Bill Guerin, Jakarta – Eddie Widiono Suwondo, president of state power utility Perusahaan Listrik Negara (PLN), is struggling to bring the virtually bankrupt monopoly back into the black. Ironically, he has had help from the onetime arch-enemies of PLN – the independent power producers (IPPs) who in effect own and run PLN's monopoly power-supply network.

In the early and mid-1990s, the Suharto government signed contracts with 27 IPPs. The government suspended most power projects in 1997 and urged PLN to renegotiate the contracts. This led to long disputes between the company and the IPPs.

PLN has now completed contract renegotiations with 20 of them in deals, which will all attenuate the company's severe financial burden.

The virtual force majeure caused by the plunge of the rupiah against the US dollar in late 1997 set PLN on a fast track to its current perilous state. While its revenue is in rupiah, it pays for its oil and gas and private power in dollars, as well as most of its borrowings.

Twenty IPPs have finally agreed to cut their power price to below 5 US cents per kilowatt-hour, which is lower than PLN's current selling price of Rp488 (5.42 cents) per kilowatt-hour.

Six out of the seven remaining contracts, all geothermal power projects. Wayang Windu, Sarulla, Kamojang, Bedugul, Dieng and Patuha power plants, are expected to be resolved by the middle of this year. The Karaha Bodas project remains in jeopardy after years of legal wrangling between its contractor and the state-owned oil and gas company Pertamina.

The Asahan hydropower plant, the Sibayak geothermal power plant and the Cibuni geothermal power plant were all renegotiated last December.

Power from Asahan will now cost PLN 4.6 cents per kilowatt-hour, from 7 cents under the old contract, and from Sibayak and Cibuni there has been a reduction from 7 cents to 4.7 cents and 4.45 cents respectively.

Widiono said last week that he would adopt tough policies in facing the critical years ahead and his first priority was to turn the company's poor financial performance around so to allow it to finance new investments in power generation and transmission.

PLN has made no new investments since 1998 due to a total lack of funds exacerbated by an almost total lack of commitment from the three administrations since former president Suharto stepped down in May 1998.

Since then PLN has been operating at a loss partly because the government has been progressively cutting electricity subsidies – a policy forced on it by the International Monetary Fund (IMF).

Badly shaken by last September's fiasco when most of greater Jakarta was plunged into darkness for hours, the government is at last addressing major issues holding back PLN.

Rotating power cuts have been in place since the blackout resulting from a break in the transmission line feeding power from the giant 3,400-megawatt coal-fired Suralaya complex, west of Jakarta.

The country will suffer a serious power supply problem in 2004 and 2005 unless there is sufficient new investment in the power sector to generate more electricity amid fast-rising demands.

PLN's own master plan shows that electricity demand will grow by 8 percent annually. In order to cope with this $28.5 billion will need to be invested in new power generation, transmission and distribution investment up to 2010. Without this investment, the country will suffer a major power crisis.

Additional power demand until 2005 in Java alone is projected to be between 11,000 and 12,000 megawatts, and about 5,000-6,000MW outside Java.

The peak load in the Java-Bali grid can reach 16,000MW against an installed generating capacity of less than 18,800MW. PLN calculates a minimum power reserve margin of 30 percent to avoid extended blackouts in parts of Java during peak demand periods.

The decades of successful industrialization and development during Suharto's New Order has left the community almost wholly dependent on power. Unfortunately the national power distribution structure has a large gap between Java-Bali and other areas. The so-called electrification ratio – a measure of the percentage of the population with access to power – has reached 59.4 percent in Java and Bali this year. Sumatra, Kalimantan, Sulawesi and the eastern regions, including Papua, come in at 53.1 percent, 46.6 percent, 47.2 percent and 33 percent, respectively.

As the lights fade on new foreign investment prospects in Indonesia salvation for the beleaguered PLN is also at hand from the country's oldest ally – Japan. Japan is one of Indonesia's largest foreign investors and trading partners. The Jakarta Japan Club (JJC) said last month it would try to assist PLN by improving its financial soundness and increasing the capacity of existing power plants.

JJC members are all Japanese businesses operating in Indonesia and are concerned about a secure power supply for the large number of manufacturing projects in Indonesia.

At the end of the month both countries inked a yen loan deal worth US$616 million to be used to expand the generating capacity of both the Muara Tawar and Muara Karang gas-fired power plants, just outside metropolitan Jakarta.

The 30-year loan, $465 million for the Muara Karang plant and $152 million for Muara Tawar, has a 10-year grace period and carries a 1.8 percent interest rate.

The agreement will enable PLN to raise the power generating capacity of the plants. When finished the capacity of the Muara Tawar power plant will be 1,225MW and Muara Karang will generate 720MW, more than double its existing 300MW capacity.

Construction of the rusting shell of the 1,200MW Tanjung Jati B power plant in Jepara in Central Java is also set to resume this month, after a tough two-year round of negotiations.

Hong Kong-based Hopewell Holdings Ltd's chairman Gordon Wu has been trying to get rid of his white elephant for almost two years. The Hong Kong-based infrastructure company owned 80 percent of the Tanjung Jati B project in Java.

Recently Wu announced he had sold. Hopewell will get US$215 million and the obligatory Indonesian "partner" in the project, 20 percent stakeholder PT Impa Energi will get about US$53 million. The remaining US$38 million will be used to pay outstanding contractors' bills.

The Tanjung Jati project began in 1997 with Hopewell as developer and Japanese trading giant Sumitomo Corp as the constructor. Sumitomo decided later to take over the leadership of the project and will now lead the construction due for completion by 2005.

Funding will come from the Japan Bank for International Cooperation (JBIC) and a syndicate of other Japanese-based financial institutions. The government will provide some modest financial support to guarantee the state retains part ownership with Sumitomo.

Once construction is completed, the power plant will be leased to PLN for 20 years, and after that the utility will fully own the power plant.

Financing for yet another plant has been restructured recently. The US Export Import Bank (USEXIM) will lend US$381 million direct to the Paiton power project that was first commissioned in 1999 but delayed because the government needed time to approve the funding for it.

USEXIM, along with the Japanese Bank for International Cooperation, Nippon Export and Investment Insurance of Japan and the US Overseas Private Investment Corp are the major lenders to the project.

In addition, commercial banks from the United States, Europe, Japan, Australia and other Asian countries and bondholders will play a minor role.

Industry analysts say this particular deal will act as a catalyst for US-Indonesia bilateral energy talks, which have been stalled for several years.

Paiton, mainly owned by Edison Mission Energy, GE Capital and Mitsui & Co, owns and operates a 1,230MW coal-fired power plant in East Java, the largest independent power project in Indonesia. PLN also claims it is trying hard to improve its efficiency. Part of this strategy is to use more gas than oil as a source of energy to generate power. Poor planning and judgment by bureaucrats and international agencies over the years have allowed Pertamina, the state oil and gas giant, to call the shots throughout the energy sector.

PLN's production costs are high and their rate of 7 cents per kilowatt-hour is higher than in some other Southeast Asian countries, where the rate is between 5 and 6 cents per kilowatt-hour but fuel components are considerably cheaper than in Indonesia. In Malaysia, for example, the state electricity utility buys gas for $1.60 per million British thermal units (MMBTU), while PLN has to pay state oil and gas company Pertamina $2.50 per MMBTU.

Last year PLN lost some Rp4.47 trillion (US$502 million). Accumulated losses since 1997 amount to Rp45 trillion ($5.05 billion). The government decision in 2001 permitting quarterly 6 percent increases in electricity prices was yet another an integral component of the recovery plans.

PLN has raised electricity rates by an average of 6 percent every three months since then so that by 2005 it can reach the commercial rate level of 7 cents per kilowatt-hour. The current rate is about 5.24 cents per kilowatt-hour after PLN raised its rates this year.

The subsidy has been reduced from about Rp800 billion a year pre-crisis to about Rp200 billion this year.

The current price level of Rp488 per kilowatt-hour is equal to about 5.42 cents, still lower than production costs. Tariffs do not properly reflect the regional costs of production. Logically the additional subsidies required for such a policy should be borne by the government, not PLN, but there is no sign of the government moving towards any sort of composite energy plan that would address such needs.

Also, this year's first hike in electricity prices coincided with the government's decision to raise fuel prices by up to 22 percent, and telephone charges by an average of 15 percent, prompting strong criticism from various quarters, including street protests by students and workers (see Mega price hikes fuel Indonesia's discontent, January 15).

For the first time ever industrial users are being wooed, with Energy and Mineral Resources Minister Purnomo Yusgiantoro promising last week that they would get a 2.5 percent discount on the next 6 percent rise in tariffs due out soon.

The idea is to prompt such users to analyze their consumption patterns and shift operations from peak time to other times.

This assumes that the PLN infrastructure and transmission system is capable of responding to changed demand cycles. This is far from the case at the moment. Insufficient capacity and problem of increasing demand has been exacerbated by transmissions bottlenecks.

Though PLN has enough installed capacity to just about meet demand for the time being, transmission bottlenecks mean that it is unable to transmit excess supply from East Java, where it is available, to West Java, where it is needed. For example, the Paiton complex, a mix of state and private coal-fired units on the East Java coast, is capable of producing up to 3,200MW of electricity. Of this amount, however, only up to 2,000MW has ever been utilized (even during periods of peak demand), with 1,400MW dispatched to West Java through the North Route 500-kilovolt transmission line and 600MW consumed locally in East Java.

The lack of a meaningful energy policy in resource rich Indonesia, with its abundant reserves of natural gas, and the government's failure to develop the potential of natural gas has cost PLN dearly.

One example alone highlights the folly. A 1,300MW plant in Central Java, Tambak Lorok, runs on oil and because of this costs PLN an estimated Rp600 billion ($58 million) a year more to run than the entire 3,200MW Paiton complex.

There are still palpable dangers of major power blackouts across the board, leading to social unrest or worse and a disruption of the economy. Three decades of growth under Suharto means that electricity is even more vital now than ever to the community. Not just the industrial sector, but home industries and small factories, even in the most rural areas, depend on power. Blackouts and rising costs hit them where it hurts most.

The stakes could hardly be higher. No power means no growth and high costs of electricity impact negatively on the efficiency of the whole economy. Major industrial users are already being asked to either halt production during the peak hours of 5-8pm, or to run their generators during that period – or even to feed some of their surplus into the PLN grid. This is meant to reduce peak loads by 300MW this year and up to 400MW in 2004.

The light at the end of this particular tunnel is far from visible at the moment.