With the COVID-induced economic contraction, this is not the time to be subsidizing a downstream energy project that doesn't make economic sense.
IEEFA estimates that the proposed DME plant would lose US$377 million annually after operating and finance costs. This would exceed any savings from lower LPG imports by US$19 million.
Indonesia’s coal industry is currently facing tough questions with prices below breakeven for all but one of 11 listed companies, as highlighted in our three previous Indonesian coal industry reports.
To boost coal demand, the Indonesian government is exploring policies which support downstream coal processing in the hope of finding profitable value addition niches.
One of the most advanced proposals is state-owned Tambang Batubara Bukit Asam’s (PTBA’s) proposed US$2 billion project in Sumatra for the construction of a coal gasification plant to produce methanol and subsequently dimethyl ether (DME). DME would then be used as a direct substitute in Indonesia’s domestic liquefied petroleum gas (LPG) sector.
In a sign of the government’s commitment to a new generation of fossil fuel subsidies, the recently passed Omnibus Law now grants royalty relief for any downstream coal projects.
What top planners have missed, however, is that technical viability is not the same as financial viability. The coal-to-DME process has been tried in other coal-rich countries but it has never been deployed at scale. Although there have been studies on the technical and operating aspects of a DME project for Indonesia, the one report on the economics of DME uses 2018 data when the price of LPG was US$591/tonne. This compares to the current price of around US$365/tonne — a level which robs DME of its competitiveness as an LPG substitute.
To test the financial viability of the proposed DME project, we used updated market prices and relevant coal sector project costs and compared these to costs from an operating DME plant in China as a proxy.
Our conclusion is that an Indonesian DME plant cannot be justified on economic terms. The proposed DME plant would lose US$377 million annually after operating and finance costs. This would exceed any savings from lower LPG imports by US$19 million.
On this basis, IEEFA’s estimates indicate that the total per tonne cost of the proposed Indonesian DME plant would be US$470/tonne. This would value the energy in DME at nearly twice what consumers now pay for LPG. In the end, the Indonesian taxpayer will be paying more for less energy.
IEEFA’s view is that the numbers on the proposed DME project do not add up:
Please view full report PDF for references and sources.