Fiscal 2015 Overseas Development Planning Study Project ... · B. Plans (roadmap) for installing...

Fiscal 2015 Overseas Development Planning Study Project forEstablishing Business Bases and Capturing the Overseas

Infrastructure Market

Study on Business Base Development in Indonesia

February 2016

Ministry of Economy, Trade and Industry

Conducted by EY ShinNihon LLC

Contents

Introduction ......................................................................................................................................................... 1

I. Proposals for establishing an efficient and effective electricity network in Indonesia ......................... 2

A. Overview of RUPTL .............................................................................................................................. 2

1. Power Development Plan ................................................................................................................... 2

2. Supply-demand operation simulation results considering RUPTL 2015 development plan .......... 4

3. Supply/demand situation by region and transmission line expansion plans .................................. 6

B. Plans (roadmap) for installing efficient and effective power plants and transmission network ... 8

1. Developing efficient coal-fired thermal power ................................................................................. 8

2. Obtaining power sources for frequency modulation ........................................................................ 9

3. Achieving supply reliability in central Jakarta ................................................................................. 11

II. Case studies of state-owned enterprise subsidy reform and implications for Indonesia ................ 13

A. The importance of stable management of electricity sector ......................................................... 13

B. State-owned enterprises subsidy reform best practice in selected countries.............................. 22

1. Armenia .............................................................................................................................................. 24

2. Brazil ................................................................................................................................................... 27

3. Kenya .................................................................................................................................................. 30

4. The Philippines ................................................................................................................................... 32

C. Subsidy reform for PLN: background and current status ............................................................... 34

1. Background to subsidy reform for PLN ............................................................................................ 34

2. PLN’s revenue structure .................................................................................................................... 35

3. Position of electricity subsidies in context of overall energy subsidies ......................................... 37

4. Support from the World Bank .......................................................................................................... 39

5. PLN subsidy reforms: current status and plans ............................................................................... 39

III. Laws and regulations pertaining to electricity business in Indonesia ............................................... 41

A. Institutional challenges in implementing 35 GW Electricity Program ........................................... 41

B. Government guarantees ................................................................................................................... 43

1. Legislation regarding government guarantees for power projects ............................................... 43

2. Status of government guarantees and Indonesian government stance ....................................... 46

C. Land acquisition ................................................................................................................................. 47

1. History and status of laws regarding land acquisition .................................................................... 47

2. Roles and procedures for related organizations ............................................................................. 49

3. Operation of legal system regarding land acquisition .................................................................... 52

D. Local content regulations .................................................................................................................. 55

1. Overview of relevant laws ................................................................................................................ 55

2. Relevant entities and their roles ...................................................................................................... 56

3. Operational issues ............................................................................................................................. 56

IV. Workshops in Indonesia ........................................................................................................................ 57

A. The First Workshop ........................................................................................................................... 57

B. The Second Workshop ...................................................................................................................... 58

V. Conclusion ................................................................................................................................................. 59

Figure 1. Demand assumptions ........................................................................................................................................... 2Figure 2. Energy sources (MW) ............................................................................................................................................ 3Figure 3. Relationship between demand and supply capacity .......................................................................................... 3Figure 4. Fuel prices .............................................................................................................................................................. 4Figure 5. Power generation volumes by energy source ..................................................................................................... 5Figure 6. CO2 emissions ........................................................................................................................................................ 5Figure 7. Supply/demand situation by region and transmission line expansion plans ................................................... 6Figure 8. Intraregional transmission volumes (maximum values) .................................................................................... 7Figure 9. Steam conditions of pulverized coal-fired power plant technologies ............................................................... 8Figure 10. Comparison of CO2 emissions per unit of electricity ........................................................................................ 9Figure 11. Startup time after eight hours shut down and rate of output change ......................................................... 10Figure 12. Candidates for frequency modulating power sources ................................................................................... 10Figure 13. Power transmission system in central Jakarta (2014) .................................................................................... 11Figure 14. Power transmission system in central Jakarta (2024) .................................................................................... 11Figure 15. Cross-section of passageway with underground transmission cables in Tokyo Metropolitan area ........... 12Figure 16. Relationship between Socio-Economic Goals & the Power Sector .............................................................. 13Figure 17. Balance between revenues and costs ............................................................................................................ 14Figure 18. Relationship of main players ............................................................................................................................ 14Figure 19. The importance of the steady implementation of PDP.................................................................................. 15Figure 20. Issues to be considered in the balance of Revenues and costs ..................................................................... 16Figure 21. Fuel Cost for Power Generation ...................................................................................................................... 16Figure 22. Cumulative default probabilities (%, based on 1983-2010 history) .............................................................. 18Figure 23. Cumulative default probabilities over time (based on 1983-2010 history) .................................................. 18Figure 24. Annual cash flows ............................................................................................................................................. 19Figure 25. Annual cash flows in different ratings ............................................................................................................. 19Figure 26. Cash flows by case ............................................................................................................................................ 20Figure 27. Subsidy and electricity tariff per kWh by category (2014) ............................................................................. 20Figure 28. Electricity subsidy by area (2014） ................................................................................................................ 21Figure 29. Attainment of economic goal and Power Development Plan....................................................................... 22Figure 30. Armenia: economic growth rate (%) and per capita GDP (USD) ................................................................... 24Figure 31. Armenia: standard power tariffs (AMD/kWh) ............................................................................................... 25Figure 32. Armenia: electricity business structure ........................................................................................................... 26Figure 33. Brazil: economic growth rate (%) and per capita GDP (USD)......................................................................... 27Figure 34. Brazil: inflation rate (%) .................................................................................................................................... 27Figure 35. Brazil: electricity tariffs ..................................................................................................................................... 29Figure 36. Brazil: share of hydropower (%)....................................................................................................................... 29Figure 37. Kenya: economic growth rate (%) and per capita GDP (USD) ....................................................................... 30Figure 38. Average electricity tariffs for users .................................................................................................................. 31Figure 39. Share of hydropower generation in Kenya ..................................................................................................... 31Figure 40. Philippines: GDP growth and budget balance................................................................................................. 32Figure 41. Retail electricity rates and generation charges (Peso/KWh) ......................................................................... 33Figure 42. Breakdown of average power charges (2014) ................................................................................................ 34Figure 43. PLN: power subsidies (trillion rupiah) ............................................................................................................. 35Figure 44. PLN: equity and fixed assets (trillion rupiah) .................................................................................................. 36Figure 45. PLN: equity ratio and DSCR .............................................................................................................................. 36Figure 46. Structure of energy subsidies ........................................................................................................................... 37

Figure 47. Breakdown of government expenditure in 2014 budget............................................................................... 38Figure 48. Breakdown of government expenditure in 2015 budget............................................................................... 38Figure 49. Forecast for Indonesia’s revenue and expenditures (share of GDP, %) ........................................................ 39Figure 50. Recent PLN electricity tariff revisions .............................................................................................................. 40Figure 51. Electricity subsidy reduction plans .................................................................................................................. 41Figure 52. Potential risks when running a cross-border power business ....................................................................... 42Figure 53. Standard IPP project scheme ........................................................................................................................... 42Figure 54. Overview of legal arrangements regarding government guarantees of power projects ............................ 45Figure 55. Projects with government guarantees ............................................................................................................ 45Figure 56. Overview of land acquisition legal framework ............................................................................................... 47Figure 57. Land Acquisition Law (Law 2/2012) and implementation guidelines (Presidential Regulation 71/2012).. 48Figure 58. Main provisions of Presidential Regulation 30/2015 ..................................................................................... 50Figure 59. Organizations involved in land acquisition and their roles ............................................................................ 50Figure 60. Land acquisition process .................................................................................................................................. 51Figure 61. PLN’s land acquisition program ....................................................................................................................... 52Figure 62. Overview of local content guidelines for electricity infrastructure developments ..................................... 55Figure 63. Examples of Indonesia’s local content goods/services regulations .............................................................. 56Figure 64. Local content regulations: Relevant entities ................................................................................................... 56Figure 65. Programme of the first workshop.................................................................................................................... 57Figure 66. Photos of the first workshop ............................................................................................................................ 58Figure 67. Programme of the second workshop .............................................................................................................. 58Figure 68. Photos of the second workshop ...................................................................................................................... 59

1

Introduction

The Power Supply Business Plan (known as RUPTL, short for Rencana Usaha Penyediaan Tenaga Listrik)produced by Indonesia’s state-owned electricity company, PLN (Perusahaan Listrik Negara), forecastselectricity demand to grow by an average annual rate of 8.7% assuming annual economic growth of 6-7%. In order to accommodate this, installed capacity needs to expand by 35 gigawatts (GW) by 2019.The 35 GW Electricity Program was established to this end.

Of the 35 GW in the plan, PLN will be responsible for 10 GW and independent power producers (IPPs)for 25 GW. As of 2019, primary fuel is forecast to be over 90% coal and gas.

Both President Joko and Vice President Kalla are involved in the program, as they view electricity as thedriving force of economic growth. They have high hopes for the direct spillover effects of the program tothe domestic economy. The Indonesian government is seeking to develop stable, sustainable powerinfrastructure. There is potential for the advanced technical expertise of Japanese corporations withhighly efficient coal-fired thermal power plants and other technology to contribute to the provision ofsuch infrastructure.

However, there are many challenges in the way of swiftly realizing these plans: power plants andtransmission networks planning can be more efficient, and issues of land acquisition, risk allocation(government guarantees), and local content regulations remain. For example, one idea that mightenable PLN to raise the necessary project funding without government guarantees for each individualproject is for the Indonesian government to make its methodology for providing subsidies to PLNpredictable and transparent.

In light of these circumstances, we have conducted a research project via dialogue with our governmentcounterparts and concerned individuals from the corporate sector with the aim of assisting Japanesecorporations to capture overseas infrastructure markets. At the forefront of our thinking was howJapanese technology, expertise, and yen loans and other financial assistance schemes funded by theJapanese public sector could be introduced and leveraged to assist with the implementation of the 35GW Electricity Program.

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I. ProposalsforestablishinganefficientandeffectiveelectricitynetworkinIndonesia

A. OverviewofRUPTLThe section below provides an overview of the Java-Bali power system in RUPTL 2015.

1. PowerDevelopmentPlanDemand assumptions

Assumptions for the Java-Bali system overall are annual growth of 7.6%. Demand growth assumptionsfor the Jakarta Banten (JKB) region are highest.

Figure 1. Demand assumptions

Source: RUPTL 2015

Energy sources (aggregate Java-Bali region: includes power received from Sumatra)

Through 2018 most development is thermal power fueled by gas and oil, but from 2019 large-scale coal-fired thermal plants will be developed, and coal-fired will be the main type of power plant developedthereafter.

3

Figure 2. Energy sources (MW)

Source: RUPTL 2015

Demand and supply capacity

Under the plan, the ratio of supply capacity to demand increases rapidly through 2019 when it breaches1.5x, for more than adequate capacity as shown in Figure 3 below.

Figure 3. Relationship between demand and supply capacity

Source: RUPTL 2015

4

Fuel pricesThe fuel prices detailed in RUPTL 2015 have been converted into price per equivalent amount of heat toenable comparison. LNG (liquefied natural gas) and oil (HSD [high-speed diesel] and MFO [marine fueloil]) are considerably more expensive than coal. This means that for economical power plant operation,coal-fired thermal operation takes precedence, and gas and oil are less desirable.

Figure 4. Fuel pricesPrice in RUPTL Price (USC/Mcal)

Coal Sub bituminous 80 USD/ton 5,100 kcal/kg 1.57 USC/McalLignite 60 USD/ton 4,200 kcal/kg 1.43 USC/Mcal

Gas Natural gas 7 USD/MMBtu 252,000 kcal/Mscf 2.78 USC/McalLNG 16 USD/MMBtu 252,000 kcal/Mscf 6.35 USC/Mcal

Oil HSD 0.86 USD/l 9,070 kcal/l 9.48 USC/McalMFO 0.7 USD/l 9,070 kcal/l 7.72 USC/Mcal

Source: RUPTL 2015

2. Supply-demandoperationsimulationresultsconsideringRUPTL2015developmentplan

RUPTL 2015 shows power plant development plans, but not conditions under which those power plantsoperate. Based on RUPTL 2015 development plans, the research team utilized its supply-demandoperation simulation tools to find the most economical supply/demand operation, the results of whichare below.

Energy source composition

Figure 5 shows the share of different energy sources for power generation. Until 2018, coal-firedthermal accounts for around 70% and gas for about 20%, but from 2019 onwards the share of coal-firedincreases dramatically to over 85%.

5

Figure 5. Power generation volumes by energy source

Source: Calculated by TEPCO study team based on PDP in RUPTL 2015

CO2 emissions

Figure 6 shows CO2 emissions. Note that calculations below are all based on the assumption that futurecoal-fired thermal power developed will be supercritical (SC) thermal power, which is more efficientthan currently installed traditional thermal capacity. CO2 emissions rise gradually, and in 2024 they areapproximately double current levels. Meanwhile, on the basis of emissions per kWh, while demandincreases steadily, levels remain high at over 0.8 kg CO2/kWh.

Figure 6. CO2 emissions


16% 18% 23% 25%3% 3% 3% 5% 5% 5%

73% 72% 67% 68%90% 88% 87% 86% 86% 86%

0%10%20%30%40%50%60%70%80%90%

100%

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024Year

Hydro Gas Oil Coal Geothermal

0.75

0.80

0.85

0.90

0.95

1.00

1.05

0

50

100

150

200

250

300

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024Year

CO2 emmissions (left) CO2 emmissions per kWh (right)

6

3. Supply/demandsituationbyregionandtransmissionlineexpansionplansFigure 7. Supply/demand situation by region and transmission line expansion plans


2014

2014

(MW)

7

In 2014, there was a notable supply capacity shortage in the JKB1 region, but there was excess capacityin the Central and East regions, so power was sent from the East to the West region. In 2024, the Centralregion should have excess capacity just as in 2014 and while the JKB region has a moderate shortfall,there will be excess capacity in the West region, and the East region will shift to somewhat of a supplycapacity shortfall.

Figure 8 below shows the results of conducting a supply/demand operation simulation based on theregional supply/demand situation noted above with maximum annual intraregional transmissionvolumes.

Figure 8. Intraregional transmission volumes (maximum values)


JKB and West Region

There is a continuous flow of 2,000-3,000 MW from the West region to JKB region. This will grow sharplythrough 2024 to over 4,000 MW.

West and Central Regions

Through 2018, a large power volume of nearly 4,000 MW will flow from the Central to the West region.This will decline gradually until around 2020 before increasing rapidly in 2024.

Central and East Regions

1 Jakarta and Bantan area

8

Through 2018, there are flows of around 2,000 MW from the East to the Central region. This will reversefrom 2019 onwards to a flow from the Central to the East to over 4,000 MW in 2024.

B. Plans(roadmap)forinstallingefficientandeffectivepowerplantsandtransmissionnetwork

If RUPTL 2015 is able to be implemented as planned, it will be possible to install sufficient supplycapacity to meet forecast demand. Further, there will be sufficient 500 KV transmission lines andtransmission capacity to eliminate the intraregional supply overruns/shortfalls.

Once adequate supply volumes have been obtained, the next necessity will be to assure efficiency aswell as initiatives to improve the quality of electric power.

1. Developingefficientcoal-firedthermalpower

Coal-fired thermal power, which is at the heart of development plans in RUPTL 2015, generates largevolumes of CO2 emissions. As shown in Figure 9 below, even with supercritical thermal power, which ismore efficient than currently installed thermal capacity, CO2 emission levels are likely to remain high atover 0.8 kg CO2/kWh.

One way to make at least a slight reduction in CO2 emissions would be to introduce even more efficientultra-supercritical (USC) thermal power plants.

The figure below shows the temperature, pressure, and typical maximum efficiency of subcritical(SUBCR), supercritical, and ultra-supercritical power plants according to a report by the InternationalEnergy Agency (IEA).

Figure 9. Steam conditions of pulverized coal-fired power plant technologiesType of coal-fired powerplant

Temperature(°C)

Pressure(bar)

Typical maximumefficiency (LHV)2

Subcritical (SUBCR) 538 167 39%Supercritical (SUPERC) 540-566 250 42%Ultra-supercritical (ULTRSC) 580-620 270-290 47%Source: CCS Retrofit (IEA)

Figure 10 shows how CO2 emissions per kWh would differ if the eighteen 1,000 MW class coal-firedthermal power plants slated to be developed by 2024 all used USC technologies.

2 LHV: based on lower heating value. For coal, the ratio of calorific value between LHV and HHV (higher heatingvalue) is around 95%. When LHV is substituted for HHV, calorific value falls by about 5%.

9

Figure 10. Comparison of CO2 emissions per unit of electricity

Source: Calculated by TEPCO study team based on RUPTL 2015

In 2024, CO2 emissions per kWh would decline by around 5% from 0.85 kg CO2/ kWh to 0.81 kg CO2/kWh. Utilizing USC technology would save 5.8m tons of coal consumption (converted at 5,100 kcal/kg)for a reduction of USD460m in fuel costs3.

2. Obtainingpowersourcesforfrequencymodulation

Coal-fired thermal power is inferior to other power sources in ability to adjust output fluctuations inshort time frames. It lacks responsiveness to changes in supply and demand, resulting in large frequencyfluctuations in the system and raises concerns of a decline in power quality.

Figure below shows startup time after eight hours shut-down and the rate at which output changesduring operation for major types of power generation.

3 Calculated based on RUPTL 2015, assuming following; Coal Sub bituminous 80 USD/ton、5,100 kcal/kg、1.57 USC/Mcal

0.74

0.76

0.78

0.80

0.82

0.84

0.86

0.88

0.90

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Year

USC SC(kg-CO2/kWh)

10

Figure 11. Startup time after eight hours shut down and rate of output change

Source: Calculated by TEPCO study team based on RUPTL 2015

Hydropower is vastly superior in its ability to adjust output capacity in short periods of time, followed bycombined cycle (C/C) plants which use gas and diesel, and gas turbine (GT) plants. To keep frequenciesconstantly within standard boundaries, it is necessary to develop frequency modulating energy sourcesthat can change output in short time frames. Possible candidates are shown in Figure 12 below.

Figure 12. Candidates for frequency modulating power sourcesPriority Policy Problems1 Development of reservoir hydropower Limited availability of suitable land for

economically viable reservoir hydropower2 Development of pumped storage

hydropowerTo adjust input when pumping, necessary tointroduce variable speed pumping

3 Development of C/C or GT plants that usegas or diesel

Higher fuel costs so not very economical

The RUPTL 2015 report itself considers pumped storage hydropower as a frequency modulating powersource, but with a traditional pumped storage hydropower system, it is possible to adjust frequenciesduring the power generation stage, but not in the water pumping stage. There are machines that canadjust frequency in the pumping stage–variable speed pumps–which are spreading in Japan and Europe.

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Future plans for pumped storage hydropower development in Indonesia should examine the preciseimpact of introducing variable speed pumping machinery and consider them as an option.

3. AchievingsupplyreliabilityincentralJakartaFigure 13 shows the power transmission system in central Jakarta in 2014. Power flows are more or lessunidirectional from south or east of the city toward the center.

Figure 13. Power transmission system in central Jakarta (2014)

Figure 14 shows the power transmission system in central Jakarta in 2024.

Figure 14. Power transmission system in central Jakarta (2024)

500kV Transmissionline (2024)

- Legend -ExistingNew (overhead)New (Underground)New (HVDC)Substation

500kV Transmissionline (2014)

- Legend -Existing lineExisting Substation

12

In 2024, 500 kV transmission lines surrounding the city center will have been completed, and powersupply will come toward the city center from the nearby vicinity from various directions. If this system isconstructed, the central Jakarta load will be supplied from at least two or more directions, and aconsiderable improvement in supply reliability can be expected. However, urbanization is alreadyadvanced and it is extremely difficult to construct further overhead power lines. Underground powercables between Muarakarang and Muara Tawar are being considered, and there is a high likelihood thatother new power lines will have to be underground as well.

Underground power cables incur construction costs several times those of overhead power lines. It isnecessary to consider strategies that will reduce civil engineering costs such as coordinating works withplans for other public infrastructure such as gas, water, and subway lines and installing power lines atthe same time as other public works are being undertaken.

Figure 15. Cross-section of passageway with underground transmission cables in Tokyo Metropolitan area

Source: TEPCO website

地中送電線が通る道路の断面図 Cross-section: road with underground transmission cables車道 Road土被 Earth管路引入れ式地中送電線 Ducted underground transmission cables電話線 Telephone linesガス管 Gas pipe水道管 Water pipe共同溝 Utility tunnel下水管 Sewage pipe下水道管など Sewage pipes, etc.洞道式地中送電線 Underground transmission cables in utility tunnelガス管または水道管 Gas or water pipes地下鉄 Subway

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II. Casestudiesofstate-ownedenterprisesubsidyreformandimplicationsforIndonesia

A. Theimportanceofstablemanagementofelectricitysector

Foreign investors, especially in manufacturing sector, are interested in Indonesia because it hasabundant young and quality labor force. However, they are anxious about the infrastructuredevelopment in future. Meanwhile, the present Indonesian administration, at its inauguration, has set agoal to attain the average economic growth of 7% for the initial 5 years through rural development, jobcreation and industrial development. Departing from the “Middle Income Trap” and building asustainable growth model will be a key to attain the goal.

In order to manage the “Middle Income Trap”, quality in infrastructure (for electricity, in particular) willbe necessary. In addition, sustainable and foreseeable power sector operation is an important agenda toachieve sustainable economic growth. As to the power sector, the perception that PLN’s operation willbe sustainable for the long time should be shared by those who are interested in Indonesian powersector.

From the point of view of consumer protection, the level of retail tariffs might be reduced through theinjection of subsidies although electricity supply costs, in nature, shall be fully recovered through tariffs.However, an extravagant subsidy policy heavily affecting a nation’s financial condition would prejudicethe sustainability of the sector. Relationship between nation’s socio-economic goals and the powersector can be described as follows.

Figure 16. Relationship between Socio-Economic Goals & the Power Sector

Actions for the power sector1. Subsidy reduction

2. Tariff increase3. Effective electricity infrastructure development

Specific Goals・Right fiscal management・Infrastructure development

・Investment promotion, job creation, etc.

Overall Goal・Social stability

・Sustainable economic growth

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To ensure a stable electricity supply-demand condition, balanced coordination between costs (PPAprices) and tariffs is imperative. The policy where electricity tariffs are set low through the subsidies cansecure certain sustainability of the sector and the financial soundness of PLN. However, it does notprovide ‘real’ sustainability of the sector since it adversely affects the nation’s financial condition.Therefore, an appropriate balance model which does not heavily rely on subsidies shall be pursued.

Figure 17. Balance between revenues and costs

To structure an appropriate balance model, a set of policies taking into account the interests of variousstakeholders are required. The tariff increase and the reduction in electricity generation cost imposedifferent influences on electricity consumers, electric utilities and foreign investors (IPPs), respectively.

Figure 18. Relationship of main players

As seen in the Figure above, PLN faces with a dilemma between the interests of consumers and foreigninvestors. If it is to meet the consumers’ interest, it will aggravate financial condition. Without favorable

Retail tariffs(Revenues)

Subsidies

PPA prices(Costs)

Since, in nature, electricity is acommodity with low price elasticity, anydeficits can be recovered through rateincrease, which, however, cannot beeasily made in terms of customerprotection.

＜

＝

Since the electricity industry requires theeconomy of scale for decreasing cost, it isnecessary to present reasonably highdemand and prices based on the nationwide& mid- to long-term perspectives. However,due to the constraints of public procurement,an appropriate PPA price shall bedetermined for each project.

Can be biased (cannot be reduced) forpolitical reasons

Can be biased (reduced) to ensure a sustainablefinancial structure

VS

ConsumersPLN

Unwillingness to pay morePleased to conclude afavorable PPA (selling price)

Foreign Investors（IPPs）

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PPAs with foreign investors, investment will stagnate. As a result, excessive pursuit of lower PPA pricesmight impede the accomplishment of mid- to long-term electricity supply-demand balance (the powerdevelopment plan).

Any deficits of an IPP player incurred by a negative margin would risk the possibility of secure projectimplementation, and accordingly, nonattainment of the nationwide and mid- to long-term powerdevelopment plan might occur.

Failure to implement PDP steadily may cause insufficient investment and severe economic damage. Aswas previously mentioned, pursuing cost reduction, without selecting a sustainable balance model andIPPs sustaining it, may cause limited number of bidders, procurement of low-spec technologies, low loadfactor and forced outages. Consequently, the power development plan (PDP) cannot be implemented asinitially planned, and the jeopardized nation’s creditworthiness on its capability to execute plans willlead to failure to attract FDI in addition to that economic stagnation will take place due to electricitysupply shortage.

In an attempt to evaluate creditworthiness of a bidder, it is worthwhile considering its track record ofproject completion and actual load factor of the projects it completed as well as its default risk at atender stage. Steady implementation of both generation and T&D development plans yields high costefficiency of the power sector.

Figure 19. The importance of the steady implementation of PDP

Meanwhile, it should be noted that additional actions except for subsidy injection will be necessary forsteady implementation of the power development plan. In order to ensure successful implementation ofPDP which can be attained upon sustainable growth, stable electricity supply-demand structure and an

Steadyimplementation of the

power developmentplan

Failure to attain PDP /Delayed

implementation ofPDP Jeopardized

creditworthiness on planexecution

Electricity supply shortage Stagnation of socio-economic growth

Inadequate investmentattraction

Adequate electricity supply Achievement of socio-economic growth

Successful investmentattraction

Retention ofcreditworthiness on plan

execution

Necessary to carefully look at potential lost profits

Present

16

appropriate balance model, in particular, it is necessary to obtain the public acceptance and to takeadditional measures except for subsidy injection for simultaneous attainment of subsidy reduction andtariff increase.

Figure 20. Issues to be considered in the balance of Revenues and costs

Considering the recent development in fuel market, falling fuel prices offers a great chance to reducespending on electricity subsidies. Fuel prices significantly decreased in 2015 compared with 2013-14.Given that the fuel prices continue to be at the level in 2015, in the power sector, the opportunity costreduction as of 2020 amounts to 5,111 million.

Figure 21. Fuel Cost for Power Generation

As to the cost structure, generating cost per kWh has increased up to 2015 due to the increase of thefuel price, but it is estimated to decline along with the increase of the coal-fired power plants.

0

5,000

10,000

15,000

20,000

25,000

y2015 y2016 y2017 y2018 y2019 y2020

Fuel pricescontinue to beat the level in

2014

Fuel pricescontinue to beat the level in

2015

5,111 million USD

Million USD

* Estimated using the statistics of international fuel prices and RUPTL 2015

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Under this favorable market condition, benefit by cost reduction can be used for financial robustness ofPLN and investment for securing stable power system. Benefits gained by the fuel price decline shouldbe firstly used for subsidy cut, and then, for PLN’s internal reserve and effective investment, whenconsidering fuel price trend in middle and long term future, rather than electricity tariff reduction.

In the meantime, government subsidy for PLN which weighs 30% of its income is uncertainty for theinvestors. This subsidy weighs a large portion to PLN’s income, and the subsidy of 100 Trillion Rupiah hasbecome one of the most important policy issues.

Continuous financial robustness of PLN is very important both for subsidy reform and invitation of theinvestors. We should regard the financial robustness of PLN as very important issue when implementingsubsidy reduction policy.

It is easy to understand the above point by thinking how financial institutions or investors will assess PLNas a borrower or contract partner for long-term power purchasing agreements. When financialinstitutions lend money to an ordinary business corporation, they assess the company’s debt repaymentcapacity over the loan period. They assess the borrower’s ability in “flow” and “stock” terms. That is,whether the borrower is able to generate a continuous sustainable flow of earnings, and whether inunforeseen circumstances they have a stock of resources to maintain adequate financial strength.Similarly, investors in the infrastructure sector assess whether their counterpart in a long-term powerpurchase agreement will be able to cover its contract obligations. A rating from a ratings agency is thissort of evaluation from a third-party viewpoint. When executing an infrastructure project, investors andfinancial institutions take these assessments from ratings agencies as third-party opinions. The ratingsagencies also evaluate a business in terms of both stock and flows in a similar manner to a financialinstitution to estimate the probability that the organization will be able to cover its liabilities.

That is, maintaining strong creditworthiness (credit rating) is desirable if a power company (an off-taker)wishes to attract significant private-sector investors when executing a power generation project. Large-scale projects in particular have a long payback period so creditworthiness is even more important inattracting investors. For example, according to an assessment by the OECD affiliated IEA (InternationalEnergy Agency), the bigger the coal-fired power plant, the lower the generation costs, but the larger theinitial costs and the longer between construction and recovering the initial investment. For investorsand financial institutions the risk of debt default is higher than a project with small initial costs and ashort payback period.

From the viewpoint of energy policymakers, there is a strong need to reduce electricity costs from apolicy perspective, but if the power off-taker is not considered creditworthy enough, it is also necessaryto continue providing some sort of credit enhancement such as a government guarantee.

To get an idea of the magnitude of this risk, we consider the importance of PLN’s creditworthiness usinga model case based on PLN’s current credit rating.

According to June 2014 material by major credit rating agency Moody’s, assuming support from theIndonesian government, PLN’s credit rating would be Baa3, the same as Indonesia’s foreign currency

18

denominated and the country’s own local currency denominated sovereign risk (Baa3: investmentgrade). Without the Indonesian government’s support, it would be Ba2 (not investment grade).

Based on historical data, entities rated Ba2 have a 30% chance of debt default within 15 years. For aninvestor considering a major infrastructure investment with a long payback period this is a large risk4.

Figure below shows Moody’s’ published cumulative default probabilities for entities rated Baa and Ba.

Figure 22. Cumulative default probabilities (%, based on 1983-2010 history)1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Baa 0.202 0.561 0.998 1.501 2.06 2.66 3.175 3.71 4.26 4.89 5.541 6.225 7.079 8.004 8.881

Ba 1.197 3.437 6.183 9.067 11.51 13.757 15.76 17.675 19.526 21.337 23.003 24.843 26.653 28.663 30.722

Figure 23. Cumulative default probabilities over time (based on 1983-2010 history)

Source: Moody’s “Special Comment- Corporate Default and Recovery Rates, 1920-2020”

Here we give a concrete example and consider debt default risk. Assume there is a project expected togenerate power sales revenue of $100 million per annum over a 15-year period. We next considerwhether the purchaser has a credit rating with: 1) absolutely no default risk; 2) a Baa credit rating; or 3)a Ba credit rating.

From Figure 23 above, we derive expected annual revenue flows as shown in Figure 24 below. Thisanalysis assumes that if there are any missed debt repayments, there are no further cash flows.

4 https://www.moodys.com/research/Moodys-affirms-PLNs-ratings--PR_303016

05

101520253035

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

％

Years

BaaBa

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Figure 24. Annual cash flows

Source: Estimates by Ernst & Young ShinNihon LLC

Next, assuming a discount rate of 10% and calculating default risk, expected revenues in the Baa caseare 97% of those from the riskless case (essentially no major difference between the cases), but with aBa rating, the figure becomes 86.7%, for a large decline in expected revenues.

Figure 25. Annual cash flows in different ratings


Specific estimated cash flows in each case are shown in the following Figure 26

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To encourage investments by private sector investors, it is important that the financial health of theelectricity sector be maintained and improved during the subsidy reform process. The key to this iselectricity tariff hikes. Also, as long as the power companies are insufficiently creditworthy, there needsto be commitment from the government to enhance their creditworthiness.

Concerning the subsidy, percentage of the subsidy is larger in smaller sized users. Subsidy amount is setby the category. Electricity subsidy is decided as national budget every year by taking into account thecost to be covered and also the margin. Margin is considered to cover the necessary investment. In 2014,Margin rate was set to be 7% of the costs.

Figure 27. Subsidy and electricity tariff per kWh by category (2014)

R : Household, B：Business, I：Industry, S：Social, P：Government

Island areas have larger percentage of small sized users while the urban areas with large sized users getmost of the subsidy amount. In urban area, a great amount of the subsidy is provided to middle-largesized users, and the government has made efforts to reduce the amount by raising electricity tariff.

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Figure 28. Electricity subsidy by area (2014）

Indonesian Government currently plans to reduce the subsidy by gradually raising the electricity tariff.MEMR (ESDM) made a plan to reduce the subsidy by tariff category focusing on large sized users andhas made subsidy reduction roadmap. Also, it is planned to raise the electricity tariff adjusting with thechanges in various cost factors. Recently, it is planned to introduce financial support for low incomepopulation in a form different from the current electricity subsidy. PBR (Performance Base Ratemaking)is also planned to be implemented to facilitate PLN’s efficient business operation.

These actions are consistent with the international best practices. To make the subsidy reformsuccessful, related organizations should build and share the vision for ensuring stable and sustainablepower system in addition to the actions already taken as above.

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Figure 29. Attainment of economic goal and Power Development Plan

B. State-ownedenterprisessubsidyreformbestpracticeinselectedcountries

The Indonesian government is working to reduce subsidies to PLN, which are a drain on public finances.The keys to subsidy reform for Indonesia are reducing subsidies while also allowing sufficient powertariff increases to improve PLN’s financial health. The reasons are twofold. This is necessary for PLNitself to invest in electricity assets, and to attract investors who sell electricity from their power projectsto PLN. In other words, subsidy reform is not just a means to improve finances by reducing subsidies,but tariff increases also play a role in improving the financial situation of the electricity sector overall,which should not be overlooked.

Sustainable Growth and public welfare

Stable power systemInnovation by foreign investment

Consistent implementation of the plans

Balanced income and expenditure in mid-long termSharing the vision such as an appropriate portfolio of

Generation and transmission

Strengthening financial robustness in the situation of thisfuel price drop

Implementation of the highly efficient and frontiertechnologies with focusing on total life cycle cost

ü Gradual increase of retail electricity tariffü Ensuring subsidy reform（Performance Based

Regulation）ü Compensation for low income users

ü Application of Yen loan and Private SectorInvestment Finance（USC,transmission/distribution network, geothermal,small scale hydro, renewables）

ü Ensuring transparent bidding process withforeseeable regulations (such as non-discrimination policy national treatment）

23

In many countries around the world the government bears some of the burden of public utility coststhrough subsidies. A typical subsidy scheme in the electricity sector is one whereby the government fillsthe gap between average selling prices and costs. However, subsidies sometimes lead to excess powerconsumption by users and a notable increase in the financial burden. As a result, subsidies are a largeburden on finances not just for Indonesia but in many other countries, and some of these are working toreduce subsidies and raise tariffs.

Still, according to analysis by the World Bank and others, in many cases these initiatives fail for thefollowing reasons.

· The government has not provided sufficient information regarding the true state of subsidies tocitizens

· Citizens have lost faith in the government, or are unable to keep up with government reforms· The low-income demographic affected by tariff hikes opposes the increases· Tariff hikes raise concerns of inflation and loss of international competitiveness of the country’s

own industries

Cases of successful subsidy reform have the following five factors in common.

· Subsidy reform is implemented as part of comprehensive energy plans· A government that has a high level of support communicates appropriately with the people· There is an appropriate price setting mechanism (e.g. cost pass-through scheme)· Implementation occurs in conjunction with management reform initiatives of state-owned

enterprises (cost cuts)· Implementation occurs in conjunction with measures to protect the low-income demographic

that is affected by tariff hikes

Recent moves by the Indonesian government regarding subsidies to PLN are largely consistent with thesuccess stories. The government appears to have a good chance of succeeding in its drive to abolishsubsidies and reduce the burden on the public purse.

However, all of the above success factors are important. Subsidy reform does not always succeed. Forexample, if a determined government actively campaigns for the need for tariff hikes to the people andsucceeds in reducing subsidies, but the tariff-setting mechanism is not clearly defined to reflect changesin costs and the organizations responsible for tariff approval are not independent of governmentpressure, it may fail. Even if the subsidy burden is drastically reduced, it may increase again during aneconomic slowdown. Armenia succeeded in sharply cutting subsidies in the late 1990s and establishing atariff regulator independent of the government. However, because the tariff-setting mechanism doesnot appropriately reflect costs, losses in the electricity sector are again rising. In the Philippines as well,while an independent regulatory body had the authority to approve electricity tariffs, it was not able toadequately exercise its authority and tariff hikes were at times delayed.

This section below highlights four success stories of subsidy reduction in the electricity sector: inArmenia, Brazil, Kenya, and the Philippines.

24

1. ArmeniaArmenia is a small country with a population of three million that gained its independence from theformer Soviet Union in 1991. For some time after independence the country’s electricity sector wasoperated by a vertically integrated power company. However, household electricity rates in Armeniawere held down at levels insufficient to recover operating costs and depreciation expenses. Thissituation persisted with the result that the power company’s losses mounted. Also, there were manycases of unpaid bills and power theft. As of 1996, roughly 40% of power tariffs were uncollected. Thepower company’s losses reached 20% of GDP in 1994. To make up for these, the treasury provided low-interest finance to the power company; improving the sector’s finances became a matter of urgency.

Figure 30. Armenia: economic growth rate (%) and per capita GDP (USD)

Source: IMF

As losses continued to mount, the Armenian government decided to raise household electricity rates tothe level where costs could be recovered in stages over 1995-1999. These tariff hikes succeeded, andhousehold tariffs became consistent with other categories and government subsidies were abolished.Further, while hikes were implemented, as discussed later, the electricity sector was reformed andmade more cost efficient. From 1999 through 2009, when they increased due to higher gas prices,electricity rates were unchanged.

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Figure 31. Armenia: standard power tariffs (AMD/kWh)

Source: IMF, World Economic Outlook

“Lifeline” tariffs for people on low incomes while household power tariffs were being hiked wereabolished in 1999. In lieu of these, as part of the review of the social security system by the government,other measures were put in place to support the low-income demographic.

Also, before electricity reform, there were cases of fraudulent collusion between meter readers (alsoresponsible for collecting tariffs) and households. After payments were shifted to post offices and banks,and there was strict enforcement of power supply disconnection to those who did not pay their bills,collection rates improved markedly. This also helped contribute to shrinking losses in the electricitysector. A big factor behind the success of these initiatives was that the Armenian government was ableto use the tariffs collected to reduce power outages that had been frequent and increased electricitysupplies which it used to appeal to the people.

Underlying progress in tariff hikes and revised collection measures was the Armenian government’s far-reaching reform of the power sector. In 1997 the government enacted a new energy law and separatedthe Armenian power sector into generation, transmission, and distribution segments. This reflected agrowing conviction that it would be necessary to build an efficient energy system that separatedgeneration, transmission, and distribution in the face of a deepening energy crisis in the early 1990sfollowing independence. Further, the splitting off of generation, transmission, and distribution occurredat the same time as the establishment of the Public Services Regulatory Commission (PSRM) that hadauthority for tariff regulation and approval in the power sector.

26

Figure 32. Armenia: electricity business structure

Note: solid lines are power, dotted lines are cash flows, double lines are regulatory/supervisoryrelationships

Source: Japan Electric Power Information Center. INC

Note that while power tariff hikes in the late 1990s resulted in major reductions in electricity sectordebts, in recent years there is once again the need for a review of power tariffs.

That is, amid rising power supply costs, the Armenian government is overly focused on the affordabilityof electricity tariffs for its citizens. As a result there is once again a gap between tariffs and costs. Thereare three factors behind rising costs: 1) rising gas prices from the late 2000s; 2) a 30% appreciation ofthe US dollar against the Armenian currency due to an economic recession following the collapse ofLehman Brothers; and 3) increases in unit supply costs of electricity due to falling power consumption inthe recession. The currency had a significant impact because thermal power plant fuel purchases anddebt payments are denominated in US dollars, and thus constitute a major factor in cost increases.

Armenia will have to replace aging electricity equipment in the future; how to fund this is an importantissue. To cover the increased investment costs, large increases in electricity tariffs will be unavoidable.

The World Bank (2013) and others have pointed out that the first element in a price rise strategy is tohave the Public Services Regulatory Commission structure a mechanism whereby changes in marginalcosts flow through to electricity tariffs in a timely and appropriate manner. Also, because large rises intariffs have a major impact on consumers, a series of price rises is desirable. Furthermore, they point out

Network operator (load dispatch)

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Electric Networks of Armenia

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27

that it is important to set tariffs to reflect seasonality, time of day the electricity is being used, and fixedcosts5.

2. BrazilIn the 1980s Brazil’s economy suffered from low growth and a rising budget deficit. Specifically, real GDPstagnated at an average growth rate of 3% and inflation neared 300%, the budget deficit averagedaround 5% of GDP, and the ratio of net government debt to GDP neared 40% in 1989.

Figure 33. Brazil: economic growth rate (%) and per capita GDP (USD)

Source: IMF

Figure 34. Brazil: inflation rate (%)

Source: IMF

5 World Bank (2013), “Republic of Armenia: Power Sector Tariff Study”International Monetary Fund (2013), “Case Studies on Energy Subsidy Reform: Lessons and Implications”Inogate (2015), “A Review of Energy Tariffs in Inogate Partner Countries”Overseas Power Research Team (2015), “Electricity Business in Overseas Countries”

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Meanwhile, during this period electricity was being supplied below costs, and the sector relied ongovernment budgets to make up the shortfall, leading to the need to raise tariffs. However, theregulatory authorities that approved tariff hikes were under political pressure to keep consumer pricerises under control, so it was impossible to raise tariffs sufficiently, and electricity sector debts mounted.During this period, the parlous state of power sector finances meant that it was unable to investadequately to accommodate future demand growth. In these circumstances, the Brazilian governmentdecided to sell power assets to the private sector and reduce the debt burden. In 1993 regulations thatmandated a 10% return on capital in the power business and uniform nationwide tariffs were scrappedto smooth the way for privatization. In 1998, the government decided to unbundle the power sector tomake power tariffs more transparent.

State-based distribution companies comprised a large proportion of the power asset selloff. These hadexcess facilities and were overstaffed, and suffered large power transmission losses under a high coststructure. The Brazilian government moved to privatize the distribution companies in Sao Paulo and inRio de Janeiro first. The strategy aimed at major improvements in profit margins through managementreform at the distribution companies. In addition, it was hoped that the improved creditworthiness ofthe distribution companies that purchased power from the power generation companies wouldencourage the latter to invest. Further, while embarking on the strategy to privatize the distributioncompanies, the government overhauled the tariff-setting mechanism to reflect costs.

However, despite participation from private-sector companies thanks to such reforms, investment in thegeneration sector was still inadequate, and in 2001 when hydropower capacity declined due to adrought, the electricity supply/demand balance tightened. This resulted in an allocation regime forelectricity supplies, and major power blackouts were unavoidable. Because the Brazilian electricitysector was mainly dependent on hydropower, it was structurally very vulnerable to environmentalconditions.

The Brazilian government approved sharp hikes in power tariffs so that the distribution companies couldcover losses suffered under the allocation system. Meanwhile, electricity was supplied at no cost to thelow-income demographic, funded by the tariffs collected.

By adopting these policies the government succeeded in raising electricity rates and reducinggovernment debt. Success factors included a settling down in inflation from 2000, which created anenvironment where it was easier to raise tariffs; strong support for the administration accompanying arecovery in economic growth; and policies to compensate the low-income demographic for electricityrate hikes.

29

Figure 35. Brazil: electricity tariffs

Note: based to 100 in 2013Source: ANLEE

The Brazilian electricity sector today still depends to a large extent on hydropower plants. A drought in2014 saw declining output from hydropower plants and a surge in electricity market prices while tariffswere held flat, leading to deterioration in the earnings environment for the distribution companies. Inresponse, the Brazilian government was forced to announce support policies to rescue the distributioncompanies6. To eliminate the likelihood that the electricity sector will be an increasing burden ongovernment finances, it is necessary not just to construct a mechanism whereby power supply costs areaccurately reflected in power tariffs, but it is also necessary to create and implement comprehensivepower plans including the share of various energy sources.

Figure 36. Brazil: share of hydropower (%)

Source: World Bank

6 Reference material: International Monetary Fund (2013), “Case Studies on Energy Subsidy Reform: Lessons andImplications”Overseas Power Research Team (2015), “Electricity Business in Overseas Countries”

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3. KenyaIn Kenya from the start of the 2000s the electricity supply network was well established and demandalso increased sharply amid continuing strong economic growth. However, because power generationinvestment was not sufficient to cope with growth in electricity demand, shortfalls arose and there weremounting concerns that this would be a constraint on future economic growth. During this period,before the onset of notable electricity shortages, tariffs were insufficient to recoup power supply costs,so power companies involved in the sector were in a weak financial condition.

Against this backdrop, the Kenyan government investigated rationalizing the sector from the mid-1990s.It unbundled generation from transmission and distribution and implemented policies to promote theentry of private-sector IPP operators into the generation segment.

The current power sector is comprised of KPLC (Kenya Power and Lighting Company) in the transmissionand distribution business and KenGen (The Kenya Generating Company), a spinoff from KPLC, on thegenerating side. KenGen has about 75% of installed capacity, with six independent power generationoperators accounting for the remaining 25%. KPLC and KenGen, who hold the keys to the power sector,are both private-sector companies listed on the Nairobi Stock Exchange. KenGen and the IPPs supplypower to KPLC under power supply contracts. At one time, both KPLC and KenGen were 100% owned bythe government, but they have each been partially privatized.

Figure 37. Kenya: economic growth rate (%) and per capita GDP (USD)

Source: IMF

While sector reform proceeded, the tight power supply situation persisted, and in 2005 the Kenyangovernment embarked on root and branch reform of electricity tariffs. Specifically, the country createdan automatic pass-through tariff-setting system reflecting long-run marginal costs, fuel costs, andcurrency fluctuations. The calculations include a mechanism to reflect domestic inflation rates every sixmonths, which is posted on the Energy Regulatory Commission (ERC) website. Revisions to electricitytariffs are approved by the ERC and set independent of political pressure. Approval of tariff hikes isgranted on the presumption that services will improve.

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In Kenya the Energy Ministry is responsible for setting electricity policy. The abovementioned ERC wasestablished in 2007. The organization is independent of the energy minister and is responsible forregulating power tariffs, issuing electricity business licenses, and producing technical standards andsupply regulations. Further, there is an Energy Tribunal in case of disputes between power sectorbusiness operators and the ERC.

In this manner, power tariff-setting mechanisms were overhauled and the power companies’ marginsimproved drastically. In 2008 there were no subsidies or fiscal support measures to power companies.There was a marked impact from the power companies themselves improving their tariff collectionsystems. Figure 24 shows electricity tariff reforms over the relevant period.

Figure 38. Average electricity tariffs for usersYear USD/kWh2000 0.072006 0.152009 0.19Source: IMF (2013)

According to the IMF, underlying the successful raising of tariffs was a shared understanding amongconcerned parties that: “in order to attract foreign investors and maintain economic growth it wasimportant that KenGen and KPLC’s finances were sound and power tariff systems had to reflect trueelectricity costs.” Further, for consumers whose monthly usage was less than 50 kWh, the governmentestablished “lifeline” tariffs; this was considered important in gaining the people’s understanding.

Over 50% of installed capacity was from hydropower, followed by thermal and geothermal sources. As aresult the sector is structurally vulnerable to drought. While continuing to improve financial health ofthe electricity sector, Kenya will have to further diversify its energy sources in the future7.

Figure 39. Share of hydropower generation in Kenya

Source: World Bank

7 International Monetary Fund (2013), “Case Studies on Energy Subsidy Reform: Lessons and Implications”Overseas Power Research eam (2015), “Electricity Business in Overseas Countries”

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4. ThePhilippinesStarting in the 1990s the Philippines suffered from a shortage of power supply. At that time, the state-owned power company NPC (National Power Corporation) had a monopoly in generation andtransmission. However, the company was not able to invest enough in generation to meet growingelectricity demand accompanying economic growth, leading to the tight supply/balance demandsituation. In these circumstances, the Philippines government liberalized the generation sector andencouraged the participation of independent power producers (IPPs).

NPC was the counterpart for the IPPs’ power sales agreements. The government encouraged IPPs toenter the sector in a short time frame, and NPC signed expensive, long-term, dollar-denominated powerpurchase agreements (PPAs). Further, the contracts favored the IPP operators. In addition to high powertariffs, under take-or-pay clauses in the PPAs, NPC had to pay the IPPs even if demand was insufficientand it did not actually transmit any electricity. Due to the need to increase supply capacity in a shorttime frame, many of the IPP investors established small-scale gas turbine power plants.

As a result of these deals, energy investment progressed and capacity shortfalls were eliminated.However, while electricity charges paid to the IPPs were set high, selling prices to the distributioncompanies were held low as a matter of policy, and NPC’s financial position deteriorated markedly.Under these circumstances, when the Asian currency crisis occurred and the Philippines currencyplunged amid a slowdown in demand, NPC’s financial condition worsened even further. The fiscalburden of supporting NPC’s finances increased dramatically, heightening the need for reform in theelectricity sector.

Figure 40. Philippines: GDP growth and budget balance

Source: World Bank, “World Development Indicators”

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To cope with the increasing fiscal burden from NPC, the Philippines government enacted the EPIRA(Electric Power Industry Reform Act), a law to reform the power industry, in 2001. This marked the startof the government’s efforts to fundamentally reform the power sector. Specifically, the countryembarked on the following initiatives.

· Splitting up NPC (separating generation and transmission)· Selling NPC’s assets to the private sector (generation, transmission)· Unbundling power tariffs (making the costs of generation, transmission, and distribution

transparent)· Establishing an independent regulator in charge of tariff approval etc. (ERC: Energy Regulatory

Commission)· Establishing a wholesale electricity transaction market (WESM: Wholesale Electricity Spot

Market)· Deregulating the retail market (in future)

The fundamental aim of these reforms was to cut the government’s power sector-related debt andreduce the amount of subsidies it paid, but there was no immediate impact. It has been pointed out thatthe independent regulator had limited administrative capabilities. As a result, fiscal support for NPCreached 1.5% of GDP.

In these circumstances, then President Arroyo was concerned about the budget, and immediately afterthe 2004 presidential election announced a sweeping package to improve the budget balance, includingincreased VAT (value added tax) rates and constrained fiscal expenditures. The package included a 30%hike in electricity tariffs implemented from 2004 through 2005. As a result, the fiscal drag from NPCshrank to 0.2% of GDP. This is a good example of the need for strong political willpower when raisingelectricity tariffs and reducing subsidies. It is not enough to establish an independent regulator. For thesake of reference, the figure below shows residential electricity rates from Meralco8, the largest energydistributor, and NPC’s power generation charges in the 2000s. Both of these tariffs are approved by ERC,the regulator.

Figure 41. Retail electricity rates and generation charges (Peso/KWh)

Source: Meralco, NPC

8 Meralco is the largest distribution company in the Philippines which supply electricity in the greater Manila area.The sales of the electricity in 2014 was 35,160GWh, and the revenue is 2,623PHP in the same year.

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The key that enabled sharp electricity rate hikes was making costs transparent by unbundling powertariffs, while at the same time providing lifeline tariffs to those on low incomes below the actual supplycost, to help them absorb the impact of price increases. Funding for the difference between the lifelinetariffs and costs was via a universal charge for all users included in electricity rates. According to thePhilippines government, lifeline tariffs at a 5-50% discount to ordinary tariffs were provided to somethree million low-income households9.

Figure 28 shows a breakdown of power charges by Meralco, the largest supplier in the Manila district, in2014.

Figure 42. Breakdown of average power charges (2014)Item Peso/kWh Share

Meralco (distribution, supply) 1.61 17.1%

Generation 5.34 56.7%

Transmission 0.92 9.8%

Taxes, etc. 1.11 11.8%

System losses 0.44 4.7%

Total 9.42 100.0%

Source: Meralco, “Power to All - 2014 Meralco Annual Report”

C. SubsidyreformforPLN:backgroundandcurrentstatus

1. BackgroundtosubsidyreformforPLN

Subsidies for PLN are a major burden on government finances in Indonesia, but reform is progressing.PLN is a state-owned enterprise (SOE) set up to supply electricity in the public interest. Under the newElectricity Law (No. 30/2009) it is obliged to supply power at a “reasonable” price. Therefore, it is forcedto sell power cheaper than the economic cost. The difference between the reasonable price and theeconomic cost of power, with an appropriate operating margin added on, is paid by way of agovernment subsidy every year.

9 International Monetary Fund (2013), “Case Studies on Energy Subsidy Reform: Lessons and Implications”Overseas Power Research Team (2015), “Electricity Business in Overseas Countries”Meralco (2015 ), “Meralco Annual Report 2014”

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At the start of the 2000s there was a series of power tariff hikes and government subsidies to PLN werearound 3-4 trillion rupiah. However, subsequently fuel prices surged as oil prices climbed and thegovernment reduced subsidies for petroleum products, resulting in an accompanying increase ingovernment subsidies to PLN. In 2009, they decreased temporarily due to a fall in fuel prices andimprovements in fuel conversion, but then started increasing again. In 2012 subsidies reached 103trillion rupiah. Since 2012, power subsidies to PLN have been roughly around 100 trillion rupiah.

Figure 43. PLN: power subsidies (trillion rupiah)

Source: PLN, “Annual Report 2014”

2. PLN’srevenuestructureGovernment subsidies form a large share of PLN’s revenue. In 2014 they accounted for around 34% ofsales at 100 trillion rupiah. The Indonesian government views reducing subsidies as a key budget priority.

Electricity subsidies are not just to cover cost shortfalls but are set as part of the government budgetevery year with due consideration to required returns (margins). This is so that PLN will have enoughcapital to carry out necessary investments. In 2014, the operating margin that was deemed sufficient forPLN to have sufficient investment funds was set at 7%.

Electricity subsidy calculations are determined via a Ministry of Finance ordinance. For each tariffclassification, electricity sales prices and generation costs are compared. When the electricity sellingprice is low, subsidies are calculated based on the gap. Due to this mechanism, power tariffs were heldlow even while fuel prices surged.

Thanks to government subsidies, there are no issues with PLN’s fiscal soundness from a cashflow perspective, butas rapid growth in electricity demand continues, so does growth in fixed assets. The relatively slow growth inequity means that the equity ratio is declining. Also, the DSCR (debt service coverage ratio: an indicator of debt-servicing capacity) is trending at around 1.5x.

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Figure 44. PLN: equity and fixed assets (trillion rupiah)

Source: PLN, “Annual Report 2014”

Figure 45. PLN: equity ratio and DSCR

Source: PLN, “Annual Report 2014”Note: electricity subsidies are set by user category. The calculation formula is as follows.

Σ (average selling price (Rp/kWh) - basic electricity production cost [incl. margin] (Rp/kWh)) x electricity sales (kWh)

The smaller the user, the lower the electricity tariff. As a result, the subsidy per unit of consumption forsuch consumers is relatively high.

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3. PositionofelectricitysubsidiesincontextofoverallenergysubsidiesIn Indonesia, energy subsidies are structured as shown in Figure below.

Figure 46. Structure of energy subsidies

2013 annualaccounts

2014 revisedbudget

2015 revisedbudget

Fuel subsidies (trillionrupiah)

210.0 246.5 81.8

(Billion USD) 20.1 19.7 6.5

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(Billion USD) 9.6 8.3 6.1

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1650.0 1877.0 1995.0

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20.3 19.3 18.1

Fiscal deficit (% of GDP) 2.3 2.4 1.9

Source: International Institution for Sustainable Development (2015)

Since his election in 2014, President Joko has implemented aggressive cuts to fuel and electricitysubsidies. On a budget basis, fuel subsidies for 2015 were 81.8 trillion rupiah (-66.8% YoY) and electricitysubsidies were 76.6 trillion rupiah (-26.2% YoY). While subsidies in 2015 declined sharply from 2014, theaggregate of fuel and power subsidies was 158.4 trillion rupiah, roughly 8% of the national budget, sothey still have a large budget presence. The breakdown of Indonesian fiscal spending in 2014 and 2015 isshown in Figure below.

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Figure 47. Breakdown of government expenditure in 2014 budget

Source: IMF (2015)

Figure 48. Breakdown of government expenditure in 2015 budget

Source: IMF (2015)

The amount spent on subsidies depends to a large degree on international energy prices and themovement of the rupiah against the US dollar. Considering that these are highly volatile, it is necessaryto reduce subsidies as much as possible to stabilize the Indonesian government’s finances.

For reference purposes, the IMF’s forecasts for revenue and expenditures and energy subsidies anddevelopment through 2020 are shown in the figure below.

personnel14%

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12%capital spending12%

social spending7%

transfers toregional gov'ts

36%

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Figure 49. Forecast for Indonesia’s revenue and expenditures (share of GDP, %)

2012 2013 2014 2015 2016 2017 2018 2019 2020

Fiscal revenue 16.3 15.8 15.2 13.5 14.1 14.4 14.7 14.8 14.9

Fiscal expenditure 18.1 18.2 17.5 15.9 16.4 16.4 16.4 16.5 16.6

Of which energysubsidies

3.7 3.4 3.4 1.0 0.9 0.4 0.1 0.1 0.1

Of which developmentspending

2.7 3.0 2.5 3.0 3.4 3.7 3.9 4.1 4.1

Primary balance -0.6 -1.1 -0.9 -1.1 -0.8 -0.6 -0.4 -0.4 -0.3

Central government debts(outstanding)

24.0 26.1 26.1 26.8 26.8 26.5 26.1 25.5 25.0

Source: IMF (2015)

4. SupportfromtheWorldBankThe World Bank is supporting the Indonesian government in its efforts to reduce electricity subsidies.The Indonesian government’s initiatives are consistent with successful cases in other countries.Indonesia appears to have learned from success stories in other countries analyzed by the World Bankand the IMF. According to Indonesian government officials, the World Bank is working to introduce PBR(performance-based rating) to enhance management efficiency at PLN in conjunction with subsidyreform. Indonesian government officials and PLN have indicated their readiness to take on board adviceregarding subsidy reductions and the financial health of the power sector from organizations other thanthe World Bank as well10.

5. PLNsubsidyreforms:currentstatusandplansUnder the subsidy reduction roadmap produced by the Ministry of Energy and Mineral Resources,subsidies to PLN will reduce in stages over 2013-2018. Currently, reductions of subsidies by category aresteadily underway.

Electricity tariff hikes are occurring at the same time as subsidy cuts. In May 2014 there was a hike of atleast 38.9% for contracted capacity greater than 200 kVa for industrial users, followed by hikes of 8.6%each in two-month intervals. Users consuming over 30,000 kVA faced a price hike of 64.7%, followed by13.3% hikes in two-month intervals. Price hikes are starting with medium and large users, placing aheavy burden on major industries. Electricity tariff hikes for industry are forecast to total 8.85 trillionrupiah annually.

From May 2014, announcements regarding tariffs have been posted monthly on PLN’s website.

10 Based on a 2015 field survey

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Figure 50. Recent PLN electricity tariff revisions

Source: IISD

According to officials from the Ministry of Energy and Mineral Resources, these electricity tariff hikes arelikely to continue on schedule under the new administration, which is very keen on subsidy reform11.

In 2015, a price-adjustment mechanism was introduced in electricity tariffs for heavy power users toreflect variations in individual cost categories. Under this, tariffs are adjusted by the government everymonth to reflect consumer price inflation, currency fluctuations, and oil prices in Indonesia.

There were concerns that tariff hikes for industrial electricity would reduce the relative attractiveness ofoperating in Indonesia for foreign companies. However, the sensitivity of electricity consumers toenergy costs is declining amid falling international energy prices. Further, the fuel cost portion which ispassed through to power tariffs is falling, so these concerns are not present for now.

The Indonesian government’s plans for power subsidies are shown in Figure40 below (includes someestimates).


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Figure 51. Electricity subsidy reduction plans

Source: Ernst & Young ShinNihon LLC with estimates based on materials from the Ministry of Energyand Mineral Resources

III. LawsandregulationspertainingtoelectricitybusinessinIndonesia

A. Institutionalchallengesinimplementing35GWElectricityProgram

The key challenges from an institutional viewpoint in attracting domestic and foreign investors toimplement the 35 GW Electricity Program are as shown below.

· Government guarantees· Land acquisition· Local content regulations

The figure below shows forecast risks and standard business scheme for operating an IPP businessoverseas. In general, a global enterprises running an IPP business in emerging economies such asIndonesia covers off-taker risk with a guarantee from the country’s finance ministry, and then usesinsurance from a public sector financial organization (a trade insurer or export-import bank) to coverpolitical risk. Alternatively, financial services such as insurance or credit are available and the company isable to structure a project finance deal from commercial financial institutions that cover these risks.When Japanese companies operate an IPP project in Indonesia with PLN as the off-taker, it is usual forthe lenders to seek a government guarantee from the Indonesian finance ministry. A governmentguarantee can be considered a prerequisite for running an IPP project.

0

20

40

60

80

100

120

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

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Figure 52. Potential risks when running a cross-border power business

Source: EY ShinNihon LLC study team

Figure 53. Standard IPP project scheme

Source:EY ShinNihon study team

Avoidable? Risk type Typical status in Indonesia

Yes Sponsor risk Avoidable by participation of quality Japanese and local companies

Yes Completion risk Avoidable by employing reliable EPC company

Yes Operating risk Avoidable by employing company with operational track record

Maybe Fuel supply risk If fuel supplier from private sector, stable supply may be an issue in some cases

Yes Market risk Avoidable by using availability payments

Maybe Offtake risk In general, project finance schemes cannot absorb all of PLN's credit risk so

government guarantee mechanism necessary

Maybe Currency risk Avoidable with extended warranty from lender if there is a governmentguarantee

Yes Cash flow risk Avoidable to some extent with availability payments. Extended warranty also an

option.

Maybe Country risk Avoidable with extended warranty from lender if there is a governmentguarantee

Maybe Other (land acquisitionetc.)

Up till now business operator has been responsible for land acquisition; risk ishigh

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Nonetheless, recently there are cases where Indonesian infrastructure projects have been put togetherwithout a government guarantee, and some in the 35 GW Electricity Program have been tendered forwithout a government guarantee. This kind of attitude increases the risk of IPP projects in Indonesia andis an important issue for Japanese companies operating there.

Land acquisition is an important issue in infrastructure development. In the Indonesian electricityproject sector, the Electricity Law requires IPP operators to acquire land. It is not held to be thegovernment’s responsibility, so for foreign operators in particular this is a high hurdle. Land has notbeen acquired for the Batang coal-fired power plant project that Itochu and J-Power have invested in.The acquisition deadline for launching operations in 2016 has been extended on numerous occasions.Although this project does not involve the displacement of residents it has faced opposition from NGOsand locals. Even more than four years after the PPA agreements were concluded in 2011, the land hasstill not been acquired. As this case shows, land acquisition and expropriation are particularly difficult inIndonesia and a major concern for operators considering investing, despite recent governments effortsto mediate this issue.In recent years local content regulations have also become an issue that global companies have toconsider when investing in the electricity sector. The regulations were introduced with the aim offostering the development of the domestic Indonesian industry. The electricity sector is subject to theseregulations. Local procurement ratios come into effect above a certain threshold value of materialsprocured. These rules apply even to ultra-supercritical thermal power plants that require technicallysophisticated materials which are in reality difficult to procure locally in Indonesia, creating a situationwhere it is difficult to comply with regulations.

B. Governmentguarantees

1. Legislationregardinggovernmentguaranteesforpowerprojects

The legislation that governs government guarantees for power projects in Indonesia can be broadlydivided into those under the Electricity Law and those under the PPP Law.

In Indonesia, private-sector capital has been utilized in the electricity sector through the IPP format frombefore the advent of the PPP legal framework. The participation of private-sector capital in theelectricity business is recognized and specified under the Electricity Law that governs the sector. In thecontext of the Electricity Law, there is an institutional arrangement for government guarantees knownas BVGL (Business Viability Guarantee Letter). Even now, when the government guarantee mechanismhas been established through the PPP legislative arrangements, it is more common for the ElectricityLaw arrangements to be used for government guarantees in power projects.

In the context of the Electricity Law, PLN is designated as the party responsible for implementing PLN’spower developments under a presidential regulation (2010) for the FTP2 (Second Fast Track Program).

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This indicates that the Indonesian government will support viability of power projects developed by PLN.Under the presidential regulation, the finance minister is responsible for specifying exactly what“government support” means. Accordingly, under Finance Ministerial Regulation 173/2014, projectslisted under FTP2 will be granted BVGLs from the government of Indonesia through Ministry of Finance.Projects that are included as FTP2 projects are specified by a regulation from the Minister of Energy andMineral Resources12. The “viability guarantee” is a government guarantee covering the risk of PLN’sbankruptcy or withdrawal from a project in a PPA between a private-sector power generation companyand PLN. Guarantees regarding default payments depend on considerations specific to each project andapply to the preparation, construction and operating periods.

Government guarantees set out under Finance Ministerial Regulation 173/2014 were set to expire on 31December 2014, but reflecting delays in implementing FTP2, the deadline was extended to 31 December2019, so projects on the FTP2 least are still covered by government guarantees.

Meanwhile, in the context of the PPP Law, following a Presidential Regulation regarding PPPs in 2005,the Indonesia Infrastructure Guarantee Fund (IIGF) was established in 2010 and the procedures forapplying for government guarantees from IIGF were specified. According to the PDP law, projects in thePPP Book issued by BAPPENAS (Badan Perencanaan Pembangunan Nasional, the National DevelopmentPlanning Agency) with the approval of the finance minister may have government guarantees. A projectmust be listed in the PPP book to apply for a guarantee from the IIGF.

The PPP Law stipulates that the government may provide government guarantees to PPP projects. It alsostipulates that the minister responsible for finances may specify standards and procedures regarding theprovision of government guarantees. The minister responsible (as well as head of organization and headof region) designates infrastructure projects that are to be provided in cooperation with the privatesector (PPP projects) and creates a candidate list for PPP projects and submits it to BAPPENAS, theNational Development Planning Agency. Based on the projects submitted from the relevant minister,BAPPENAS prepares a national government list of PPP projects, and the BAPPENAS minister decideswhich projects to list in the PPP book depending on the maturity of the project.

When requesting a guarantee from IIGF, those in charge of the project must submit an applicationbefore completing procurement procedures. Specific details of the guarantee (risk allocation plans,government support, and scope of guarantee coverage [type of risk, allocation and period]) and financialforecasts for the project and draft contracts must be submitted. Based on these proposals, IIGF isresponsible for ascertaining the project’s technical and financial feasibility, the details of agreementssetting out risk allocation, and whether the guarantee amount is appropriate for IIGF’s funding ability(Presidential Order 78/2010). Once a project has been listed in the PPP book, IIGF must decide whetherit is possible to provide a guarantee based on the results of its investigation.

12 MEMR Decree15/2010, 01/2012

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Figure 54. Overview of legal arrangements regarding government guarantees of power projects

Source:EY ShinNihon study team

The 2,000 MW coal-fired power plant project in central Java that Itochu and J-Power invested in is thefirst to receive a government guarantee from IIGF and the Finance Ministry under the PPP legalarrangements. Further, as of January 2016, Sumsel 9 and10, where bidding has been delayed, were alsoexpected to receive government guarantees under the PPP Law.

Meanwhile, projects listed under the Fast Track Program are covered by BVGL arrangements under theElectricity Law.

Figure 55. Projects with government guarantees

Source: EY ShinNihon LLC study team based on press reports

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2. StatusofgovernmentguaranteesandIndonesiangovernmentstanceJapanese companies often state that they are unable to raise project finance without governmentguarantees, so cannot participate in IPP projects in particular. The Indonesian government is notnecessarily always keen to provide government guarantees and in recent years there been several casesof power projects being structured without them. As an example, the Batang IPP won an order inFebruary 2014 for a USD730 million (roughly JPY86 billion) 600 MW coal-fired power plant project withno government guarantee. Financial institutions that participated in the deal were Malaysia’s ExportImport Bank, CIMB Bank, Citibank, and RHB Bank, with Herbin Electric (China) as the EPC contractor.

In January 2014 Finnvera, the Finnish Export Credit Agency (ECA), extended a guarantee over buyerscredit worth EUR160 million (roughly JPY20 billion) over 12 years to Standard Chartered Bank, againwithout a government guarantee. This project involved the ECA guaranteeing finance directly to PLNwith no government guarantee. The then PLN president, Nur Pamudji, commented that “thisdemonstrates that ECA has assessed PLN’s creditworthiness favorably”.13 While this is a small project, in2014 the Rajamandala hydropower project was financed by JBIC and Mizuho Bank with guaranteesworth USD 200 million (around JPY 24 billion) from MIGA and no Indonesian government guarantee.Outside of power projects, in September 2015 a Chinese consortium received an order to build a high-speed railway and did not seek a government guarantee. Among projects under the current 35 GWElectricity Program, it was clear at the time of accepting bids that there will be no governmentguarantees involved in the Jawa-7 power plant. In December 2015 China’s China Shenhua EnergyCompany received an approximately USD2 billion (JPY240 billion) order for the 2,000 MW Jawa-7 powerplant.

Neither the Indonesian government nor PLN is keen for government guarantees on power projects forseveral reasons. As it builds its track record, as shown above, PLN is becoming more confident of beingable to secure finance without government guarantees; obtaining government guarantees involvescomplicated, time-consuming procedures and negotiations with the finance ministry; and Indonesia’sfinances are strained so it wants to limit the generation of contingent liabilities. As long as the financeministry does not refuse, FTP2 projects are covered by government guarantees, but the generalconsensus is that subsequent projects are unlikely to have a government guarantee. The Indonesiangovernment appears to be keeping an eye on the market’s attitude to see to what extent ECAs andmarket financial institutions are willing to extend finance without government guarantees14.

In 2015, there was a Presidential Regulation (82/2015: issued 15 July) regarding central governmentguarantees for infrastructure finance that involve direct loans from international financial institutions tostate-owned enterprises as part of a new system. This enabled government guarantees for direct loansfrom international financial institutions to SOEs. The intent was to enable SOEs to procure low-costfunds.

The government guarantees cover funding to SOEs as well as state-owned infrastructure financecompanies who obtain finance that they provide to SOEs. In this case, the credit extended to the

13 PLN HP http://www.pln.co.id/eng/?p=309514 Based on a 2015 field survey

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relevant state-owned infrastructure finance companies is also subject to government guarantee. Theconditions for providing a government guarantee are as follows:

i. The relevant SOE must be 100% state operated or other SOEs with 100% of shares owned by thegovernment.

ii. The SOE must have sound finances and evaluated to have capacity to repay loansiii. Relevant infrastructure projects must be included in the government’s infrastructure project list

and be confirmed by a feasibility study to be economically and financially viableiv. However, conditions i and iii do not apply to SOEs that provide infrastructure as stipulated by

Presidential RegulationThe state-owned infrastructure finance companies must have sound finances and the loans must be toprocure funds for the SOEs’ small and medium infrastructure projects.When an SOE applies for a government guarantee after receiving a Statement of Interest from aninternational financial institution, the SOE submits an application to the finance minister. Upon receipt,the finance minister conducts an investigation and if a guarantee will be provided, the minister providesa Letter of Interest (guarantee document) to the lender (international financial institution). As ofSeptember, there had not yet been any applications by a state-owned enterprise. Furthermore, directloan funds from an ECA (such as Japan’s JBIC) were not covered by a government guarantee15. Weunderstand that detailed rules will be contained in a Ministry of Finance Regulation.

C. Landacquisition

1. HistoryandstatusoflawsregardinglandacquisitionIndonesia historically has seen many examples where land acquisition process has delayed theconstruction of power plants and transmission lines. This issue hindered foreign investment for a longtime, especially in the power sector. Under the Electricity Law, there was a large burden on private-sector companies, which were required to acquire the land for IPP projects.

Regulations regarding the acquisition of land for public infrastructure are set out in PresidentialRegulation 36/2005. Subsequently in 2006, regulations were revised in Presidential Regulation 65/2006(the so-called old Land Acquisition Law) but investor dissatisfaction regarding the unclear status ofoperational regulations remained.

Figure 56. Overview of land acquisition legal frameworkLaw GistPresidential Regulation36/2005

Presidential Regulation issued in 2005. Responsibility for land acquisitionwas unclear.

Presidential Regulation65/2006

Presidential Regulation issued in 2006. Amendment version of PresidentialRegulation 36/2005. Contained more specific land acquisition provisions (theso-called old Land Acquisition Law).


Presidential Regulation issued in 2010. Specified that land acquisition mustbe complete before bidding on PPP projects.


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Law for Acquisition of Landfor Development in the PublicInterest. (Regulation 2/2012)

New land acquisition law that came into force from January 2012. Clarifiedrules regarding land acquisition procedures.


Presidential Regulation issued in 2012. Specified implementation rules forthe new land acquisition law.

National Land AgencyRegulation 5/2012

Following Presidential Regulation 71, gave details of the implementationprocess under land acquisition regulations.


Presidential Regulation issued in 2015. Gave private companies the authorityto purchase land in place of government agencies (under an agreement).

National Land AgencyRegulation 6/2015

New regulations to alter prevailing technical guidelines regarding landacquisition.

Source: Dr. Ir. Bastary Pandji Indra,“PPP POLICY AND REGULATION IN INDONESIA” (2011)

Note: Based on laws posted on Indonesian government website athttp://indonesia.go.id/en/lpnk/badan-pertanahan-nasional

In 2012, in light of these issues, a new land acquisition law (formally known as Law for Acquisition ofLand for Development in the Public Interest) was created with the aim of making the land acquisitionframework simpler and more transparent. Subsequently, Presidential Regulation 71/2012 set outdetailed implementation processes. Through this, the organizations responsible for land acquisitionactivities were clarified. During the preparation period the local authorities (primarily governors) weremade responsible for land acquisition, with the national land agency responsible during the executionand handover stages.

Further, under the new regulations, responsibility for actually obtaining the land was transferred fromthe project developers to the government. However, the new land acquisition law stipulated that theold land acquisition law would apply until 31 December 2014 to IPP projects that had alreadycommenced acquiring land as of 7 August 2012, when the new law came into effect. Therefore, private-sector operators were not immediately relieved of the onerous task of obtaining land. The PPP Lawstipulates that land for infrastructure projects must be ready before bidding, which also affects entitiesinvolved in land acquisition in the electricity business.

Figure 51 below shows the main details of the new land acquisition law (Law 2/2012) andimplementation guidelines (Presidential Regulation 71/2012).

Figure 57. Land Acquisition Law (Law 2/2012) and implementation guidelines (Presidential Regulation71/2012)Key provisions OverviewMaximum periodfor landacquisition

Investors commented that regulations up until now had not clarified how long it would take toacquire land, and further that the time required to complete a land acquisition was too longunder the current arrangements.In response, in addition to clarifying the land acquisition process, the law specified the periodbetween receiving land acquisition documents and completion of registration. This made iteasier for investors to estimate how long it would take to complete the land acquisitionprocess.Land acquisition period (from receiving land acquisition plans to completing land registration

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· If there are no objections to plans: approximately 319 days (minimum)· If there are objections to plans: approximately 583 days (maximum)

When buildingconstruction canbegin onpurchased land

Even if a land registration certificate has not yet been issued, the law stipulates thatconstruction of buildings may be commenced on the acquired land once the land has beentransferred

Clarification ofland acquisitionprocess andorganizationsresponsible

Land acquisition process divided into four stages: planning, preparation, execution, anddelivery. Clarifying which organization is responsible for each process made it easier forinvestors to proceed with land acquisition plans.

Responsibilitiesof National LandAgency (BPN)

Responsibility for planning and preparation stages consolidated under BPN (National LandAgency). The law stipulated that BPN takes the initiative in executing the land acquisitionprocess, starting with negotiations between landowners and investors and final delivery toinvestors.

Clarifying landownership

Those eligible for compensation for land acquisition had been hitherto vague or limited. Thenew laws made land ownership clearer. (Indigenous people and owners of buildingsconstructed in the relevant area became eligible for compensation.)

Public appraisereligibility andappointment

Presidential Regulation enabled public appraisers licensed by the Ministry of Finance toappraise fair value of the land, in addition to real estate appraisers. Further, the regulationstipulated that the appraiser would be appointed through a competitive process.

Treatment if theland had beenused for loancollateral

The regulation stipulated that even if the land had been used as collateral for a loan, once thecompensation for land acquisition was received, land title would be extinguished. For exampleif the land title was transferred for a project in the public interest, under the regulations thebank would automatically lose its collection rights on the loan collateral. (However, under theregulations, additional provisions such as that the receipt of compensation money would be“conditional on approval of the lender” could be incorporated in the loan contract.)

Small lot landpurchases

For purchases under 1 ha in size, the regulations permit the direct purchase of the land fromthe landowner through a sale and purchase agreement or other mechanism. However, in caseswhere the landowners refused to sell the land it was not clear whether compulsory acquisitionprocesses would apply.

Land purchasesby state-ownedenterprises

SOEs that have special agreements (“special assignments”) with the government werepermitted to acquire land on the government’s behalf. However, the regulations did not definewhat was meant by “special assignment” and specifically what sort of land acquisition relevantSOEs would be involved in or what the implementation guidelines would be. In particular, forpower projects, the regulations were unclear as to whether PLN would be able to acquire landin cooperation with private-sector operators on behalf of the government.

Source: Based on “Law No. 2 of 2012 on Land Acquisition for Public Interest Development”,Hadiputranto, Hadinoto & Partners (2012) “Implementing Regulation of New Land Acquisition LawFinally Issued”

2. RolesandproceduresforrelatedorganizationsThe establishment of the new land acquisition law meant that the government’s practicalresponsibilities in regard to power project land acquisitions were clarified. As the authority in charge,the National Land Agency was responsible for facilitating the basic land acquisition process. The samelaw also stipulated that SOEs with special assignment under an agreement with the government wereentitled to purchase land on the government’s behalf. However, the exact definition of “specialassignment” and detailed implementation guidelines for the purchase of land by SOEs was not specified,and it was not clear what authority PLN had in relation to acquiring land for power projects.

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The most important regulation regarding land acquisitions created in recent years is PresidentialRegulation 30/2015. Laws established prior to this stipulated the details of implementation regulationsfor land acquisition by PLN, but the 2015 law recognizes that if there was an agreement between aprivate-sector operator and a specific government organization including state owned enterprises, it hadthe authority to purchase land.

Figure below shows the main points of Presidential Regulation 30/2015.

Figure 58. Main provisions of Presidential Regulation 30/2015Key regulations GistPrivate-sector operatorsmay be included in landacquisition schemes

Previously, only specified government entities including SOEs were subject tothe Land Acquisition Law. Under the new regulations, if private-sector entitieshad agreements with a specific government entity, including SOEs, they wouldhave the authority to participate in land acquisition as part of a publicinfrastructure supply program

New funding model Previously, only the government was allowed to fund land acquisition. Specifiedgovernment entities excluding SOEs had to procure funds from the relevantstate or regional budgets. SOEs meanwhile were able to use funds from theirown budgets.Under the new regulations, private-sector entities with an agreement withspecified government entities (excluding SOEs) could provide funding. Suchfunds have to be repaid after land acquisition by the relevant government entityfrom budget funds, with the relevant expenses calculated based on investmentreturn rates.

Application to existingprojects

Previously, the old 1960 Land Acquisition Law applied to infrastructure projectswhere more than 75% of the land had been acquired. If less than 75% of theland had been acquired, a request to apply the new Land Acquisition Law had tobe submitted and the process started over from scratch. Many investorscomplained that the difficulty resulting from partially remaining regulations wasunfair.The new regulations stipulated that not only new projects, but projects thatstarted before the new Land Acquisition Law came into effect (7 August 2012)were subject to the new Land Acquisition Law, including those where 75% of theland had been acquired.

Source: Based on Presidential Regulation No. 30 of 2015, Corrs Chambers Westgarth (2015),“INFRASTRUCTURE IN INDONESIA: WILL RECENT REFORMS MAKE THINGS EASIER?”

Figure below shows organizations that are involved in land acquisition for power projects. As mentioned,in the preparation phase, regional authorities (primarily state governors) have jurisdiction; during theplanning phase and in the execution and delivery phases, the National Land Agency has jurisdiction.

Figure 59. Organizations involved in land acquisition and their rolesRelevant organization RoleLocal authority (governor) Has jurisdiction over land use permits in each region. Receives land acquisition

plans from developers and has jurisdiction over the preparation stage of landacquisition.

National Land Agency(BPN)

Government organization reporting to the President that was established viaPresidential Regulation 10/2006. Aim is to execute policies related to land,

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including land development.PLN State-owned electricity enterprise. As the organization implementing electricity

policies, it coordinates between the National Land Agency and developers.

Further, jurisdiction and implementation regarding land acquisition in the four phases of planning,preparation, execution, and delivery are regulated under the new Land Acquisition Law.

Figure below shows the land acquisition process.

Figure 60. Land acquisition process

Source: Based on “Law No. 2 of 2012 on Land Acquisition for Public Interest Development”,Hadiputranto, Hadinoto, & Partners (2012) “Implementing Regulation of New Land Acquisition LawFinally Issued”

First, in the planning stage, the project operator (institution) creates a business plan, as well as a plan foracquiring the land needed to execute the plan. Next, the operator submits the land acquisition plan tothe local authority. The local authority puts together a preparation team engaged in detailed landacquisition planning and delivers modifications to the relevant region, conducts a preliminary survey,and holds public hearings. Once these have been completed, the land to be acquired is specified andannouncements made. This is the preparation phase.

After the local authority has drafted the land acquisition plan, this is submitted to the National LandAgency (BPN) and the contents are verified and amended as necessary. Next, an appraiser who willcalculate the amount of compensation is chosen. Then, negotiations must occur with the landownersregarding the amount and method of compensation. As mentioned previously, under the new landacquisition law and the subsequent Presidential Regulation, if there are certain agreements between

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private-sector operators and PLN, they may be permitted to acquire land on the government’s behalf.The regulations assume that on occasion there will be proactive land acquisition processes so thatprivate-sector operators can move swiftly to develop a project.

In these cases, the private-sector operator will have to advance a certain amount of funds forcompensation and other payments, but the regulations stipulate that these funds must be repaid fromthe budget of the related government entity following land acquisition.

If the amount of compensation for landowners is determined by a court ordered compromise, this willbe in the final delivery stage. In this case BPN has jurisdiction, and the transfer of land to the operatorand issuance and registration of land ownership certificates bring the series of processes to an end.

While land acquisition laws are better developed than previously, land acquisition is still not proceedingsmoothly in actuality. PLN, the entity responsible for implementing electricity policy, has a program tofacilitate land acquisition. Figure 55 below sets out details of this program.

Figure 61. PLN’s land acquisition programItem OverviewApplication of newLand Acquisition Law(2/2012) with clearimplementationguidelines

· Recommendation to government: proclaim priority provisions in the new LandAcquisition Law regarding implementation guidelines for other sectors such asforestry, transport, and state budgets

· Recommendation to government: simplify land acquisition process or proclaimregulations to improve the process (Presidential Regulations 71/2012, 40/2014,99/2014 and 30/2015)

Application of specialschemes

· In light of costs and benefits, carry out land acquisition through marketmechanisms with the involvement of business operators

· Make efficient use of real estate purchasing agents in the land acquisitionprocess

· Proactively offer landowners chance to participate in IPP projectsImprove coordinationamong variousinstitutions andstakeholders

· Running social awareness campaigns to further the understanding ofindigenous people and other stakeholders regarding new land acquisition

· Recommendation to government: proclaim regulations to establish publicorganizations that will take the initiative in order to accelerate land acquisitionand license approval for electricity programs

Coordinate legalrequirements andpractical operationsand simplify licensing

· Simplify licensing and coordinate central and regional government regulations(reducing number of permits, etc.) (e.g. environmental approvals and permitsto install transmission lines)

· Recommendation to government: draft regulations for early granting of licensesso licenses are finalized during project development

3. OperationoflegalsystemregardinglandacquisitionThe government is more heavily involved in land acquisition than previously. The burden on businessoperators is thus lessened. However, even after the land acquisition role has passed to the government,cases where the necessary land has been purchased by the bidding stage are scarce. In some cases,opposition from local residents after bids have been received has stymied progress in land acquisition sothe project cannot raise finance and thus does not materialize. When it takes more than one year to

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acquire the necessary licenses and obtain the land, EPC operators’ estimates of project costs expire. Theresulting alterations to initial estimates may mean the project cannot be financed.

For land acquisition to proceed smoothly, in some cases the IPP operators do not rely just on thegovernment or PLN and become involved themselves. We understand that while the land agency islegally responsible for negotiations, in actuality the final decision often rests with the state governor orother local government head.

The reason that residents are often stridently opposed to land purchases is that the benefits of buildingelectricity facilities are unclear while the damage is clearly apparent, such as the loss of land and declinein collateral values, so in some circumstances it is hard to reach an agreement. On occasion, in additionto compensation payments, there are measures to contribute to the region such as the provision ofmicro-finance or job placements.

One project that has gathered a lot of attention regarding land acquisition is the Batang coal-fired powerplant in central Java that J-Power and Itochu have invested in. The main points are summarized below.

Case study: land acquisition for central Java Batang coal-fired power plant

Consortium of J-Power and Itochu (PT Bhimasena Power Indonesia) to develop a large-scalecoal-fired power plant with two 1,000 MW units.

After operators selected in 2011, development began from 2012. Total project cost forecast atroughly JPY400 billion.

Project required the acquisition of a total of 226 ha of land in three sections in the Batangregion.

Land acquisition encountering difficulties due to an opposition campaign from local residentswho fear negative impact on their livelihoods from environmental damage and impact onfarmlands and fishing grounds.

Startup was initially scheduled for 2016 but since development started in 2012, constructionstart has been delayed. In July 2014 the operators declared force majeure due to inability tocomplete land purchase.

On 30 June 2014, the Central Java Governor issued an administrative order approving PLN’scompulsory acquisition of a total of 12.51 ha of land that the landowners were refusing to sell.This gives PLN the power to legally evict the local residents.

On August 28, 2015, President Joko visited the project land and declared the start ofconstruction. Under his firm initiative, the purchasing process has speeded up, but as of January2016 the government is still in the process of acquiring the land for the power plant.

Source: based on various press reports

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This project was promoted under the PPP Law and is to be Indonesia’s first ultra-supercritical coal-firedpower plant. The Indonesian government is aggressively supporting the land acquisition, recently inparticular.

It is desirable for the government to spearhead the land acquisition processes. It is easier for investorsto bid if the land purchase has already been completed. As seen in several projects already, investors areattracted when the Indonesian government completes the land acquisition process ahead of time.

Also, one idea is to introduce incentives for the local community when constructing power plants orinstalling transmission lines to counter opposition from local residents. For example, Japan (under the“three electric power law grants”) provides funds to local governments in return for having power plantsin the region and has fixed asset tax schemes. These are examples of such initiatives.

A simple example of the application of grants from the three electric power laws is the case ofHigashidori village in Aomori Prefecture.

Case study: Higashidori village

Higashidori is a village facing the Pacific Ocean and the Tsugaru Strait in the north-east of the ShimokitaPeninsula. Population, 6,812 (May 1, 2015 estimate); area 295.27 km².

The village has industries such as fishing, cement, and mining but is extremely reliant on the energyindustry based on a nuclear power plant. When the village was established, there were several smallhamlets scattered here and there, no defined town center, and no roads to speak of, so the town hallwas located in neighboring Tanabu Village (became Tanabu-Cho in 1988, currently Mutsu City; prior to1988, there was no town hall in the village).

The funds for the construction of the town hall and community center came mainly from three electricpower law system grants to attract the Higashidori nuclear power plant.

The nuclear fuel taxes paid by Japan Nuclear Fuel to Aomori Prefecture reached roughly JPY15bn (fiscal2010), accounting for more than 10% of the prefecture’s tax revenue. The company is also payingsubsidies to the Tsugaru district for urban revitalization, whose electricity industry does not have anynuclear power facilities.

The development of these regions could not have occurred without grants from attracting power plantswhich have played a major contribution in fostering their economies.

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D. Localcontentregulations

1. OverviewofrelevantlawsIndonesia has local content regulations that mandate local procurement with the aim of fosteringindustry development.

Indonesia’s Ministry of Industry has issued a Ministerial Regulation mandating that electricityinfrastructure operators engaged in public infrastructure businesses who receive grants from thenational or regional government budgets, or finance or assistance from overseas countries, mustprocure goods and services from Indonesia (Regulation 48/M-IND/PER/4/2010, in force from 19 April2010). Electricity infrastructure as referred to herein includes generators, electricity transmissionsystems, and distribution networks. The TKDN (Tingkat Komponen Dalam Negeri: level of domesticcomponents) specifies the proportion of local goods and services that must be used for each powerinfrastructure project and varies depending on the type of project. Specifically there are the following sixtypes of power infrastructure project: 1) coal-fired thermal power plants; 2) hydropower plants; 3)geothermal power plants; 4) gas-fired thermal power plants; 5) solar power plants; and 6) powergeneration and distribution networks16. TKDNs are stipulated for projects by type in chapter 2 of theministerial regulation.

In 2012 “Guidelines related to using domestic products in electric power infrastructure development”(Regulation 54/M-IND/PER/3/2012) was issued. This regulation stipulated procurement ratios byproduct, and punishments are clearly stipulated for failure to meet regulations including fines orplacement on a blacklist.

Figure 62. Overview of local content guidelines for electricity infrastructure developmentsRegulation DetailsDCL: Level ofDomesticComponent

Examples of key products Products Services Products &services

Coal-fired power plants > 600 MW 36.10% 71.33% 38.21%Gas combined power plants > 300 MW 25.63% 71.53% 30.22%275 kV/500 kV transmission lines 68.23 % 100% 74.59%

Fines Fines equivalent to 10% of contract value levied (maximum for failure to meet 5%)Failure to haveover 5% localcontent

Registration on blacklist (until project completed)

Source: No. 54/M-IND/PER/3/2012

For example, for a coal-fired thermal plant bigger than 600 MW, there is an overall 38.21% local contentrequirement, with fines levied for every 0.01% shortfall of the threshold. The high 30% range is difficultto achieve given Indonesia’s current product availability and pricing. This is a major barrier to theparticipation of Japanese and other overseas companies.

16 Source: Japan Machinery Center for Trade and Investment (2014)

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Figure 63. Examples of Indonesia’s local content goods/services regulationsYear enacted Law number Details2010 No.48/M-IND/PER/4/2010 2010 Ministry of Industry Regulation. Electricity

infrastructure operators required to use Indonesianproducts and services.

2012 No.54/M-IND/PER/3/2012 2012 Ministry of Industry Regulation. Stipulated specificfigures for local content ratios and fines related to 2010local content regulations.

2014 No.02/M-IND/PER/1/2014 2014 Ministry of Industry Regulation. Stipulated increaseduse of Indonesian products and services by thegovernment.

Source: based on 2014 survey by Japan Machinery Center for Trade and Investment

2. RelevantentitiesandtheirrolesLocal content regulations in the electricity industry are regulations from the Ministry of Industry. TheIndonesia Investment Coordinating Board has jurisdiction over implementing the regulations, but interms of discussions regarding local content in power projects, PLN, which has jurisdiction over ourprocurement, is the contract entity.

Figure 64. Local content regulations: Relevant entitiesRelevant agency RoleMinistry of Industry Issues regulations regarding local content regulations in power industryBKPM;Indonesia InvestmentCoordinating Board

Government agency involved in investment approvals and consultation (excludingthe oil, gas and finance sectors). Under regulations from the Ministry of Industry,has jurisdiction over implementing local content regulations in the power industry.

PLN In line with regulations from the Ministry of Industry, procures electric power-related materials.

3. OperationalissuesDomestic content ratios under the regulations are indeed high considering the products and pricesavailable to procure currently in Indonesia; they are generally unattainable. The denominator is the totalvalue of the EPC contract, so calculating using the value of the limited amount of locally procured goodsas the numerator cannot help but result in an insignificant percentage.

Further, there are also detailed regulations as to what constitutes local procurement in terms ofmaterials and investment ratios, which makes for a complicated system. In these circumstances, somecompanies are calling for a simple system that reflects the actual situation17.

Local content regulations were introduced to foster the development of Indonesian industry, butapplying them to sophisticated technological materials such as those used in ultra-supercritical thermalpower plants, where local procurement is difficult to actually implement, leads to questionable sideeffects. Meanwhile, for relatively simple construction materials such as balance of plant (BOP)


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equipment, the insistence on fostering local industries and working to boost local content has somemerit as an argument. However, no matter how much BOP equipment is procured domestically it willonly account for a limited proportion of the entire procurement amount and it is very difficult for powerprojects to meet the local content regulations the Indonesian government sets, according to somecompanies.

IV. WorkshopsinIndonesiaIn this research project, two workshops were held in Jakarta co-organized by Indonesia and Japan

government agencies, to discuss on power sector development in Indonesia.

A. TheFirstWorkshopThe first workshop titled “Indonesia-Japan Workshop on Power Sector Development” was held on

10th December 2015 at Gran Melia Hotel, Jakarta. This workshop was co-organized by the Ministry ofEnergy and Mineral Resources of Indonesia and the Ministry of Economy, Trade and Industry of Japan.We welcomed more than 50 participants including the guests from the Ministry of Energy and MineralResources, PLN、BAPPENAS、BKPM、Ministry of Economy, Trade and Industry and other Japanesegovernment organizations and Private companies. This workshop discussed on the power developmentplan in Indonesia as well as the expectations from Japan to Indonesia.

Figure 65. Programme of the first workshop

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Figure 66. Photos of the first workshop

B. TheSecondWorkshopThe second workshop was held on 10th February 2016 at Gran Melia Jakarta. We had more than 75

participants from the organizations including MEMR, PLN, MOF, BAPPENAS and from Japan. Thisworkshop consisted of two sessions; finance and technical solutions. Presentations included subsidyreform, government guarantee, realization of the transmission projects and possibility of introducingefficient generating equipment. In the Q&A and discussion at the venue, discussions were made onpower sector privatization, subsidy reform and electricity tariff increase and necessity of strengtheningtransmission system in Indonesia.

Figure 67. Programme of the second workshop

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Figure 68. Photos of the second workshop

V. ConclusionReflecting recent global economic developments, the Indonesian economy is slowing down, but onaverage it has grown at a sustained rapid pace over the past several years. There have been twodomestic demand growth drivers of the economy: capital investment and consumption.

In the electricity sector government has produced the 35 GW Electricity Project and there are proactivesteps such as subsidy reform to reduce the fiscal burden. The 35 GW Electricity Project has extremelyambitious targets. If the plan is implemented to schedule, electricity supply capacity is forecast to bemore than adequate.

Subsidy reform involves reducing the burden on the public purse from subsidy expenditures with theaim of increasing investment in social infrastructure. At the same time it aims to maintain and bolsterthe fiscal strength of the state-owned electricity company PLN, which necessitates an appropriateincrease in power tariffs. To assure the long-run soundness of PLN’s finances, it is essential to attract IPPoperators and raise power tariffs while gaining the understanding of the populace.

Current subsidy reform initiatives by the Indonesian government—explanations to the people, having atariffs strategy, and lessening the impact on the low-income demographic—are largely consistent withsuccess stories in other countries. Recent falls in commodity prices have reduced inflationary pressuresso subsidy reform looks likely to succeed. Considering the rapid speed of the decline in oil prices, oneoption is to limit the pass-through of fuel cost declines in power tariffs and use that portion to reducesubsidies, to secure internal reserves, and enable PLN to allocate this toward high-quality powergeneration and transmission investments. With higher credibility of PLN, it can attract more credibleinvestors and it will enable appropriate realization of 35GW power development plan. On the contrary,rough and fast procurement of low quality infrastructure will lead to the delay in the plan realization.For attracting more credible investors, it may be important to secure transparent bidding process. Itcould be also discussed government support for establishing more firm finance structure may be neededwhen PLN credibility is in the stage of development.

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Introduction of highly efficient clean coal technology power plant equipment

While the Indonesian government has a policy of increasing the share of coal in power generation, thecountry said it would aggressively push for the introduction of clean coal technology (CCT) in view ofenvironmental considerations. To reduce electricity unit generating costs and adopt coal-fired powerplants, it is recommended that the country use highly efficient large-scale facilities. The introduction ofhighly efficient ultra-supercritical facilities would limit the burden on the environment and cut powersector costs, as well as enable electricity subsidies to be reduced.

In addition to highly efficient power generation technologies such as ultra-supercritical equipment,Japan has sophisticated technology such as desulfurization and smoke and soot removing equipment.Also, the country has an abundant track record of employing this equipment and technology both athome and abroad. If Indonesia were to incorporate desulfurization and smoke and soot removingequipment technology in its existing coal-fired power facilities, there is a possibility of Japaneseparticipation.

Also, Japan could provide its technology for integrated coal gasification combined cycle (IGCC) power,one of the country’s strengths. Indonesia has a strong desire to exploit the low-grade (subbituminous)coal produced domestically, and IGCC enables this, so is a technology that matches the country’s needs.

Therefore, Japan could contribute to the Indonesian electricity sector in the fields of highly efficientcoal-fired power plant equipment and environmental equipment.

Further, if these power generation facilities were introduced, it is possible that official support fundingfrom the Japanese government could be applied. This provides a useful option for Indonesia from theviewpoint of being able to secure low-interest, creditworthy funding sources. Currently, internationalfinancial institutions such as the World Bank and the Asian Development Bank do not support coal-firedpower so Japan could potentially play a major role by supporting with its public monies.

Introduction of highly efficient transmission lines

Indonesia has a long, narrow, east-west geography, with economic activity concentrated in Jakarta.Therefore, transmission lines from the power source to demand centers are lengthy, resulting in largetransmission losses. The introduction of high-voltage, high-capacity efficient transmission lines wouldreduce transmission losses and enable effective use of capacity with the result that PLN and theIndonesian government’s finances would improve. Further, rural electrification is an important issue forthe Joko administration, which is likely to proceed with installing electricity transmission anddistribution networks in the countryside.

Japan has sophisticated technology for low-loss transmission lines and a long history of installing themdomestically, so could cooperate in the area of transmission lines. Further, Japanese public fundingassistance could be employed to fund some of the huge costs involved in installing transmission lines.

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Introducing variable-speed pumped storage technology

Indonesia has plans to introduce coal-fired power on a large scale, but this has a weakness: inability tochange output capacity over short frames. Hydropower has a strong advantage that could compensatefor this shortcoming, followed by combined cycle (C/C) and gas turbine (GT) power plants fueled by gasor diesel. We propose introducing hydropower into the Indonesian electricity system, specificallyvariable-speed pumped storage technology, which can modulate frequencies during pumping. Japan hasa track record of installation and operation of variable-speed pumped storage technology so could assistwith its adoption.

Laying underground transmission lines

It would be desirable to supply power from a number of directions to Jakarta to boost supply reliabilityto the central Jakarta district, and this is planned under RUPTL. However, Jakarta has already developedas a major metropolitan area, and it is difficult to install new overhead transmission lines, so there is ahigh probability that underground transmission lines will be used. Carrying out installation work at thesame time as work on Jakarta’s MRT would help defray civil engineering costs. In Japan there arecompanies with experience in other countries installing underground transmission lines that run parallelto associated infrastructure. They could potentially help in the installation of underground transmissionlines in the future.

Financial support

Japan could provide financial support via tools such as ODA or yen loans, as well as direct loans to PLN.Indonesia has established a mechanism whereby direct loans to PLN from international institutions aregovernment guaranteed. Utilizing the system in future could be a useful tool in developing electricityinfrastructure.

Also, under current conditions when government guarantees are not actively utilized, there is somebenefit from supporting investment from private sector companies in riskier projects. If JBIC and otherpublic-sector financial institutions are able to provide insurance or finance to IPP projects were PLN isthe off-taker without guarantees from the Indonesian government, this could encourage the entry of IPPoperators to invest in the projects, leading to the provision of high quality infrastructure to Indonesia.

The improvement in the Indonesian power sector investment environment should attract qualityoperators, leading to expanding investment in manufacturing and other industries and job creation. Toremove the bottlenecks in the Indonesian electricity infrastructure, Japan has a major role to play byfurther building on the good relationships constructed over a long period of time while keeping in mindlessons from the high-growth period.

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