Divya Karyza, Jakarta – Indonesia must reconsider its coal price cap policy to expedite renewable energy development in the country, according to analysts.
The JETP Secretariat through its Comprehensive Investment and Policy Plan (CIPP) suggested the government evaluate the US$70 per tonne price cap for domestic sales of coal to power plants to facilitate the supply of electricity from renewable sources to state-owned utility PLN's grid.
The policy undermined market price signals that were crucial for electricity companies' decision-making process regarding future investments, the CIPP document reads.
The Asian Development Bank (ADB), meanwhile, has noted that the cap on PLN's own retail prices for electricity incentivizes the firm to source power at the lowest possible cost.
Under current conditions, coal-fired generation typically is far cheaper and is therefore the electricity company's preferred power source, according to an ADB report published in 2020.
Fabby Tumiwa, executive director of the Institute for Essential Services Reform (IESR), said the price ceiling, called the domestic price obligation (DPO), prevented a level playing field between coal and renewable energy power plants by making the cost of coal artificially low and stable.
"Pro-coal rules such as the DPO must be revoked to expedite the development of renewable energy power generation," Fabby told The Jakarta Post on Thursday, adding that a higher mix of renewable energy in PLN's electricity grid would lead to cheaper electricity generation costs.
"Removal of the [coal] price cap accompanied by a rapid expansion of renewable energy power generation is expected to have a positive impact on PLN and the state's financial sustainability," he said in response to a question about whether the move would badly affect PLN's finances.
A reform of domestic coal pricing would send a clear price signal to PLN, according to Indonesia's JETP CIPP document. The document suggests that PLN will be compensated for the difference between the market price and the current $70/tonne price cap to manage the associated increase in fuel cost, should the price cap be revoked.
"In the long run, it is expected that the true cost of coal will be reflected in PLN's investment decisions and dispatch order," the document reads.
Indonesia's JETP Secretariat head Edo Mahendra said the policy recommendation document suggested the price cap removal to correct the relative price of coal.
"The only thing that would change [under the proposed scenario] is the relative cost, but the delta remained the same," he told reporters in Jakarta on Tuesday.
In Indonesia, renewables are still considered expensive sources of electricity, according to an IESR report, citing the case of solar power generation.
The average levelized cost of electricity (LCOE) of solar in the country remains the highest compared with other Southeast Asian countries, reaching $165 per megawatt-hour (MWh), far below Myanmar with an average of $79/MWh, the same report reads, pointing out that that situation significantly affected the trajectory of Indonesia's future renewable energy policy and investment climate.
The LCOE, a standard tool used for comparing the cost of different electricity generation technologies, is a measurement of the total cost and electricity generated by an asset over its lifetime.
Jisman Hutajulu, the Energy and Mineral Resources Ministry's electricity director general, said the government had yet to consider evaluating the DPO rule.
"We want renewable energy penetration to happen without causing electricity prices to skyrocket. Electricity prices have to remain affordable [...] to maintain our [Indonesia's] industrial competitiveness," he said during a press conference, also on Tuesday.
The effect that abandoning the $70 price cap would have on PLN's financials would be offset by lump sum compensation for the state utility, according to Institute for Energy Economics and Financial Analysis (IEEFA) energy analyst Putra Adhiguna's interpretation of the policy recommendation.
He went on to say that the compensation would be funded through a type of levy charged to coal producers with reference to the previous price cap and the domestic market obligation (DMO) quantity.
"The proposed concept is [based on the] deviation between the market price of coal and the $70 price [that existed] under the DPO regulation," he explained, illustrating that, if Indonesia's benchmark coal price (HBA) was $80 per tonne, PLN would have to buy its coal supply at a full price, but coal producers would be subject to a $10 levy, which would be paid to PLN.
"The implied message is that PLN would not experience a loss and would be compensated by a special entity that would distribute the funds to PLN to offset the higher market price versus the capped price," Putra told the Post on Thursday.