Energy Prices Missing Link

Dr. Terry Lacey

Top Indonesian politicians and officials led by Vice President Boediono speaking at the 34th Annual Convention of the Indonesian Petroleum Association seem to have discovered a missing link between energy pricing and energy shortages.

Indonesia has severe electricity and gas shortages.

Vice President Boediono said in Jakarta at the IPA convention, “The gas price must be market driven and must not be limited by producers providing indirect subsidies to end users”. (The Jakarta Post, 19.05.10).

Ira Miriawati, head of oil and gas utilization in upstream oil and gas regulator BPMigas said “Current domestic as price is somewhere between $1.2 to $6 per MMBTU, while exported liquified natural gas (LNG) can fetch somewhere between $10 and $12”.

“One day”, confirmed Boediono, “All gas prices must follow the economical prices.”

Indonesia is short of gas because of hesitation by investors over the poor quality of information available when bidding to develop oil and gas fields, political and economic uncertainties over gas pricing policy when government suddenly imposes a domestic obligation on a specific gas-field and lack of downstream infrastructure so that gas cannot be delivered to domestic customers.

This can even result in the government suddenly insisting gas from a field like Donggi-Senoro must be for domestic users, thereby discouraging investors who had presumed international gas prices for exports, even though government has not even built the infrastructure needed to deliver the gas to domestic customers.

On the same day that Vice President Boediono spoke out on gas pricing to the oil and gas industry, new PLN president director Dahlan Iskan fresh from his media background and experience as an Independent Power Producer (IPP) confirmed he had learned that if an IPP is asked to sell power to the state power utility PLN at a price too low to cover its own operating costs, then it closes, causing blackouts. This happened at Tawaeli in Sulawesi.

When the government launched its first accelerated 10,000 MW power expansion program based on coal-fired power stations, then the associated Power Purchase Agreements (PPAs) offered prices and conditions such that many developers could not produce bankable proposals to finance their proposed power stations.

This generation of coal-fired PPAs set prices too low, and potential scope for price variation and amendment in the light of specific conditions were too limited. These PPAs were too inflexible to deal with price volatility on coal, logistics and lack of security of supply, reflecting weak pricing as well as underdevelopment of infrastructure.

PLN is reportedly attempting to renegotiate about 50 failed PPAs for coal-fired power stations rather than start the whole process of PPA allocation all over again.

Dahlan made it clear that in the case of the 2 X 15 MW Tawaeli power station that PLN now intends to renegotiate the PPA to arrive at a price more like US.8 cents per Kilowatt (kWh) rather than the US 4.50 cent price that closed down the power station.

He said PLN had been constrained by a ministerial decree fixing the price at $4.5 cents per kWh although the Jakarta Post said this constraint had been removed.

It is ludicrous that the economic price of power generated by PLN is between $11 and $12 cents per kWh and that the Indonesian Government refuses to allow PLN to charge $12 or $13 cents.

Instead PLN sells power at an average $6.5 cents. If you run a half-price electricity industry then you end up with half the electricity you need, struggling to install 2.5 Gigawatts (GW) of new power capacity a year when you need 5 GW.

John Respati, Editor of the new clean and renewable monthly energy review, RESPECTS, to be launched in Indonesia in June, commented “If the Indonesian government can move towards realistic energy pricing and then fix the rates for each technology and review them frequently, then developers should get these prices like Feed In Tariffs (FIT). Then renewable energy would be on an even playing field”.

Terry Lacey is a development economist who writes from Jakarta on modernization in the Muslim world, investment and trade relations with the EU and Islamic banking.

Digg This
Reddit This
Stumble Now!
Buzz This
Vote on DZone
Share on Facebook
Bookmark this on Delicious
Kick It on
Shout it
Share on LinkedIn
Bookmark this on Technorati
Post on Twitter
Google Buzz (aka. Google Reader)

Leave a Reply

Your email address will not be published. Required fields are marked *