Moody's Investors Service has assigned a Baa2 rating to the proposed senior unsecured medium term notes (MTN) to be issued by state-owned power producer, PT Perusahaan Listrik Negara (PLN), it said today (06/22) - Photo by the Company

JAKARTA (TheInsiderStories) – The Ministry of Energy and Mineral Resources (MEMR), together with coal producers and state-owned electricity company PT Perusahaan Listrik Negara (PLN) is currently discussing ways to set the price of coal sold on the domestic market, under the so-called ‘Domestic Market Obligation’ (DMO).

The discussion was triggered by the coal price hike which has increased PLN’s expenses. The reason is that PLN buys coal from coal producers based on market price; however, PLN is prohibited from raising the tariff of electricity sold to consumers. As a result, PLN suffers an extra burden anytime the coal price surges – as is happening at the present.

PLN earlier requested the Energy and Mineral Resources Ministry to set the price of coal purchased by PLN under the domestic market obligation. However, the ministry is yet to make a decision, pending results of discussions with all stakeholders, including coal producers.

In 2017, Indonesia produced 461 million tons of coal. Of this output, 97 million tons were supplied to the domestic market – in this case to PLN to fuel its power generation plants – under the DMO scheme. The remaining 364 million tons were exported.

As for this year, the government set a minimum DMO of 25 per cent of total production, which is estimated to reach 385 million tons.

The President Director of PT Adaro Energy Tbk (IDX: ADRO) Garibaldi Thohir, said after attending a meeting at the Energy and Mineral Resources Ministry office on Monday (5/2) that the three parties – PLN, coal producers and the government – have agreed to search for mutually agreeable solutions. This is however not easy, because coal price is set based on many factors, including royalties, taxes, coal producer capacity and others.

Garibaldi Boy Thohir expressed the hope that there will be a long-term solution for the coal price under the DMO scheme, one which benefits the State and will also take into account the long-term interest of the coal producers.

In principle, he said, the coal producers support the government efforts to set coal price, however, the government should also consider the continuity of the coal industry going forward.

Meanwhile, PLN has assumed coal price at average of US$63 per ton for 2017, however, the coal price has surged to over US$80 per ton.

PLN Director for Strategic Procurement Supangkat Iwan Santoso said the surge of coal price has added extra expenses of Rp14 trillion to PLN. However, the rise of coal price purchased by PLN to generate its coal-fired power plants, could not be passed on to consumers as the electricity tariff is set by the government.

The rise of coal price has significant impact on PLN since around 60 per cent of PLN’s power plants at present are powered by coal. PLN still relies on coal as the electricity cost of coal power plants is cheaper at Rp650 per kWh, far lower than diesel power plant’s electricity costs at 1,600 per kWh.

In the nine months to September, 2017, PLN recorded net profit of Rp3.05 trillion, plunged by 72 per cent compared to Rp10.97 trillion in the same period last year. Its revenues in the period reached RP187.88 trillion, up from Rp157.39 trillion in the same period last year.

Its expenses however, increased by 11.75 per cent to Rp200.3 trillion, driven by an increase of the resources purchase, including coal, to Rp53.5 trillion and other expenses at Rp5.8 trillion, up 24.9 per cent from a year earlier.