Recalculating Electricity Over Supply

After three years, the government will finally review the 35 GW power plant development megaproject until 2019, considering the unexpectedly low demand growth. The target is planned to be cut down for 20-25 percent, leaving only 26.5 to 28 GW depends on the electricity demand growth.

“The cut down is done to lighten PLN’s burden,” said the Coordinating Minister for Economic Affairs, Darmin Nasution in Jakarta, October 16 2017 just a couple days prior the third anniversary of Joko Widodo-Jusuf Kalla government.

35 GW megaproject is Jokowi-JK’s strategic program during their early years government. This program is aimed to meet the need for increased electricity consumption in line with economic growth and for distribution of development, in the form of increasing the ratio of electrification in the areas outside of Java.

As a part of strategic project, 35 GW megaproject become a part of the plans written in Power Supply Business Plan (RUPTL), that has become PLN’s reference in planning electricity supply for the next ten years. RUPTL 2017-2026 has been authorized by the Minister of Energy and Mineral Resources, Ignatius Jonan in letter No. 1415 K/20/MEM/2017, on March 2017.

This RUPTL refers to some aspects such as economic growth projection, power load realization, and realization of power plan project completion. For 2017-2026 period, 2017 ecomic growth projection benchmark value is 5.1 percent following the draft budget (RAPBN) in 2017. However, RUPTL will be revised annually depends on the real situation and the policies that affect the electricity supply projection.

As in the previous years, Java-Bali electricity system become the pedestal for RUPTL considering Java-Bali is the center of industry and economy of Indonesia. In 2016 alone, industry in Java become the largest electricity buyer, reaching 60,475 Gigawatt hour (Gwh). This number is equal to 65 percent of national electricity consumption. Beside that, until August 2017, 65 out of 82 industrial areas in Indonesia is located in the Java Island.

According to the RUPTL, electricity demand in the Java-Bali system is estimated to grow 7.2 percent in average for the next ten years. Despite 80 percent of industry is centered in Java Island, electricity demand growth in this area has slowed down it becomes worrying. In 2016, the consumption growth is only 1.2 percent because of the negative demand growth in West Java, Jakarta, and Bali. It means, the real demand in the last 1-2 years is not in accordance with PLN’s estimation.

Nicke Widyawari, PLN’s Director of Corporate Planning at the time, in an interview with Majalah Listrik Indonesia December 2016 edition has warned about the potential for low industrial growth that will impact on electricity consumption. “Do not let the increase of electricity supply become unabsorbed because it is not followed by the increase of consumption,” she said.

Whereas in the RUPTL, the increase of electricity supply capacity in the Java-Bali system is estimated to grow for 8.8 percent per year. If this plan is followed, electricity supply will be abundant in Java-Bali since the number of unabsorbed electricity will be increasing.

Electricity over supply might happen because of PLN’s supply drive approach. This approach will bring positive impact if the planning for industry, development, and policy between each minister/instituion is in line with the RUPTL. In the other side, if the ministers/instituions are not integrated, then it will only bring negative impact.

Electricity over supply also might potentially happen because of PLN’s policy to determine 30 % of reserve margin for every system. There are some reasons on this policy, among them are performance derating, operation outage, risk mitigation for newer and more efficient power plant, low performance of power plant from the Fast Track Program step I, and to keep delayed connection requests.

In the next ten years, based on Katadata’s calculation in accordance to the RUPTL’s projection, the reserve margin in Java-Bali system is estimated to be 27-60 percent. High reserved margin spike will happen in 2019, with unabsorbed electricity reaching up to 60 percent. From that point reserved margin will slowly decrease to 42-54 percent range.

Inefficiency Threat

Abundant reserved margin surplus will be a threat for PLN in the future. Moreover, the surplus will be 1.5 times of the predefined value. If electricity over supply is let unabsorbed, it will drive a high inefficiency.

PLN is bound by a take or pay agreement with a private electricity producer. This take or pay clause written in Power Purchase Agreement (PJBL) is initially  an incentive from the government to invite private investors into the power plan business. Through this incentive, PLN is obligated to buy all electricity produced by private power plan even though PLN will use none of them. This clause submitted because the country’s ability to fund all electricity develompent plan is limited.

With such a scheme, according to the expert of Energy Financing from Institute for Energy Economics and Financial Analysis (IEEFA) Yulanda Chung, PLN will potentially bear the burdensome burden since PLN will keep paying the electricity even if it is unabsorbed by the system.

Referring to RUPTL 2017-2026, nationally the number of coal plants that will be developed is around 24 GW. If the contract period lasts for 25 years and investment return rate is 12 percent, then PLN must pay US$ 3.16 billion per GW. In total, PLN will have to pay US$ 76 billion for 24 GW. “This is just too expensive for PLN,” said Chung as reported by Katadata on August 11 2017.

Chung ave an example of the potential reserved margin in Java-Bali system that could reach more than 40 percent. It means capacity payment for 5.14 is should still be borne even though it is unabsorbed. In other words, PLN will have to spend US$ 16.2 billion for wasted capacity.

Economist Rizal Ramli has warned about the potency of elecricity over supply when he served as Coordinating Minister of Maritime in August 2015-July 2916. Referring to the calculation result, in September 2015 Rizal has revealed that 35 GW megaproject will endangered PLN financial if forced until 2019. Because, the national electricity need in 2014 is only 50.9 GW and 74.5 GW in 2019.

That is just a problem caused by the take or pay scheme. Beside that, PLN is also facing the risk of unstable and unpredicted price of coal in the market. This state owned company had a bad experience from the increase of coal price in the market. In 2011 and 2012, PLN financial performance was affected badly when the coal price reached above US$ 100 per ton. As a result, the government had to add the portion of electricity subsidy to keep PLN’s revenue stability. Referring to the composition of the plants supplying PLN’s electricity, this risk is still possible.  So far, coal-fired Steam Power Plant (PLTU) is still the main and the most dominant option. PLN is using the least coast principle for efficiency. Therefore, for the next ten years, coal-fired PLTU portion is estimated to contribute for more than 40 percent of PLN’s electricity needs.

For information, until 2015 the total capacity of coal-fired PLTU owned by PLN in Java and Bali reached up to 10.7 GW. This number is planned to be increased for 3.3 GW until 2026. The increase of plan capacity will definitely affect the increase of demand and purchase of coal in the future.

The problem is in the past few months, the trend of coal prices began to show an increase. Based on the data of Minister of Energy and Mineral Resources, Coal Reference Price (HBA) is experiencing upward trends for the last three months. On August, the price was only US$ 78.9 per ton, it increased to US$ 83.9 per ton on August and to US$ 92 per ton on September. This increase will certainly add the burden for PLN

Looking back to this situation and challenge, it is not surprising if PLN management intends to take some anticipatory steps. One of them is the plan to revise 2017-2026 RUPTL. Moreover, recenlt the PLN management together with Minister of State Owned Enterprise and Minister of Energy and Mineral Resources have received a Warning Letter from the Minister of Finance Sri Mulyani to be aware of PLN’s financial condition.

Two energy and electricity observers met by Katadata’s research team, Fathor Rahman and Fabby Tumiwa agreed with PLN’s plan to recalculate. According to them, reserved margin excess problem must be calculated accurately by PLN. “If there is any miscalculation, then the consequences will be fatal,” said Fathor. Fabby also reminded the fact that any mistake in reserved margin management will have big impact, including troubling the Minister of Finance because PLN’s burden will also have to be bore by the country.


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