Running out of options: Six questions for PLN

The COVID-19 pandemic has not done the Indonesian power sector any favours. Demand has crashed, prospects for tariff relief are poor, and the coal sector is pushing hard for relief at state power company PT Perusahaan Listrik Negara’s (PLN’s) expense. For PLN’s leadership team and the financial stewards at the Ministry of Finance (MOF), PLN’s increasingly troubled financials raise questions that neither arm of the bureaucracy are well positioned to answer in public.

Financial and power sector analysts normally perform an annual health check on PLN following the release of the Electricity Supply Business Plan (RUPTL), but this year’s RUPTL has been delayed. To get things started, PLN released a planning document in September that provides insight into current post-COVID thinking about the outlook for PLN’s financials. IEEFA has used this data and other disclosures to update our PLN model in advance of the release of the RUPTL.

Based on our newly revised forecast for PLN’s financial performance from 2020 through 2022, investors and development partners will need to stress test the new RUPTL based on the following risks to PLN’s future:

1. Downside Demand Risks: An average of PLN’s new scenarios projects a demand decline of 6.0% in 2020 before seeing a rebound of 4.7% in 2021. This compares with PLN’s pre-COVID outlook which called for 4.5% unit sales growth in 2020 and the same 4.7% in 2021. In the new scenarios for the 2021-2029 period, however, PLN’s planners have maintained average annual growth at 5.2%, in line with their pre-COVID projections, despite much higher risks to economic growth and structural changes in the sector
2. Is There a Limit to MOF Subsidies? Based on IEEFA’s estimates, subsidies and compensation to cover higher independent power project (IPP) payments will rise by 31.5% in 2020 to IDR 97.3 trillion (USD 6.5 billion). In the absence of tariff increases, over the next two years, the price tag will almost double to IDR 170.2 trillion (USD 11.4) as new IPPs come on-line.
3. The Tariff Model is Broken: PLN’s reliance on IPPs with fixed capacity payments have robbed the utility of any ability to manage its operating cost profile. This will put the MOF on the front-line as PLN’s guarantor in light of the gap that has now opened up between current tariff norms and those that would be required to meet a traditional cost recovery model referenced by lenders. Our estimates suggest that tariffs would need to rise by more than 30.0% to sustain PLN’s operating cash flow—a level that would surely test public approval.
4. Cost-Cutting Has Consequences: PLN has rightly announced its intention to preserve cash in 2020 and our forecasts include lower fuel costs and capital expenditure (capex). Moving forward, fuel costs should remain in check, but capex cuts could come at a cost to badly needed improvements in system performance. PLN’s grid requires significant investment as a result of rapid capacity expansion and poor system control.
5. The 23% RE by 2025 Target Remains Aspirational: Despite PLN’s decision to lock-in new fossil fuel baseload, the company has recently adopted a PR-friendly green narrative. The current plan includes more large hydro, geothermal, biomass co-firing, and minimal wind and solar. Looking at the data, fossil fuels will account for more than three-quarters of the energy mix for the coming decade and cost competitive new renewables will account for no more than 3.7% during the period.
6. Leading Financial Intermediaries Have Missed the Real Risks: PLN has maintained its access to global capital markets despite a comprehensive breakdown in the company’s fundamentals. Its baseline credit score has been quietly downgraded by Moody’s to Ba3—the lowest investment grade rating. The disconnect between the sovereign rating which anchors PLN’s access to debt markets and the company’s deteriorating fundamentals has the potential to bite investors and the MOF.

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