Perusahaan Listrik Negara (PLN): A power company out of step with global trends

Indonesia’s monopoly coal-dependent state-owned power company, Perusahaan Listrik Negara (PLN), is sinking under the weight of a flawed planning process that lacks crucial insight into the clean energy trends reshaping global power.

In years past, international capital markets might have overlooked the company’s coal dependency and its shaky finances. But not anymore, and that spells trouble for PLN, which is planning to seek more than $1 billion from a bond sale this quarter to fund its growth plans. Increasingly, global bond investors understand the risks associated with coal lock-in for high-growth countries like Indonesia.

To make its issuance a success, PLN will need to answer a number of crucial questions:

Can PLN reduce it reliance on Ministry of Finance subsidies? PLN’s coal-intensive growth plan exposes it to long-term financial risks that can be solved only by higher tariffs or long-term, and large, subsidies from the Indonesian government. PLN’s current tariffs fail to cover its costs, which has led to operating losses averaging US$2.1 billion annually over the past four years—a shortfall that the Ministry of Finance (MoI) has covered. PLN’s tariffs are frozen for 2018 and 2019 and payments to independent power producers (IPPs) are set to rise, meaning the utility stands to be an even bigger drain on Indonesia’s treasury over the medium term. While Indonesia’s sovereign credit profile has improved recently, PLN’s debt service metrics compare unfavorably to other Asian issuers. We see more risk, not less, ahead.

Can PLN adopt a more credible planning process? PLN’s planning process is in disarray. The 2018 RUPTL, which dictates PLN’s capital spending and operations is a black box with multi-year forecasts that are disconnected from actual outcomes and relevant regional and global trends. The RUPTL has front-loaded cuts in new capacity needs, necessitated by an over-optimistic plan. These revisions appear to be haphazard, suggesting that PLN’s planning horizon may not be much longer than 12 to 24 months— a timeframe that is a bad fit for power system planning. Power sales forecasts have been cut in each of the past three years, with the forecast 2026 level now 31.6% lower than the earlier prediction. Nevertheless, underlying growth forecasts continue to have an upside bias. In addition, the forecast generation mix is at odds with global market trends, which reflect dramatic changes thanks to new industrial-scale renewable solutions. If PLN hopes to be in good standing with global bond investors, it will need to find a way to address flaws in its high-cost IPP-dependent planning process, which sees a bigger future for diesel-fired capacity than for cost-effective utility-scale solar.

How can PLN lower the risk of its capex program and manage major technology and market changes? PLN would benefit from a crash course on the type of dynamic scenario analysis that experts use to analyze the type of risks that come with overreliance on legacy coal technologies and weak planning disciplines. North Asian bankers and equipment suppliers will not do this work for PLN because it’s not in their interest. By contrast, consultants like McKinsey and leading bond rating firms like Standard & Poor’s have a wealth of research that highlights the importance of greater technology flexibility and modular grid management strategies that would put PLN in better control of its economic destiny. As S&P notes, “if the forces of change…are here to stay, then it makes sense to make smaller capital bets to plan for a more dynamic future.” Otherwise, it’s the Indonesian public that will be left to pay for PLN’s large and growing IPP obligations in the face of a rapidly changing market, one that is dramatically re-pricing power assets, resources, and grid services.

Does PLN recognize that long-term investors place a value on environmental performance? The Government of Indonesia (GoI) scored a victory in the global bond markets in February with an attractively priced five-year US$1.25 billion green sukuk, which will fund projects in a range of green” areas including renewables, energy efficiency, climate change adaptation, sustainable transport, and green buildings. Capital markets now favor these trends, as opposed to fossil-fuel-heavy development plans like PLN’s. The utility may say it aims to “suppress future CO2 emissions,” but that stated intention stands in stark contrast to the realities in the Ministry of Energy and Mineral Resources’ 2018 Electricity Supply Business Plan (RUPTL). That plan rests on a 26.8-GW increase of installed coal-fired capacity. Assuming PLN moves ahead with a conventional global bond offering with unrestricted use of proceeds, most influential global investors will be expecting disclosure to clarify PLN’s climate risk profile, a proposition that would lay bare unacceptable risks.

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