A review of Indonesia’s coal price cap policy is being advocated by analysts as a means of expediting the country’s shift to renewable energy.
A review of Indonesia’s coal price cap policy is being advocated by analysts as a means of expediting the country’s shift to renewable energy.
The Joint External Debt Technical Assistance Project (JETP) Secretariat, through its Comprehensive Investment and Policy Plan (CIPP), suggests that the government should reassess the $70 per tonne price cap for domestic coal sales to power plants. This move aims to facilitate the integration of electricity from renewable sources into the state-owned utility PLN’s grid.
The CIPP document argues that the current policy undermines market price signals essential for the decision-making process of electricity companies regarding future investments. While the agreement is non-binding, it carries recommendations such as monitoring AI systems for potential misuse, safeguarding data from tampering, and scrutinizing software suppliers.
The Asian Development Bank (ADB) has noted that the cap on PLN’s retail prices for electricity incentivizes the firm to source power at the lowest possible cost. Under current conditions, coal-fired generation is typically cheaper, making it the preferred power source for electricity companies.
Fabby Tumiwa, Executive Director of the Institute for Essential Services Reform (IESR), highlights that the price ceiling, known as the domestic price obligation (DPO), creates an uneven playing field between coal and renewable energy power plants. He argues that by keeping the cost of coal artificially low and stable, the DPO hinders the development of renewable energy.
Tumiwa suggests that the removal of the coal price cap, accompanied by a rapid expansion of renewable energy generation, could lead to a higher mix of renewables in PLN’s electricity grid, resulting in cheaper electricity generation costs. This, in turn, could positively impact PLN and the state’s financial sustainability.
The JETP CIPP document proposes a reform of domestic coal pricing to send a clear price signal to PLN. It suggests that PLN could be compensated for the difference between the market price and the $70/tonne price cap to manage the associated increase in fuel cost if the cap is revoked. The document emphasizes that in the long run, the true cost of coal should be reflected in PLN’s investment decisions.
Indonesia’s JETP Secretariat Head, Edo Mahendra, states that the policy recommendation aims to correct the relative price of coal. He clarifies that the proposed scenario would change the relative cost, while the delta remains the same.
While renewables are considered more expensive sources of electricity in Indonesia, the IESR report notes that the average levelized cost of electricity (LCOE) for solar power generation in the country is the highest compared to other Southeast Asian nations. To address this, analysts suggest revisiting the DPO rule and ensuring a balance between renewable energy penetration and maintaining affordable electricity prices.
Jisman Hutajulu, the Energy and Mineral Resources Ministry’s electricity director general, mentions that the government is yet to consider evaluating the DPO rule. He emphasizes the importance of renewable energy penetration without causing electricity prices to skyrocket to maintain Indonesia’s industrial competitiveness.
Energy analysts suggest that if the $70 price cap is abandoned, the effect on PLN’s financials could be offset by lump sum compensation through a levy charged to coal producers. The compensation would be based on the deviation between the market price of coal and the capped price, ensuring that PLN does not experience a loss.
As Indonesia navigates its energy transition, revisiting coal pricing policies becomes crucial for balancing economic sustainability with the imperative to increase renewable energy capacity.