Policy feedback FGD (power) Indonesian 2019

Energy Policy Feedback (Power)
Focus Group Discussion
Jakarta, 18 October 2019
Sustainable Infrastructure Assistance Program (46380-023)
TA 9511–INO: Indonesia Energy Sector Assessment and Priorities 2020–2024
1

Contents
2
1. Background
2. Current conditions in the Indonesian power sector
3. Policy identification and assessment
4. Proposed policies

Background
4
 ADB is supporting Bappenas in the identification of key energy related pillars and
indicators to inform the Medium-Term National Development Plan (RPJMN) 2020–2024
 As part of this, Castlerock has been contracted to assist with policy advice for energy
sector planning in the form of an Energy Sector Assessment and Priorities for 2020–2024.
Areas of focus include:
(i) the electricity sector
(ii) increasing renewable energy
(iii) sustainable energy pricing
(iv) energy efficiency measures
(v) the identification of technological and regulatory innovation
 An assessment of the energy sector’s performance and identification of key issues was
consulted on at a previous FGD. The current FGD consults on potential policy responses
to the previously identified issues

The analysis has been complemented by a national
survey of public opinion
5

2. Current conditions in the Indonesian power sector
6

Energy efficiency is Indonesia’s largest and cheapest
energy resource, but little attention goes to harnessing it
7
From Amory Lovins, Asia Clean Energy Forum 2019

Capacity expansion has enabled growing demand to be
met, but with increasing coal dependency
8
RUPTL 2018-28. Derated capacity is shown. The small reduction in capacity from 2014 to 2015 is due principally to diesel generator retirements
Between 2011 and 2018, generation capacity increased
by 17 GW (52%) with 11 GW being coal-fired
The share of coal in the generation mix has increased
from 44% to 60%, replacing oil-fired generation
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2011 2012 2013 2014 2015 2016 2017 2018 (Jan-
Oct)
Hydro Coal Gas Oil Geothermal Other
0
10,000
20,000
30,000
40,000
50,000
60,000
2011 2012 2013 2014 2015 2016 2017 2018
Deratedcapacity(MW)
Hydro Coal Gas Oil Geothermal Other Peak demand

Renewables expansion is falling far short of the levels
required to meet targets
9
Over the last 10 years, PLN has added 2.3 GW of renewables capacity. Over the next 10 years, PLN needs to add 17-
31 GW of renewables capacity, a 10x increase in the rate of additions
0
5
10
15
20
25
30
35
1 2 3 4 5 6 7 8 9 10
Cumulativecapacityadditions(GW)
Year (2009-18 for actual and 2019-28 for planned)
Actual geothermal (2009-18) Actual hydro (2009-18) Actual other renewables (2009-18) RUKN 2019-38 RUPTL 2019-28
RUKN 2019-38, RUPTL 2018-28 and consultant calculations

Electrification is nearing 100%, but still requires very
significant expansion in absolute terms
10
• 996,000 households without electricity (1.5%)
• 1,340,000 with non-PLN supply (2.0%) – for many less
than Tier 3 service
Off-grid supply and subsidized connections will be
increasingly important in reaching remaining households
– not more generating capacity on large systems
BPS SUSENAS 2018 – primary source of lighting ESDM July 2019
Off-grid represents 28% of
planned 2019 connections

Subsidies are rising again, after a period of decline
11
Subsidies now exceed 2015 levels, despite the major
reforms to tariffs in that year
Electricity subsidies remain poorly targeted. <25% of
450VA customers are in the bottom 20% of households
ESDM July 2019 SUSENAS 2017 and consultant calculations
12.3%
11.0%
10.6% 10.2%
9.8% 9.5% 9.2% 9.2% 9.1% 9.3%
0%
2%
4%
6%
8%
10%
12%
14%
1 2 3 4 5 6 7 8 9 10
Shareoftotalcustomers
Expenditure decile (1 = lowest 10%)
450 VA connections by expenditure decile
101.2 99.3
56.6 58.0
45.7 48.1
65.3
58.6
0
20
40
60
80
100
120
101.2 99.3 56.6 58.0 45.7 48.1 65.3 58.6
2013 2014 2015 2016 2017 2018 2019 2020
Final APBN RAPBN
RPtrillion

Excessive and badly-targeted investment contributes to
rising costs and subsidies
12
Reserve margins are planned to greatly exceed targets
Meanwhile, inadequate networks mean that service
quality remains poor in many regions
RUPTL 2019-28 PLN Statistics 2018
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Margin(%)
Capacity(MW)
Existing (Derated) Ongoing and Committed
Planned Planned reserve margin
Target reserve margin

…although PLN has also consistently failed to deliver
against planned capacity expansion
13
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
110,000
120,000
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Total Installed Capacity, MW
Actual Total Capacity RUPTL 2011‐2020 RUPTL 2013‐2022
RUPTL 2015‐2024 RUPTL 2017‐2026 RUPTL 2019‐2027

0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
milliontCO2
NDC - BAU NDC - Unconditional
Pusdatin - BAU Reported actual
It is not possible to assess how fast emissions are
growing and their compliance with NDC commitments
14
From 2012 to 2018, reported emissions grew at 0.8% pa
compared to an NDC commitment of 5.8% pa
Major revisions to estimated energy consumption mean
that reported data is unreliable and inconsistent
BP Statistical Review 2018, Pusdatin (2016) and Indonesia First NDC ESDM Handbook of Economic and Energy Statistics (various years)
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
thousandBOE
2018 edition 2016 edition 2015 edition
2014 FEC (thousand BOE)
2015 HEES : 1,292,796
2016 HEES : 1,114,003 (-14%)
2018 HEES : 855,552 (-34%)
• Actual 2018 emissions are
estimated at 28% below the BAU
level assumed in the NDC
• Pusdatin projections are for BAU
emissions by 2030 to be 40% below
the BAU level assumed in the NDC
NDC commitment
Reduce energy sector
emissions to 19% below
BAU by 2030

3. Policy identification and assessment
15

Major challenges for the sector
16
Inefficient use of
energy
Poor planning Badly-targeted
subsidies
• Higher costs of clean
technologies cannot be
recovered by PLN – leads
to caps on prices that PLN
will pay
• ‘Locked-in’ investments in
coal reduce the ‘space’ for
clean energy capacity
expansion
• Targets are poorly related
to NDC commitments
Slow pace of
decarbonisation
• Energy data and plans
using this are inconsistent
and subject to frequent
and large revisions
• Plans are not based on
cost-benefit analysis and
technology selections do
not reflect social costs
• Lack of external oversight
and transparency
• Over-emphasis on
generation expansion
rather than network
enhancement
• Lack of incentives to
improve energy efficiency
at both production and
consumption levels
• Plans are oriented
towards increasing
consumption, not
improving efficiency
• Increases fiscal cost of
subsidies and reduces
public funds available for
other purposes, such as
supporting clean energy
• Worsens bias against
clean energy with
perceived higher costs
• Counteracts measures to
improve energy efficiency

The energy value chain
17
PRIMARY TRANSFORMATION END-USE
Electricity *
Oil and gas
Refineries, Oil products,
LPG, LNG, gas
pipelines
Coal
Oil
Natural Gas
Households
Industry and Commerce
Transport
Other
ENERGY EFFICIENCY
Biofuels
* Renewable energy resources used principally for
power production are considered under Electricity OVERALL SECTOR MANAGEMENT
Renewables *
Solar, wind, geothermal, hydro,
biomass, waste-to-energy

Key power sector policies and the value chain
[Non-power policies are covered in a separate presentation]
18
OVERALL SECTOR MANAGEMENT
PRIMARY ENERGY
ENERGY TRANSFORMATION – Electricity
END USE – Electricity
1. Redefine and clarify emissions targets
2. Improve data reporting and policy analysis
3. Replace the PLN coal price cap with an export levy
4. Strengthen regulation
5. Separate planning, procurement and system operation from PLN
6. Accelerate use of renewable energy
7. Implement non-PLN off-grid supply
8. Optimise delivery of electricity subsidies
9. Promote end-use efficiency

Energy efficiency is a fundamental theme
19
End-UseTransformation
 Huge potential for savings across the value chain
 6 of 9 proposed electricity policies promote efficiency
Production
Pricing&
Subsidies
Planning&
Operations
Physical
measures
3. Replace coal price cap with an export levy
5. Separate SB+SO
4. Strengthen power sector regulation
8. Optimize electricity subsidies
9. Building, MEPS, Industrial
end-use efficiency

Mapping electricity policies to challenges
20
Inefficient use of
energy
Poor planning Badly-targeted
subsidies
Slow pace of
decarbonisation
3. Replace the PLN coal price
cap with an export levy
5. Separate system planning, generation procurement and system operation from PLN
8. Optimise delivery of
electricity subsidies

Impacts are assessed using the energy ‘trilemma’
framework
SECURITY
SUSTAINABILITY ACCESS & EQUITY
Effective management of primary energy supply from domestic
and external sources, reliability of energy infrastructure, and
ability of energy providers to meet current and future demand.*
Accessibility and affordability of energy
supply across the population.*
Additionally, fair distribution of costs and
benefits of energy supply, for both present
and future generations, and open and
transparent processes for sector
management.
Encompasses achievement of supply- and
demand-side energy efficiencies and
development of energy supply from
renewable and other low-carbon sources.*
* Definition from World Energy Council, “World Energy Trilemma Index 2017”
21

Understanding the impacts
22
SUSTAINABILITY
SECURITY
EQUITY
Highly supportive
Neutral
Highly
counterproductive
In this example, the policy is:
• Highly supportive of sustainability
• Neutral impact on equity
• Moderately counterproductive
with respect to security

Feedback questionnaire
23
 There will be a discussion period after the
presentation and periodic opportunities for questions
 We have also left a questionnaire on your seat
• Electricity (morning session) on one side, Non-Electricity
(afternoon session) on the other
• Any policies you think we have missed?
• Simple evaluation of policies we propose (Agree,
Disagree, Neutral)
• Comments on individual policies, if any
• Optional – your name, institution and contact email
 Please submit your completed questionnaire in the
box near the door when you leave

a. Overall Sector Management
25

26
Issues
 Current NDC targets are essentially
meaningless given data problems and
unrealistic baseline
 As a result, there is a lack of clear
emissions targets to guide planning
Proposed policy
 Redefine emissions target as being 19%
below most recent BAU estimate (ie, not
NDC estimate) by 2030
 Pusdatin to update and publish BAU
projections whenever the underlying data
is revised
As currently defined, emissions could increase by 150%
and still remain within the NDC commitment
Consultant team calculations
535
273
463
820
1,134
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
Actual 19% below
Pusdatin BAU
Pusdatin - BAU NDC -
Unconditional
NDC - BAU
2018 2030
MtCO2
3.5% pa
5.3% pa
8.1% pa
9.9% pa

Impacts
27
SUSTAINABILITY
SECURITY
EQUITY SUSTAINABILITY
SECURITY
EQUITY

28
Issues
 Energy sector data is currently produced
by multiple agencies, is inconsistent and
is subject to large revisions
 Multiple energy sector plans (RUEN /
RUKN / RIKEN / RUPTL) with frequent
gaps and inconsistencies between them
Proposed policy
 Designate Pusdatin ESDM as the source
of official government energy data
 Annually review progress against targets,
consistency across plans and the impacts
of proposed new policies
 Facilitates comprehensive consideration
of energy efficiency
Electricity demand forecasts vary widely across different
planning documents
Consultant team calculations
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
TWh
Actual RUEN 2015-50 RUKN 2019-38 (medium case) RUPTL 2019-28

Impacts
29
SUSTAINABILITY
SECURITY
SECURITY
EQUITY

b. Primary Energy
30

31
Issues
 Increases mismatch between coal
generation’s financial costs and its
economic costs to society, distorting
planning and operational decisions
 Suppressed prices lead to inefficiency
 Extremely inefficient means of subsidizing
electricity to poor households—most
benefits accrue to large consumers
Proposed policy
 Remove coal price cap
 Apply an additional export levy and
allocate the proceeds to targeted
electricity subsidies
Coal prices would have exceeded the $70/tonne cap in 8
out of the last 10 years
World Bank. Assumes 6,000 kcal/kg
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
Jan2009
Jun2009
Nov2009
Apr2010
Sep2010
Feb2011
Jul2011
Dec2011
May2012
Oct2012
Mar2013
Aug2013
Jan2014
Jun2014
Nov2014
Apr2015
Sep2015
Feb2016
Jul2016
Dec2016
May2017
Oct2017
Mar2018
Aug2018
Jan2019
Jun2019
$/t
Australia, actual PLN cap

Impacts
32
SUSTAINABILITY
SECURITY
SECURITY
EQUITY

c. Energy Transformation – Electricity
33

34
Issues
 Inadequate resources within DJK to oversee
planning, procurement and to assess efficiency
of PLN’s operations
 Responsibilities shared across MEMR, MOF
and MSOE, diluting oversight
 No transparency or structured public
participation
 No apparent consideration of economic costs
and benefits – leads to inefficiency
Proposed policy
 Establish a new regulatory agency through a
Government or Presidential Regulation
 Builds on DJK, supervised by ESDM but
governed and budgeted by a supervisory
commission (Partial SKK Migas model)
• Review of assumptions and analysis for
preparation of the system plan on and
economic basis
• Development and supervision of generation
procurement processes
• Supervision of system operation in line with the
Grid Code
• Enumeration of terms and conditions of
licenses
• Analysis of operators costs and performance as
a basis for recommending service/tariff
payments
• Conducting public engagement.
Proposed primary functions of a regulatory agency

Public Opinion
35
While PLN is generally seen as performing well, there remains strong support for a greater public role in energy
planning and regulation

Impacts
36
SUSTAINABILITY
SECURITY
SECURITY
EQUITY

5. Separate planning, procurement and system
operation from PLN
37
Issues
 Conflicts of interest between PLN’s
multiple roles (eg, favouring PLN-owned
capacity in system operating decisions)
 Internalising planning and operational
decisions reduces transparency and
access to alternative views
 PLN generation subsidiaries are
“financially malnourished” due to transfer
prices below full costs
 PLN is vulnerable to pressures from
vested interests
 Planning currently conducted on basis of
PLN’s interests, not the nation’s
Proposed policy
 Phased implementation of the
“independent” system operator as
envisaged in RUKN 2019-2038
• Separation of system operator + single
buyer from PLN
• Transfer of PLN-owned generation to
subsidiary companies
• PPAs put in place with the single buyer
 Accompanied by regulatory, tariff and
subsidy reforms
 Transition in stages based on
achievement of pre-determined
milestones and pre-requisites
 No asset unbundling

operation from PLN
38
• Requires step-by-step
transition, with specific
actions by PLN,
Government and IPPs
• Must be conducted in
conjunction with tariff,
subsidy and regulatory
reform
• Mitigates PLN conflicts of
interest, helps insulate
PLN from vested interests,
leads to greater efficiency
of investment and
operations, strengthens
PLN’s generation business
National SB+SO Entity
Competent & Transparent Regulation
PLN
GencoIPP
Distribution
Single
Buyer
System
Operator
Customers
Transmission
PLN Group
Geographic
cross‐subsidy*
PPAs
SOA
TSA
DSAs
Agreements
Energy flows
Cash flows
GovernmentDirect
subsidy
* As collected from lower cost systems under a national
uniform tariff
Cost recovery tariffs

operation from PLN Impacts
39
SUSTAINABILITY
SECURITY
SECURITY
EQUITY

40
Issues
 Indonesia’s deployment of renewable
energy falls far below targets and potential
 Financing and tax incentives are available
but numerous impediments remain
 Caps on prices are a major barrier
Proposed policy
 End linkage of prices to BPP and replace
by prices based on economic benefits
 Consider subsidies to PLN to close any
gap between price and avoided costs
 Address the other significant barriers
0
500
1,000
1,500
2,000
2,500
3,000
3,500
JawaBarat
JawaTengah
DKIJakarta
Banten
Bali
JawaTimur
Lampung
SumateraBarat
S2JB
SulawesiSelatan
SumateraUtara
KalimantanTimurdan…
KalimantanBarat
Riau
Aceh
KalimantanSelatandan…
Belitung
Lombok
Papua(Jayapura)
FloresBagianBarat
Timor
Bangka
Tambara
Sumba
Maluku(Ambon)
FloresBagianTimur
Rp/kWh
Geothermal cost
1,754 Rp/kWh
National Average BPP
1,119 Rp/kWh
PLN (2019) and BPK (2019). Geothermal costs are shown for Java-Bali and may be higher
in more remote grid
Current generation BPP-based price caps make many
renewables projects unviable

Multiple actions are required
41
1. Establish a technically capable regulator
2. Ensure regulatory transparency
3. Provide for public participation
9. Separate Single Buyer/System
Operator functions from PLN
10. Introduce new system
planning tools
13. Introduce modern grid
management practices
11. Introduce balanced PPAs in line
with international practice
5. Require system planning on
an economic basis
7. Relax foreign investment &
local content restrictions
6. De-risk projects in advance of
tenders, e.g. land acquisition
4. Remove BPP price caps &
require reverse auctions
12. Streamline procurement &
negotiations
8. Provide loan, subsidies and/or
credit enhancementsPLN / MSOE
MoF
PLN / MSOE
PLN / MSOE
PLN / MSOE
PLN / MSOE
President
President
President
MEMR
MEMR
Various
President / MoInd

Public Opinion (1)
42
Among those who are aware, there is strong support for renewable energy

Public Opinion (2)
43
Concerns over price impacts remain a barrier. However, there is a greater willingness to pay more if renewable energy
also delivers local economic development and supports access for remote areas

6. Accelerate the use of renewable energy
Impacts
44
SUSTAINABILITY
SECURITY
SECURITY
EQUITY

45
Issues
 PLN has proven reluctant to give up rights
to supply in remote areas
 But remote supply is costly, and requires
technologies and approaches not well-
suited to PLN
Proposed policy
 Build upon the framework in Permen
ESDM 38/2016 for off-grid supplies
 Establish mechanisms to identify areas for
off-grid supply, competitive selection of
suppliers and administration of subsidies
 Establish an off-grid subsidy mechanism
In remote areas, grid extension to all households is
infreasible. Off-grid supply will be required
ADB, Least-Cost Electrification Plan for Maluku and Papua, 2019

Impacts
46
SUSTAINABILITY
SECURITY
SECURITY
EQUITY

d. End-Use – Electricity
47

48
Issues
 Inefficient targeting of subsidies
• <25% of 450VA customers are low-
income households
• ~40% of low-income households are
supplied at connections of 900+VA
 Leads to higher subsidies than needed
and to the use of alternatives, such as
suspending tariff adjustments
 Leads to inefficient consumption
Proposed policy
 Replace blanket 450VA subsidies with
means-tested subsidies, using the UDB
 Restore automatic tariff adjustments
Better targeting could reduce 450VA subsidies by up to Rp 19
trillion annually (33% of 2020 RAPBN)
Consultant calculations using Susenas 2017 data and PLN billing data for 2018
The calculation presented here assumes that non-subsidized customers do not reduce their
consumption in response to the tariff increase following withdrawal of subsidies. The
available evidence from the impacts of earlier tariff revisions is that such impacts are small.
The calculation also does not allow for subsidies being paid to low-income households with
900+VA connections, who currently are non-subsidised
450VA customers only Without policy With policy
All Subsidised
Non-
subsidised
Customers millions 23.25 5.81 17.44
Share 25% 75%
Average revenue (a) Rp/kWh 379 359 1,352
Sales TWh 24.3 4.4 19.9
Share 18% 82%
Revenues Rp trillion 9.2 1.6 26.9
Change with policy Rp trillion +19.3
(a) Assumes non-subsidised tariff is increased to the 900VA tariff

Public Opinion (1)
49
Current subsidies (including non-energy subsidies) are generally perceived to be poorly targeted

Public Opinion (2)
50
The continuing use of subsidies to lower tariffs, rather than their replacement by direct subsidies, is preferred by around
half of all households

Public Opinion (3)
51
There is evidence of an acceptance of reduced subsidies, if supply quality and access to electricity is improved

Public Opinion (4)
52
Among unelectrified households near to the existing grid, connection fees are the major barrier—suggesting a need to
switch subsidies from consumption to connection

8. Optimize delivery of electricity subsidies
Impacts
53
SUSTAINABILITY
SECURITY
SECURITY
EQUITY

9. Promote end-use efficiency: Industry
54
Issues
 Evidence of significant potential to
improve energy efficiency in industry
 Current ESCO market very under-
developed, meaning little of this potential
is being realised
Proposed policy
 Enforce PP 70/2009 (energy audits)
 Higher Minimum Efficiency Performance
Standards (MEPS) for electric motors
 Consider dedicated industry energy
efficiency financing facility (under PT SMI)
Adopting Chinese-level MEPS for electric motors could alone
save 7.7 PJ (2.1 TWh / 350 MW) by 2030
IEA (2016). IE1 corresponds to current Indonesian MEPS proposals and IE2 to Chinese standards for
electric motors. The calculation of capacity (MW) savings assumes an average capacity factor of 70%

9. Promote end-use efficiency: Buildings
55
Issues
 Evidence of significant potential to
improve energy efficiency in buildings
 Little incentive for new ‘green’ buildings
 Under-developed ESCO market
Proposed policy
 All government facilities required to
reduce energy consumption by 17%* by
2025, creating a market for ESCOs
 National roll-out of a Green Building Code
using the Jakarta and Bandung models
Indonesian buildings are only around two-thirds as
energy-efficient as those in Japan
IECES (2016) using data from JICA (2009)
* National target specified in Draft RIKEN (2013)

9. Promote end-use efficiency: Appliances
56
Issues
 Existing minimum energy performance
standards (MEPS) cover CFLs, but
these are being displaced by LEDs
 MEPS under development for clothes
washers, well pumps, and televisions,
and possibly water coolers or irons
Proposed policy
 Expand the coverage of MEPS
 Make existing and proposed MEPS
more stringent, bringing them closer to
Best-Available-Technology levels
 Phase in BAT requirements to allow time
for consumers to adjust
Improved appliance efficiency could reduce peak electricity
demand by as much as 25% by 2025
LBL (2019)

Public Opinion
Awareness of the Government’s energy efficiency programs is very low, but energy efficiency measures are widely
supported as awareness increases. The primary benefit is seen as coming from cost reductions

Impacts
58
SUSTAINABILITY
SECURITY
SECURITY
EQUITY

TERIMA KASIH
mike.crosetti@castlerockasia.com
william.derbyshire@eca-uk.com
59
If you will not attend the afternoon session,
please complete your questionnaires and
submit in the boxes near the exit doors
This presentation can be downloaded from
https://tinyurl.com/y49po9ak

Policy feedback FGD (power) Indonesian 2019

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