Indonesia – Electric Power & Renewables 2019

Power Plant Construction in Indonesia Suffers From Unclear Regulation

Published: 21 May 2019

 

Market drivers

  • Rising electricity demand in the long term
  • Large deposits of fossil fuels
  • Ensuring power supply is a political priority

 

Market barriers

  • Short-term excess capacities of electricity
  • Legal uncertainty
  • Poor infrastructure hinders expansion

 

Private sector to build more power plants

In Indonesia, demand for power plants is expected to double in the coming years. Electricity consumption is still low at 900 kWh/capita per year. But growth rates are high in the wake of strong economic performance. In addition, a considerable portion of the existing power plants is outdated. Many inefficient and polluting plants have to be replaced by new ones.

The country relies predominantly on coal and gas as energy sources for power generation. In remote areas, diesel generators are common. The public utility company PLN (Perusahaan Listrik Negara, https://www.pln.co.id) builds and operates most of the plants and is responsible for tenders. PLN is heavily indebted and therefore wants to involve the private sector more closely in power plant construction. As so-called Independent Power Producers (IPPs), private companies should push the expansion of power generation.

Chinese technology has a bad reputation

However, power plant construction in Indonesia is burdensome. Companies have to cope with non-transparent tenders, high bureaucratic hurdles, and a lack of legal certainty. All that is driving up the costs of power plants and ultimately the electricity prices. Therefore, bidding companies and their suppliers have to be prepared for long delays in tenders and adjust their financial planning to several years in the future.

Nevertheless, PLN’s tenders have generally improved compared to previous years. Today, many meet international standards – although there are still dubious direct awards. Among other things, PLN is trying to keep Chinese power plant constructors at a distance, for example, by demanding OECD standards. Thus, the Chinese play a minor role in Indonesia.

 

Indonesia: Current conventional power plant projects

Project (energy source) Capacity Status Commissioning
Jawa 5 (coal) 1.000 MW Planning 2022
Jawa 9 & 10 (coal) 2 x 1.000 MW Funding 2024
Sumsel-8-Mine-Mouth (coal) 2 x 660 MW Funding 2023
Banten (coal) 660 MW Planning 2026
CC-Jawa-1 (gas) 2 x 880 MW Funding 2023
CC Sumbagut-1,3,4 (gas) 800 MW Tender 2020
CC Jawa-3 (gas) 800 MW Tender 2020
CC Riau-2 (gas) 250 MW Planning and tender 2024

Source: PwC Power Guide 2018

 

A bureaucratic marathon

The licensing process of a power plant is still an enormously complex and time-consuming process. Many different permits have to be obtained, both at the national and the provincial level. There are numerous “agents” who take care of the necessary paperwork – for a generous fee. The bureaucratic marathon can, therefore, hardly be accomplished under strict compliance rules. Some market participants are deliberately limiting themselves to the role of suppliers. South Korean and Japanese companies, however, often act as main contractors.

Legal uncertainty is also a problem for power plant constructors. The legal situation and regional expansion plans are constantly changing. When the Indonesian Rupiah temporarily lost up to 15% of its value against the US$ in 2018, import restrictions were imposed on capital goods. Without them, however, no plant can be built.

Most equipment comes from abroad

Almost the entire technology for power plant construction is imported. Depending on the size and type of plant, there are local content requirements, which lie between 10% and 30%. However, exemptions are generally granted without problems.

According to government plans, domestic power companies should soon be able to produce technology for their own needs. However, little has happened so far. Nonetheless, Indonesian state-owned company Barata took over Siemens’ turbine plant business in the industrial city of Cilegon in 2018. The aim is to supply the domestic power plant construction sector in cooperation with Siemens.

Only a few small and medium-sized foreign suppliers are represented locally. Their components are either imported directly or are already built in machinery imported by the large technology groups. But there are opportunities for foreign consulting companies. International players such as the Fichtner Group have representative offices in Indonesia.

Electricity grids are outdated

The 35,000 MW program initiated by President Joko is an example of how difficult power plant construction is in Indonesia. The plan sets the capacity expansion target for the period 2015 to 2019, but to date, less than 10% of that has been accomplished.

The pressure to work efficiently is currently low. Excessive electricity consumption forecasts have resulted in overcapacities in electricity generation. The resulting scope is now being used partly to bring PLN’s power plant projects forward while projects of private electricity producers were left behind.

However, an overly rapid expansion of power generation creates completely different problems: “Every new power plant is a ticking bomb,” says one market participant, describing the increasing danger of grid overload. In the coming years and decades, large sums have to be invested in the grid.

Transfer to public ownership

The feed-in tariff that PLN guarantees the power plant operator under a Power Purchase Agreement (PPA) varies regionally – with high rates in the eastern regions and lower tariffs on the main island of Java. In recent years, PLN has significantly lowered its remuneration. In some cases, PLN even forced renegotiations for finished PPAs. Such measures are poisonous for the investment climate.

Private power plant constructors usually build new plants in the form of Build-Operate-Transfer (BOT) projects. After mostly 20 to 25 years, they are handed over to PLN. If necessary, a PPA can be extended for a further period. After the handover, PLN is responsible for a possible dismantling.