Can IPPs efficiently increase power capacity? Montty Girianna  ;   A deputy at the Office of the Coordinating Economic Minister

JAKARTA POST,  15 Desember 2014

                                                                                                                       

In the next five years, we aim to increase generation capacity by nearly 34,000 megawatts (MW). Half of this additional capacity is to come from independent power producers (IPPs). This additional capacity is to ensure that our 5-6 percent economic growth can be maintained within the next five years and that we are able to connect nearly all villages with electricity. But the question is whether IPPs will be able to boost power capacity more than ever before. And if they can, will they deliver the additional capacity efficiently? IPPs began operations in the early 1990s as captive power producers that sell excess power or all power to state-owned electricity company PT PLN. The state utility company has improved its capacity in tendering projects to IPPs since its first experiences with Paiton I and II power projects in the early 1990s. As a sole contracting agency for procurement of all electricity, PLN has also improved its power purchase agreements (PPAs) to expedite negotiations with potential IPPs and enhance the bankability of power-generation projects.  IPPs activities seem to be increasing, with the Cirebon and Paiton 3 projects reaching financial close, while other projects include those in Central Java and minemouth IPPs in South Sumatra. But managing such an ambitious target for new generation capacity requires careful planning and project delivery capability beyond what PLN has today. PLN needs to achieve adequate in-house technical capacity to manage the construction and operation of the required additional generation capacity itself. This is evidenced by the problems it experienced with the fast track 10,000 MW program. Delays have only caused a fraction of the program to be attained. For the last ten years, IPPs were only able to build less than 20 percent of the new power capacity. Between 2009 and September 2014 IPPs have only developed about 3,000 MW. Since IPPs will likely be able to develop only 700 MW in new capacity annually, it is doubtful they will be able to deliver 15,000 MW within the next five years. Carefully designed IPPs can provide unlimited access to private financing that would not otherwise be available, and at the same time IPPs can help harness private sector efficiency and innovation for our electricity sector. Their performance, however, very much depends on how good we are in delivering and maintaining competitive pressure. Unlike in the mobile telecommunications sector, where competition can easily be increased, it is quite challenging to create and sustain competitive markets in the electricity sector, which has been traditionally recognized as a sector that has natural monopolies. Ideally, head-to-head competition would put pressure on IPPs to reduce electricity costs of production and improve service quality. We are not saying it is impossible, but for the succesfull delivery of IPPs we need robust planning and ongoing supervision. Margaret Thatcher famously did it in the UK when she unbundled and privatized the Central Electricity Generating Board — the UK equivalent of PLN — to create bulk and retail markets. A few years later, the state of Victoria pioneered similar restructuring in Australia, in part because it urgently needed to sell some assets to reduce its heavy debt. IPP ownership does not automatically denote that electricity customers will get good services at lower prices. Market structure and competition are more important than ownership. It is for this reason that the US has long sought to break up private monopolies, with AT&T being one of the more notable cases. In more recent times, California legislated in 1996 to restructure its privately owned power sector so as to enable competition. Today, we do not have competitive bulk or retail power markets. Following the Constitutional Court’s December 2004 ruling, we are unlikely to have them in the near future. Consequently, IPPs’ portfolios in the electricity sector currently occur either in the form of captive power or through contracts with PLN. Because an IPP can only sell to PLN, developers and lenders require the government via PLN to bear key risks. IPPs will not accept demand risk, not only because they have no control over the macro and regional factors that influence power demand but also, much more importantly, because PLN manages the development of the transmission and distribution system as well as controlling plant dispatch. Our IPPs’ “take or pay” contracts accordingly require PLN to pay minimum amounts that will enable financial viability even if PLN is not able to take any power. Once the PPA is signed, the rates and its escalators are locked-in and will not be affected even if other more efficient and lower-rate plants come on line. We can argue that big IPPs are therefore similar to PLN plants financed with international borrowings inasmuch as both involve long-term US dollar-denominated payment obligations. These payment obligations necessarily affect PLN’s ability to raise money for other projects, meaning that private financing for IPPs is not entirely additional financing from PLN’s perspective. In other words, IPPs’ long-term obligations payment is reflected in PLN’s accounts. Thus, while there is a huge pool of private financing potentially available, PLN’s ability to enter into new PPAs or to take on new debt is constrained by its balance sheet. It is also likely that financing-related costs for an IPP plant will be higher than those for a PLN plant because IPP developers require risk-related return on their equity and likely pay higher interest on debt than PLN. We see, therefore, that an IPP is a cheaper solution for PLN only if the savings costs made possible by its higher efficiency in EPC and power plant operation more than offset its higher financing costs. The main case for using IPPs needs to rest more on efficiency and capacity arguments than on accessing additional financing. Our key question is therefore what will create the pressures for a prospective IPP to shave its costs. The only possibility seems to be effective competition during the bidding stage — competition for the market. This is where the technical capability of PLN is very crucial to the success of the 3,000MW-per-year IPPs program. ●