How to close the electricity gap

How to close the electricity gap Heru Dewanto ;   Secretary-General of the Indonesian Engineers Association (PII), Vice President of the ASEAN Academy of Engineering and Technology (AAET) and Board Member of the British Chamber of Commerce (Britcham)

JAKARTA POST, 13 November 2012

In spite of its old fashioned image, in 2011 coal was the world’s fastest-growing form of energy apart from renewable, and accounted for 30.3 percent of all energy consumed globally. This is the highest proportion since 1969, according to the BP Statistical Review of World Energy report. Much of this rise came from China and India, but in fact Europe, in particular its economic engine, Germany, is also turning to coal. Such a shift is occurring due to a number of few factors.  While tens of billion of euros have been invested in renewable energy for the last few years, they do have some limits because of their volatility — especially when it comes to solar and wind.  The shale gas revolution in the US has made US coal producers export their products to Europe at a lower price. The Fukushima disaster in Japan at the other end of the scale has also contributed to the switching policy. Now, most of Europe believes that modern, clean and efficient coal-fired plants are indispensable.  Coal is Indonesia’s primary source of power. It now accounts for more than 50 percent of all power generation and will continue to grow to 64 percent by 2020. As of March 2012, Indonesia had a total installed capacity of almost 38 gigawatts (GW).  Most of this capacity, approximately 28 GW, is still supplied by state power producer PT PLN, who is the main purchaser of electricity from Independent Power Producers (IPPs) who cover the remaining capacity.  PLN has sole responsibility for power transmission and now controls 36,700 kilometers of cable. As the sole electricity distributor, PLN also operates distribution lines of 685,000 km of cable.   Indonesia’s electricity is suffering from gaps in both distribution and demand. Java and Bali account for over 75 percent of the total installed capacity, or 28.5 GW, while west and east Indonesia only have 5.5 GW and 3.6 GW, respectively. According to the electricity master plan (RUPTL), the country needs to build more than 55 GW of new capacity in the next 10 years or approximately 5,500 MW annually to meet the predicted economic growth of 8 percent by 2020.  It is evident that Indonesia needs an eloquent strategy to substantially increase its generating capacity. For this, government has turned to private investment to help fill the gap.  An extreme shift from a fully monopolistic regime to a deregulated market took place with the issuance of the Electricity Law in 1985, while the fully liberalized market in 2002 brought the pendulum back to a mean position in 1985.  It then swung again to a more liberalized yet balanced position by the issuance of an amended Electricity Law in 2009. The extreme switches have heavily impacted private investment in Indonesia’s electricity sector, resulting in a low success rate.  With government guarantee, from 27 first generation IPPs (1992-1998), 15 IPPs can produce 4.3 GW. Without government guarantee, only 18 out of the 126 second generation IPPs (2004-2009) can be implemented and produce power up to 5.5 GW.  The issuance of the 2009 Electricity Law marked a historical transformation of electricity in Indonesia toward a much more investment-friendly environment. It was then followed by regulations that set the rules and procedures for Public Private Partnerships (PPPs) and launched fast and second-track programs that basically provided a more stringent risk-sharing mechanism, including the provision of government guarantees.  In line with that, the government has also established Indonesia Infrastructure Guarantee Fund (IIGF), which provides sovereign guarantee, SMI and IIP to support infrastructure investors in obtaining domestic financing in the form of lending and equity.  In 2011, five new coal-fired IPPs commenced operation: Cirebon electric power plant with 660 MW; Paiton III expansion with 815 MW; Tanjung Jati B expansion with 2x660 MW; Tanjung Kasam with 2x55 MW, and Jeneponto with 2x125 MW. It means additional 3.2 GW capacity is supplied to PLN’s national grid.  In current circumstances, Indonesia has the momentum to expedite investment and potentially close the electricity demand gap. The challenge is how to make the third generation IPPs work with a higher success rate and less risk  of failure.  First, it would be logical for the government to encourage those proven players to expand their existing capacity. A new regulation is required to facilitate their investing in different locations and to have flexibility to form consortiums.  Second, such a regulation should also help groom new players through a transfer of knowledge from successful IPP projects. As regulations keep changing, electricity players are required to have dynamic capability to  renew, reconfigure or acquire new resources and capabilities to adapt to the changes.  A successful power plant builder, for example, is not necessarily capable of investing in a power company. Likewise, a coal-fired power company will not automatically be a master in geothermal projects. PLN, therefore, needs to adopt stricter tender requirements to address this matter. Third, the government can encourage coal miners to build main mouth IPPs. This should shorten the supply chain and the value chain.  Fourth, Indonesia needs a radical capacity increase, not an incremental one. Large capacity coal power plants should be the focus for large islands in the archipelago. Smaller-scale renewables, like hydro, solar and wind plants, are preferable on small, remote islands.  Fifth, the application of modern coal fired plants with cleaner and more efficient technology must become our policy direction.  Sixth, Indonesia, with the world’s second-largest geothermal resources, needs to overcome its exploration risk and to accumulate capabilities to optimally utilize this potential.  Newly issued regulations, such as Ministerial Regulations No. 2/2011 and 22/2012, support investment in geothermal, which now covers only 5 percent of all power generation but is expected to grow to 12 percent in 2020.  Lastly, as the ecosystem remains the same while world consumption exponentially increases, fossil fuel will eventually disappear.  Technology will save the planet. For this reason, nuclear power is indispensable only for near future use. Only then can we get ahead of the electricity demand rather than run around trying to close the demand gap. ●