The revelation made last week by Dahlan Iskan, president of state-owned electricity company PT PLN, of a plan to import around nine million tons of coal next year when Indonesia is the world’s top seaborne exporter of thermal coal with annual shipments of almost 190 million tons, implies several things, all of which are negative for the country’s energy policy.
Even though Coordinating Economic Minister Hatta Rajasa immediately shot down the PLN idea as ridiculous, Dahlan’s statement made after a meeting with the House of Representatives last Thursday could either indicate the government’s impotence to enforce the domestic market obligation (DMO) imposed on coal miners since early this year or his frustration in dealing with corruption ingrained in the company’s procurement system.
PLN importing thermal coal would indeed be a very odd corporate decision that would unnecessarily increase electricity rates given the high cost of transporting the resource and the larger stocks that have to be managed to minimize supply interruption (inventory costs).
Local coal is certainly much cheaper because of the lower haulage costs. The faster delivery time would also enable PLN to cut down on storage and inventory costs by arranging just-in-time delivery for its power stations. Such efficient supply-chain management would be rather difficult for imports that require much longer delivery times, not to mention the risk of PLN being exposed to foreign exchange fluctuations.
We don’t think the PLN CEO’s remarks on the import plan had anything to do with the government’s inability to enforce the DMO upon coal miners. The government ruling on the DMO stipulates that producers that fail to realize their obligations to the domestic market are liable to a 50 percent cut to their output for the following year.
As Boy Garibaldi Thohir, president of publicly-listed PT Adaro Energy, PLN’s single largest coal supplier, asserted last Friday; “commercially, as long as the prices are right and PLN does not demand long credit payment terms we prefer selling our coal to domestic users as this will cut delivery time and freight costs, improving our cash flows.”
Blaming the low quality (calorific value) of domestic coal for the need for imported coal simply does not make sense because the government and PLN have known for years that virtually all coal mined in Indonesia is of sub-bituminous quality standard. Hence, the boilers of the PLN power stations should have been designed to use sub-bituminous coal.
Hence, we are inclined to think the main reason behind Dahlan’s outburst about the coal import plan was his miserable failure to remove the deeply entrenched cartel-like system within PLN’s procurement system, which he inherited from the previous management.
The Energy and Mineral Resources Ministry and state-owned companies should thoroughly audit the PLN procurement system, from the planning of its annual needs, right down to technical specifications imposed on its tendering processes.
Shifting more of PLN’s primary energy production to coal is quite crucial, in view of the resource’s abundant supply. More importantly, the cost of generating electricity from coal is very low, about Rp 450 (5 US cents) per kilowatt hour (kWh), as opposed to Rp 800 per kWh for natural gas and Rp 1,800 per kWh for diesel oil.
In addition, PLN itself has planned to convert its diesel-fired power plants with a combined capacity of 7,750 megawatts (MW) into coal-fired plants, and most of the additional 10,000 MW new capacity being built under the crash power is also based on coal. All in all, PLN will eventually generate more than 50 percent of its output with coal, thereby catapulting the need for thermal coal to more than 150 million tons a year.
Certainly, there is a need to achieve the right balance between maximizing export revenue from coal and securing supplies for domestic users. The challenge, however, is how to make producers accept domestic prices as fair compared to what they would make exporting their product.
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