Jakarta – The enforcement of the domestic market obligation (DMO) for coal producers, set at 25 percent of their respective output, will continue to be problematic insofar as the government is unable to set a formula or a better mechanism for setting what are seen by coal firms as relatively fair prices they get under the DMO scheme.
The coal stock crisis at 20 major power plants early this year seemed strange as Indonesia is the world's biggest seaborne thermal coal exporter, and domestic coal needs are only about 30 percent of the total national output. The root of the problem is the strikingly wide difference between export prices and the coal price set by the government for DMO sales.In the second half of last year, the price difference was as much as US$100 per ton because the $70/ton DMO price was set in 2018. An acute lack of oversight of coal companies allowed many producers to avoid the DMO.
But the government's plan to establish a public service agency like the Crude Palm Oil Support Fund (BPDPKS) to raise funds to subsidize the difference between the coal export price and DMO price not only will be ineffective but is also rather irrelevant.
First of all, crude palm oil (CPO) producers are not subject to the DMO, and palm oil is a commodity that will continue to play an increasingly important role in the economy, while coal is a mineral that will be phased out and replaced by renewable energy within the next 20 to 25 years. The BPDPKS was set up under Law No. 39/2014 on plantations to raise funds from palm oil exports to support sustainable palm oil development. The funds are managed by the finance minister for use in supporting biodiesel and the replanting of smallholder oil palm plantations.
Since the prices of such commodities as oil, palm oil, coal and other minerals are highly volatile, the government should set up a regulatory framework to ensure adequate domestic supplies. Hence, coal, oil and natural gas companies that operate under contracts of work are subject to the DMO.
Oil and gas mining companies have always been subject to DMO amounting to 25 percent of their respective shares under the production sharing contract but there have never been major problems in the DMO implementation. The oil and gas prices for the DMO are periodically reviewed so that they are not radically different from the international prices. The main reference prices are the monthly reviewed Indonesian Crude Price (ICP) and the average oil price assumed for the annual state budget.
Yet, most important is that oil and gas production is directly supervised by the Upstream Oil and Gas Special Regulatory Taskforce (SKKMigas) so that the government knows exactly how much each oil contractor produces (oil lifting).
Hence, instead of setting up a fund-raising body as the BPDPKS, the government should establish a better mechanism for periodically determining coal prices for the DMO as is the practice in the oil and gas sector. Overly wide price differences will be vulnerable to export smuggling. Higher DMO coal prices will certainly raise power costs but this should serve as a stick to accelerate our coal exit.