Bill Guerin, Jakarta – Countrywide risk factors, legal risk, a weak banking sector and weak capital markets, community violence and the like, affect sentiment over doing business in Indonesia, but there are few factors more important on would-be investor's score cards than a regular and reliable supply of electrical power at an affordable price.

Last week a series of "rolling-over" blackouts in some areas of East Java sparked concerns that the looming power crisis, which has been predicted for years, had arrived. Sector analysts predict that US$28.5 billion will need to be invested in new power generation, transmission and distribution infrastructure up to 2010. Without this investment, the country will suffer a major power crisis. The disruption to supplies followed damage to four large-capacity power plants caused by heavy rains and landslides. The plants affected were the 200-megawatt combined-cycle power plant (PLTGU) at Gresik in East Java, the PLTGU at Muara Tawar in West Java with a capacity of 200MW, and the PLTGU at Tambak Lorok in Central Java with a 200MW capacity. The Gunung Salak geothermal power plant (PLTP) in West Java was also damaged by landslides, causing a loss of 100MW of power at the plant.

State-owned electricity utility PLN confirmed on Monday that the total installed capacity in Java and Bali is 18,612MW, the load capacity 12,815MW, and peak capacity 13,250MW. This has raised eyebrows over whether PLN is actually coming clean on its minimum reserve power level.

The recent blackouts should not have occurred, in theory, with more than 40 percent spare capacity to cope with the loss of, at most, 700MW. PLN said the supply disruption was only temporary and was due to "technical" problems at the plants concerned.

Energy and Mineral Minister Purnomo Yusgiantoro was having none of this and promptly called on PLN to shift load capacity to its biggest customers, in industry, and convert peak load into base load.

The WG-PSR (working group on power sector restructuring) slammed PLN over the latest blackouts, which, it said, indicated that PLN's management, particularly with regard to the maintenance system at power plants, has been less than adequate.

WG-PSR has called on the government to set up an independent investigation team into the looming power crises, on account of the potential for shortages of power to seriously disrupt any future efforts to boost the economy.

"The national parliament [DPR] should summon all related parties and hold a hearing. The issues have to be resolved transparently and the public should be made aware of the facts. PLN has to give compensation to customers who may suffer from losses due to intentional blackouts," Fabby Tumiwa, coordinator of the organization, said last week.

Eddie Widiono Suwondo, current PLN president, was installed in March 2001 some time after an independent audit of the company mandated by the International Monetary Fund (IMF) found that inefficiencies had resulted in annual losses averaging Rp5.3 trillion during 1995-98.

The Arthur Anderson report noted that poor investment decisions accounted for the bulk of the losses, or about Rp4 trillion per annum, while operational inefficiencies accounted for the balance. The audit concluded that more than half of the losses were due to factors beyond PLN's control – ie, government policies or the actions of suppliers, customers, financial institutions, Pertamina, etc.

Though Widiono is not blamed for these past ills, PLN's peak load management, maintenance systems and the efficiency of its transmission and distribution lines have come under deep scrutiny during his watch.

In March Widiono survived a purge when State Minister of State Enterprises Laksamana Sukardi replaced four of the company's five directors. Only Widiono and finance director Parno Isworo, who had also survived previous management shakeups, managed to retain their posts. The government also restructured PLN's organization by removing the planning division and introducing a generation and primary energy division.

This year had been a fairly good one for PLN prior to last week's blackouts. On the supply side there was good progress after dispute settlements with 20 of the 27 independent power producers (IPPs), including a successful debt-restructuring deal with PT Paiton Energy in March.

US-ASEAN Business Council president Ernest Z Bower said that "the importance of the Paiton settlement cannot be overstated", and it would send a positive signal to foreign investors in the country. Indonesia, according to Bower, had taken proactive steps to address its long-standing energy supply problems, which gives investors and markets greater confidence as a result.

Many of these resurrected projects, though, are not due on stream for another three or four years.

The Tanjung Jati B power plant in Jepara, Central Java, which would have raised the capacity of the Java-Bali power grid by next year, remains bogged down in a morass of financial difficulties. It has been postponed until 2006.

At a cabinet meeting last October, Widiona won approval for his proposal to expand the capacity of the Muara Tawar power plant in West Java providing it with combined open-cycle gas turbines and a capacity of 850MW. This April a Siemens-led consortium won the bid to build six power units there, each with a generating capacity of between 100 and 150MW.

Japan, Indonesia's biggest investor, has agreed to provide a US$616 million loan to raise the capacity of the Muara Tawar and Muara Karang power plants.

A power plant is also to be built in Bali, which gets its power from Java through the Java-Bali transmission grid that connects the two islands via giant underwater cables. Demands for electricity on the island will soon outstrip PLN's capacity to supply power from Java.

PT Indonesia Power, a unit of PLN, got the green light in March to go ahead with its controversial $51 million Pemaron plant, which will be built smack in the middle of one of Bali's nicest and unspoiled locations, Lovina Beach, a favorite diving and snorkeling area. Construction was delayed for two years by protests from various community groups who argued that the power plant would pollute Lovina Beach, as it will use about 700 tons of diesel, delivered by tankers through a pipeline installed at Lovina Beach, every two weeks.

Gede Wisnaya, chairman of the Bali Development Study and Empowerment, said he was extremely disappointed. "We have been protesting since 2001, and have also written a letter to President Megawati Sukarnoputri and the minister of environment, but no one has responded."

Widiono said in response: "We have calculated the risks and affirm that there will be no major environmental degradation."

PLN says it will spend some Rp34 trillion ($3.82 billion), out of a total Rp65 trillion budgeted for this year, on fuel costs alone. Historically, PLN has encountered frequent problems on price and supply when it was forced to buy from state-owned oil and gas firm Pertamina. However, in April PLN signed a memorandum of understanding (MoU) with Singapore-based fuel trader Concord Energy to supply fuel to the Indonesian utility. After implementation of the Oil and Gas Law No 22/2001, Pertamina lost its monopoly on the distribution of fuel throughout the country (see Pertamina's new paradigm, May 23).

The electricity law, which was based largely on an August 1998 White Paper on power-sector restructuring, also has many positive aspects for the future provided that implementation goes ahead as planned.

PLN will gradually lose its decades-long sole rights in power generation, transmission and distribution to mid-size and large users.

Power-sector regulation is being improved, including the issue of a regulatory framework that will give security and certainty for investors in the power sector.

The government believes competition would encourage more investment in the power sector, and power producers would compete to provide the best service to customers.

The industry is to be unbundled, beginning with the Java-Bali grid, which will have one grid-operating company and five distribution companies, together with five generating companies. The government's objective is to create competition in the power generation and power retail segments.

Parliament decided against an independent regulatory body and plumped for a government agency that acts independently, like Bank Indonesia. The commissioners of the agency will be chosen by the president with the approval of the DPR.

A "social electricity development fund" is planned whereby the government will subsidize electricity for the poor.

Help is also on hand from two Malaysian state electric utilities, the Serawak Electricity Supply Corp (Sesco) and Sabah Electricity Board (SESB), which will build power stations in two Indonesian provinces. PLN said on Monday that Sesco will build plants in West Kalimantan starting in 2006-07 and SESB will follow by building in Sumatra starting in 2008. PLN will buy at least 50MW of power from Sesco to start with.

The electricity sector is expected to be exempt from value-added tax in the future, which will also help.

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.