The case for system transformation in Indonesia

Many Indonesians had begun to count on reliable electricity in their daily lives. That changed when a massive blackout hit Java in August 2019. The power outages lasted more than six hours in both the capital city Jakarta and the regions of West Java and Banten, including some parts of Central Java.

Almost one hundred million people were affected, and the political fallout was immediate. The state-owned electricity monopoly, Perusahaan Listrik Negara (PLN) offered compensation to customers of up to IDR 865 billion (USD 61 million). 

PLN’s lack of system-level planning coupled with its slow emergency response had resulted in the longest and probably most expensive blackout ever for Indonesia.

The ‘2019 Java blackout’ should be a catalyst for a fundamental re-think of PLN’s planning practices. 

PLN have engaged in an aggressive build-up of new, high-cost coal-fired capacity at the expense of investment in the grid and operational innovations.

Concerns about PLN’s system operations and related planning disciplines have gained momentum over the past two years.

The 35 gigawatt (GW) vision of President Joko Widodo (Jokowi) gave PLN and its subsidiaries room to collaborate with private power developers in building new generation capacity. New regulations strengthened by the Ministry of Energy and Mineral Resources (MEMR) in 2017 allowed PLN to adopt a direct appointment system for mine-mouth power projects.

MEMR then directed PLN to build a number of mine-mouth coal-fired power plants close to the abundant lignite coal resources in Sumatera and Kalimantan based on the argument that bringing the power generation plant closer to the fuel source would save costs, specifically transportation and handling costs. In theory, the plan sounded plausible.

In practice however, the economics are not favourable as the overall cost of generation and transmission were not taken into account.

To better understand PLN’s planning decisions, IEEFA reviewed two significant mine-mouth projects—Riau 1 and Banyuasin. IEEFA also tested the financial impact of PLN’s capacity planning processes by examining the full cost of two additional mine-mouth projects—Jambi 1 and 2—where incremental transmission costs are estimated to reach IDR 1.9 trillion (USD 134.5 million). Finally, to put these highlevel planning decisions into an operating context, we extended our analysis to the systemic problems in the Java-Bali grid that have resulted from an over-reliance on baseload thermal coal generation.

This analysis shows that MEMR’s regulation increased the speed of approvals at the expense of competition, transparency, and performance.

Based on IEEFA’s analysis, many of PLN’s mine-mouth projects planned for Sumatera and Kalimantan suffer from a legacy of opaque ownership interests and project approval practices, raising questions about the underlying economics. At the same time, grid management strategies focusing on delivering more resilience to fast changing power systems have simply not been prioritized.

Thankfully PLN is not asleep to these problems, but fresh policy leadership will be required to guide a change in system level processes.

In July 2019, the previous interim Chief Executive Officer of PLN, Djoko Abumanan publicly acknowledged that the mine-mouth program should be re-evaluated because of lower-than-expected electricity demand in Sumatera and Kalimantan. 

This type of candour from senior officials is crucial because PLN needs to reevaluate not only its mine-mouth plans, but also its electricity planning at a system level. A holistic analysis will assist PLN and Indonesian ratepayers by reducing the risk of blackouts due to a lack of grid resiliency, while insulating electricity rates from the impact of volatile fossil fuel prices.

On October 23rd 2019, President Joko Widodo announced his new Cabinet members, with management changes at PLN expected to be announced in the coming month. The appointment of a new team will provide a much-needed opportunity for senior Cabinet policymakers to undertake a full review of PLN’s operations. The sector outlook should be re-assessed in light of new cleaner technology options already reshaping power sector economics for Indonesia’s regional competitors.

Going forward, IEEFA recommends:

• Conduct a full system audit of PLN. Both PLN and investors need credible data and analysis in order to make the right decisions on long-term infrastructure investment. A full system audit would reveal the true performance of the whole electricity system. It would highlight unreliable generation units and transmission/distribution bottlenecks that are causing sub-optimal utilization. An audit would also permit PLN, investors and technology planners to address PLN’s investment choices, including technology and investment pathways and the risk of stranded assets, in a more realistic way.
• Enact system-level reform of Indonesia’s electricity sector. Based on the full system audit of the PLN, and using improved system-level planning processes, planners could evaluate the best power generation options for Indonesia’s electricity sector, and then match this with the careful design of associated transmission and distribution requirements. This should be done with realistic technical and funding expectations to support alignment with the overall development goals of Indonesia.
• Provide a healthy level of competition in project procurement. Better system-level planning would support the right level of competition in the project procurement process. The goal is to achieve real price discovery appropriate to new technology solutions especially when foreign direct investment is involved. The government should put in place consistent policies that answer to market realities.
• Transform the design of the national electricity planning document (RUPTL) into a more transparent process based on meaningful data and evidence. It is crucial that public stakeholders be given relevant data in a way that permits them to make responsible choices about their power usage and investment decisions. Transparency in data and evidence will motivate new partners to bring PLN and the national electricity planning process their best strategies.
• Set up a truly independent power regulatory body. An independent power regulatory body would oversee the planning and operation of Indonesia’s electricity sector to protect the long-term interests of stakeholders, including consumers. This body would progress transparency, accountability and good governance, and therefore provide confidence to international investors.

It is crucial to have a power sector planning process that is credible. Without that, the best investors and technology partners may look elsewhere, and stranded asset risks related to poor system decisions may impair PLN’s ability to meet public expectations on an ongoing basis.

Finally, it is imperative that the newly appointed Minister of Energy and Mineral Resources, Arifin Tasrif, and Minister of State-Owned Enterprises, Erick Thohir work together with PLN management to oversee a much-needed upgrade of the systems and processes that govern the Indonesian electricity sector.