Indonesia limps toward power generation target

President Joko “Jokowi” Widodo’s target to install 35,000MW of new power generation capacity by 2019 has created aggressive competition for projects in Indonesia. But progress has been slowed thanks to the limitations of state utility PLN.

One of President Jokowi’s key election pledges in 2014 was to solve Indonesia’s chronic electricity shortage. Once elected, He duly set an ambitious target to build 35,000MW of new power generation capacity in five years. The capacity expansion was part of Jokowi’s policy to raise Indonesia’s electrification rate from 87.35% to 97.35% by 2019 and help support economic growth of over 5% a year.

“35GW is a demand that is based on a projection and the target was set based on economic growth projections in 2014” that have since slowed, Agung Wicksono, vice-chairman of Indonesia’s Ministry of Energy and Mineral Resources told IJGlobal on the side-lines of the second annual Indonesia Infrastructure conference in Jakarta on May 24.

Two years later, that target appears a long way off. Only 10,942MW, or 30% of the target, has found sponsors and completed power purchase agreements. Even less, or 3,742MW of capacity, has moved to the construction stage, according to the latest data from the Energy and Mineral Resources Ministry.

The failure to get anywhere near the 35,000MW target has prompted some finger pointing in Jakarta after President Widodo recently ordered the ministry to review why progress has been so slow.

Finger pointing

The chief culprit is state-owned electricity company and procurement agency PLN, according to many attendants at IJGlobal’s second annual Indonesia Infrastructure conference, held this week.

The state utility, in fairness, has been given a momentous task: build 17,000MW of new capacity itself and tender out another 18,000MW of capacity to the private sector. In light of PLN’s failure to execute the plan, the government is looking to reduce the share of the utility to around 10,000MW, although PLN will still be in charge of running the tenders.

Several issues have arisen with PLN’s procurement process – one is the 10% upfront payment imposed on bidders, at pain of disqualification, by the banks running the tenders. The new rule has already scuppered one project: in mid-May, the 2x1000MW supercritical coal-fired power plant, commonly known as Java 5, in the Banten province of Java Island was cancelled.

“PLN’s position was that they want to ensure commitment but the 10% is wrong,” said Wicksono. The rule is under review, IJGlobal understands.

Another mooted change is how natural gas is sourced for the upcoming LNG-fired gas projects that are in the process of being tendered out, including the flagship $2 billion 1,600MW Java 1 LNG power plant. The government’s policy is to use as much of the gas produced in Indonesia as possible. “The government position is that gas supply will be provided by Tangguh LNG – we want to ensure that where there is domestic supply, we use it,” Wicksono said.

The bid submission deadline for Java 1 is in June, but the date is expected to be pushed back as bidders wait for clarification on how LNG will be supplied to the plant.

Under pressure

PLN may not be entirely to blame for the delays to procurement. It is under immense political pressure and is at least trying to execute what is turning out to be an overly ambitious and probably unattainable target.

In hindsight, the state utility may have simply been ill-equipped to deal with a flood of bidding from international investors. Several sponsors and advisers have argued that PLN lacks staff with the necessary technical, legal or financial experience to administer a tender process to international bidders. The lack of expertise has produced tender documents that need to be thoroughly reviewed and adjusted.

“No reasonable international investor can be expected to submit a bid based on the initial request for proposals document framework,” one sponsor told IJGlobal. Not only are the bidding documents not ready, but international investors and bankers also need time to adjust to shifting risk allocation profiles as well as the absence of the traditional government guarantee, said one international project banker.

Many participants in the tenders argue that the procurement process is moving in the right direction, if in fits and starts. And most remain committed to Indonesia and acknowledge that the 35,000MW target has got projects moving at a faster, if still albeit painfully erratic, pace. “Our South East Asia power independent power producer pipeline remains concentrated on Indonesia,” said another international project finance banker.


Asset Snapshot

Java-5 Coal Fired Plant (IPP) (2000MW)

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Transaction Snapshot

Java-5 Coal Fired Plant (IPP) (2000MW)

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