ASSESSMENT OF THE ENERGY SECTOR

Transcription

1 Indonesia CPS Final Review Validation, Linked Document 6 ASSESSMENT OF THE ENERGY SECTOR A. Sector Background 1. There is widespread agreement that the limitations in basic physical infrastructure in the energy and transport sectors are key constraints to more rapid and inclusive growth in Indonesia. 1 In energy, Indonesia has abundant indigenous resources and is one of the leading exporters of thermal coal and liquefied natural gas. There is considerable potential for the expansion of new and renewable energy sources, particularly geothermal, hydro, and wind power. The recent official estimates (for 2012) suggest that the country s primary energy mix comprised oil (46.7%), coal (23.9%), natural gas (24.1%), and renewables (5.1%). 2 Concerns are growing that lack of energy will hold back economic growth unless there is a significant expansion of power generation and transmission capacity. The energy elasticity of gross domestic product is currently estimated at around 1.6; hence, a 5% annual growth of gross domestic product can be expected to trigger energy demand growth of about 8%, which is a little below the annual figure of 8.4% projected to 2022 in the current long-term development plan of the State Electricity Company (PLN). Given the country s income level, the power sector coverage is modest. Electrification coverage of the population was 81% in 2013 and, correspondingly, electricity use per capita is quite low. There is also uneven regional coverage, with quality of service and coverage poorer in parts of Eastern Indonesia. However, official coverage data are somewhat open to interpretation since a village can be classified as connected or electrified if there are any household connections, without regard to the proportion of village households connected. Furthermore, a minimum level of reliability of supply is not incorporated in the definition. 2. Responsibility for the governance and planning of the sector is complex and divided among a number of ministries and related bodies. The Ministry of Energy and Mineral Resources and its agencies are responsible for overall regulation, but state-owned enterprises such as the PLN and the State Oil and Natural Gas Mining Company (Pertamina) are managed and regulated by the Ministry of State Enterprises. The Ministry of Finance allocates funds to cover fuel and electricity subsidies to consumers and the Ministry of National Development Planning produces national plans with energy targets. Since the decentralization policy was introduced, local governments are responsible for issuing permits for infrastructure projects in their areas. 3. The challenges facing the sector are clear and remain those highlighted in the country partnership strategy (CPS), A substantial expansion of generation and strengthening of transmission and distribution capacity is required, with unofficial estimates suggesting a capacity shortfall of 20,000 30,000 megawatts (MW) over the next few years. Recent expansion has been dominated by coal-fired plants and if this continues it will counter the policy aim of significantly increasing the share of electricity generated by renewables. Financing is a serious issue from two angles. First, the rising cost of coal and oil imports for thermal plants has increased generation costs, and government policy has been to cushion consumers from the worst effects of this by a system of consumer subsidies. Although there have been recent moves to reduce these, the fuel subsidy in 2014 (including the electricity subsidy) was budgeted at 17% of the entire annual government budget. Second, funding for the investment costs of the expanding access and coverage is also a critical issue since the government budget can only cover a proportion of the cost, with the private sector expected to cover the rest. The Energy Sector White Paper 2014 estimates that total investment in the power sector of $100 billion is needed for , compared with a total allocation of government investment for all infrastructure of $119 billion. 1 See for example Asian Development Bank (ADB), International Labour Organization, and Islamic Development Bank Indonesia: Critical Development Constraints. Manila. 2 ADB Energy Sector White Paper. Manila. para. 7.

2 2 Linked Document 6 B. Sector Road Map 4. Policy for energy is governed by the revised National Energy Policy adopted in January This is expected to form the basis of the energy section of the National Medium Term Development Plan, President Joko Widodo signed Presidential Decree No. 2 on January 8, 2015 on the issuance of the development plan. 3 Broadly, the current National Energy Policy aims to (i) increase production of primary energy, (ii) increase use of indigenous resources (coal, gas, hydro) and to redirect coal and natural gas production away from exports, (iii) increase the role of new and renewable energy in the energy mix, (iv) increase accessibility and population coverage, (v) rationalize the fuel subsidy scheme, and (vi) improve energy efficiency. 5. Generation expansion since 2006 has involved indigenous coal, but there are also plans to develop clean coal technology and geothermal capacity. To support private investment through public private partnerships (PPPs), the price cap on purchases by the PLN was removed and additional funding sources are being sought to support geothermal exploration. A target electrification rate of 95% was set for The National Energy Policy 2014 sets a target for the energy mix by 2025 of 25% for oil, 22% for gas, 30% for coal, and 23% for new and renewable energy sources. The target for renewables is almost certainly unrealistic given that the current share in the primary energy mix was about 5% in The Asian Development Bank (ADB) sector strategy set out in the CPS, was to support improved infrastructure (including energy services) and climate change mitigation (a motivation for clean energy provision) on the grounds that these goals were aligned with two of the pillars of Strategy inclusive growth and environmental sustainability. The CPS also noted ADB s extensive experience of supporting the energy sector in Indonesia. Under the CPS, , ADB was to be involved in (i) a multitranche financing facility for geothermal exploration and generation; (ii) (iii) projects to improve transmission and distribution systems; and technical assistance support for development of renewables and carbon capture and storage technology, as well as policy advocacy and dialogue with the government in these areas. 7. Of these, (i) and (iii) were linked with the clean energy and climate change mitigation agenda and (ii) was rationalized to improve access in poorly served areas and fostering cross-regional ties, and at the same time boosting system efficiency. Private sector operations were to give priority to renewables in underserved areas of the country. C. Sector Portfolio Table 1: Country Partnership Strategy Loans: Planned and Actual CPS Planned CPS Delivered/Approved Comments Geothermal MFF 1 $90 million Dropped from CPS Geothermal MFF 2 $230 million Dropped from CPS West Kalimantan Power Grid West Kalimantan Power Grid Project is transmission line to Strengthening $50 million Strengthening $50 million allow low cost hydro-based 3 Sekretariat Kabinet Republik Indonesia Government Has Issued Medium Term Development Plan News Release. 15 January. 4 This is in terms of total primary energy supply; see footnote 2. 5 ADB Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank, Manila.

3 Assessment of the Energy Sector 3 CPS Planned CPS Delivered/Approved Comments Approved in August 2013 power imports from Sarawak to replace higher cost oil-based power in West Kalimantan. In RRP, EIRR = 52% Benefits are net saving between import purchase price and diesel-based cost. The results are robust to alternative scenarios. Project also assists carbon reduction targets. Java Bali 500-Kilovolt Power Transmission Crossing $185 million Java-Bali 500-Kilovolt Power Transmission Crossing $224 million Project allows coal-based power from Java to be transmitted to meet growing demand in Bali. It Approved in December 2013 will allow high-cost diesel generation in Bali to be In RRP, EIRR = 25% mothballed. The results are sensitive to the coal price used and a 9% real rise in coal prices will make the project marginal. Sumatra-Peninsular Malaysia Deferred to 2015 Interconnection $138 million Sarulla Operations no figure specified in CPS Sarulla Operations $250 million, $50 million Clean Technology Fund, and $20 million Canadian Climate Fund Approved in December 2013 No EIRR Not mentioned in CPS Supreme Energy Rantau Dedap $50 million from Clean Technology Fund Approved in June 2014 In RRP, EIRR = 12% This is a high-risk geothermal exploration project. It is funded from PSOD as envisaged in the CPS. ADB value-added is expected to be the catalytic effect on private investment in geothermal exploration. This is a high-risk geothermal exploration project. It is funded from the Clean Technology Fund but is not mentioned specifically in the CPS. Project has a marginal EIRR of just above 12% using a willingness-to-pay estimate for power. ADB = Asian Development Bank, CPS = country partnership strategy, EIRR = economic internal rate of return, MFF = multitranche financing facility, OCR = ordinary capital resources, PSOD = Private Sector Operations Department, RRP = report and recommendation of the President. Sources: ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan and Administration of Loan and Grant to Indonesia for the West Kalimantan Power Grid Strengthening Project. Manila; ADB Report and Recommendation of the President to the Board of Directors: Proposed Loans to Indonesia for the Java Bali 500-Kilovolt Power Transmission Crossing Project. Manila; ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan and Technical Assistance to Indonesia for the Sarulla Geothermal Power Development Project. Manila. 8. Loan approvals over the CPS period totaled $575 million, with actual loans delivered at $275 million (Table 1). The approvals were significantly below the original planned total in the CPS because of the government s rejection of the geothermal multitranche financing facility with a planned allocation of $320 million, and the deferral of the Sumatra Peninsular Malaysia Interconnection Project worth $138 million. The CPS envisaged an active private sector lending program to support geothermal exploration, and two loans were approved over the CPS period to contribute to exploration consortia: one for the Sarulla Geothermal Power Development Project, which was mentioned specifically in the CPS, and the other to the Rantau Dedap Geothermal Development Project, which was not.

4 4 Linked Document 6 9. The CPS referred to technical assistance support to promote new and renewable energy technology, including hydro and carbon capture and storage. No target figure was given but over the period, two technical assistance projects were undertaken; one for scaling up renewable energy access in Eastern Indonesia ($1.00 million each) 6 and another for a pilot carbon capture and storage facility ($0.25 million). 7 Funding for the renewable energy technical assistance support came from the Government of Norway and the Clean Energy Fund; funding for the carbon capture and storage came from the Carbon Capture and Storage Fund. 10. Three loans were closed during the CPS period, two of which the Renewable Energy Development Sector Project 8 and the Power Transmission Improvement Sector Project 9 were rated satisfactory in the project completion reports. Both were subject to delays of nearly 12 years from approval to closure, with land acquisition and procurement emerging as particular issues. In both cases, the view was that communication between ADB and various stakeholders could have been improved. In both cases there were also policy aspects attached to the loan, relating to tariff adjustments and support for the implementation of a competitive electricity market, neither of which was implemented because of changes in government policy. However, their recalculated economic internal rates of return (EIRRs) at 47.5% (Renewable Energy Development Sector Project) and 19.8% (Power Transmission Improvement Sector Project) indicated a high return. 11. ADB cofinanced with Agence Française de Développement the Java-Bali 500-Kilovolt Power Transmission Crossing Project and the West Kalimantan Power Grid Project, and with the Japan Bank for International Cooperation for the Sarulla Operations. The Java Bali project has also received funding from the Association of Southeast Asian Nations (ASEAN) Infrastructure Fund and the West Kalimantan Power Grid from the Multi Donor Clean Energy Fund. The private sector operations in geothermal exploration, Sarulla Operations and Supreme Energy Rantau Dedap, received funding from the Clean Technology Fund. 12. ADB chose to position its support for energy by focusing on renewables and climate change mitigation, and strengthening transmission and distribution links. How far a clear division of effort between development partners was applied is unclear. However, the Minister of Finance stated on a visit to ADB headquarters (27 November 2014) that the government would like ADB to concentrate the bulk of its resources on basic infrastructure power, transport, and irrigation. As an input into government planning, ADB funded the Energy Sector White Paper 2014 under the multisector technical assistance Sustainable Infrastructure Assistance Program. 10 The white paper aims to inform and support the plans for energy to be included in the National Medium Term Development Plan (RPJMN), by setting out the key technical issues in relation to the current position of the sector and the options available to meet stated government objectives. It is likely to be a useful input to the next CPS. 6 ADB Technical Assistance to Indonesia for Scaling Up Renewable Energy Access in Eastern Indonesia. Manila. 7 ADB Technical Assistance to Indonesia for Planning a Pilot Carbon Capture and Storage Activity. Manila. 8 ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan and Technical Assistance Grant to Indonesia for the Renewable Energy Development Sector Project. Manila. 9 ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan to Indonesia for the Power Transmission Improvement Sector Project. Manila. 10 ADB Report and Recommendation of the President to the Board of Directors: Proposed Technical Assistance Cluster to Indonesia for the Sustainable Infrastructure Assistance Program. Manila (financed by the Government of Australia).

5 Assessment of the Energy Sector 5 D. Sector Assessment 1. Strategic Positioning 13. The CPS s focus on energy is aligned with the country s need to address the infrastructure gaps and Strategy 2020 s goals of inclusive growth and environmental sustainability. Improvements in access to electricity are central to greater inclusion, and the pattern of energy use in the future will influence how growth will impact on the environment. Efforts to involve the private sector in energy projects are relevant to the crosscutting theme of private sector development in Strategy Furthermore, the cross-border West Kalimantan Power Grid Strengthening Project, linking Malaysia and Indonesia, contributes to the regional integration agenda. Information provided to the study team from the Ministry of Energy and Mineral Resources suggested a serious power shortage within 5 years without further expansion of the sector. 2. Relevance 14. The government deems that ADB should prioritize energy, transport, and irrigation in the next CPS. ADB has already provided inputs to the forthcoming RPJMN, through the Energy Sector White Paper and the report on the assessment of PPPs, which offers a guide to the type of institutional change required to implement an effective PPP energy project. 15. A question is whether the exact mix of activity within the energy portfolio was the most appropriate and relevant. Government objectives combined expansion of the power system with greater inclusion by raising electrification rates and improving reliability of supply in poorly served parts of the country, particularly Eastern Indonesia. In addition, there was a focus on raising the share of new and renewable energy sources to 23% by ADB s energy portfolio tried to address each of these potentially conflicting goals. Initially, for new and renewable sources of energy the CPS planned to invest $320 million in projects for geothermal exploration plus a then unspecified Private Sector Operations Department (PSOD) loan to the Sarulla geothermal project. In addition, a number of relatively small technical assistance awards were made to support hydro power development, energy conservation, and scaling up of carbon capture and storage. To meet inclusion and expansion objectives, $235 million was planned for projects to strengthen transmission and distribution systems, although in at least one case there were expected environmental benefits in allowing the phasing out of diesel generators. 16. During implementation, as noted, not all of the planned activities went ahead. The multitranche financing facility for geothermal exploration of $280 million was not taken up by the government, a sign that it was not relevant (at least at the time). Two geothermal projects with PSOD lending did go ahead the Sarulla project and Supreme Energy Rantau Dedap as well as the technical assistance support mentioned in the CPS. The transmission and distribution projects were approved with lending at $275 million, which was about $40 million more than planned. However, actual lending commitments (excluding the PSOD operations) were less than half the planned levels at 11% of the total CPS envelope compared with a planned 27% (country partnership strategy final review [CPSFR]). 17. Although Indonesia has the world s largest geothermal reserves, exploration is both high cost and risky, and private sector interest has been slow to develop. This raises the question of whether the impact of the sector portfolio might have been greater if less emphasis had been placed on developing high-risk geothermal projects at a time when the private sector clearly viewed the risk return balance as unfavorable and, instead, more attention was devoted to conventional generation, transmission, and distribution projects to meet inclusion and reliability objectives. ADB policy currently rules out investment in conventional coal-based plants, but hydro schemes or basic transmission and distribution projects might have been considered.

6 6 Linked Document The geothermal initiative is clearly relevant to government policy and ADB has clearly tried to support this policy by encouraging private investors to enter the sector. The Sarulla project, which was supported in the CPS, is the largest geothermal exploration in the world at a capital cost of around $1.25 billion. A large catalytic effect on private sector investors in geothermal exploration is expected and a figure of $14 billion of private sector investment by 2025 is referred to in the project s design and monitoring framework, although it is not clear how such a projection was arrived at and how realistic it is. 19. Progress in attracting other private investors has been slow and expansion of geothermal capacity is well behind plan targets. Plans for geothermal exploration have been discussed for many years and projects planned for the 1990s were delayed by the Asian financial crisis. Geothermal power has a low operating cost, but its capital costs can be more than three times that of a similar sized fossilfuel-based project because of the high cost of drilling. It has the potential for low long-term (or levelized) unit costs relative to other renewables, and its great attraction is that it offers 80% 90% reductions in carbon dioxide emissions relative to coal-based plants. However, with high upfront costs and development risks, it has proved difficult to create attractive financial packages for private investors in geothermal in Indonesia. The feed-in tariff is a key issue, with various rounds of increases failing to prove attractive. ADB has supported government efforts to establish a risk mitigation fund, and the World Bank has helped the government reformulate the geothermal energy tariff, based on avoided costs of other power sources. The new tariff was set to be introduced before the end of Only 135 MW of new geothermal capacity came into operation in against an annual target of 500 MW. In light of the pressures on the energy sector, it would be worth making a detailed assessment of the case for further geothermal support from ADB under the current incentive regime as part of the preparation for the next CPS. With limited funding available for a priority sector and with immediate challenges, long-term high-risk investment may not be the most appropriate. With this caveat for geothermal exploration, the energy program was overall relevant to government and ADB objectives, as well as to the needs of the economy. 21. Over the next few years, the key challenge for energy policy is meeting a projected shortfall in capacity of 20,000 30,000 MW. Finding private sector funding for this will be difficult and much of the new capacity will likely be supplied from coal-fired plants. To retain relevance, ADB needs to position itself to address these issues in the forthcoming CPS. 3. Efficiency 22. High ex ante and ex post EIRRs have been calculated for specific projects. The West Kalimantan Power Grid Strengthening Project has an EIRR of 52% based on the report and recommendation of the President, 11 and the Java-Bali 500-Kilovolt Power Transmission Crossing Project has an EIRR of 25%. 12 However, the Java Bali project is sensitive to the coal price used and it only requires a 9% real increase to render it marginal. The Supreme Energy Rantau Dedap Geothermal Development Project 13 has a marginal EIRR of 12%, based on conservative assumptions about the willingness-to-pay price for electricity. This is a fairly high-risk activity designed in part to attract private investors to the geothermal 11 ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan and Administration of Loan and Grant to Indonesia for the West Kalimantan Power Grid Strengthening Project. Manila. 12 ADB Report and Recommendation of the President to the Board of Directors: Proposed Loans to Indonesia for the Java Bali 500-Kilovolt Power Transmission Crossing Project. Manila. 13 ADB Report and Recommendation of the President to the Board of Directors: Proposed Administration of Loan to PT Supreme Energy Rantau Dedap for the Geothermal Development Project (Phase 1) in Indonesia. Manila.

7 Assessment of the Energy Sector 7 side of the sector, and it seems that the economic analysis chose to establish the switching-value price for electricity and used this to value benefits. Hence, not too much weight can be placed on this result. 23. Given the uncertainty attached to ex ante EIRRs, the ex post results from project completion reports can be more revealing. Here, the recalculated EIRRs were higher than at the report and recommendation of the President stage in two out of the three cases in which project completion reports were available. The reports and recommendations of the President had the following recalculated EIRRs: for the Renewable Energy Development Sector Project % compared with the original 33.9%, and for the Power Transmission Improvement Sector Project % compared with the original 27.8%. 24. EIRRs are summary indicators over a project s working life and do not reveal the full picture. The Power Transmission Improvement Sector Project, for example, had an acceptable recalculated EIRR of 19.8% based on quantifiable project effects in terms of energy output. However, as stated in the report and recommendation of the President, the project also had a policy component to supply information and communication technology services as well as hardware and software to help establish a competitive electricity generation market. In addition, the project completion report listed further special features covering a formula-based automatic tariff adjustment mechanism and various changes to the organization and governance of the sector. None of these ambitious policy reform plans were applied because the annulment of the Electricity Law No. 20/2002 in December 2004 changed the policy environment. 25. Despite high EIRRs, challenges in project design and implementation were encountered and led to considerable delays. At the design stage, for the West Kalimantan Power Grid Strengthening Project more than 6 years elapsed between initial project preparations and loan approval; for the Java-Bali 500- Kilovolt Power Transmission Crossing Project the delay was 4 years. The exact causes of these delays at the design stage varied by project, but land acquisition, accessing local government approval, and environmental and resettlement issues were each cited in this context. Moreover, many of the original targets may have been unrealistic. And once projects were approved, there were also significant implementation delays. The two projects, which exited the portfolio in the CPS period renewable energy development (footnote 7) and power transmission improvement (footnote 8) were significantly delayed. The Power Transmission Improvement Sector Project was approved in December 2002 and the first disbursement was in November The original closing date of March 2008 had to be extended to September 2013 for implementation delays mainly because of social safeguards compliance, land acquisition, and issues relating to right of way. A key lesson highlighted in the draft project completion report is the importance of promptly obtaining land and forestry permits, acquiring land, and obtaining rights of way for transmission lines. It suggests there was a difference in strategy between ADB and PLN on the timing of obtaining rights of way, and that a clear, standardized, and agreed compensation structure between ADB and PLN should have been defined at the beginning of the project. 26. The Renewable Energy Development Sector Project was approved in December 2002 and the loan took effect in October The original completion date of September 2008 was delayed and the project was not completed until September The project completion report attributed the delay to compliance with social safeguards, difficulty in accessing forestry permits, and poor performance by contractors. It highlighted gaps in communication between ADB and stakeholders including PLN and affected communities as contributing to delays. The Infrastructure Reform Sector 14 ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan and Technical Assistance Grant to Indonesia for the Renewable Energy Development Sector Project. Manila. 15 ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan to Indonesia for the Power Transmission Improvement Sector Project. Manila.

8 8 Linked Document 6 Development Program 16 approved in November 2006 was extended by nearly 2 years and, as of 2015, was still not closed. Difficulty with the application of public sector procurement procedures is cited as a key factor in the delay Improvements have been observed in project implementation and procurement after responsibility was moved from ADB headquarters to the Indonesia Resident Mission. Differences in procedures and standards between ADB and the government on a range of issues including procurement, contracting, and resettlement appear to have complicated project implementation. Comments by ADB staff to the study team indicated a concern relating to delays caused by safeguards and other ADB standards. Also, the CPSFR reports complaints about senior government officials in the power and road transport sectors over the time required to deal with these issues on ADB projects. 28. Several multisector programs have energy components with technical assistance support. The Sustainable Infrastructure Assistance Program funded by the Australian Department of Foreign Affairs and Trade and administered by ADB supported the technical assistance for Scaling up Renewable Energy Access in Eastern Indonesia. The government requested an extension of the program with a new technical assistance project approved in September This supports pilot projects to develop renewable energy (such as solar voltaic, small wind, and biofuels) on the island of Sumba. The governments of Norway and Australia are providing funding to help scale up these schemes. Also under the Sustainable Infrastructure Assistance Program, project preparatory technical assistance funding ($2 million) was approved to prepare feasibility studies for three hydro power projects to support PLN s hydro development program. A request for funding support for these projects is anticipated once the preparation is complete. 29. The technical assistance cluster to the Sustainable Infrastructure Assistance Program (footnote 10), again funded by the Department of Foreign Affairs and Trade, provides $23 million to support the development of infrastructure in general. Approved in May 2013, its outputs are a combination of policy advice, capacity building, project preparation studies, and knowledge dissemination. The Energy Sector White Paper 2014 was produced as part of this program. The multisector technical assistance Support for Selected Sector Analysis for National Medium-Term Development Planning on ASEAN Connectivity, approved in December 2013, is designed to provide very modest funding ($0.25 million) for background studies to assist the incorporation of connectivity with ASEAN into the national plan The other two active energy-specific technical assistance programs deal with providing support for carbon capture and storage technology (footnote 7) and supporting government bodies dealing with PPPs in infrastructure. 19 The first covers a feasibility study for carbon dioxide injection at the Gundih gas field in Central Java. The original technical assistance project was extended for 6 months until the end of 2014, and it is expected that the government will request a loan of $10 million in 2015 to commercialize the technology. The Technical Assistance to Indonesia for Enhancing Private Sector Participation in Infrastructure Provision became effective in April 2007 and was due to close at the end of 2011 but remains open as of the time of writing this report. This suggests difficulty in spending a relatively small amount of funds and casts doubt on how effective it has been. 16 ADB Report and Recommendation of the President to the Board of Directors: Proposed Program Cluster, Loans, Technical Assistance Grant, and Administration of Grant from the Government of the Netherlands to the Republic of Indonesia for the Infrastructure Reform Sector Development Program. Manila. 17 ADB Country Portfolio Review: Indonesia. April background paper. Manila. 18 ADB Technical Assistance to Indonesia for Support for Selected Sector Analysis for National Medium- Term Development Planning on ASEAN Connectivity. Manila. 19 ADB Technical Assistance to Indonesia for Enhancing Private Sector Participation in Infrastructure Provision. Manila. This later became ADB Report and Recommendation of the President to the Board of Directors: Proposed Program Cluster, Loans, Technical Assistance Grant, and Administration of Grant to Indonesia for the Infrastructure Reform Sector Development Program. Manila.

9 Assessment of the Energy Sector Overall, there was clearly a significant impact of ADB activities in the energy sector over the CPS period. However, there were also difficulties in designing and implementing projects to schedule. 4. Effectiveness 32. There is a limit to how far ADB s activities can be linked with macro targets, given the many influences at work. The CPS results framework for energy used two indicators the share of new and renewables in total generation, and the share of the population with access to electricity. Both are very general and it might be more appropriate in the future to combine macro targets with those linked more closely with the ADB portfolio (such as the contribution to renewal energy from ADB projects or the number of electricity customers who benefit from improvements in ADB transmission and distribution projects). 33. Going by the progress made, it is very unlikely that CPS energy targets for 2020 will be achieved. The target for 2020 is set at 20% of generation capacity from new and renewable sources. But with the need for rapid expansion of generation capacity to meet rising demand, new capacity has come largely from coal-based plants. Hence, the share of renewables in generation capacity has fallen, rather than risen, from 13% in 2011 to 12% in The population electrification target of 95% coverage by 2020 seems more attainable, with coverage rising rapidly from 65% of the population in 2011 to 81% in However, as noted, the statistics used to gauge progress are not clear on the proportion of households covered. Targets for the expansion of generation and transmission capacity are very high by historical standards and were missed by a large margin in 2012 and In 2013, the expansion of geothermal capacity was less than 30% of the target and the overall increase in generation capacity was 63% of the target (footnote 2, Figure 20). 34. Where there is a doubt about the effectiveness of the recent CPS and previous activity is in the wider policy area. In Indonesia s policy environment, it has been much more difficult to make progress. This is despite the fact that, like other development partners, ADB has tried to contribute to the policy debate and provided guidance on how to implement government objectives. Particularly relevant here are the Energy Sector White Paper 2014 under the multisector technical assistance Sustainable Infrastructure Assistance Program and the Assessment of Public Private Partnership Institutional and Governance Issues in Indonesia: A Way Forward report, also from The report provides guidance, based on experience in the Philippines, on ways to support and encourage PPPs in infrastructure. Both documents are intended as inputs to the National Medium-Term Development Plan Nonetheless, it is not clear what impact ADB s contribution has had in the formulation of policy. 35. Reform in the energy sector has proved difficult. Moving toward a competitive generation market, which the Power Transmission Improvement Sector Project was meant to support, was blocked in PPPs in infrastructure which ADB and other development partners have long encouraged have been very slow to develop. The ADB report on PPPs in Indonesia highlights the following as key development challenges: creating effective institutional arrangements, strengthening the project preparation process, developing local financing sources, ensuring the availability of long-term local currency financing, improving capacity to mitigate noncommercial risks, and developing robust PPP frameworks. 21 ADB sought to overcome some of these problems through, among other interventions, the Infrastructure Reform Sector Development Program approved in November This set up the Infrastructure Project Development Facility, designed to assist the government in preparing feasibility studies, adopting appropriate bidding processes, and executing PPP projects. Initially, the aim was to 20 ADB Country Partnership Strategy Final Review: Indonesia, Manila. Table A7: CPS Results Framework. Utilization of capacity is lower in renewables than in nonrenewables; hence, their share of on-grid electricity of 5% in 2012 was roughly half their share of generation. 21 ADB Assessment of Public-Private Partnership Institutional and Governance Issues in Indonesia: A Way Forward. Manila. para. 24.

10 10 Linked Document 6 prepare 10 national and 40 regional projects. However, despite ADB fielding 22 teams to conduct prefeasibility studies, no PPP projects had been offered to public tender by mid-2014, according to the CPSFR. The Project Development Facility has clearly not functioned effectively as its future is under review. Of particular concern is the need to charge adequately for the facility s services. To this end, a revolving fund could be created for refinancing and fulfill the need to move away from government procurement guidelines in dealing with private investors. The report, Assessment of Public Private Partnership Institutional and Governance Issues in Indonesia: A Way Forward, suggests ways of reorganizing and relocating the Project Development Fund. 36. The failure to attract more private investment into the energy sector cannot be attributed to ADB, but since this was an important aspect of both government and ADB policy it means that the effectiveness of the CPS was limited. 5. Sustainability 37. In terms of the funding of ongoing projects, the main issue is the financial viability of PLN. The CPSFR argues that PLN has a good record in maintaining the assets of ADB and other projects, and that it has been profitable for each of the past 5 years ( ) with a good credit rating. This appears slightly misleading in that other data suggest two loss-making years (2008 and 2013), with the loss for 2013 attributable to currency fluctuations. 22 Furthermore, PLN s financial position is largely dependent on a government subsidy under the public service obligation that covers the gap between tariff revenue and PLN s costs with a margin for profit included. In 2013, the subsidy component was 39% of total revenue (tariff plus subsidy); in 2008, it was nearly half of total revenue. Current policy is to retain price controls while reducing the associated subsidy component over the forthcoming CPS period. It is not clear how this will affect PLN s revenue position. 38. However, the new projects coming on stream will reduce system generation costs, which should help PLN s financial position. The West Kalimantan Power Grid Strengthening Project is expected to more than halve system generation costs in the area served by allowing cross-border trade with Malaysia. Similarly, the Java-Bali 500-Kilovolt Power Transmission Crossing Project is designed to phase out high-cost diesel generators and replace their electricity in Bali with supply from cheaper coal-based plants in Java. In addition, when new geothermal and hydro capacity comes on stream, this is expected to reduce the overall system generation cost. 39. PLN has a critical role in the expansion plans for the energy sector, and ambitious targets for new investment have been set. But even with optimistic targets for private sector investment, PLN is still projected to fund more than 40% of the capacity expansion during (footnote 19). Given this pivotal role and the recognition in government circles that it is critical to avoid an energy crisis, it is reasonably safe to assume that PLN will receive the support needed to sustain its projects over the CPS period. 6. Development Impact 40. In terms of development impact, the electrification rate is probably the energy sector s key indicator since it has major consequences for inclusion and affects health and education, as well as economic opportunities. Indonesia currently has a relatively low electrification rate for its income level, and the government aims for the whole population to be covered by However, as noted, there is some dispute about the accuracy of the current statistics on coverage. ADB has made a modest contribution to this through its two new projects in the past CPS period, which allow for transmission 22 ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan to Indonesia for the Rantau Dedap Geothermal Development Project Phase 1. Manila. The figures for 2013 are confirmed in the Energy Sector White Paper 2014 (p. 31).

11 Assessment of the Energy Sector 11 between Java and Bali and the importation of power from Sarawak. Both of these not only replace a high-cost source of power but also allow an expansion of use. Insofar as the geothermal projects and technical assistance support lead to more sustainable and lower-cost sources of power, this should also contribute to greater inclusion, provided affordability issues for the poorest consumers are addressed. Current government thinking is to phase out the blanket consumer subsidy scheme and replace it with more narrowly targeted power subsidies or cash transfers.