IPPs to lead generation capacity expansion in Indonesia
Independent power producers (IPPs) have traditionally played a limited role in the Indonesian power sector. Over the coming decade, however, the presence of private players in the sector is set to witness unparalleled growth. Over 20.5 GW of generation projects are currently being constructed or developed by IPPs, while projects aggregating another 30 GW are still to be allocated. The growing share of IPPs is attributed to the unprecedented growth expected in Indonesia’s energy needs as well as the limited investment capability of government-owned power utility Perusahaan Listrik Negara (PLN) and the favourable investment environment created for IPPs.
At the end of 2013, IPP-owned generation projects aggregated 7,600 MW, amounting to 15 per cent of the country’s total installed capacity of 46,100 MW. Private participation witnessed a steady growth over the past decade, with the power purchased by PLN increasing from 26,087 GWh in 2009 to 52,222 GWh in 2013. Private generation increased at a compound annual growth rate of about 9.1 per cent during the nine-year period, higher than the growth in total generation at 6.8 per cent. The majority of the IPP capacity in the country is owned and operated by Paiton Energy, Jawa Power, Central Jawa Power, Cirebon Electric Power, Sumber Segara Primadaya, Pertamina, and Chevron Geothermal Indonesia.
Capacity growth and requirement
According to PLN’s Electricity Supply Business Plan (RUPTL) for 2013–2022, electricity consumption in Indonesia is expected to increase from 189 TWh in 2013 to 386 TWh in 2022, registering an average annual growth of 8.4 per cent. During this period, the number of electricity consumers is projected to increase from 54 million to 77 million as the electrification ratio increases from 79.6 per cent to 97.7 per cent. In order to meet the growing demand, Indonesia will need to increase its generation capacity by nearly 59.5 GW in the coming decade. The massive investment required for this capacity addition is unlikely to come from PLN as the company continues to report losses and its debt continues to build up.
According to the RUPTL for 2013–2022, a major part of the capacity expansion will be accounted for by the private sector, with over 25.5 GW likely to be developed by IPPs. Against this, PLN’s contribution is expected to stand at 16.9 GW, while developers and funding sources still need to be identified for projects aggregating another 17.1 GW. The Indonesian power sector is expected to witness an aggregate investment of $125.2 billion for the period 2013–22, with investments in generation by IPPs likely to stand at about $54 billion and those by PLN at about $37 billion.
Almost 55 per cent of the upcoming capacity is located on the island of Sumatra, another 43 per cent in Java–Bali, and the remaining 2 per cent in Kalseltengtimra, north Sulawesi and south Sulawesi. Nearly 63 per cent of the ongoing IPP projects are coal-fired thermal power plants (TPPs), 26 per cent are geothermal-based power plants, 9 per cent are hydropower plants, and the remaining 2 per cent are gas-based TPPs. The largest projects under construction by IPPs are the 1,900 MW Jawa Tengah TPP, the 1,200 MW Riau Kemitraan TPP, the 1,200 MW Sumsel-8 TPP, and the 1,200 MW Sumsel-9 TPP, all of which are expected to be operational by 2018–19.
Policy support
The expanding role of the private sector has been made possible by policy initiatives. Previously, the government had decided to allocate 39 projects totalling 30,072 MW to IPPs during the mid-1990s, but only a handful that could manage to secure debt were developed, while the majority were cancelled or put on hold as a result of the East Asian financial crisis of 1997. After the economic crisis ended, the demand for electricity sector reforms gained momentum due to the insistence of multilateral donor agencies like the World Bank, the United States Agency for International Development and the Asian Development Bank.
After nearly a decade of struggling with formulating new laws and managing local opposition, the government passed a landmark legislation in 2009 to liberalise the electricity market, breaking PLN’s monopoly as the sole electricity supplier. Under the new electricity law, IPPs are permitted to sell electricity to entities other than PLN. However, most continue to operate either as captive power plants or sell power to PLN. Foreign ownership in IPPs is permitted up to 95 per cent for projects above 10 MW capacity.
PLN procures power from new IPPs under a few different strategic programmes. The main one is the Fast Track II programme, which was launched in 2009 to develop 10,147 MW of capacity. This was subsequently expanded to include almost 18,000 MW of capacity. Some IPP power is also procured under the public–private partnership programme launched in 2005. PLN also procures power from IPPs outside of these two programmes, which currently include a variety of coal mine-mouth projects.
The procurement method determines the type of incentives offered for the projects, including the availability of a government guarantee under a 2011 regulation passed by the finance ministry. The tendering process used for project procurement comprises either direct appointment or public auction. The power purchase agreements (PPAs) signed with IPPs are based on negotiations and vary from project to project. Typical PPAs signed by PLN are valid for a period of 19 to 30 years from the date of a project’s commercial operations.
The government is looking to expand the role of private players further. The Ministry of Energy and Mineral Resources is in the process of drafting new regulations that will enable greater involvement of private players beyond the IPP scheme. One proposed model is power wheeling, wherein private entrepreneurs will be allowed to build special power plants outside industrial zones to wheel power to industrial areas by paying transmission fees to PLN.
Issues and the way forward
The government’s efforts to promote and expand the role of private players in the Indonesian energy sector are commendable. However, there are multiple challenges that IPPs continue to face during the development and construction of projects. The highly regulated structure of the Indonesian power sector is prone to corruption, and IPPs often become the targets. Projects are subject to an extensive list of permits from a variety of government departments and ministries, which adds to project gestation period. Land acquisition is another major challenge as developers are expected to not only acquire land for power plants but also to develop the evacuation system. They struggle with unequal risk allocations in PPA clauses and the low tariffs prevalent in the Indonesian market.
Going forward, it is imperative for the government to establish a more efficient and transparent investment climate for private players by presenting investors with fiscal and non-fiscal incentives, providing attractive energy sale prices, and simplifying the terms and conditions of the power purchase mechanism. A holistic and flexible approach that protects the interests of investors while addressing local concerns is needed to ensure the success of the projects planned in the country.
