Big hurdles for Indonesia power projects but many still planned for execution in short term

Despite numerous regulations supposed to speed up infrastructure development, Indonesia is still besieged with countless impediments to a sufficient supply of electricity. Demands consistently outpaces capacities. Blackouts continue across the country on a regular basis, with a significant one effecting virtually the whole of Jakarta at the beginning of April.

State power company PT Perusahaan Listrik Negara (PLN) called the blackout inevitable and blamed damage to its main power line.

Surprisingly, or perhaps unsurprisingly, the company has no contingency plans for a back up supply from other networks. PLN is simply unable to ensure that power for the heart of the country’s economic and governmental affairs remains uninterrupted.

Jakarta’s woes, however, are almost trivial when compared to those of other regions, including those with rich natural resources.

Samarinda, the capital of East Kalimantan, to cite one example, puts up with rotating blackouts on an almost daily basis despite the fact that the province is a major supplier of coal that fuels the country’s power plants.

Other coal-rich provinces, such as Central Kalimantan and South Sumatra, share similar problems. Power penetration in these areas stands at less than 75 percent. 

While demand escalates, the government has said that efforts are already in place to keep up.

But the numbers tell a different story. In the last few years, demand has grown by between 9 and 11 percent annually, or at least 4,500 megawatts (MW), outpacing a supply that has grown by less than 3 percent, or around 1,600 MW, according to the Energy and Mineral Resources Ministry.

The protracted impediment that has slowed expansion of power capacity is partly attributable to vague, nebulous policies, bad planning and poor execution of existing regulations.

Disruption in the construction of a 2,000 MW coal-fired plant in Batang, Central Java, the largest project of its kind in Southeast Asia with a cost of around US$4 billion, is the latest example of the confusion in the sector.

PLN initially expected the plant to be completed in 2016 on the assumption that land acquisition and permit issues would have been settled in October last year. However, problems have emerged that have kept construction on hold.

Landowners have held out, refusing to sell their land unless investors pay considerably inflated prices. Aside from the land issues, the Batang plant has been bedeviled by legal uncertainties.

The Batang administration is facing a lawsuit by villagers living near the planned site. The villagers oppose construction, claiming it will harm the surrounding environment.

The central government has teamed up with local administrations to try to resolve the problem, but to no avail.

Problems in land acquisition have become increasingly pervasive in the last five years, killing off, or at least severely wounding, many crucial power plant projects in Kupang in East Nusa Tenggara, Gorontalo, Tarakan in North Kalimantan and West Sumatra.

The regulations that were intended to speed up land acquisition turned out to be hard to implement.

A presidential regulation on land acquisition was issued in the middle of last year as the legal basis for the implementation of the 2011 Land Acquisition Law, but the regulation only covers projects that began after the enactment of the law.

Land acquisition for projects approved before the law came into force are still regulated by the old law.

However, if by 2014, land acquisition problems have not been settled, the new law can be used.

“We urgently need to resolve these land procurement issues. Development of power plants must be accelerated,” said businessman Sandiaga Uno, whose company is involved in several power plant projects, including Batang.

“The main issue that needs to be addressed is bureaucracy,” he said.

Sandiaga said Indonesia already had sufficient resources to build necessary power plants, including investor availability, abundant coal and gas to fuel the plants, and even finance from banks. “All we need is firm regulations,” he said.

Even PLN as a state entity is struggling to build plants with a less-than-helpful bureaucracy.

PLN president director Nur Pamudji has repeatedly said that aside from the land clearance problems, bureaucracy and licensing have hampered the company from speeding up the construction.

Since the launch of the 10,000 MW power plant acceleration program in 2006, the government has only completed 46 percent of the project, according to the Energy and Mineral Resources Ministry.

In 2009, the government launched a second 10,000 MW program that mostly covers geothermal power.

It’s estimated that Indonesia has about 40 percent of the world’s potential geothermal energy.

But construction has not even started yet due to red tape that has delayed regulation of the selling price of the electricity generated by PLN.

While the issues have now been resolved, problems with land acquisition and the accuracy of the government’s geothermal mapping remain.

Institute for Essential Services Reform energy expert Fabby Tumiwa said that mismanagement played a role in holding back plant construction.

“The government has failed to produce sufficient distribution of primary energy and transportation infrastructure for the power plants,” he said.

PLN is still in dire need of gas as one of its primary energies for its plants despite the fact that Indonesia is the world’s third-largest liquefied natural gas exporter after Qatar and Malaysia.

PLN also struggles with coal supplies despite abundant resources. Indonesia is among the world’s biggest coal exporters.

Given these impediments, investment in power plants carries worrying risks. Many private investors are turning away.

Indonesian Electricity Producers Association’s Santoso believes players in the power plant industry are confronted with high-risk evaluations.

 The protracted expansion of power capacity is partly attributable to impediments such as vague, nebulous policies, bad planning and poor execution of existing regulations.

“Banks still impose a relatively high interest rate for power plant investors. In China, banks charge 5 percent but here, the cost could be double,” Santoso said.

“Tapping foreign loans is also difficult. An investor must have a vast and solid international network, but only a few players here can meet that requirement,” he said.

At least $9.6 billion is needed annually to construct power plants and transmission networks, according to the Energy and Mineral Resources Ministry. 

The government, along with PLN, can only cover around half of that amount with the remainder expected to come from the private sector.