Indonesia wrestles with its chronic electricity crisis

Indonesia’s attempts to end its many years of power shortages must overcome tough challenges to remedy years of indecision and ensure capacity keeps pace with economic growth.

à‚ Nicholas Newman

Crisis was the term Indonesia’s president Susilo Bambang Yudhoyono chose to describe his country’s electricity problems. Dahlan Iskan, CEO of state-owned power company PT PLN (Persero), has also admitted the country’s supply of electricity is very limited. PLN has encountered power shortages in 250 regions, including 243 locations in eastern Indonesia, he said.


Two main causes underlie the latest current power crisis, which started in 2008. The first is the 1997 Asian Economic Crisis, which forced PLN to cancel many new power station developments says Dr Mika Purra, a research fellow at Lee Kuan Yew School of Public Policy in Singapore. The looming power shortage was masked by the crisis and almost a decade of slow growth until Indonesia’s economy began to accelerate around 2006.

The second underlying cause has been government and business sector indecision over investment in generating capacity for at least five years before the current crisis began, suggests Peter McCawley, a visiting fellow at Australian National University’s (ANU) Indonesia Project.


Regular planned power cuts have affected consumers throughout the country since 2008. Some have been scheduled to protect the system, but interruptions to power supplies have also been triggered by factors such as frequent earthquakes and volcanic eruptions in this geologically active country. Typhoons have also regularly disrupted delivery of coal from mines on neighbouring islands.

In recent years many power cuts have hit customers in Indonesia’s economic heartlands of Java, Madura and Bali (JMB). Companies like PT Sanyo Jaya Components have complained to Indonesia’s president about disrupted production. Some foreign businesses are even considering building their own gas fuelled power plants to maintain power supplies.

Frustrated customers have set up Facebook groups across the country to express their discontent over the quality of service. A popular joke about the power cuts runs, “What did we have before we used candles? Electricity!”

Yet, in July 2010, PLN claimed Indonesia now has enough power supply to meet its requirements and could soon see an end to the policy of scheduled blackouts. Dahlan Iskan said recent improvements in the power supply situation were due to PLN’s investments over the last six months.

But he admitted that power shortages would continue in regions outside the main population centres on the islands of Java and Bali, such as South Kalimantan on Borneo and North Maluku. PLN admits that power reserves are around 19 per cent on the JMB network and 10 per cent elsewhere, despite its target of an operating reserve of 30 per cent.

Nevertheless, Fabby Tumiwa, director of the country’s Institute of Essential Services Reform, is sceptical about PLN’s promises. He suggests PLN lacks the infrastructure to tackle the power issues it faces on its own. In fact, many industry insiders are suggesting the policy of scheduled power cuts will return within six months.


Indonesia is Southeast Asia’s largest energy consumer, even though around 80 million of its growing population of 237 million still have no access to electricity, according to the International Energy Agency (IEA). However, energy conservation policy has not been viewed as either a political or business priority.

The government’s current energy subsidy regime encourages wasteful energy use. Studies suggest the country could cut its energy consumption by a quarter without denting its economy, says Hanan Nugroho, economist at the National Development Planning Agency.

Indonesia’s current GDP growth of 6 per cent reflects sustained domestic demand in recent years. Electricity demand increased between 2005 and 2009 at an average of 6 per cent per year, according to the Economist Intelligence Unit (EIU). The industrial sector now accounts for 35 per cent of demand, while the residential sector constitutes about 40 per cent of the market. Electricity demand is set to swell further as the economy booms and living standards rise.

Jakarta’s goal of extending the population’s access to power supplies from approximately 66 per cent today to 93 per cent by 2025 is reflected in Business Monitor International forecasts that the country’s power consumption is likely to increase from around 130 TWh in 2009 to more than 160 TWh in 2014.


Until this year, Indonesia had not raised its power prices since 2003. PLN had therefore been selling electricity at $6.5 cents per kWh, the lowest price in Southeast Asia. But it was costing the utility $11 cents per kWh to generate such power in 2009.

The failure to increase prices has been costing the government some $6 billion a year in subsidies. Meanwhile, PLN’s increasing financial stress has made it hard for the company to maintain systems, let alone fund new investment from its revenues.

In 2009, as part of plans to reduce government subsidies and improve PLN’s financial position, the government planned to increase electricity prices by between 20 per cent and 30 per cent. This would have cut the government’s subsidies to PLN from $6 billion to $4.07 billion a year.

But in the face of strong political, business and public opposition, the Indonesian parliament only approved tariff increases of 10 per cent to 15 per cent, which were implemented this July. These increases are not uniform for PLN’s 40 million customers but target better-off households and business, while leaving 30 million low-income households exempt. Business interest groups have complained of electricity bills soaring by 30″80 per cent. Some claim their production costs have climbed by 40 per cent.


The World Bank reports that Indonesia has one of the lowest rates of electrification for comparable economies. The country’s total generating capacity is estimated today at around 31 GW by the IEA, though many plants are due for retirement.

Until the passing of legislation to reform the power sector in September 2009, PLN was the monopoly supplier of power to customers. Even today, PLN operates an estimated 85 per cent of the country’s generating capacity. The private sector, which was previously only permitted to sell power to PLN for onward sale to consumers, can now begin to compete against it, as can other state agencies.

In 2009, PLN had about 24 GW in generating capacity but daily output is well below that due to old and inefficient plants, while demand is growing at 6 per cent a year, threatening the sort of power crisis that has hit China and India in recent years.

At present, 83 per cent of installed capacity is operated by PLN or its subsidiaries. Another 14 per cent of capacity is provided by independent power producers (IPPs), while 3 per cent comes from private power utilities (PPUs), reports the Ministry of Energy and Mineral Resources (EDSM).

Indonesian electricity comes from a variety of sources: 88 per cent from thermal sources, including locally produced oil, gas and coal; 7 per cent from hydropower; and 5 per cent from geothermal sources, according to the EIU. In recent years, Indonesia has shifted away from oil as prices have increased and it became a net oil importer in 2004.

In terms of service provision, overall delivery is not uniform. Electrification ratios tend to be over 60 per cent only in core economic areas like Jakarta, tourist areas like Bali, and resource-rich provinces where coal mining takes place. Elsewhere, service provision is much lower.

As in many countries, Indonesia built its power sector when it was a net oil exporter and this fuel was cheap on the domestic market. PLN has recently switched away from oil ” mainly to coal and gas, though some interest has been shown in domestic power sources, such as geothermal and hydro, which Indonesia has in abundance.


In 2006, the government announced a fast-track programme in power station building so that capacity can meet current and future needs. The government has also restructured PLN, turning it into a corporation. The 2009 energy law also permits private investors, local authorities and state organizations to compete against PLN in the generation, distribution and selling of power.

The EDSM estimates the country needs a $84 billion electricity investment by 2018. But many industry insiders suggest more reforms are needed to realize such ambitions.

The first phase of investment, from 2006 to 2009, has an estimated cost of $8 billion and should develop 10 000 MW in new coal fired generating capacity, although PLN has also been buying power from the private sector and investing in new transformers while renting diesel gensets, improving its grid and extending infrastructure repairs.

Ten large coal powered stations are being constructed on Java, costing in total $5.6 billion to provide some 7000 MW of power to the JMB grid, together with another 30 smaller power plant elsewhere. PLN expects its coal consumption to surge from about 24 million tonnes in 2009 to close to 32 million tonnes in 2010 as Indonesia switches away from oil. But only 50 per cent of phase one of the programme is likely to be completed by 2010 and the rest by 2013. This is due, in part, to the inevitable administrative, legal, regulatory and fiscal issues.

Some projects have been delayed after anticipated Chinese funding failed to materialize. Instead, investors have had to look to domestic banks and the Ministry of Finance’s support to complete programme financing.

For instance, the 600 MW Labuan project, which is being built at a cost of $500 million, is among the fast-track programme’s projects set to come on stream by 2010, despite fallout from the economic crisis affecting the original Chinese contractor Chengdu Engineering’s attempts to raise finance from Chinese banks.

Such funding delays are causing problems for PLN. McCawley suggests another factor behind the failure of such schemes to attract foreign investors is the lack of “bankable projects”: a shortage of money is usually not the problem but the failure of governments and engineers to provide realistic project documentation and to facilitate progress through the myriad approvals, appraisals and social support that are required by a large infrastructure project.

The 1365 MW coal fired Paiton 1 power plant in East Java Source: International Power

Disputes over land ownership and acquisition have prompted delays that have meant major headaches for many new schemes.

So far, PLN has converted about 8000 MW of oil and diesel powered plant into coal fired plants. In addition, due to the power sector’s supply problems, it is unsurprising that there has been little reporting of the closure of life-expired power plants. But Yogo Pratomo, the fast-track project’s head, has observed that the new capacity created in phase one is unlikely to meet market needs past 2011.

One project likely to complete on schedule in 2012 is IPP PT Paiton Energy, a new 815 MW supercritical coal fired technology power station, built as a joint venture owned by Mitsui, International Power, Tokyo Electric Power and PT Batu Hitam Perkasa.

The government’s second phase of investment from 2009 to 2013 is intended to provide a further 10 000 MW in generating capacity. This additional capacity is forecast to come 48 per cent from geothermal, 14 per cent from gas plants, 12 per cent from hydro, and just 26 per cent from coal plants. PLN in its role as the industry’s strategic planning authority estimates the second phase will cost some $17 billion.

Fast-track fuel mix for the JMB (Java-Madura-Bali) grid Source: IEA 2008

PLN expects to provide $3.8 billion in investment, while IPPs deliver $13.5 billion. PLN’s director Fahmi Mochtar expects foreign banks and sovereign funds ” including the Japan Bank for International Co-operation (JBIC), the World Bank, the Asian Development Bank (ADB), German financing institution KfW, and perhaps some banks from Saudi Arabia ” to provide the necessary investment capital for phase two.

However, the second phase is likely to prove more costly for Indonesia as the government is required to provide enough incentives to make such investment feasible for private investors.

In the longer term, PLN’s recent electrification plan (RUPTL) from 2008 to 2018 will see the role of coal in power generation increase from 45 per cent in 2008 to 63 per cent by 2018. RUTPL should also raise the use of cleaner energy power plants ” such as gas, geothermal and hydro ” from 30 per cent in 2008 up to 35 per cent in 2018. But past experience suggests such ambitious targets are “aspirational”, says McCawley.

The plan envisages that installed generating capacity will have to increase from about 25 000 MW in 2008 up to 82 000 MW by 2018 to meet growing demand and improve access rates. PLN estimates this investment will cost $84 billion, of which PLN expects the government to provide $58 billion and the private sector, both domestic and international, the remainder.

In March, the Indonesian Parliament gave a green light to government proposals to plan for the construction of nuclear power stations. The National Nuclear Energy Agency has estimated that the installation of a 1000 MW nuclear power plant would be a useful addition to the country’s power generation capacity.

It has been suggested the first commercial plant would be in Central Java near Surabaya, providing power to the island’s 135 million people by 2017.

For the industry, it is proving a very interesting time, suggests Juliette Williams, a technical advisor on business development and the Indonesia Country Program for CastleAsia.


Indonesia currently lacks a nationwide grid, partly due to its fragmented geography. The Indonesian power system has seven interconnection systems and more than 600 isolated systems. In 2002, Indonesia’s transmission networks had experienced losses of some 16 per cent, although by 2008, this had been reduced to about 11 per cent, reports PLN.

Because of the 2009 reforms, PLN no longer has the monopoly on power distribution. But the new price tariffs make it unlikely many new entrants will enter the power distribution market.

Despite PLN’s financial problems, PLN has been actively involved in several projects to improve the grid’s capacity and reliability over the next decade, using financial aid from the government and international agencies like the World Bank.

On the domestic side, PLN is upgrading the JMB network, expanding the Borneo grid and it has announced plans aided by the Japan International Co-operation Agency (JICA) to finance the construction of a 700 km, 200 MW interconnector linking Sumatra with Java. This plan is designed to deliver power from new power plants being developed on the South Sumatran coal fields to the energy-hungry JMB network.

As part of Indonesia’s plans to trade power with its neighbours, Jakarta has agreed several schemes due to complete by mid-decade to link Peninsula Malaysia with Java; East Malaysia with West Kalimantan; and Singapore with the neighbouring Indonesian industrial island of Batam.


On top of its coal and gas reserves, Indonesia has plenty of renewables potential. Both domestic and foreign investors are currently investigating potential power generation schemes of various sizes fuelled by biofuels, hydropower, tidal, wind, solar and geothermal.

Geothermal has attracted most interest from investors. At last April’s World Geothermal Congress in Bali, 12 projects were announced with a total worth of $5 billion. Currently, Indonesia is generating less than 1200 MW of power from six geothermal plants, a fraction of output in the United States for example.

Yet President Susilo Yudhoyono has announced plans to boost geothermal output to 9500 MW by 2025. The EIU currently estimates the country’s potential capacity at 27 000 MW.

Paiton 1 is co-owned by International Power, Mitsui, Tokyo Electric Power (Tepco) and the Indonesian company PT BHP

Entrepreneurs investing in geothermal projects face similar barriers to promoters of more traditional power generation technology. In addition, building a plant usually requires eight years, before which the investor must conduct a $20″40 million survey to discover geothermal potential. The government has recently set up the Indonesia Infrastructure Guarantee Fund, backed by the World Bank, which is intended to facilitate investment in such projects.


In the short term, the country is unlikely to meet its ambitious power supply requirements ” in part due to the slow pace of economic and political reform, but also to strident opposition from pressure groups and vested interests within the business sector.

At a regional level, though, resource and revenue support will shift. Provinces such as Western Kalimantan are likely to enjoy better power supplies than neighbouring areas as a result of recent government reforms.

In the longer term, further progress will largely depend on how fast and well the government and business sectors complete the essential programme of energy policy, together with legal and economic reforms.

If these reforms are achieved, the Indonesian power sector should attract the investors it needs to achieve its ambitions, and to eventually turn the country into a net exporter of power to its regional neighbours. That said, the Indonesian business environment can be alarming for foreign investors, who have sometimes been described as rabbits in the midst of tigers!

Nicholas Newman is a UK-based freelance journalist who writes on energy-related issues for a variety of publications.

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