Lights Out in Indonesia

After years of chronic underinvestment in energy infrastructure, Indonesia is heading the list of Asian countries struggling to keep its lights on. It has been forced to schedule a series of rolling blackouts across the capital city of Jakarta and the industrial zone of Tangerang over the next two weeks as one of the main gas suppliers for state-owned electricity company PLN shuts down for routine maintenance.

Across the region, countries are struggling to keep up with soaring energy demand and skyrocketing prices. But Indonesia has been hit harder than most. It has too few power stations, many of which are poorly maintained. Coupled with the soaring price of coal, oil and gas, it has left the country exposed and looking for a quick fix.

Last week the government announced a new rule forcing manufacturers in Java and Bali to shift two working days each month to a Saturday and Sunday. The move is designed to take the pressure off during peak electricity periods. Any company that doesn’t comply will have its power temporarily cut off.

The government also wants coal companies to start paying their 13.5 percent royalty with coal, not cash to make sure it is going straight into PLN’s power plants and isn’t lost or pilfered through the bureaucratic process.

Critics have described the latest policy announcements as “Band-aid” solutions to a very serious problem. Companies complain that their working weeks will be turned upside down and costs will go up because of the disruptions to production and distribution and the higher wages for people to work on the weekend.

“Shifting work hours to a Saturday or a Sunday won’t solve anything,” says Umar Juoro, an economist at the Center for Information and Development Studies in Jakarta . “You can’t solve this problem with administrative changes, you need to address the real issues.”

Indonesia ’s struggle to meet the electricity demands of an economy growing at more than 6 percent, faced with a quadrupling of coal prices and a doubling of oil prices in the past year, is not unique in the region. Electricity consumption is up more than 12 percent so far this year in China , where since 2000 consumption has increased 60 percent. Beijing is keeping up, as generation has also increased 60 per cent, according to the country’s Energy Information Administration. Unlike Indonesia , there is even talk of a supply glut sometime in the next few years, prompting the government to slow its approvals for new power stations.

It’s a different story in India , where poor management and inadequate funding for the state electricity boards, which control distribution and own most of the generating capacity, have made power outages common. In recent years, the government has tried to ease foreign investment restrictions in the power sector but most new investments have been financed by domestic capital or with the help of institutions like the Asian Development Bank. And the government is struggling to win support at home for a landmark nuclear deal with the US that would allow it to import technology and material to establish a nuclear power industry.

Vietnam is also desperately trying to add capacity to catch up with growing energy demands. The government has plans to build 74 new power stations, quadrupling its 2004 capacity by 2020.

Indonesia also has an ambitious program to add 10,000 megawatts of capacity by 2010, an increase of more than 40 percent. It’s the interim period that has people worried. For years companies operating in Indonesia and the 53 percent of households which actually have access to electricity have put up with regular brownouts and blackouts across the country, caused by a lack of new and well-maintained power stations. But the problem has been exacerbated in recent months by the rising cost of oil, coal and gas.

The country’s new central banker, Boediono, said last week that underinvestment in infrastructure, particularly electricity supply, is the biggest threat to economic growth.

“If we can manage over the next year or so I think we can manage the electricity crisis in such a way that minimizes the costs for industry and the economy in general,” he said in one of his first major speeches since taking on the job seven weeks ago.

But the ‘wait-and-see’ approach has businesses and economists concerned. Manufacturing is still the biggest contributor to the economy, accounting for just less than 30 per cent of gross domestic product.

“Companies looking for new investments or deciding whether to expand here will be put off by this problem,” says Juoro.

Not to mention the threat of withdrawal from companies already operating in the country.

Japanese companies, backed by the embassy, earlier this month sent a letter to the government and PLN complaining about financial losses related to recent blackouts and demanding something be done.

Amaya Hiroyuki, secretary general of the Jakarta Japan Club, said its more than 400 corporate members were “very nervous about this situation” and some were threatening to withdraw their investment from the country.

“This is a very big problem for our members,” he said. “Electricity supply needs to be improved.”

The local business group for petrochemical companies said its members would delay about US$1.5 billion worth of investment slated for this year until the government could give them some certainty of power supply.

“Since the economic crisis, there has been no expansion or improvement of energy infrastructure,” says Chatib Basri, an economist at the University of Indonesia

“This wasn’t a problem for the first three years after the crisis because demand was still weak but now that economic growth has picked up, demand is strong but it is not supported by adequate electricity infrastructure.”

Indonesia ’s government did try to break open PLN’s monopoly by introducing a new law in 2002 but the constitutional court annulled it two years later. So the country is left with the 1985 electricity law, under which the government is responsible for providing electricity across the country, via PLN. However, that law also allows for PLN to partner with other entities, including the private sector, where it is unable to provide the necessary services on its own. Consumers can also generate their own electricity if PLN is unable to and sell any excess production back to the state-owned firm.

Juoro says the government should provide incentives for the private sector to build their own generators on industrial estates.

Indonesia ‘s energy mix for the production of electricity is about 40 percent coal, 26 percent oil, 13 percent hydroelectric , 11 percent natural gas and just under 9 percent geothermal.