Heru Dewanto, President Director, Cirebon Power; Roberto Lorato, CEO, Medco Energi Internasional; and Garibaldi Thohir, President Director, Adaro Energy: Interview

Interview: Heru Dewanto, Roberto Lorato, Garibaldi Thohir

What is your assessment of the 35-GW plan?

HERU DEWANTO: I would say the Indonesian government is well on the way in terms of regulation and de-regulation. Although the permitting process to create one power plant is still long, the new one-stop service should help reduce this. The Ministry of Energy and Mineral Resources Regulation No. 3 of 2015 is expected to simplify and shorten the procurement process. Issuance of Presidential Regulation No. 4 of 2016 may potentially solve the spatial planning problem and clear the way for many infrastructure projects, including 35-GW projects, to start an environmental impact assessment. Acquiring land is still difficult for power plant projects, especially obtaining land for the transmission line, which may travel up to 50 km to the connection point. The government still treats power plants like private players, while it handles land acquisition for toll roads. Moreover, transmission lines are considered special facilities, so after private companies construct them and clear the land, they have to hand them over to the state-owned power company Perusahaan Listrik Negara (PLN).

However, there is a big gap between making regulations and implementing them. Of the first 10 GW of power plants to sign the power purchase agreement (PPA) none have yet reached financial close. If the first coal-fired power plant starts construction in 2016 it will not start commercial operations until the end of 2020. Considering that coal’s share in the energy mix in the Energy Supply Business Plan is 50%, we can easily see that 50% of the 35-GW projects will not meet the 2019 target. Meanwhile, gas-fired power projects – 25% of the programme – are still lacking gas sources and infrastructure. Another 25%, to come from renewables, faces more implementation challenges than coal and gas. So we need to strengthen the strategies to make this noble programme a success. This is an absolute necessity for the country that we all have to support.

ROBERTO LORATO: The government’s plan to develop an additional 35-GW of generation capacity is crucial to the continued development of Indonesia. Currently, the national electrification ratio is limited to 85%. The construction of another 35 GW of power plants is expected to boost the ratio up to 98% which in turn will help the country accelerate economic growth.

The primary challenge is the five-year timeline for the completion of the programme. As the focal point of this project, PLN will directly develop a large portion of the power plants (around 10,000 MW), as well as act on behalf of the government to tender, select and sign the PPA with the private sector, under the independent power producer (IPP) scheme. PLN is also tasked with the development of the transmission and distribution lines that are required to balance the grid and ensure connectivity.

GARIBALDI THOHIR: The 35-GW project is an absolute necessity for Indonesia to achieve sustainable economic growth going forward. Our current electrification ratio is one of the lowest in South-east Asia. With a growing population, industrialisation and the need to achieve sustainable economic growth, it is vital the government realises the project in the next five years and achieve the target of a 97% electrification ratio. Among the main challenges that can be mentioned are land acquisitions, permits and transmission lines. However, the state has taken some measures to counter these issues, implementing some good policies, as well as aggressive expansionary measures, by putting out several new economic stimulus packages.

How can private players be further involved in delivering new installed capacity?

LORATO: While the private power companies perceive a lot of opportunities in Indonesia, they will also compare them with those in other countries. Key contractual terms in the PPA and tender requirements will be critical in determining economic attractiveness. To improve private sector participation, PLN may want to benchmark and improve the attractiveness of the projects offered to the private sector.

One thing PLN has done recently is to provide the land, as in the Java 7 tender. This land provision accelerates the project completion, as the private sector can focus more on the areas they are best at: developing and operating the power plant. Furthermore, land provision will also benefit PLN, as the overall tariff from the private sector will be relatively lower. More fundamentally, PLN could opt to focus on developing the transmission lines and distribution connection to ensure grid balance and efficiency, as well as the connectivity of the electricity generated to the end-users. A new generation plant can be fully developed by the private sector and PLN will be the party to sign a PPA with the private sector.

THOHIR: Power projects in Indonesia present distinctive challenges for private companies: frequent delays due to red tape, difficulties in land acquisitions, transmission-line completion issues and other hurdles, such as PLN’s unique financial situation, given their public service obligation. While the government should continue to take good measures to improve these issues, the key thing the government can do is to ensure that projects generate a sufficient return for private companies. If the returns are sufficiently attractive, many credible private investors will participate despite the myriad issues described above.

DEWANTO: The easiest way to provide incentives for private players is to give a government guarantee. This will help private players get funding from the banks, and the government may not even have to provide any cash. If the government were to do an evaluation and provide guarantees for the best private power companies, they would not have to use any of their money. There is also the aspect of government rentals. It costs PLN around $0.25 per KWh to rent diesel generators. If they can switch from diesel to coal they only have to pay around $0.60 per KWh. So, if the government provides a contingent guarantee, they can help coal-fired power plants to develop and replace the expensive diesel generators, and they may never even have to pay cash for the guarantee.

What are the relative advantages of coal to other sources of power production?

THOHIR: Coal is one of the cheapest sources of energy compared to other fuel sources for power. Given that Indonesia has been naturally blessed with coal reserves, we believe it should remain an important part of power generation in the future. Outside of the normal challenges that any power developer faces, the main difficulty for coal mining companies is that the coal reserves are located far away from where the power demand is. This is partly why we fully support the idea that PLN should begin to focus even more on building transmission and should outsource power generation to IPPs.

DEWANTO: For renewables, the big issue is that the technology is not yet sufficient to make it as economical as fossil fuels. Indonesia needs to balance between two requirements. First is the urgent energy needs required for basic living standards and the country’s economic development. This can best be supported by coal, as it is currently the cheapest source of energy and has the lowest geopolitical risks. Second is the need to invest in the future, for which we need new and renewable energy. Indonesia should continue utilising its abundant coal sources but at the same time apply clean coal technology.

LORATO: Coal-fired power plants tend to be more suitable for supplying the base load than, for instance, gas-fired plants. Relative to a gas-fired plant, the capital cost of a coal-fired plant is higher, but the fuel cost is usually lower. Therefore, coal-fired plants tend to be preferred for base-load supply, while gas-fired plants are a better fit for mid-merit and peak loads.