Top Indonesian politicians and officials led by Vice President Boediono, seem to have finally discovered that there is a link between energy pricing and energy shortages and they appear to be making a renewed commitment to rational pricing.

Indonesia is short of gas because investors have been reluctant to bring badly needed investment capital to the industry. Information is sparse and often poor for bidders seeking to develop oil and gas fields. There are also political and economic uncertainties over gas pricing policy, as when the government suddenly imposes a domestic obligation on a specific gas field. The government has lacked commitment so far to building downstream infrastructure, preventing gas from being delivered to domestic customers.

This can even result in the government suddenly insisting that gas from the long-stalled Donggi-Senoro gas field in central Sulawesi be for reserved 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.

"The gas price must be market driven and must not be limited by producers providing indirect subsidies to end users," Boediono told the Indonesian Petroleum Association in Jakarta last week. Ira Miriawati, head of oil and gas utilization in upstream oil and gas regulator BPMigas said "The current domestic gas 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," Boediono confirmed, "All gas prices must follow the economical prices."

On the same day that Boediono spoke out on gas pricing to the oil and gas industry, the new PLN president director Dahlan Iskan, fresh from his 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, 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 the potential scope for price variation and amendment in the light of specific conditions was 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, 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 pricing 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.

"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," said John Respati, editor of the new clean and renewable monthly energy review, RESPECTS, to be launched in Indonesia in June.

Terry Lacey is a development economist who writes from Jakarta.