitment of reducing emissions by 29% from business as usual by 2030. To achieve this mix, it needs to find ways for more gas supplies to enter the market and for gas and renewables to be price competitive. A spin-off renewables company, separate from PLN, may be established to focus on renewables procurement.

Adding to the emissions issue for coal is the fact that many of the generation plants so far scheduled for construction are small, below 200 MW per unit, though some do have large 600 and 1000 MW units. The dominant coal-fired plants will use sub-critical technology, which is less emissions-friendly than larger, newer-technology and more capital-intensive super-critical and ultra-critical plants. In part this is due to the fragmented nature of the Indonesian electricity system, but it also reflects procurement specifications. 

The next round of procurement needs to up-scale and technically specify plants that will put Indonesia on a pathway towards emissions reduction.

Delivering electricity to the more populous islands of Java and Sumatra, which will soon be increasingly interconnected, is relatively simple. Delivering electricity to the rest of Indonesia's 6000 inhabited islands, many of them remote and with small populations, is much more difficult – but socially, economically and politically imperative. Generation is likely to involve a mix of fuels, including LNG, CNG, diesel and solar. 

The proposed renewables company may also gain a remit to facilitate remote electricity supply, which the government hopes also will attract strong private sector investment. Several Asia-Pacific economies, including Australia, have expertise in cost-effective remote power technologies. The first round of procurement has attracted strong participation by Chinese companies (46% of capacity), Japan (30%), Korea (9%), Malaysia (8%) and Indonesia (6%).

Western investors are largely and conspicuously absent. The Government of Indonesia is keen to attract a diversity of investment in energy, but must overcome the reluctance of investors unnerved by a history of capricious policies driven by economic nationalism.

Photo courtesy of Flickr user BxHxTxCx.

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