Fuelling growth: With demand surging, the government is adjusting to maintain supply

Rising domestic consumption brought on by organic population growth as well as increased energy intensity from industrial and economic expansion is fuelling the country’s drive to boost electrical power generation capacity, which is targeted to double in size by 2020. Delivering this new wave of electricity generation will be crucial for the development of Indonesia given the fact that its current installed capacity of around 40 GW ranks it among the lowest in the region, far behind other nations such as Thailand, Malaysia, Vietnam and the Philippines. While state-owned power company Perusahaan Listrik Negara (PLN) retains the bulk responsibility for power generation in addition to its role as transmission system operator and distributor, independent power producers (IPPs) are also taking on a larger share of power production, moving forward since their foray into the market following the passage of the 1985 Electricity Law.

Generation

Striving to keep pace with perpetually rising demand, 2012 marked another record year for power production, which exceeded the 200,000-GWh mark for the first time. Of the 200,317 GWh produced, PLN accounted for roughly three-quarters of all generation with 149,755 GWh compared with 50,562 GWh from IPPs, although losses and other technical aspects put the total amount sold to consumers at 173,000 GWh, according to PLN data. The residential sector remained the largest single purchaser of electricity, accounting for 41.5% of all power used, followed by the industrial sector with 34.6%, and commercial and public usage at 17.8% and 6.1%, respectively. Of this energy production 39,108.56 GWh (26.12%) was produced by natural gas, 66,920.80 GWh (44.69%) was produced by coal, 29,640.59 GWh (19.79%) by oil, 10,524.61 GWh (7.03%) by hydro and 3557.54 GWh (2.38%) by geothermal. As the largest single power producer, PLN operated 32,901 MW of installed capacity in 2012, up 12.4% from the 29,268 MW the previous year, as per PLN data. Of these, coal-fired steam power plants were the largest contributor, representing 14,446 MW of capacity, followed by more modern combined-cycle power plants fuelled by fossil fuels with 8814 MW, 3516 MW of hydropower, 2973 MW of gas turbine capacity, 2590 MW of diesel-fired generators, 548 MW of geothermal, and less than 10 MW of solar and wind power production. Two of the larger private power producers selling electricity to PLN in 2012 included the Paiton Energy Company, which sold 8514 GWh (18.34% of private sales) to the national grid, and Jawa Power with 8450 GWh (18.20%).

Planning For The Future

Given the prevalence of the fuel spread throughout the country, it comes as no surprise that Indonesia’s primary power source will stay as coal for the foreseeable future. But while the cheap and plentiful carbon supply will remain a mainstay of the country’s energy mix going forward, improvements in technology and growing concerns about both the environment and energy security have led the country to explore and eventually employ a more varied energy strategy. Recognising the need for diversification, various segments of the government have crafted related strategies, plans and legislation over the years to further these goals in the form of Law 30 of 2007 on energy diversification; Presidential Regulation No. 5 of 2006, which calls for a eventual 17% contribution of renewable energy to the primary energy mix; and the Ministry of Energy and Mineral Resources’ (MEMR) Vision 25/25, which outlines a plan to achieve a 25% renewable energy contribution by 2025.

To this end, Suriyanto, president director of Enviromate Technology International, told OBG, “ASEAN integration will boost the environmental sector in Indonesia as nations in the region will have greater opportunities to share technology and solutions.”

As a whole, these plans vary in their target goals and timelines but all seek to reduce the role of petroleum within the energy mix, secure domestic energy needs, reform subsidies and develop new and renewable energy sources. While delays have limited the expansion of renewables called for in these strategies, increasing the production and domestic use of natural gas has proven more successful in the short term. Known as the “bridge fuel” between dirtier-burning coal and generally more expensive renewables, natural gas is playing a growing role in the country’s energy mix, in spite of a heavy reliance on gas exports in the past. Since 2003 the accumulated volume of domestic natural gas contracts allocated for electricity production has increased from 1.18trn cu feet (tcf) to 7.59 tcf by 2012, according to SKK Migas. In 2012 alone 17 new contracts were signed to provide 580.73bn cu ft (bcf) of natural gas for power plants. These contributions could increase in the future as well, with new forays being made in terms of unconventional natural gas plays including shale oil and coal bed methane, the latter of which has already initiated its first 3-MW demonstration power plant.

In the short term, the government has launched a pair of fast track programmes (FTPs), FTP1 and FTP2, each of which calls for the construction of 10 GW of generation capacity. Initiated in 2006, FTP1 was originally scheduled to have new plants up and running by 2013, but delays have meant that about one-third of these projects had yet to be completed by 2014. FTP2 is expected to be extended to 2020, reflecting the push for energy diversity. The plan will consist of 49% geothermal, 30% coal, 17% hydro, 3% gas turbine and 1% combined-cycle power plants, with 63% of projects taken on by IPP contractors and 37% by PLN.

Renewables

While the FTPs should, when completed, provide the power supply stability needed in the short term primarily through the usage of proven, traditional hydrocarbons (geothermal projects not withstanding), lessening the country’s reliance on fossil fuels remains a long-term goal for the government. In order to reduce Indonesia’s vulnerability to price shocks in the market, increase its domestic energy security and provide more environmentally friendly alternatives, more renewable power will need to be developed.

While geothermal projects already make a noticeable contribution to sustainable power and have the potential to have a serious impact on the sector (see analysis), another well-established power source with untapped potential of some 75 GW is the hydropower sector. To date, investments have limited the sector to 6.6 GW of installed capacity, due to a number of challenges, including the remote location of potential sites, difficulty with connectivity to the grid and low tariffs.

Financing also remains a challenge for long-term, largescale investments, with sovereign guarantees only offered for geothermal projects.

In spite of the creation of the National Energy Policy in 2006, the Energy Vision 25/25 in 2010 and the addition of a feed-in tariff (FIT) in 2012 payable for geothermal and small scale (under 10 MW) hydro and bioenergy, large-scale implementation of other renewables still faces significant financial and regulatory hurdles.

“In order to attract sufficient investment, the FIT simply must be adjusted so to incentivise development of renewable energy resources. For example, Indonesia offers $0.09-0.12 KWh for biomass-generated electricity while the Philippines offers $0.15 plus,” KK Ralhan, president director of power solutions company Kaltimex, told OBG. Hydro, solar and wind participation in the FIT scheme are still being finalised, and land acquisition also remains a concern for the land-intensive projects required for commercial-scale wind and solar photo-voltaics as well. Charles Gobel, CEO of Bormindo, told OBG, “Land acquisition continues to be the single most problematic issue for the onshore industry and it has gotten out of control, as landowners have the upper hand in negotiations and there is no clear legal framework to solve these challenges.”

Infrastructure

The national electrification ratio has climbed rapidly over the past three decades from 8% in 1980 to 57% by 2000, and has continued this rise to reach 77.65% as of 2013, as per MEMR data. As of 2012, Indonesia’s electrification ratio still lagged far behind the Philippines (89.7%), Vietnam (97.3%), Thailand (99.3%) and Malaysia (99.4%), according to Renewable Energy Support Programme for ASEAN reports. As of 2012, PLN operated a national grid totalling some 38,096 km of 25- to 500-kV transmission lines, along with 741,957 km of low- and medium-voltage lines.