Indonesia to see increased energy generation capacity under a new plan

The country’s plans to raise generation capacity to meet soaring demand have been boosted by the signing of power purchase agreements (PPAs) for over 17 GW with independent power producers (IPPs) in 2015. The high level of investor interest, principally from IPPs in China, South Korea and Japan, offers hope to the administration of President Joko Widodo that despite long-standing regulatory and financing issues, as well as ongoing difficulties over land rights, the government will deliver on its new commitments with little delay. Speedy implementation of Indonesia’s 35-GW programme, its latest fast-track power generation plan, is considered critical, not just for the reputation of the president and his government, who made the programme a cornerstone of their infrastructure development plan, but also to meet rocketing growth in energy demand, which is resulting in increasing load-shedding and blackouts.

Demand Growth 

Historical underinvestment in the power sector has seen demand outstrip new supply with an average rise in annual demand of 8.7% between 2009 and 2014 on the back of economic and population growth and subsidised electricity tariffs. Electricity demand is set to continue to increase, with 12% of the population still without access to electricity as of the end of 2015, an estimated annual per capita power consumption of 787 KWh and projected GDP growth of 5-7% per annum in the next few years.

According Perusahaan Listrik Negara (PLN), the state-owned power producer and transmission system operator, electricity consumption is forecast to more than double to 464 TWh by 2025, based on 8.7% growth. This will require a total of 70.4 GW of new capacity, or an average of 7 GW annually over the next 10 years. To put this into context, at present a total capacity of 53 GW serves a population of around 250m. To address the system’s demand requirements and achieve almost universal electricity access by the end of 2019, in April 2015 the government rolled out its plans to add 35,500 MW of new capacity between 2015 and 2019, 70% of which is expected to come from the private sector. In total, nearly 43 GW is due to be commissioned by 2020, including 7.4 GW from a previous fast-track programme.

Challenges 

Delays in the commissioning of capacity are expected to accentuate supply shortages, with a corresponding knock-on effect for economic growth. According to a March 2016 study by advisory firm PwC, even a two-year delay in the commissioning of the planned 43 GW would see Sumatra and the Java-Bali regions’ reserve margins fall below 13% from 21% and 29%, respectively, and would in turn be likely to lead to a deterioration in grid performance measures such as the System Average Interruption Duration Index (SAIDI) and System Average Interruption Frequency Index (SAIFI). Both Indonesia’s SAIDI and SAIFI lag behind regional neighbours at 5.8 and 5.6, respectively, with a typical consumer in Central Java and Yogyakarta experiencing an average of 13.1 disruptions per year in 2014, according to PLN. In addition, reserve margins in every island group, except Java-Bali, are currently below the International Energy Agency’s recommended level of 20-35%. In recent years, whenever the reserve margin has fallen to 15%, PLN has been forced to implement load shedding, leading to daily blackouts.

Lessons Learnt 

The announcement of the 35-GW programme was greeted with some cynicism and much scepticism given Indonesia’s track record. Fast Track I, which was initiated in 2006 and targeted 10 GW in capacity additions by 2010, is around 85% complete, while Fast Track II, which started in 2009 with a target of 17 GW by 2018, is less than 5% complete. To address key obstacles that have hindered the two previous fast-track programmes, President Widodo has actively sought to speed up the development of new power capacity, with a number of new regulations, including Presidential Regulation No. 4 of 2016 on the Acceleration of Power Infrastructure Development (PR4/2016) and new decrees on land acquisition which amend Land Acquisition Law No. 2 of 2012. The two main features of PR4/2016 are the introduction of a new government guarantee for the development of power projects, which cover both projects developed by PLN and those undertaken by PLN in cooperation with IPPs. PR4/2016 also introduced provisions to expedite licensing, as well as streamline one-stop services at the Investment Coordinating Board, and provincial and regency levels.

Land Laws 

The other main issue that has been troublesome is land rights. Two amendments to the Land Acquisition Law No. 2 of 2012 that were issued in 2015 have provided IPPs with greater flexibility in acquiring land. Prior to this law, the government had no compulsory land acquisition powers to facilitate public infrastructure projects. Under the 2012 law state companies and institutions were permitted to acquire land on behalf of private developers, but complicated procedures meant that the process could take up to 546 working days. Now, as a result of an amendment issued in late 2015 – Presidential Regulation No. 148 of 2015 – private developers can negotiate land settlement arrangements with private landowners without having to comply with the land acquisition procedures under the law.

The amendments to the law have already started to produce results. In June 2016 Bhimasena Power Indonesia (BPI) – a consortium comprising Adaro Power, the power arm of Indonesia’s leading coal producer, and Japan’s J-Power and Itochu Corporation – announced it had reached financial closure on the 2000-MW Batang coal-fired plant in Central Java, having finally secured, after a four-year delay, the remaining land required to proceed with the project. In the process it became the first IPP to benefit from the amendments to the 2012 land law.

The $4.2bn project, which will receive $3.4bn in financing from the Japan Bank for International Cooperation and a consortium of nine commercial banks, is scheduled to come on-line in 2020. The IPP project, which is to be developed on a build-own-operate-transfer basis, with its output to be sold to PLN under a 25-year, government-guaranteed PPA, is the first such scheme in Jakarta to be undertaken as a public-private partnership (PPP) but more PPPs can be expected. “Lower interstate rates, better regulatory issues, more clarity – especially when talking about the potential of build-own-operate agreements for contractors or project owners – needs to be pushed to incentivise private sector’s contribution to the sector,” Mustain Sjadzali, founder and president director of Citra Panji Manunggal, told OBG.

IPPs 

The project is one of a growing number of major coal-fired schemes to be developed by foreign IPPs in partnership with local investors. By the end of 2015 PPAs for a total of 17.3 GW had been signed, out of the 29 GW of capacity under the 35-GW programme which are to be built by IPPs, according to PLN’s 2015 annual report. Of the PPAs signed, representing an estimated $20bn in investment, the vast majority are for major coal-fired plants in Java, including the 2-GW Java 7 and 600-MW South Sumatra 1 projects, which are to be built by consortia led by China Shenhua Energy Company. The 1-GW expansion of the 660-MW, coal-fired Cirebon power plant, known as Java 1, will be carried out by Cirebon Energi Prasarana, a special purpose firm sponsored by Japan’s Marubeni, Chubu Electric Power, South Korea’s Komipo and Samtan, and local coal producer Indika Energy. Sumber Segara Primadaya (S2P) will oversee the 1-GW expansion of the coal-fired Cilacap plant. In addition, in late 2015 Malaysia’s YTL Power International signed an amended 30-year PPA for the 1320-MW Tanjung Jati A coal-fired plant in Cirebon. All of these plants are scheduled for commissioning in 2020.

Engineering, procurement and construction (EPC) contracts for close to 4 GW were signed with foreign equipment suppliers and contractors in 2015, indicating more advanced progress. These include: the 1040-MW Upper Cisokan plant, which will be the country’s first pumped storage hydropower station; the 800-MW, combined-cycle gas turbine Java 2 plant being built by PLN; and the 1-GW expansion of the Cilacap coal-fired plant by China Chengda Engineering and S2P. Meanwhile, 1989 MW of the government’s first 7-GW new-build generation programme was in operation by the end of 2015, consisting of 980 MW by PLN and 1008 MW by IPPs. The remainder is either under construction or in commissioning.

Local Investors 

While the involvement of foreign investors is critical to the success of Indonesia’s new-build plans, local companies are also playing their part, most notably coal producers Bukit Asam and the Adaro Group, which in response to falling demand and prices in international markets have accelerated their push into power generation. In addition to the 2-GW Batang project, Adaro Power is to build a 200-MW plant in East Kalimantan and aims to have 5 GW of installed capacity by 2020, according to Dharma Djojonegoro, deputy CEO of Adaro Power.

Meanwhile, state-controlled Bukit Asam confirmed in June 2016 that it remains on track to build 5 GW of new coal-fired capacity in Sumatra by the end of the decade. Construction is expected to begin in 2016 on the $1.6bn, 1240-MW Sumsel 8 mine-mouth power plant in South Sumatra, which is being developed under a 45:55 joint venture with China Huadian Corporation. Its project pipeline also comprises the 1800-MW Sumsel 9; 10 projects in Muara Enim; a $2.4bn, 800-1200 MW plant in Peranap Riau, in partnership with PLN and Tenaga Malaysia; and a 700-MW plant at Kuala Tanjung in North Sumatra, with state aluminium producer Indonesia Asahan Aluminium.

Generation Mix 

These new PPAs reflect the recently updated energy mix under the 35-GW generation programme. Out of the total, 56% of generation will be coal-fired, or 17,598 MW, of which 13,045 MW will be built by IPPs. Another 6123 MW will utilise gas and 1347 MW from renewable energy. This breakdown is also in line with government policy guidelines that prioritise the use of indigenous energy resources to serve the needs of the country over exports. Given falling oil and gas production, coal has become and will continue to be the main source of power generation in the country, accounting for 53.5% as of 2015 and expected to rise to nearly 64% under the PLN’s business plan through 2024. The majority of coal-fired capacity will provide base load power to the islands of Java-Bali and Sumatra.

Renewables and gas-fired capacity will be developed to provide power to remote islands in line with the government’s target to raise electricity access to 97% of the population by the end of the decade, as well as to replace costlier and dirtier diesel-fired generation. Gas will also be used to supply an increasing number of peaking plants that will be needed to address supply shortages at peak hours. The growth in off-grid captive power plants underlines the country’s peak supply problems.

New Direction

Continued growth in coal-fired generation and its environmental side-effects are at odds with President Widodo’s commitment to reduce greenhouse gas emissions. The new master plan by the PLN thus reflects changes in government thinking, even if coal remains king in Indonesia. Under the original plan, coal-fired power plants were to make up about 60% of new infrastructure, with the remaining 40% to be mainly gas and a smaller share of renewables. According to the draft of the new master plan, which foresees the construction of 70 GW by 2025, including the 43 GW already planned, the share of coal-fired capacity will be reduced from 42 GW to 34 GW, with 25 GW from hydro, geothermal and nuclear combined, and 10 MW from gas plants. Indonesia has significant gas and geothermal resources, but has yet to create a regulatory framework to incentivise them.