Power Struggles

Indonesia

Economic News

22 Jul 2010
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Jakarta is facing two weeks of rolling blackouts as state monopoly utility company PLN strives to cope with the demand on its grid. While there has been an assurance that hospitals and other strategic facilities will not be affected, companies are bracing themselves for lost business hours and expressing concern that they stand to lose revenue from delays and disruptions.



According to PLN, the forced blackouts are a result of scheduled maintenance work being conducted on gas supplies at two of its power plants that currently provide electricity to Jakarta and the satellite city of Tangerang. With growing demand for electricity - and a national grid that is considered by most to be under-capacity - local and foreign companies are seeking assurances that similar disruptions will not become a regular occurrence.



The Indonesian Chamber of Commerce and Industry (Kadin) held a meeting with PLN officials recently requesting better information and more advanced notice on future blackouts, stating that the sudden cuts are harming production. They have also requested that PLN prioritise power to industries with a heavy reliance on electricity, such as those with cold storage facilities and export driven activities.



According to Sofyan Wanandi, chairman of the Indonesia Employers Association, Tangerang, which hosts 655 manufacturing companies, is expected to incur losses of up to Rp2-3bn ($220,000 – $330,000) a day, over the two week period. Textile factories in the area, which rely heavily on electricity, stand to lose Rp200m - Rp700m ($21,000 – $76,000) for every eight-hour of blackout faced. This does not factor in long-term, more intangible costs, such as cancelled contracts that arise from not meeting delivery obligations.



Of equal concern is the impact on the sentiment of foreign investors, who place stable and predictable electricity supply as critical investment criteria when choosing locations. Mohammad Hidayat, chairman of Kadin, told an international newspaper last week that “if the power cuts continue, foreign investors won’t come to Indonesia. They will choose China instead. As long as our infrastructure is not ready, foreign investors will think twice before they invest here”.



The Japan Jakarta Club, a lobby group made up of 42 Japanese companies with facilities in the country, released a survey indicating that member companies operating in blackout-affected areas outside Jakarta have already accrued losses worth Rp42bn ($7m).



The focus is on PLN, whose output is well below capacity due to a variety of factors including outdated plant infrastructure and lack of funding, as well as maintenance requirements. While estimated grid capacity stands at 24,000MW, according to the ministry of energy and mineral resources, daily output stands at only 60% of the country’s electricity needs.



As a temporary solution to stave off the impasse, a joint ministerial decree from the ministries of energy, industry, labour, state enterprises and home affairs was issued on July 14, forcing some manufacturers to shift production to weekends in order to reduce demand during peak times. According to the ministry of industry, manufacturers consume approximately 38% of the country’s electricity, followed closely by households and other businesses such as malls and offices at 20%.



The regulation, which will take effect at the end of July, will require factories to shift at least two days of production per month to weekends. According to a statement made by Indonesian Vice President Yusuf Kalla there is usually a surplus of 1000MW available on Saturdays and 2000MW on Sundays. Companies failing to comply will receive warnings followed by imposed cuts in their electricity supply. Companies which operate 24-hour shifts will be exempt from the regulation.



The measures are due to be in place until the end of 2009, when it is hoped that a large proportion of the new power plant capacity currently under construction will have come on line. Kalla told local media that this is just a temporary solution, , “If we really want to solve the power crisis in Java and Bali, we must finish this [power plant] project,” he said.



As part of a national energy plan aimed at decreasing dependence on a depleting oil supply, the new power plant will be mainly fired by coal. While Indonesia is the world’s largest exporter of coal, the infrastructure and mechanisms to deliver it to the domestic market is restricted. Earlier this month, Energy and Mineral Resources Minister Purnomo Yusgiantoro told local media that the state is considering plans to have companies pay royalties in coal, rather than cash, in an effort to secure adequate domestic supply to meet the power plants’ sourcing requirements.



Another issue being debated in the country is whether to set export restrictions on coal. This is to ensure that more supply is fed locally, as producers - benefiting from record global prices - are increasingly tempted to allocate a greater proportion of output to exports.



Jeffrey Mulyono, chairman of the Indonesian Coal Mining Association (ICMA) told OBG. “We have to prioritise and secure domestic supply. I am not saying there should be a restriction on exports. But we have no other choice but to create controlling regulations specifically to meet domestic market obligations.”



While no-one would argue that the current blackouts are a good thing, some feel they highlight a decade-long issue: the country’s need to upgrade and expand its electricity grid. Indonesia, with vast coal, natural gas and geothermal resources, has the necessary stocks to increase capacity, and should be able to meet its requirements head-on with the right infrastructure and coordination in place.

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