POWER July 2013 - 38

POWER POLICY
Indonesia's North Kalimantan region, and
work is expected to begin next year.
Nuclear. Though nuclear capacity is
not included in PLN's plans, a 2006 presidential
decree calls for four nuclear power
plants to be built in Indonesia by 2025.
The country already has three experimental
nuclear reactors and at least two
uranium mines. Despite the Fukushima
accident in March 2011, the quake-prone
country seems determined to build new
" modern " (possibly thorium) reactors.
According to media reports, the Indonesian
government has $8 billion earmarked
for the reactors that could be built in Central
Java and Bangka Island, off the north
coast of southern Sumatra.
Grid. Consisting of eight domestic interconnected
systems and 600 isolated
grids-all operated by PLN-Indonesia's
power grid is characterized by high transmission
losses and electricity theft.
Meanwhile, plans are under way by
leaders of the Association of South East
Asian Nations (ASEAN), a geopolitical
and economic organization, to develop a
grid that will interconnect its 10 resourcerich
Southeast Asian country members by
2020. The project consists of 14 links,
at least two of which will link Indonesia
to Peninsular Malaysia and to the Asian
mainland.
A Need for Higher Power Tariffs
The EMR's Rudi in December warned
that along with minimizing the supply gap
to avert a future energy crisis, the nation
would have to push for energy efficiency
measures. Rudi recognized that complicating
Indonesia's challenges is a government
commitment to electrify 99% of the country
by 2020-up from about 76% in 2012.
Subsidizing energy " caused Indonesian behavior
trends to be consumptive and wasteful
on energy use, " he cautioned.
Several funding entities have echoed
Rudi's concerns, saying that PLN's income
from operations alone is " insufficient " to
achieve Indonesia's goal to extend electricity
to nearly 20 million citizens. The problem's
cause is simple: Tariffs have been set
low by the government for social reasons,
but the " cost of generation is much higher
than the average tariff, " notes the Asian
Development Bank.
To bridge the deficit, the Ministry of
Finance (MoF) provides funding to PLN,
which is referred to as the Public Services
Obligation (PSO). But because the PSO
is critical to PLN's solvency, that means
for IPPs like Japan's Marubeni-which
recently built the Cirebon supercritical
plant-arranging long-term dollar-de38
nominated
project finance requires " certain
government guarantee/support to be
issued from the MoF to assure PLN's payment
obligations, " a spokesperson told
POWER. Analysts note, however, that
government support is now only available
for projects within the " fast track " Stage
II or PPP programs.
Change is under way, albeit slowly.
Recognizing the burden on progress posed
by artificially depressed power tariffs, the
House of Representatives has made good
on efforts to increase tariffs by 15% this
year, starting with a 4.3% increase in
January and an additional increase every
three months. This hasn't boosted PLN's
bottom line yet, however. As the Jakarta
Post reported in April, the utility reported
a 41% drop in net income last year, losing
$330 million on foreign exchange losses,
increased operating expenses, and rising
fuel costs. Though it saw a revenue hike of
about 12%, about 44% of PLN's revenue
came from state subsidies, the newspaper
reported.
Land Acquisition and Finance
Hurdles
Nevertheless, reforms to encourage foreign
investment in the country's power
sector seem to have been successful. Currently,
no " major " regulatory or legal impediments
involve foreign investment in
the power sector, experts claim, though
they outline a list of hurdles that must be
overcome beyond that. Among them, as a
recent analysis from the U.S. Embassy in
Jakarta notes, are " [a]ccess to financing,
protracted land acquisition processes and
legal uncertainties, " which " can still cause
bottlenecks in infrastructure projects in
the sector and serve as a deterrent to doing
business in Indonesia. "
These are serious issues that are hindering
even PLN from gaining ground on its
fast-track program. The company's construction
director, Nasri Sebayang, told
the Jakarta Post this April that at least 36
out of 52 geothermal projects in the second
stage of the program are lagging and would
not meet the projected 2016 deadline. Six
plants with a total capacity of 360 MW are
delayed because they are located in conservation
forests, while 16 other projects
with a capacity of 1,510 MW face technical
issues. Of the 9.9 GW projected for
the first stage of the first-track program,
only about 45% are in operation, while just
46% (about 4.7 GW) of the second stage
was on track to come online on time.
Attracting IPPs has been Indonesia's
most vital challenge as it tackles the growing
demand for power, the strain on the
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cost structure system, and the underutilization
of energy resources. In 2010, a
presidential regulation (amended in 2011)
established the Fast Track II program,
which consists of 44 coal, gas, geothermal,
and hydropower power projects totaling
10.1 GW-3 GW of which have been
reserved for IPPs. Some IPP projects are
procured under the country's 2011-amended
PPP framework, which could provide
infrastructure guarantees and may provide
fiscal and nonfiscal government support to
improve their feasibility.
Recent liberalized laws also allow power
generators to sell electricity to entities
other than PLN, though a 2010 regulation
stipulates that foreign ownership of any
power project above 10 MW is limited to
95%; Indonesian entities or individuals
must own the remaining 5%.
Other factors that could temper enthusiasm
for developing power projects in the
country involve land acquisition and permitting.
PLN generally expects developers
to acquire all land needed for a plant site
and transmission lines needed to connect to
the nearest substation (a corridor typically
20 km to 40 km in length) before the financial
closing date. However, the process of
land acquisition can be complicated, given
that Indonesian law broadly recognizes
numerous forms of unregistered land, including
Adat (or native title), which sometimes
makes it difficult to ascertain the
identity of land owners. And because the
law forbids foreign-owned companies to
hold unregistered land, converting rights
to registered land can be a lengthy and expensive
process.
Among the permits required-which
are prone to delay or blockage-are those
from the Ministry of Forestry to " borrow "
forest area to build power projects. Then
a variety of permits are required from
government departments or ministries, including
the approval of an environmental
impact assessment, a business license, an
electricity business license, and a certificate
of operation worthiness.
Nevertheless, several experts agree that
Indonesia's economic fundamentals and
emerging regulatory framework are beginning
to synchronize. Some even express
" renewed optimism " in the investment
sector.
But others decry the high degree of
politicization of the system, pointing to
a failure to reform PLN, which, as Purra
describes it, has become an " untouchable
behemoth that is allowed to continue to
dictate the future direction of Indonesia's
electricity sector. " ■
-Sonal Patel is POWER's senior writer.
POWER | July 2013
http://www.powermag.com
POWER July 2013

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