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Switch On/Switch Off:Lesson Learn from the Reform Indonesia Power Sector

Fabby Tumiwa

Institute for Essential Services Reform

Presented atInternational Conference on Establishing Dialogue on Fuel and EnergySector Transparency InitiativeBishkek, 26-27 September 2011


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INDONESIA


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Indonesia Electricity Sector at Glance (1)

13,466 islands, 1.9 mil sqmeter

Population: 237.6 million(2010)

GNI/capita: $ 2500 (2010)

Poverty headcount ratio:13.3% (2010)

CO2

emission/capita: 1.7(2007)

Electrification ratio: 65% (est,2010)


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Electric Power Law in 2009 markedthe change of power industrystructure, end the special status ofthe state-owned company - PLN. Further liberalize the power sector.

New industrial structure, mix of verticalintegrated and unbundled monopolymodel.

Shared responsibility and decentralizedauthority to local government (district

and provincial level). Regional electricity tariff as alternative

to the uniformed national electricitytariff.


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PLN dominates electricitysector National-wide coverage

Vertically integratedcompany: generation,

transmission & distribution 40,000 employee

27,000 MW Installed capacity(as 2010) + Purchasing energyfrom IPP (~ 3000 MW)

40 million customers

170 GWh total energyproduction, and 147 GWhenergy sold

Annual expenditure: ~US$ 18billion


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Governance Challenges

Electricity Industry is politicalsubject. Indonesia constitution regard

electricity as vital and strategic tothe state

Regulated and controlled by thestate.

Regulated Model prone tocorruption, and utility becometarget of political interest. Political, social, economic interest

vs. Commercial interest;

Governance of the management isseriously compromised.


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Historical Development of Power Sector in

Indonesia

1882 1942: Dutch electricity companies set-up and provide electricity

services to consumers in some major cities

1945: Dutch LWBs was taking over and establishment of Ministry of

Public Work and Power of Republic of Indonesia

1945 1956: Nationalization of foreign gas and power utilities 1965: gas and power utilities were separated, creation electric power

utility company (Perum PLN) and natural gas company.

1972: PLN has given task to electrify the entire country, with

monopolist status.


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Historical Development of Power Sector in

Indonesia

1985: New Electricity Law, starting deregulation andliberalization of Indonesia power sector, open-up forIPPs (first reform)

1990-1997: the emerging of IPPs, PLN act as singlebuyer.

1995: Corporatization of PLN, separating asset and unitunder a vertical-integrated structure: generation,transmission, distribution (second reform);

1998 2002: Power Sector Reform, intend to do fullliberalization, privatization develop competitive marketfor electricity, enactment of new law on electricity (No.20/2002) (third reform)

2004: the annulment of the Electricity Law No. 20/2002by the Constitutional Court.

2006 2009: development of new electricity law,enacted in 2009 (Law No. 30/2009).


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Electricity Sector Reform (ESR) in Indonesia (1)

ESR evolves since 1980s.

A major structural ESR designed since early 1990s by WorldBank and development donor agencies (such USAID). Driving by larger industrial deregulation attempt in 1980s

Main objective to end the monopoly of state-owned electric utility,

introducing market-oriented industrial structure, creation ofelectricity market, facilitation for private investment.

ESR getting more momentum after the economic crisis in 1997 economic stabilization loans from WB and IMF string attached to

the conditionality to do reform (deregulation and privatization) ofelectricity and oil and gas sector.

Asian Development Bank (ADB) and USAID assisted the policyformulation for the Power Sector Reform (PSR) and drafted the draftof the law.


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Element of Proposed Reform (1998 White Paper and Electricity LawNo. 20/2002): Separation ofPLNs asset in Java-Bali and non-Java Bali.

Java & Bali system accounted of 75% of energy sold by PLN and more matureinfrastructure.

Unbundling of the PLN into generation, transmission and distributioncompanies; Later, privatization of unbundled companies.

Separation of Government policy-making and regulatory function forelectricity sector.

Establishment of electricity market regulatory body.

Establishment of electricity market (power pool) in Java-Bali system. Rationalization of Independent Power Producers (IPP).

Estimated cost to complete the overall reform program wasestimated around US$ 4-5 billion.


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Civil Society Organization and Labor Union

took the 2002 Electricity Law to the

Constitutional Court in 2003.

The Electricity Law were revoked by the

Constitutional Court in 2004, practically ending

the Electricity Sector Restructuring Program.


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Why Civil Society opposing the 2002 Power

Sector Reform (PSR)?

Externally driven by IFIs and Western Donor Institutions that

is seen as the instrument to serve capitalist interests.

The Reform package perceived as a program that only

promote and facilitate private interest and very narrow to

the financial issue of the sector, instead of taking into

account a wider public interest.

The reform package missed to address the need to secure

the electricity service provision for the people that is

affordable and reliable.

State responsibility vs.Private profit


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Why Civil Society opposing the 2002 Power

Sector Reform (PSR)?

The design of PSR and the formulation of 2002 Law were lack with civil

society and consumer participation in the first place.

Process did not well communicate, information and document were

hard to obtain;

Impact of reform did not well assessed and properly addressed in theproposed electricity law.


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Failing Reform

Government failed to define and implement PSR theelectricity law revoked by the Constitutional Court: The Electricity Law is passed without sufficient public

consultation or taking into account public concern.

Doubt over the implementation of the electricity law to addressconcern over electricity supply.

Failed to establish independent regulatory body to oversightPLN and private utilities.

Electricity subsidy remaining high in the last 5 years ( averageabout $ 6 to 8 billion/year).

Despite the Electricity Law intends to stripped PLNs monopolypower, in practice PLN has given more role (i.e. purchaserenewable electricity from small-hydro and geothermal).


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Lesson Learn of Designing and Implementing the

Electricity Sector Reform (1)

Electricity sector reform is a complex matter. Require wider institutional reform before overall electricity

reform take place.

Defining the definition and scope of Electricity Sector

Reform Citizen-oriented electricity sector reform

Reform should not always ended up in privatization andincreasing in electricity tariff.

Reform shall be contextualized in the situation of countries

(political, economic development, state of electricityindustry, etc).

Assessing impact, cost, and unintended consequences


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Lesson Learn of Designing and Implementing the

Electricity Sector Reform (2)

Address civil society and consumer

concerns/issues since the beginning while

developing the reform agenda.

Creating platform and process for public

participation and mechanism for consultation.

Require strong and knowledgeable civil society

organizations to be participated effectively.


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Conclusion

Power sector is critical and important indeveloping countries context and subject topolitical struggle.

Indonesia PSR failure caused by many factors, inaddition to the complexity of the reform itself.

Power Sector Reform requires wide-range reformin energy sector and public sector.

Creating a platform for dialogue, clear andtransparent mechanism for public consultation isa prerequisite condition toward a citizen-oriented power sector reform.


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THANK YOU

[email protected] website: www.iesr-indonesia.org
mailto:[email protected]:[email protected]

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