Overpaid and underutilized: How capacity payments could lock Indonesia into a high-cost electricity future

Capacity payments have been instrumental in promoting private investment in the Indonesian power sector. The practice provides independent power producers (IPPs) an assured revenue stream that covers an adequate return on the significant project capital investment and risks to which they are exposed.

However capacity payments also expose the Indonesian utility, Perusahaan Listrik Negara (PLN), and Indonesian consumers, to significant risk of paying for power that is not needed.

Capacity payments are part of the tariff calculated based on the power capacity of a plant, regardless of whether the power produced by the plant is dispatched, paid by the offtaker for each kilowatt of available capacity.

As renewable energy costs have come down drastically, renewables are forcing utilities, policymakers and regulators around the world to rethink the way the electricity sector is structured. Further commitments to coal-fired power plants will require PLN to make significant financial outlays, saddling the utility with costly 25-year power purchase agreements and payment for potentially un-needed power from underutilized plants.

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Key Findings

1. IEEFA estimates that PLN contracts to pay approximately US$3.16 billion per gigawatt of installed capacity in the form of capacity payment for power availability from coal-fired plants. According to PLN’s 2017-2026 Electricity Supply Business Plan (RUPTL), a total of 24GW of coal-fired power and mine-mouth power generation capacity has been allocated to IPPs. In aggregate, PLN will pay an estimated US$76 billion over the course of 25-year PPAs to secure access to this scheduled capacity. As renewable sources such as wind and solar become cheaper and contribute a greater proportion of the overall energy mix through priority dispatch, PLN will face the unwelcome prospect of having to continue to make capacity payments to thermal power IPPs even though less power will be sourced from them. In effect, capacity payments disincentivize PLN from procuring more renewable energy as a way of avoiding paying future capacity charges for underutilized thermal plants.
2. The Java-Bali system requires a reserve margin of 25% in accordance with PLN’s planning. Progressing with the capacity increase from all energy sources for Java-Bali will increase the reserve margin to more than 40%, reaching 55% in 2019. The proportion of coal-fired power generation capacity assigned to IPP from 2017 to 2026 is 12,845MW. Assuming 40% of this capacity will remain un-dispatched, considering the current utilization rate of 57%, this would amount to 5,138MW, translating into an obligation to pay US$16.2 billion for idle capacity. Even without a single IPP coal-fired power plant capacity contract being added to Java-Bali from 2017 to 2026, the reserve margin will still be at or above 12% throughout this period, and will be at 16% in 2026 for this individual power network, where 80% of demand resides.
3. The cost of coal power is inflationary, as both fixed and variable operation and maintenance costs are indexed to the inflation rate. This truth is borne out by comparing the cost of power generation (BPP) in Indonesia between 2015 and 2016. A total of 16 of 21 provinces have seen their regional BPP increase, due to dominance of thermal power generation. On the other hand, the cost of renewable is falling rapidly. The levelized cost of electricity (LCOE) for solar in Indonesia is estimated at USD 17 cents/kWh in 2016. We see solar PV becoming grid competitive at around USD 8 cents/kWh in 2021, and even Java and Bali, where there is low BPP, will benefit from cheaper renewable prices soon after that. This analysis ignores the additional cost externalities of thermal power generation, suggesting that a fully costed grid parity comparison will be achieved well before 2020.

This report acknowledges the importance of continuing the use of capacity payments to encourage private sector investment in Indonesia. However, the more entrenched these commitments are and the farther they stretch into the future, the likelier they will serve the interest of aging and under-utilized thermal power plants at the expense of better investments.

An economical alternative to national energy security exists through the development of renewable energy and the diversification of energy sources in Indonsia’s power generation portfolio.

Press release: IEEFA Report: Indonesia Policy on Electricity-Generation Buildout in Java-Bali Means US$16 Billion in Unnecessary Coal Costs

Please view full report PDF for references and sources.