CHAPTER 2 ELECTRICITY CONDITION IN INDONESIA 2.1. Overcoming The Electricity Crisis The prolonged electricity crisis is caused by the shift in the society s life style that is very dependent on electricity. Therefore, the demand of electricity will increase faster than the company s ability to supply electricity. To make thing worse, the industrial customers who previously relied upon own oil based power plant currently shift to PLN s electricity due to oil price increase. In impeding the growth of electricity demand, the company has the policy of different tariff regulation especially during peak shaving hours. The company also requests the contractors of the existing power plants to accelerate the completion of the Coal Steam Fired Power Plants (CSFPPs). The company also expedites the financing for establishment of the new power plants by issuing international bonds. In addition to the structural power supply shortages, there are the more operational threats to the power production. A problem in the power supply is the pricing of fuel. State-owned oil company Pertamina is only willing to supply oil and diesel to PLN at subsidized rates to the amount stated in the government budget. If PLN needs more volume to meet the growing demand, it will have to pay market rates. PLN however refuses to do this, because it has to supply households at fixed tariffs. Disagreements over the price are leading to delays in the delivery of fuel. Even though the government is giving a direct subsidy to PLN to cover its deficit, the subsidy will probably less than what PLN will need to cover its expected deficit. Many factors are contributing to the deficit. Tariffs are too low; power theft and distribution losses are also a problem. Moreover, the facilities outside Java are mostly Diesel Plants and Gas Turbine Plants. Production and maintenance cost for these facilities is approximately twice as much as for those on Java, and they have to be frequently maintained. Often, the budgets allocated for maintenance are not sufficient and power generation facilities remain off-line for long periods of time. To illustrate, in 7
early 2007, 22% of the installed capacity outside Java was out of operation, compared to 8% on Java and Bali. There is also not much grid development in the provinces that could alleviate some of the problems. In order to solve these problems it is necessary to increase the power grid both in dimension and in capacity and install larger plants in strategic locations along this grid. In general, the major problems in Indonesia s electricity sector, including its PLN internal organization can be categorized into four main subjects: Tariff, Subsidy, Margin, Debt restructuring, Renegotiation of Independent Power Producers (IPPs) and, Sector and Corporate efficiency. 2.2. Current Condition Under the former Law Number 15 Year 1985 on Electricity, the electricity supply in Indonesia was conducted by the state through the state-owned electricity utility (PLN). As stipulated in the law, the authority to supply electricity had been delegated to PLN to act for and on behalf of the government. As long as it was not contrary to the state s interests, opportunity might also be given to private companies and cooperatives to take part in the power sector by operating power plants for sale to PLN, supply of electricity to the public, as well as for captive power generation. Otherwise it was PLN s sole responsibility to develop, own and operate the power system throughout Indonesia. The role of co-operatives and private generation serving general public had been rather insignificant until the early 90es when the government, through Presidential Decree No. 37 Year 1992, invited private investors to participate in the power sector by operating large-scale independent power producers (IPPs) for selling of electricity to PLN or other parties. The electricity sector today faces at least one certainty. Acute power shortages that require power rationing through rotating electricity blackouts or changes in industrial operating shifts will continue until late 2009. Businesses are now calculating the losses they will suffer during the rotating blackouts. But most industrial companies seemed resigned to the tragic fact that the 8
Indonesian government is virtually powerless to cope with the power supply crisis until some of the new power plants currently under construction, with combined capacity of 10,000 megawatts (MW), come on line in early 2010. So until some of the power plants currently under construction start operations, forget all the big talk about bold reform measures to improve the investment climate. Without a reliable, adequate supply of power, not a single investor will come to this country. Forget all the optimistic projections of more than 6.5 percent economic growth this year and next year. Lack of power or frequent blackouts could kill all the bullish sentiment. The power supply crisis should therefore serve as a strong warning to the government that the current crash program to add 10,000 MW to the PLN grid only offers a medium-term solution. This power crisis will continue to loom over the country as long as the government fails to improve the electricity rate structure. The current universal rate structure imposed on PLN cannot provide it with adequate revenues for achieving long-term financial sustainability. PLN Generation PP Independent Power Producer Transmission & System Operation Self-Generation Distribution Cooperatives Tariff C U S T O M E R S Figure 2.1. Electricity Supply Industry (Source: Hanan Nugroho, Syamsidar Thamrin and Gumilang Hardjakoesoema, 2005) The big problem however is infrastructure. Infrastructure seems to be the only thing that is not growing. It is the iron straitjacket that is increasingly suffocating Indonesia s growth. Especially the electricity power supply is becoming a big problem. Companies are halting their investment plans, because state-owned electricity company PLN cannot guarantee the additional power supply that is needed. 9
Main Problem Lack of Investment High Fuel Cost High Growth of Electricity Consumption Lack of Supply Capacity High Production Cost High Demand PLN Status: PSO vs Business Infrastructure vs Commodity Investment: Govt. Guarantee vs PLN s Financial Condition Tariff: Society buys rate vs Economic Tariff/UPC Electricity: Adequate Amounts Good Quality Affordable Price Environment Friendly Sustainable Figure 2.2. Electricity Supply Problem (Source: Eddie Widiono Msc., 2007) Figure below depicts the current tariff and subsidy policy: Economic Growth Projection Electricity Consumption Projection Peak Load and Capacity Req. Projection Capacity Addition Projection Gap Tariff and Revenue (Law No. 15/1985) Available Fund incl. loan & obligation Development according to available fund Subsidy Allocations to PLN There is no investment assurance Figure 2.3. Current Tariff and Subsidy Policy (Source: Dr. Herman Darnel Ibrahim, 2008) 10
2.2.1 Electricity Basic Tariff Electricity selling price in Indonesia is a government regulated one. In line with Law No. 15 Year 1985 on Electric Power and pursuant to Government Regulation No. 17 Year 1990 on State Electricity Public Company, PLN is the Authorized Holder of Electricity Business (PKUK) which has the obligation to supply the electricity for the public with the selling price determined by the Government. The tariff is structured into several customer categories to enable cross subsidies among customers. The tariff is applied uniformly across the country. In 2007, as in previous year, the Government did not increase the Electricity Basic Tariff. The Government s Policy not to increase the Electricity Basic Tariff since 2004 has caused lower electricity sales compared to the operation cost, therefore increasing the magnitude and dependency on PSO s subsidy from the Government. The funding for investment which was expectedly received from the economic scale of Basic Electricity Tariff was not meet, because the Government decided not to increase the Basic Electricity Tariff due to the low purchasing rate of the society. Therefore to secure electricity supply for the public, PSO s subsidy is the main key in PLN s business. 2.2.2 Subsidy for Electricity PLN as Authorized Holder for Electricity Business pursuant to Law No.15/1985 is under the obligation to provide electric energy for public needs (Public Service Obligation - PSO). However, as a State-owned Company, as cited in Law No. 19/2000, PLN shall constantly has the objective in raising profit. To serve this purpose, for customers categorized as low rate customers with average electricity sale price below the electricity principal production cost 11
(BPP), the difference in price is covered by Government Subsidy to the customer which has increased significantly since 2004 when the Government decided not to raise the basic electricity tariff for this category. In year 2007, the electricity subsidy received by PLN reached Rp 34,043 billion; therefore, what is received by PLN still cannot cover the cost plus the expected margin. Based on Law No. 19 year 2003, regarding State-Owned Enterprises (BUMN), the Government is obliged to provide compensation to these BUMN, which were appointed to perform special assignment, for all expenses which they have incurred, including expected return (margin). The Company is a BUMN, which performs a special assignment of providing electricity power with subsidy to the public. 2.2.3 Expanding capacity (Fast Track Program) As an effort to reduce dependency on expensive fuel oil, the Government has stipulated to accelerate the energy diversification for power plants into non fuel oil. For that purpose, the Presidential Decree No. 71 Year 2006 was issued which assigns PLN to accelerate the construction of Coal Steam Fired Power Plants (CSFPPs), which should be prepared for operations by 2009-2010. The CSFPPs are expected to operate commercially in 2009 which will overcome the national problem of electricity supply. In the current crash program, the government plans to construct 10.000 MW of installed capacity by 2010. So far however, less than 20% of the planned additional capacity has been completed. The projects are being delayed, when Chinese banks withdrew part of their funding commitments earlier this year. Also, local governments, which are now much more powerful than in the past, are not always willing to make land available for the projects. The situation is getting more urgent. Early 2007, there was already a waiting list of already 5000 MW on Java and 1000 MW outside Java, of companies that requested additional power. With the economic growth, it can be 12
assumed that this waiting list has grown further, to a total of probably 7000 MW. The 10.000 MW of additional power that is currently being installed, will already be fully utilized by 2011, so new major expansions are necessary. 2.3. Company Finance There are many financial aspects that need to be redefined, improved and clarified. These include the low revenues and projected investment needed to finance the short, medium and long-term project developments. 2.3.1 Low Revenues PLN s low revenues are clearly due to the tariff set by Government. To compensate for the deficit, PLN asks for subsidy from the Government. Unfortunately, there is no clear mechanism on this subsidy, such that it is hard to detect where this subsidy fund goes. Electricity theft and receivables are also another cause of low income of PLN. There are many receivables, especially of some governmental customers, that have not been solved yet. All of these have caused the deficit in PLN cash flow. 2.3.2 Instalment Cost PLN charge its customer a certain amount of fee, called installment cost in order to customer to get connected to its electric grid and has electricity delivered to their premise. This cost varies but basically depends on the tariff applied to the customer. Again, as the tariff is not set properly and subsequently the installment cost, PLN may loss some revenue opportunities from steady income. 13
2.3.3 Cash Flow Similar to the investment plan, there is a critical need to maintain a certain level of cash flow in PLN balance sheet. This fund is necessary to support all the short- and medium-term activities. It is needed to sustain the operation of existing facility, to ensure the continuing supply of electricity to PLN customers. 2.4. Financial Planning 1 Financial Planning is an important aspect of the firm s operations because it provides roadmaps for guiding, coordinating, and controlling the firm actions to achieve its objectives. Two key aspects of the financial planning are cash planning and profit planning. Cash planning involves preparation of the firm s cash budget. Profit planning involves preparation of pro forma statement. Long-term (strategic) financial plans lay out a company s planned financial actions and the anticipated impact of those actions over periods ranging from 2 to 10 years. Long-term financial plans are part of an integrated strategy that, along with production and sales plan, guides the firm toward strategic goals. Short-term (operating) financial plans specify short-term financial action and the anticipated impact of those actions. These plans most often cover a 1- to 2-year period. Key inputs include the sales forecast and various forms of operating and financial data. Key outputs include a number of operating budgets, the cash budget, and pro forma financial statements. The entire short-term financial planning process is outlined in figure 2.3. Here operating budget and cash budget are ignored, which focus on the accounting and cash aspect of short-term business plans, instead of focus solely on profit planning. The concentration only on the key outputs of the short-term financial planning process: the pro forma income statement, and the pro forma balance sheet. 1 GITMAN, L. J. (2006). Principle of Managerial Finance (Eleventh Edition). Boston, US: Pearson Education, Inc. 14
Sales Forecast Information Needed Output for Analysis Production Plans Long-term Financing Plan Current- Period Balance Sheet Pro forma Income Statement Pro forma Balance Sheet Cash Budget Fixed Asset Outlay Plan Figure 2.4. Short-term Financial Planning (Source: Gitman, 2006) Profit planning relies on accrual concepts to project the firm s profit and overall financial position. Shareholder, creditors, and the firm s management pay close attention to the pro forma statements, which are projected, or forecast, income statement and balance sheet. Two inputs are required for preparing pro forma statements: (1) financial statements for the preceding year and (2) the sales forecast for the coming year. The technique that is used to pro forma income statement that the entire firm s cost and expense are variable. This approach implies that firm will not receive the benefits that result from fixed cost when sales are increasing. If the firm has fixed cost, these costs do not change when sales increase; the result is increased profits. But by remaining unchanged when sales decline, these costs tend to lower profits. Therefore, the use of past cost and expense ratios generally tends to understate profit when sales are increasing, and vice versa. When using a simplified approach to prepare a pro forma income statement, costs and expenses should be broken down into fixed and variable component. In this research the researcher concentrate on the cost and expense, which are including: (1) Fuel and Lubricant; (2) Purchase Electricity; (3) Personnel and Administration; (4) Maintenance; (5) Depreciation; (6) Interest Expense and Financing Charges, and etc. 15
2.5. Research Questions According to the problem definition that described above, the main issue of the company is how to fulfill the increasing demand of electrical energy on the next decade. PLN need funding for investment to increase the capacity of the generator and the transmission network and build electricity infrastructures for electricity supply sustainability when the company has struggling with how the company should manage their financial problem because of their low revenues due to the tariff set by Government, then to compensate for the deficit, PLN asks for subsidy from the Government. Therefore, these questions is developing to obtain the answer of those problems by generating the central questions of this research that will guides researcher to develop a list of questions as follows: 1. What margin is required for PLN electricity supply sustainability? 2. What subsidies are required if tariff will not increase? 3. What tariff is required if there is no subsidy? and; 4. What tariff is required if subsidy remain the same? 2.6. Research Objective The objective of this research is to find the suitable tariff, profit margin and subsidy projection to be applied by PT. PLN (Persero) to ensure investment in electricity sector for electricity supply sustainability until next ten years. 2.7. Research Scope Due to enormous area of the research to be conducted with the problems, the research will be limited to: Company s historical data: financial data, annual report, statistics, etc. 16
Assumption and projection to be applied in the analysis: electricity consumption projection, investment fund requirement projection, and unit production cost projection. Pro forma income statement analysis. 17
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