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