Indonesian Government Agrees to Scale Back 2011 Electricity Rate Hike

Ririn Radiawati Kusuma | September 23, 2010
A worker tending to Jakarta’s labyrinth of power lines. The tangled cables are emblematic of state electricity provider PLN, which lawmakers say is inefficient. Despite the dire need to improve power infrastructure, the 2011 state budget may force PLN to slash costs. (JG Photo/Afriadi Hikmal) A worker tending to Jakarta’s labyrinth of power lines. The tangled cables are emblematic of state electricity provider PLN, which lawmakers say is inefficient. Despite the dire need to improve power infrastructure, the 2011 state budget may force PLN to slash costs. (JG Photo/Afriadi Hikmal)

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Under pressure from lawmakers, the government on Thursday offered to reduce next year’s proposed electricity rate hike from 15 percent to 5.4 percent. The smaller increase would force power provider Perusahaan Listrik Negara to make steep cuts to its operating costs.

Members of the House of Representatives Commission VII, which oversees energy issues, argued that it was not necessary to raise rates. In a compromise, the government offered the smaller cut, but no final agreement was reached.

But even with an abbreviated rate hike, the size of the proposed electricity subsidy in the 2011 draft budget would be maintained at Rp 41 trillion ($4.6 billion), a 25 percent decrease from the 2010 subsidy.

The reduction would force PLN to cut costs by Rp 8.1 trillion, according to Energy Minister Darwin Zahedy Saleh.

Darwin said the state utility would be forced to cut costs by converting diesel-powered generating plants to use cheaper natural gas and trimming maintenance, human resources and administrative budgets.

PLN had said it would need a Rp 53 trillion subsidy to meet its current operating budget.

The government is eager to reduce fuel and electricity subsidies to relieve their burden on the state budget — the subsidies total Rp 111.9 trillion this year. In March, the government said it planned to eliminate all fuel and electricity subsidies by 2014.

On Wednesday, however, the government and House agreed to raise the quota on subsidized fuel for public consumption next year, while keeping the value of the subsidy unchanged.

The International Monetary Fund last week warned that the government must eliminate energy subsidies in order to sustain high economic growth, especially given an expected decline in national oil production revenue in coming years.

However, the House has been less eager to cut the subsidies, and lawmakers have frequently called on PLN to cut costs instead.

With a few exceptions, the utility has operated at a loss for years because the government forces it to sell electricity below generating costs.

PLN’s losses have hampered development of the country’s power grid and resulted in frequent blackouts.

Many lawmakers have criticized the plan to raise power rates, saying PLN should instead improve efficiency and complete long-delayed infrastructure to add 10,000 megawatts of generating capacity through its fast-track program.

According to Darwin, PLN said it would be able to slash costs by up to Rp 2.53 trillion a year when three gas fields in Sumatra begin production in 2011, providing additional fuel to power plants.

It can also save up to Rp 2.3 trillion once the floating storage receiving terminal to be operated by Pertamina,

Perusahaan Gas Negara and Nusantara Regas opens in West Java.

The terminal will make it easier for power plants to receive fuel.

Electricity analyst Fabby Tumiwa said converting power plants from diesel to gas should yield big savings for PLN, and said such savings were within reach.

“The government has made the right move. When PLN becomes more efficient, the subsidy will no longer be needed,” Fabby said.

Meanwhile, Sustainable Development Indonesia analyst Drajad Wibowo said PLN remained too inefficient, and that it was unprepared for subsidy cuts.

He said PLN would be forced to lower maintenance costs, in turn increasing the likelihood of outages and accidents.

“It’s just like suicide,” he said

http://www.thejakartaglobe.com/business/indonesian-government-agrees-to-scale-back-2011-electricity-rate-hike/397760