Building the Future of Indonesia in Remote Areas by Indonesia Climate Change Center

Building the Future of Indonesia in Its Remote Areas

BUILDING THE FUTURE OF INDONESIA IN ITS REMOTE AREAS

Preview of Study Renewed Perspectives on How to Attract Renewable Energy Investments Feasibility Study: Crop to Energy (“CTE”) Case Artissa Panjaitan

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1. BACKGROUND Indonesia still has about 25% unelectrified households1 (HH) after 69 years of independence. Almost all of unelectrified HH are in remote, spread-out and sparsely populated areas. In addition, among the 75%, many areas still have limited hours of electricity service. Electric power solutions to develop Indonesia’s remote areas and archipelago must be strategically prioritized in order to integrate all citizens into the wealth of growth2. As such, Indonesia will accelerate its Human Development Index (HDI) improvement and resilience to food and energy security threats in the less developed areas.

Figure 1 - Electrification Ratio of Households by Province

Sufficient resources must be dedicated to help resolve the obvious challenges in promoting electrification to scattered & sparsely populated remote areas3. Some of clear issues include: building small capacity power plants into areas where PLN’s grid is absent; subsidizing consumers’ buying power in the early stage and allowing their access to financial system; and improving the Renewable Energy investment risk/return profile4. 2. SOLVING THE STRATEGIC PUZZLE – ELECTRICITY FOR REMOTE INDONESIA A. ECONOMIC BENEFITS Providing electricity to all remote locations in Indonesia would require a policy to improve investment attractiveness. Indonesia as a whole will benefit by creating values from what will be invested in the development. The obvious but latent opportunities in Indonesia’s remote areas and archipelago are in agriculture, forestry, fishery and tourism sectors. Understandably, due to the small-scale electricity demand characteristics in each remote site and diverse local Renewable Energy (RE) types, the key to attract investments will be a function of nationally accepted investment return benchmark, the size of investment opportunities and the simplicity as well as the clarity of licensing process. So far, Government Of Indonesia (GOI) has provided Feed In Tariff (FIT) scheme for maximum 10 MW capacity per PPA. But, experience shows that such scheme will be outdated by inflation, exchange rate (currency) depreciation and impacts of difficulty to reach remote areas. This scheme of investment return benchmark has already been implemented in the case of toll road investments. In order to reduce risk elements in cost and logistics, our assessment shows that the primary energy source must be locally available with proven conversion technology. The use of locally available primary energy will also allow job openings for local people to

INDONESIA CLIMATE CHANGE CENTER

In 2010, Statistical Yearbook of Indonesia by BPS, the number of households = 61,164,600 with an average size of 3.9 persons per household. 2 Reduced income gap, modern healthcare & education facilities, telecommunication services, village & government administrations, access to distribution of local produce. 3 The smallest number of population in a regency in Aceh province still has about 30,000 people in which a small village only had about 200 inhabitants, while in East Kalimantan province the smallest regency only had 15,000 people. 4 Current Indonesia’s policy is not attractive to Stateowned Electricity Company or Public Private Partnership interest.

Building the Future of Indonesia in Its Remote Areas

share the wealth of development. Indonesia: Household (HH) Electrification Rate

National Issues without Electricity: • Education

(100% = 61,105,458) ≈ 14,886,000 HH

25%

75%

• Healthcare

≈ 60 million Citizens

• Financial Services

Electrified

Unelectrified Average Consumption 46,220,000 HH (supplied by PLN): = 1561 kWh/year/HH = 4.3 kWh/day/HH

• Telecommunication • Village/Government Administration • National Integrity/Security

The gap between PLN’s data and estimated demand indicates owned generators

Country

Population (million)

GDP(PPP)/Capita (US$)

kWh/Day/Capita

GDP(PPP)/kWh (US$)

Thailand

8,318

6.18

3.7

Vietnam

2,782

2.40

3.2

Philippines

3,425

1.70

5.2

Indonesia

240

3,821

1.70

6.1

China

1,339

5,969

7.04

2.3

Japan

127

34,173

23.25

4.0

USA

307

47,036

39.25

3.3

35,671

20.61

4.7

6,784

10,325

8.18

3.5

Germany Global

Electricity Production directly correlates with: 1. Economic Competitiveness, 2. Income improvement, 3. National Security.

* Source: 2012 PLN Statistics; IEA, United Nations & ICCC Analysis.

Figure 2 – Direct Impact to Economic Growth from Electricity for All in Indonesia Plan

With 25% of the population is still unelectrified, Indonesia’s average electricity consumption per capita is still lower than Vietnam’s. Figure 2 also reflects electricity consumptions positively correlate with income per capita. Therefore, the solution for electrification of Indonesia’s remote areas is a way to: stimulate economic growth, fundamentally improve the country’s capacity in global competitiveness and sustain the national security. Electrification of remote areas will help mobilize valuable resources from more developed Indonesian areas to remote ones, to provide basic functions of a modern society, such as for: education, healthcare, telecommunication, financial services and village administration. Without these basic functions, about 25% of Indonesia’s natural and human resources will not optimally participate in the country’s growth. Indonesia average household electricity consumption reported in 2012 PLN Statistics is lower than the number we analyzed from international consumption/capita reports (2008). The gap is provided by people in remote areas using their own diesel generators. Despite of the subsidy in electricity price, PLN’s revenue number translates to electricity consumption of 4.3 kWh/day/HH only5. This number also indicates a significant part of the electrified HH still have low consumption instead of just limited service hours. Most of 25% Unelectrified Population

Existing Owned GeneratorSet

• Population without Buying Power and need Government fiscal intervention.

• Population with Buying Power but in some areas PLN is unable to supply 24-hour service. • Currently rely on owned expensive Diesel power outside of PLN’s service hours. • Propose IRR measure instead of Feed In Tarif for 24-hr service

National Policy for Electricity Price Decisions

• Population potentially with Buying Power but PLN is unable to supply. • Currently have no Diesel power, possibly due to supply issue to remote areas.

• Population with Buying Power but PLN is unable to supply. • Currently rely on expensive Diesel power. • Propose IRR measure to attract investments

Bupati/Mayor Policy for Electricity Price Decisions

PLN’s Grid Connection

Figure – 3 Excerpt of electricity demand situation in sparsely populated and remote Indonesia

Average bill size of registered 46.219.780 HH = 4.3 kWh/day/HH x Rp. 631.66 /kWh x 30 days = Rp. 81,043 per month. The reality of current electricity spending in remote areas will be less than this average.

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As showed on Figure 3, the majority of unelectrified HHs are in areas where the PLN’s grid is absent. Only a small fraction of those unelectrified HHs are actually unable to pay for PLN’s connection fee and monthly bills. The rest of HHs can still afford to consume PLN generated power as indicated by their phone bills6 and expensive diesel back-up power. To understand the remote area electricity demand characteristics, ICCC team simulate the electricity demand from a 500-household village with 24-hour low-voltage electricity grid and some basic village services, such as: school, medical clinic, internet-telco services, village & governmental administration and security/police station (see Figure 4). The simulation gives us an indicative electricity demand composition from the HHs, commercial entities and village-services at around 85%, 10% and 5% correspondingly. The over-all average electricity consumption by the 500 HH is at 5.6 kWh/day/HH, with Peak-to-Base-Load Ratio is approximately 5 and the Capacity Utilization of 2 x 160 kVA power plant at only 43%.7 Consumption VA (Watt) 350,000 300,000 250,000 200,000

100%

320,000

Initial Design @ 2 x 160 kVA

Typical for 500 households in remote Indonesia

90% 271,400

80% 70%

With the presence of 4 Retailing Shops

60%

160,000

50%

150,000

84.8%

Average daily Capacity Utilization = 43%. 41.6%

40% 30%

100,000

Peak/Base-load: ± 4.7 Avg. Consumption: ± 5.6 kWh/day/HH

50,000 0

20%

hour

17.9%

10%

hour

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Figure 4 – Demand characteristics of electricity market in remote areas with 500 HH

The electricity demand characteristics necessitate power plants with fast Transient Time. It means that Indonesia’s remote areas require gas- or liquid-fueled energy conversion engines. However, to meet the criteria for a 24-hour service from locally generated energy using established technology, the remote locations will be best powered by internal combustion biogas engines with biomass supplies from energy crops (CTE). Combinations of biogas engines with hydro power8 as well as solar panels will also be a possible solution but with a risk of more complex and expensive operations. This is a case where low emission technology is more feasible for remote areas than fossil fuels without considering the value of carbon/emission trading. CTE biogas-power solutions will need several policies to work in parallel to ensure: land availability, supply of suitable (licensed) energy crops, standardized energy conversion technology9 and attractive investment return. On working level, CTE concept will need to build a mechanism to secure developer’s portion of feedstock farms and a means of promoting local economic activity in each village to ensure the channel of wealth distribution. Table 1 - Land Requirement for 1 MW Electricity Generation Parameters Electricity Capacity Electricity Yield kWhel/ton FM

Unit

Quantity*

Quantity**

1,000

kWhel/ton FM

37010

494

1st Year Capacity factor (based on 8760 hours/year)

Electricity produced per year (incl. 5% internal use)

kWh

4,380,000

Feedstock Requirement

ton FM/year

11,838

8,866

Feedstock Productivity

ton FM/ha/year

160

160 – 320

Feedstock Electricity Yield Land Requirement

kWhel/ha/year

59,200

79,040

For 50% Capacity Utilization

74.0

27.7 - 55.4

For 85% Capacity Utilization

125.8

47.1 - 94.2

*) Electricity yield based on literature review (using energy characteristics of Maize in German’s standard for Taiwan Grass); **) Electricity yield based on Taiwan Grass Lab. test and Team’s calculation using a range of empirical productivity.

INDONESIA CLIMATE CHANGE CENTER

Results of interviews during site visit. A 200-household village is projected to have electricity demand composition from household, commercial and village services at around 68%, 19% and 13% respectively. The set up will require a 2 x 80 kVA power plants. 8 Indonesia’s remote highlands will have hydro and solar power potentials but with more difficult terrains to grow energy crops. 9 This initiative to electrify remote Indonesia would also be able to develop new industries, such as: biogas energy conversion technology & equipment, energy crop farming and financial transactions in remote areas. 10 Biogas yield at 200 m3/ton Fresh Material (Maize), with: 53% methane content in biogas, 37% electricity generation efficiency and approx. 5% of biogas methane does not burn into power. 7

Building the Future of Indonesia in Its Remote Areas

In addition to managing the supply of feedstock between Owned and near-by farm areas, a power producer may also introduce price differentiation to balance the supplydemand, especially during peak hours, as well as to minimize excess power during its cycle of base to normal to peak load working hours. A different metering, both by hardware and software control, can also be applied for supplies to business entities within the distribution grid. At 0.64 kW/connection with a peak load design at 80–85% of the installed generation capacity, the 15 million unelectrified households will need a peak installed capacity of 10–12 GW and eventually generate 30,660 GWh11. This total capacity will require about US$ 30–36 billion capital expenditures. This figure is larger than the total of currently generated diesel and gas power. To provide this size of capital, the financing would be better complemented by capital markets. By taking in to account the electricity consumption of 15 million households at 5-6 kWh/day and the average US$ 3.5/kWh economic productivity, electrification of remote Indonesia can be projected to create US$ 100 billion additional GDP. B. THE RIGHT PRICING FOR THE RIGHT PRODUCT This study is also seeking for a solution to attract RE investments into Indonesia. So far, under current FIT scheme, there have not been many new plants in either hydro (as the most established RE technology) or biomass/biogas power. The possible explanation for such is the imbalance of investment risk and return profile, in which intransparency or difficulty of getting the permits is a discouraging risk. To understand the risk and return profile of current RE investment, we analyze MEMR Decree No. 31/2009 and No. 12/2014 for mini hydro and MEMR No. 4/2012 for biomass/biogas plants against other fossil fueled power. Rp./kWh 3,500

3,000

2,500

2,000

Price Schemes of Mini (≤ 10 MW) Hydro PPAs GHG Emission Source (Heavily Subsidized)

Average Generation Cost of Diesel Power

3168.6

Diesel Power Production (2012): •Owned= 3,484.5 GWh •Hired Genset = 18,070.8 GWh

Hydro Power Production (2012): 10,524.6 GWh

(Rp./kWh)

3,500 3168.6 3,000

@ Average Fuel Price (2012) = Rp. 8629.8/liter.

2,500

PLN’s average cost (2012) is higher than the PPA price of a Medium Voltage Mini Hydro in Papua

Price of Low Voltage 1305.2 Mini Hydro 1204.8

2363.0

PLN’s Average Cost

2,000 1,500

1217.3

1121.5 1001.8 810.1

1,000

1506.0

1,500

1,000

Inflation Adjusted

Average Cost of Power Generation 4,000

1004.0

1217.3 984.0 852.8 787.2 656.0

GHG Mitigation (Lightly Subsidized) 500 Basic Price (Java & Bali) Kalimantan, NTB & NTT Diesel Power Average Cost

Price of Medium Voltage Mini Hydro

Sumatera & Sulawesi Maluku & Papua

(A)

500 0

2012 Average Selling Price 728.3 (CAGR: 3%/year) 155.9

2007

Hydro

2008

2009

2010

Coal

2011

2012

Diesel

Natural Gas

Geothermal

Combined Coal & N. Gas

Average Selling Price

(B)

Figure 5 – Understanding Indonesian policy in developing RE power from hydro power PPA

Under current Mini-Hydro (1 < capacity ≤ 10 MW) PPA pricing policy, it suggests that price differentiation of Mini-Hydro is generally based on groups of low and medium voltage (Figure 5A). As such, there is no price overlap between the 2 types of supply voltage. This price scheme differentiation may not be suitable to attract RE investments if we make investment return as the main objective instead of using FIT. By setting an investment return as the target, remote areas with big energy potentials could be developed using medium voltage grid for transmission to near-by populated areas. PLN’s hydro power average cost is relatively flat and still cheap (Figure 5B). But, the policy of fixed Mini-Hydro PPA prices (Figure 5A) over the period of PPA (20 years) and by setting price coefficients for 4 regions, i.e. Java (base price), Sumatra & Sulawesi, Kalimantan & West Nusa Tenggara & East Nusa Tenggara, Maluku & Papua have the following policy weaknesses and appeared as unattractive risks: 1. These price coefficients for each geographical zone do not reflect the actual

At 70% life cycle assessment emission reduction from diesel power base, this number translates to 12.5 million ton CO2e per year.

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difference of investment risks12 at each location and, therefore, have little relevance/incentive to attract investors to remote areas in Sumatra, Kalimantan, Sulawesi, West Nusa Tenggara, East Nusa Tenggara, Maluku and especially Papua. 2. PLN’s average total cost (Figure 5B) follows cost inflation that since 2011 it is already more expensive than the fixed medium-voltage Mini-Hydro PPA price in all regions13. a. Under the fixed price PPA scheme, any investor (interested to invest in Mini Hydro several years after the regulation is set) would lose investment attractiveness due to inflation of capital expenditure in equipment price and construction costs. b. Low-Voltage Mini-Hydro power prices in Java, Bali, Sumatra and Sulawesi are now below the national average cost of PLN. c. PLN provides little- or no-incentive for mitigation actions in power generation by Mini Hydro developers. This is in contrast to inflation adjustment and heavy consumer subsidy applied to diesel (fossil fuel) power generators. 3. PLN’s 2012 average cost in coal-powered electricity-generation is sending the “Wrong Product” signal since it is more expensive than the purchase price from medium-voltage Mini-Hydro developers in Java, Sumatra and Sulawesi. a. This is a message that “green energy” of hydro is not the “right product” for investors or at least coal power is preferred by PLN in Java, Sumatra and Sulawesi. b. While for example Nias island (North Sumatra Province), Buton island (South-east Sulawesi Province) or deep inland of Sumatra and Sulawesi still have no electricity, the locally generated Hydro power potentials in there will remain unattractive at current PPA price since they carry even higher costs to develop compared to near-by places to PLN’s grid. 4. Figure 5B shows that diesel and natural gas power costs (18.2% of total production14) are above PLN’s average cost and have dragged PLN’s cost even more expensive than PLN’s geothermal cost. Rp./kWh 3,500

3,000

Price Schemes of Biomass & Biogas PPAs GHG Emission Source (Heavily Subsidized)

Inflation Adjusted

Average Generation Cost of Diesel Power

@ Average Fuel Price (2012) = Rp. 8629.8/liter.

2,500

Hipothetical price curve to improve PPA Attractiveness

2,000 1722.5 1590.0

1,500

Price of Low Voltage Biomass Power

1325.0 1,000

GHG Mitigation (Lightly Subsidized)

1267.5 1170.0 975.0

2012 PLN Average Price

Inflation Adjusted

Price of Medium Voltage Biomass Power

500 Sumatera, Java, Madura & Bali

Kalimantan, Sulawesi, NTB & NTT

Maluku & Papua

Diesel Generator Cost

Figure 6 – Understanding PPA pricing policy for biomass/ biogas power

Having analyzed the policy of Mini Hydro PPA price, we observe the same principle is applied on Biomass/Biogas power price regulation15 (Figure 6). The policy of fixed PPA prices makes biomass/biogas medium-voltage power in Sumatra, Java, Madura, Bali, Kalimantan, Sulawesi, NTB and NTT cheaper than 2012 PLN’s average cost. Similar to hydro power, PLN provides little- or no-incentive for low emission power by biomass/ biogas developers. Biomass crops practically can be grown to power-up most of unelectrified Indonesians. The fixed price PPA scheme seems to have been initiated using the same principle of PLN’s hydro-power cost and the model of “waste to energy” where the biomass fuel is

INDONESIA CLIMATE CHANGE CENTER

Technical, product, market, social, security risk. The policy for a fixed Mini Hydro selling price to PLN was signed on November 13, 2009 during the drop of global energy costs. 14 Natural Gas and Diesel electricity productions are 5,668.0 GWh, 3,484.5 GWh (owned generators) + 18,070.8 GWh (rented generators) from the total production (includes IPP) of 200,317.6 GWh. 15 The regulation was issued on January 31, 2012. 13

Building the Future of Indonesia in Its Remote Areas

assumed from non-price competitive materials. As of now, we do not see competitive use of the farm land and the crops for biomass fuel in remote areas. But, the future potential of the land after some economic development will demand for a fuel price adjustment. There would also be a complexity to adjust the price of biomass crops based on inflation. So, we need to investigate existing policies to accommodate price inflation in public services. MEMR Decree No. 31/2009: November 13, 2009

MEMR Decree No. 12/2014: May 2, 2014

PPA Price PPA Price Coef. 20 kV Low Volt. (IDR/kWh) (IDR/kWh)

Hydro Power Location

Coef.

PPA Price PPA Price 20 kV Low Volt. (IDR/kWh) (IDR/kWh)

Jawa, Bali

1.0

656

1004

Jawa, Bali, Madura

1.0

880

970

Sumatera, Sulawesi

1.2

787

1205

Sumatera

1.1

968

1067

Kalimantan, Nusa Tenggara Barat, Nusa Tenggara Timur

1.3

853

1305

Kalimantan, Sulawesi

1.2

1056

1164

Maluku, Papua

1.5

1506

Nusa Tenggara Barat, Nusa Tenggara Timur

1.25

1100

1213

Maluku, Maluku Utara

1.3

1144

1261

Papua, Papua Barat

1.6

1408

1552

984

Figure 7 – Revision of Hydro Power FIT scheme to renew investment attractiveness

A week after the final report delivery, MEMR issued a new decree to revise Hydro Power FIT scheme (see Figure 7). The revision proves the hypothesis that investment return is a better proxy of investment attractiveness compared to FIT. As of now, FIT revision is necessary once investment demand dries out. On the other hand, investment return is used as a measure of investment attractiveness, the system will automatically adjust the viable price for each location based on capital expenditure of projects, exchange rate, inflation and capacity utilization. The MEMR Decree No. 12/2014 came with 34% price increase for 20 kV connection while it is a 3% decrease for Low Voltage PPA price. In addition, the price difference between low voltage and 20 kV connection is only 10% from previously 53% in MEMR Decree No. 31/2009. The new price scheme also has 2 other revisions, i.e. the change of geographical coefficients and the price range for low voltage and 20 kV connections. In MEMR Decree No. 31/2009, the price range of 20 kV and low voltage connections had no price overlap. We believe government intervention can be done in all determinants of investment return to meet the requirements from efficient investors. To gauge the expected investment return, Government and PLN bond yields are compared to the perspective of average equity return from the Equity Index.

PLN 1) Financing Capacity

C. GETTING THE IMPLEMENTATION OF INVESTMENT POLICY Good Quality

Total 1) Investment

Electrified Areas

Electrified

(Mostly Subsidized)

Electrified Areas

25% Unelectrified (Off Grid) • Remote: on main islands & small islands • Sparsely populated, Low Demand (small market size per site)

US$ 54.1 b

US$ 30-36 b

Total Financing gap

Poor Quality (On Grid)

Financing gap in PLN’s Financing2) for grid area Electrification

US$ 125.2 b

75% Nation Wide Electrification

US$ 71.1 b

Based on 2013 – 2022 RUPTL (Power Generation Business Plan), signed on 31 Dec. 2013: • Electrification rate target: to reach 97.7% (2022) • Number of Customers: 49.7 million (2012) to 77.2 million (2022) • Total Investment Need = US$ 125.2 billion, to meet objectives for: 1) demand growth, 2) electrificiation and 3) captive market. • PLN Financing Capacity = US$ 71.1 billion, Total Gap = US$ 54.1 billion.

Figure 8 – Financing capacity to reach national electricity plan

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Based on the most recent PLN’s Business Plan, there will be about US$ 54.1 billion needed to complement PLN’s financing capacity of US$ 74.1 billion to reach 97.7% electrification rate. Figure 8 shows the financing capacity of PLN to reach National Electricity Plan. On the other hand, we estimate that there will be US$ 30–36 billion investment needed to electrify 25% of the HHs and development of new businesses in currently “Off Grid” areas. Therefore, PLN expresses the fact that it can not develop some part of its On Grid areas and certainly the Off-Grid ones as well. Using CTE in remote areas, Indonesia can certainly replace existing GHG emitting diesel power plants. We believe CTE solution will be best applied on islands where power supplies still use diesel power generators. CTE can also fill-in power deficiency in PLN’s grid areas during peak hours. At this stage of the study, we estimate the minimum size to attract investments in remote areas would be between 3 and 5 MW. The nature of remote areas with scattered and sparsely populated settlements would need a cluster of villages (Figure 9) to meet such minimum capacity. The clusters will need about 4500 to 8000 households and between 150 – 250 ha for fast-growing and high-energy-content crop farms, owned by the developers, either in a region (kabupaten) or sub-region (kecamatan) set-up. Optimization of clusters, energy-crop farms and local grids will be studied by investors and regulators. 3 – 5 MW PACKAGE (4500 – 8000 HH) Migration of People

100 HH

Migration of People

300 HH

Hub, example: 2000 HH

500 HH

Base station for Technicians, Service & Storage of Spare Parts

1000 HH

600 HH

Figure 9 – Hub & spoke concept to optimize capacity and investment

Standardization of engine capacity would also be a method to optimize investments and make financial institutions more easily identify/calculate the associated risks. Standard engine sizes will also help supporting-domestic-industries grow to sustain the policy. A non-economical site will possibly make the population to relocate voluntarily in order to receive electricity services. Our study indicates the industry standards that need to be developed for this policy. The “hub and spoke” arrangement will put a pool of technicians, service & maintenance schedules as well as spare part inventory in the Hub at a more efficient level. Ministry of Public Work National Land Agency

Ministry of Environment

Ministry of Energy & Mineral Resources

Ministry of Forestry

Bupati

PLN

Governor

Specific Indonesia Risk Profile: Pre-Operating Costs, Legal Aspects, Price-Market Competition, Payment Terms & Conditions and Growth. RE Business Developer

Technology Owner Contractor

G-thermal

Hydro

Biomass

Solar

Wind

Financiers: Equity & Debt Insurance Companies

Owner of RE sources

Local Inhabitants & Land Owners

Figure 10 – Complexity of RE investment arrangement leading to One Gate service model

INDONESIA CLIMATE CHANGE CENTER

Building the Future of Indonesia in Its Remote Areas

Accelerating the implementation of this policy will also need streamlining the process and screening of prospective investors. Current experience demonstrates the weakness in awarding RE investment license whereby many of licenses did not materialize and cause delays in development of unelectrified areas. Some of delinquency incidents occurred due to complexity in RE investment process/arrangements. The complexity in Indonesia’s renewable energy investment map can be seen in Figure 10, which indicates a high pre-operating costs if not streamlined. To streamline the process, we propose the need to have a One Gate Office that will arrange the administrative process and able to validate the Feasibility Study and Operating Reports submitted by RE developers. This office will be managed by technical, financial, legal and administrative staffs with direct linkages to regulators, local licensing authorities and investment communities. The office will also help announce: results of technical and financial audits, upcoming opportunities, status of applications and implementations.

Figure 11 – Sensitivity test on Internal Rate of Return (after Fiscal Incentives) by changing the capacity utilization and testing the price of low voltage FIT in Maluku and Papua

Figure 11 shows sensitivity analysis to test the impact of capacity utilization and electricity price to changes of IRR at 1 MW installed power generation capacity. It is showed that increased capacity utilization will increase the IRR at fixed selling price of electricity. Based on the price of Low Voltage biomass power FIT in Maluku and Papua (IDR 1,722.5/kWh), even the capacity utilization increased to 85%, the IRR is only less than 10%. In case of using IRR announced by PLN (14%), electricity price is estimated IDR 2,229/kWh at capacity utilization 50%. This sensitivity test indicated that based on attractive IRR, the highest FIT electricity price still not enough to attract RE investment. Figure 12 shows sensitivity analysis to test the impact of installed power generation capacity and capacity utilization to electricity price at IRR target ≈ 18%. It is based on the principle that increased capacity utilization will reduce the selling price of electricity. • At capacity utilization of 50%, 60%, 70%, 75%, 80% and 85% in year 1, 2, 3, 4, 5 and 6 respectively, the electricity price of 1 MW power plant (without receiving current scheme fiscal incentives) will be at IDR 2,600. • This price will decrease to IDR 2,130 if the same 1 MW power plant capacity utilization reach 85% from the first year. • Under the scenario of current scheme of incentives, the price can reach to as low as IDR 1,865/kWh if a region with 5 MW total installed capacity can reach 85% utilization right from the 1st year of operations. Increasing total biomass power plant capacities apparently allow a significant electricity price decrease until power capacity reaches 3 MW. Power plant total capacities of 3 and 5 MW give an almost similar price at constant IRR 18%.

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Capacity Utilization

Year

2.700 2.600

Price (IDR/kWh)

2.500 2.400

Price

50% 60% 70% 75% 80% 85%

60% 70% 75% 80% 85%

70% 75% 80% 85%

75% 80% 85%

80% 85%

85%

1 MW Without Incentive

5 MW With Incentive

2,600 2,400 2,250 2,200 2,150 2,130

2,225 2,070 1,980 1,920 1,885 1,865

2.300 2.200 2.100 2.000 1.900 1.800 45%

50%

1 MW without incentive

55%

60%

65% 70% 75% 80% 85% 90% Capacity Utilization 1 MW with incentive 3 MW with incentive 5 MW with incentive

Figure 12 – Sensitivity test on price by changing the capacity utilization at constant IRR = 18%

As the study progresses, the study finds that remote unelectrified areas will be out of PLN’s financing capacity and electricity generation capacities below 10 MW can be initiated without being part of PLN’s Business Plan. Since electrification of remote areas will need capacities less than 10 MW per cluster, the solution for remote area electrification implies non-participation of PLN but will certainly still need to be governed properly. Figure 8 also indicates a clear need to relinquish business areas16 to private companies. Relinquishment is necessary to invite investments in generation, transmission and distribution for remote areas. But, it is not yet indicated clearly in which area PLN will relinquish its business areas and how the relinquishment process will be carried out. Connection (Business Area)

Service Level

Possible Action Plan

“Good” Service Level

PLN to maintain Service Level and add more capacity to meet growth of demand

Presentation symbol on Map

PLN to improve service level to the agreed National Standard

On Grid

Off Grid

“Poor” Service Level

National Target: • Electrification • Service Level (reliability)

Invite Public Private Partnership (PPP): • A guaranteed off-take • Agreed IRR/ROI • Agreed Service Level target • At less than existing PLN’s cost. Divest PLN’s assets (business areas) to a PPP company: • Agreed IRR (Investment Return) • Agreed Service Level target (to be improved by PPP) • At less than existing PLN’s cost. Offer to PPP companies: • Agreed IRR (Investment Return) • Agreed Service Level target with Corporate Guarantee • Solicited or Unsolicited

Source: Team and ICCC Analysis

Figure 13 – Proposed structure of presenting business opportunities in remote areas

10 |

INDONESIA CLIMATE CHANGE CENTER

By law, all Indonesia electricity markets are mandated for PLN but open for relinquishment to meet development goals.

Building the Future of Indonesia in Its Remote Areas

Figure 13 proposes the structure of how Indonesia can approach the efforts to promote business opportunities in closing the financing gaps for On-Grid and Off-Grid areas. The participants for remote area electrification plans will still have to get PLN involved but with much larger role of local governments and Public Private Partnership. PLN can announce areas where they will clearly be kept by PLN or relinquished. There will be 2 main criteria for PLN to keep/operate or to relinquish its business areas, by agreeing on: 1. affordable electricity price (with or without subsidy) and 2. service level. The subsidy can be provided as part of Public Service Obligation. The process of publishing attractive investment opportunities is still relatively new in Indonesia power generation business and may raise suspicions that the provided information is not fully transparent or falling back to business as usual. In addition, efforts to invite business to remote Indonesia areas will only be successful if there are clear procedures in business development.

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About the Author

Artissa Panjaitan is the Coordinator of Low Emission Development Strategy (LEDS) cluster in ICCC. LEDS cluster primarily focuses on mitigation aspects of power (electricity), transportation and agriculture developments. Contact: apanjaitan@gmail.com Feedback and suggestion can be sent to email info@icccnetwork.net or address Gedung Badan Pengkajian dan Penerapan Teknologi (BPPT) 1, 16th Fl. Jl. MH Thamrin 8, Jakarta 10340. Further information of ICCC is available on www.ICCC-network.net.

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