JAKARTA (TheInsiderStories) – Indonesia plans to keep electricity tariffs and fuel prices unchanged this year and the next by hiking subsidies, in a move aimed at maintaining the purchasing power of its citizens. Somehow, this decision is likely to hurt state-owned electricity firm PLN, which spearheads President Joko Widodo’s 35,000-megawatt capacity and power grid expansion project, has been under financial pressure.
President Joko Widodo who will run for the second Presidential race next year has won international praise and credit rating upgrades for the country after some fuel subsidies were discarded in 2015. In the last few years, some electricity subsidies have also been phased out.
The measures have saved Indonesia billions of dollars, which were then used to build infrastructure.
Indonesia’s economy has grown 5.07 per cent in 2017, its best pace in four years, but consumption – the biggest contributor to the economy – has remained sluggish at around 5 per cent from its pre-financial crisis era rate of 6 per cent.
“The president understands that the people’s purchasing power must be kept at its current level, if not increased,” Energy Minister Ignasius Jonan.
Indonesia has been home to some of the world’s largest subsidies for electricity use. Electricity prices have been set at low levels, with the government making transfers to Indonesia’s electricity utility, Perusahaan Listrik Negara (PLN), to cover its losses. In 2012, electricity subsidies cost the government US$10 billion.
In an ambitious reform program, since 2013 Indonesia has taken major strides to reduce this subsidy bill. The reforms have involved raising electricity prices to levels that reflect costs, with exemptions for customers with small electricity connections, including the poor. Subsidies for road transport fuels were also reduced.
Consumers should ideally face electricity prices that at least cover the costs of production. If electricity is sold at a below-cost price, consumers are likely to consume inefficiently.
Somehow, if the government decided to keep prices of subsidized electricity stable until the end of 2019, in a bid to maintain national purchasing power, PLN will likely be bleeding internally.
PLN is incapable of shouldering the additional cost price if it continues to buy coal at the current market price. The Indonesian benchmark price for coal is now $101.86 per metric ton, in February 2015 it was $50.92 per ton.
To tackle the issue of efficiency, the government plans to introduce a new electricity price formula, which will take into account the coal reference price (HBA), by March at the latest in an effort to ease the financial burden on state electricity firm PLN.
PLN previously said that rising coal prices had resulted in an increase of production costs, as around 57 per cent of the company’s generated power came from coal-fired power plants
At present, the Energy and Mineral Resources Ministry sets the electricity price formula for PLN’s non-subsidized customers by taking into account changes in the exchange rate between the US dollar and rupiah, Indonesian Crude Price and inflation.
Last year, Finance Minister Sri Mulyani warned Energy Minister Ignasius Jonan and State-Owned Enterprises Minister Rini Soemarno about PLN’s ailing financial performance in the past three years.
President Director of PLN, Sofyan Basir said the company has made some efforts to suppress the loss, including by shutting power plants that have high operational costs and by reducing coal transports from production areas.
PLN still needs the price to be capped, as coal-based power plants account for nearly 60 per cent of the national electricity supply.
The new arrangement may hit the coal industry, which has not yet fully recovered from the 2013-15 coal market crash.
However, the ministry plans to add HBA as a new component in the formula following the rapidly-increasing portion of coal-fired power plants in the country’s power generation.
As we acknowledged the issuance of the new formula might lead to an increase in electricity prices for PLN’s non-subsidized customers. However, such an action was needed to ease PLN’s burden.
Written by Elisa Valenta, email: email@example.com