PLN

Fiscal 2015 Overseas Development Planning Study Project for
Establishing Business Bases and Capturing the Overseas

Infrastructure Market
Study on Business Base Development in Indonesia
February 2016
Ministry of Economy, Trade and Industry

Conducted by EY ShinNihon LLC
Contents
Introduction ......................................................................................................................................................... 1
I. Proposals for establishing an efficient and effective electricity network in Indonesia ......................... 2
A. Overview of RUPTL .............................................................................................................................. 2
1. Power Development Plan ................................................................................................................... 2
2. Supply-demand operation simulation results considering RUPTL 2015 development plan .......... 4
3. Supply/demand situation by region and transmission line expansion plans .................................. 6
B. Plans (roadmap) for installing efficient and effective power plants and transmission network ... 8
1. Developing efficient coal-fired thermal power ................................................................................. 8
2. Obtaining power sources for frequency modulation........................................................................ 9
3. Achieving supply reliability in central Jakarta .................................................................................11
II. Case studies of state-owned enterprise subsidy reform and implications for Indonesia ................13
A. The importance of stable management of electricity sector .........................................................13
B. State-owned enterprises subsidy reform best practice in selected countries..............................22
1. Armenia ..............................................................................................................................................24
2. Brazil ...................................................................................................................................................27
3. Kenya ..................................................................................................................................................30
4. The Philippines...................................................................................................................................32
C. Subsidy reform for PLN: background and current status ...............................................................34
1. Background to subsidy reform for PLN ............................................................................................34
2. PLN’s revenue structure....................................................................................................................35
3. Position of electricity subsidies in context of overall energy subsidies.........................................37
4. Support from the World Bank ..........................................................................................................39
5. PLN subsidy reforms: current status and plans ...............................................................................39
III. Laws and regulations pertaining to electricity business in Indonesia ...............................................41
A. Institutional challenges in implementing 35 GW Electricity Program ...........................................41
B. Government guarantees ...................................................................................................................43
1. Legislation regarding government guarantees for power projects ...............................................43
2. Status of government guarantees and Indonesian government stance .......................................46
C. Land acquisition .................................................................................................................................47
1. History and status of laws regarding land acquisition ....................................................................47
2. Roles and procedures for related organizations .............................................................................49
3. Operation of legal system regarding land acquisition ....................................................................52
D. Local content regulations..................................................................................................................55
1. Overview of relevant laws ................................................................................................................55
2. Relevant entities and their roles ......................................................................................................56
3. Operational issues .............................................................................................................................56
IV. Workshops in Indonesia ........................................................................................................................57
A. The First Workshop ...........................................................................................................................57
B. The Second Workshop ......................................................................................................................58
V. Conclusion .................................................................................................................................................59
Figure 1. Demand assumptions ........................................................................................................................................... 2
Figure 2. Energy sources (MW) ............................................................................................................................................ 3
Figure 3. Relationship between demand and supply capacity .......................................................................................... 3
Figure 4. Fuel prices .............................................................................................................................................................. 4
Figure 5. Power generation volumes by energy source ..................................................................................................... 5
Figure 6. CO2 emissions ........................................................................................................................................................ 5
Figure 7. Supply/demand situation by region and transmission line expansion plans ................................................... 6
Figure 8. Intraregional transmission volumes (maximum values) .................................................................................... 7
Figure 9. Steam conditions of pulverized coal-fired power plant technologies............................................................... 8
Figure 10. Comparison of CO2 emissions per unit of electricity ........................................................................................ 9
Figure 11. Startup time after eight hours shut down and rate of output change ......................................................... 10
Figure 12. Candidates for frequency modulating power sources ................................................................................... 10
Figure 13. Power transmission system in central Jakarta (2014) .................................................................................... 11
Figure 14. Power transmission system in central Jakarta (2024) .................................................................................... 11
Figure 15. Cross-section of passageway with underground transmission cables in Tokyo Metropolitan area........... 12
Figure 16. Relationship between Socio-Economic Goals & the Power Sector .............................................................. 13
Figure 17. Balance between revenues and costs ............................................................................................................ 14
Figure 18. Relationship of main players ............................................................................................................................ 14
Figure 19. The importance of the steady implementation of PDP.................................................................................. 15
Figure 20. Issues to be considered in the balance of Revenues and costs ..................................................................... 16
Figure 21. Fuel Cost for Power Generation ...................................................................................................................... 16
Figure 22. Cumulative default probabilities (%, based on 1983-2010 history) .............................................................. 18
Figure 23. Cumulative default probabilities over time (based on 1983-2010 history).................................................. 18
Figure 24. Annual cash flows ............................................................................................................................................. 19
Figure 25. Annual cash flows in different ratings ............................................................................................................. 19
Figure 26. Cash flows by case ............................................................................................................................................ 20
Figure 27. Subsidy and electricity tariff per kWh by category (2014)............................................................................. 20
Figure 28. Electricity subsidy by area (2014） ................................................................................................................ 21
Figure 29. Attainment of economic goal and Power Development Plan....................................................................... 22
Figure 30. Armenia: economic growth rate (%) and per capita GDP (USD) ................................................................... 24
Figure 31. Armenia: standard power tariffs (AMD/kWh) ............................................................................................... 25
Figure 32. Armenia: electricity business structure ........................................................................................................... 26
Figure 33. Brazil: economic growth rate (%) and per capita GDP (USD)......................................................................... 27
Figure 34. Brazil: inflation rate (%) .................................................................................................................................... 27
Figure 35. Brazil: electricity tariffs ..................................................................................................................................... 29
Figure 36. Brazil: share of hydropower (%)....................................................................................................................... 29
Figure 37. Kenya: economic growth rate (%) and per capita GDP (USD) ....................................................................... 30
Figure 38. Average electricity tariffs for users.................................................................................................................. 31
Figure 39. Share of hydropower generation in Kenya ..................................................................................................... 31
Figure 40. Philippines: GDP growth and budget balance................................................................................................. 32
Figure 41. Retail electricity rates and generation charges (Peso/KWh) ......................................................................... 33
Figure 42. Breakdown of average power charges (2014) ................................................................................................ 34
Figure 43. PLN: power subsidies (trillion rupiah) ............................................................................................................. 35
Figure 44. PLN: equity and fixed assets (trillion rupiah) .................................................................................................. 36
Figure 45. PLN: equity ratio and DSCR .............................................................................................................................. 36
Figure 46. Structure of energy subsidies........................................................................................................................... 37
Figure 47. Breakdown of government expenditure in 2014 budget............................................................................... 38
Figure 48. Breakdown of government expenditure in 2015 budget............................................................................... 38
Figure 49. Forecast for Indonesia’s revenue and expenditures (share of GDP, %)........................................................ 39
Figure 50. Recent PLN electricity tariff revisions.............................................................................................................. 40
Figure 51. Electricity subsidy reduction plans .................................................................................................................. 41
Figure 52. Potential risks when running a cross-border power business ....................................................................... 42
Figure 53. Standard IPP project scheme ........................................................................................................................... 42
Figure 54. Overview of legal arrangements regarding government guarantees of power projects ............................ 45
Figure 55. Projects with government guarantees ............................................................................................................ 45
Figure 56. Overview of land acquisition legal framework ............................................................................................... 47
Figure 57. Land Acquisition Law (Law 2/2012) and implementation guidelines (Presidential Regulation 71/2012).. 48
Figure 58. Main provisions of Presidential Regulation 30/2015 ..................................................................................... 50
Figure 59. Organizations involved in land acquisition and their roles ............................................................................ 50
Figure 60. Land acquisition process .................................................................................................................................. 51
Figure 61. PLN’s land acquisition program ....................................................................................................................... 52
Figure 62. Overview of local content guidelines for electricity infrastructure developments ..................................... 55
Figure 63. Examples of Indonesia’s local content goods/services regulations .............................................................. 56
Figure 64. Local content regulations: Relevant entities................................................................................................... 56
Figure 65. Programme of the first workshop.................................................................................................................... 57
Figure 66. Photos of the first workshop ............................................................................................................................ 58
Figure 67. Programme of the second workshop .............................................................................................................. 58
Figure 68. Photos of the second workshop ...................................................................................................................... 59
Introduction
The Power Supply Business Plan (known as RUPTL, short for Rencana Usaha Penyediaan Tenaga Listrik)
produced by Indonesia’s state-owned electricity company, PLN (Perusahaan Listrik Negara), forecasts
electricity demand to grow by an average annual rate of 8.7% assuming annual economic growth of 6-
7%. In order to accommodate this, installed capacity needs to expand by 35 gigawatts (GW) by 2019.
The 35 GW Electricity Program was established to this end.
Of the 35 GW in the plan, PLN will be responsible for 10 GW and independent power producers (IPPs)
for 25 GW. As of 2019, primary fuel is forecast to be over 90% coal and gas.
Both President Joko and Vice President Kalla are involved in the program, as they view electricity as the
driving force of economic growth. They have high hopes for the direct spillover effects of the program to
the domestic economy. The Indonesian government is seeking to develop stable, sustainable power
infrastructure. There is potential for the advanced technical expertise of Japanese corporations with
highly efficient coal-fired thermal power plants and other technology to contribute to the provision of
such infrastructure.
However, there are many challenges in the way of swiftly realizing these plans: power plants and
transmission networks planning can be more efficient, and issues of land acquisition, risk allocation
(government guarantees), and local content regulations remain. For example, one idea that might
enable PLN to raise the necessary project funding without government guarantees for each individual
project is for the Indonesian government to make its methodology for providing subsidies to PLN
predictable and transparent.
In light of these circumstances, we have conducted a research project via dialogue with our government
counterparts and concerned individuals from the corporate sector with the aim of assisting Japanese
corporations to capture overseas infrastructure markets. At the forefront of our thinking was how
Japanese technology, expertise, and yen loans and other financial assistance schemes funded by the
Japanese public sector could be introduced and leveraged to assist with the implementation of the 35
GW Electricity Program.
1
I. Proposals for establishing an efficient and effective electricity
network in Indonesia
A. Overview of RUPTL
The section below provides an overview of the Java-Bali power system in RUPTL 2015.
1. Power Development Plan

Demand assumptions
Assumptions for the Java-Bali system overall are annual growth of 7.6%. Demand growth assumptions
for the Jakarta Banten (JKB) region are highest.
Figure 1. Demand assumptions
Source: RUPTL 2015
Energy sources (aggregate Java-Bali region: includes power received from Sumatra)
Through 2018 most development is thermal power fueled by gas and oil, but from 2019 large-scale coal-
fired thermal plants will be developed, and coal-fired will be the main type of power plant developed
thereafter.
2
Figure 2. Energy sources (MW)
Source: RUPTL 2015
Demand and supply capacity
Under the plan, the ratio of supply capacity to demand increases rapidly through 2019 when it breaches
1.5x, for more than adequate capacity as shown in Figure 3 below.
Figure 3. Relationship between demand and supply capacity
Source: RUPTL 2015
3
Fuel prices
The fuel prices detailed in RUPTL 2015 have been converted into price per equivalent amount of heat to
enable comparison. LNG (liquefied natural gas) and oil (HSD [high-speed diesel] and MFO [marine fuel
oil]) are considerably more expensive than coal. This means that for economical power plant operation,
coal-fired thermal operation takes precedence, and gas and oil are less desirable.
Figure 4. Fuel prices

Price in RUPTL Price (USC/Mcal)
Coal Sub bituminous 80 USD/ton 5,100 kcal/kg 1.57 USC/Mcal
Lignite 60 USD/ton 4,200 kcal/kg 1.43 USC/Mcal
Gas Natural gas 7 USD/MMBtu 252,000 kcal/Mscf 2.78 USC/Mcal
LNG 16 USD/MMBtu 252,000 kcal/Mscf 6.35 USC/Mcal
Oil HSD 0.86 USD/l 9,070 kcal/l 9.48 USC/Mcal
MFO 0.7 USD/l 9,070 kcal/l 7.72 USC/Mcal
Source: RUPTL 2015
2. Supply-demand operation simulation results considering RUPTL 2015 development

plan
RUPTL 2015 shows power plant development plans, but not conditions under which those power plants
operate. Based on RUPTL 2015 development plans, the research team utilized its supply-demand
operation simulation tools to find the most economical supply/demand operation, the results of which
are below.
Energy source composition
Figure 5 shows the share of different energy sources for power generation. Until 2018, coal-fired
thermal accounts for around 70% and gas for about 20%, but from 2019 onwards the share of coal-fired
increases dramatically to over 85%.
4
Figure 5. Power generation volumes by energy source
Hydro Gas Oil Coal Geothermal
100%
90%
80%
70%
60% 72% 67% 68%
73%
50% 90% 88% 87% 86% 86% 86%
40%
30%
20%
16% 18% 23% 25%
10%
3% 3% 3% 5% 5% 5%
0%
2015 2016 2017 2018 2019Year2020 2021 2022 2023 2024
Source: Calculated by TEPCO study team based on PDP in RUPTL 2015
CO2 emissions
Figure 6 shows CO2 emissions. Note that calculations below are all based on the assumption that future
coal-fired thermal power developed will be supercritical (SC) thermal power, which is more efficient
than currently installed traditional thermal capacity. CO2 emissions rise gradually, and in 2024 they are
approximately double current levels. Meanwhile, on the basis of emissions per kWh, while demand
increases steadily, levels remain high at over 0.8 kg CO2/kWh.
Figure 6. CO2 emissions

CO2 emmissions (left) CO2 emmissions per kWh (right)
300 1.05
250 1.00
200 0.95
150 0.90
100 0.85
50 0.80
0 0.75
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Year
5
3. Supply/demand situation by region and transmission line expansion plans
Figure 7. Supply/demand situation by region and transmission line expansion plans
2014
2014
(MW)
6
In 2014, there was a notable supply capacity shortage in the JKB1 region, but there was excess capacity
in the Central and East regions, so power was sent from the East to the West region. In 2024, the Central
region should have excess capacity just as in 2014 and while the JKB region has a moderate shortfall,
there will be excess capacity in the West region, and the East region will shift to somewhat of a supply
capacity shortfall.
Figure 8 below shows the results of conducting a supply/demand operation simulation based on the
regional supply/demand situation noted above with maximum annual intraregional transmission
volumes.
Figure 8. Intraregional transmission volumes (maximum values)
JKB and West Region
There is a continuous flow of 2,000-3,000 MW from the West region to JKB region. This will grow sharply
through 2024 to over 4,000 MW.
West and Central Regions
Through 2018, a large power volume of nearly 4,000 MW will flow from the Central to the West region.
This will decline gradually until around 2020 before increasing rapidly in 2024.
Central and East Regions
1
Jakarta and Bantan area
7
Through 2018, there are flows of around 2,000 MW from the East to the Central region. This will reverse
from 2019 onwards to a flow from the Central to the East to over 4,000 MW in 2024.
B. Plans (roadmap) for installing efficient and effective power plants and
transmission network
If RUPTL 2015 is able to be implemented as planned, it will be possible to install sufficient supply
capacity to meet forecast demand. Further, there will be sufficient 500 KV transmission lines and
transmission capacity to eliminate the intraregional supply overruns/shortfalls.
Once adequate supply volumes have been obtained, the next necessity will be to assure efficiency as
well as initiatives to improve the quality of electric power.
1. Developing efficient coal-fired thermal power
Coal-fired thermal power, which is at the heart of development plans in RUPTL 2015, generates large
volumes of CO2 emissions. As shown in Figure 9 below, even with supercritical thermal power, which is
more efficient than currently installed thermal capacity, CO2 emission levels are likely to remain high at
over 0.8 kg CO2/kWh.
One way to make at least a slight reduction in CO 2 emissions would be to introduce even more efficient
ultra-supercritical (USC) thermal power plants.
The figure below shows the temperature, pressure, and typical maximum efficiency of subcritical
(SUBCR), supercritical, and ultra-supercritical power plants according to a report by the International
Energy Agency (IEA).
Figure 9. Steam conditions of pulverized coal-fired power plant technologies

Type of coal-fired power Temperature Pressure Typical maximum
2
plant (°C) (bar) efficiency (LHV)
Subcritical (SUBCR) 538 167 39%
Supercritical (SUPERC) 540-566 250 42%
Ultra-supercritical (ULTRSC) 580-620 270-290 47%
Source: CCS Retrofit (IEA)
Figure 10 shows how CO2 emissions per kWh would differ if the eighteen 1,000 MW class coal-fired
thermal power plants slated to be developed by 2024 all used USC technologies.
2
LHV: based on lower heating value. For coal, the ratio of calorific value between LHV and HHV (higher heating
value) is around 95%. When LHV is substituted for HHV, calorific value falls by about 5%.
8
Figure 10. Comparison of CO2 emissions per unit of electricity
(kg-CO2/kWh) USC SC
0.90
0.88
0.86
0.84
0.82
0.80
0.78
0.76
0.74
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Year
Source: Calculated by TEPCO study team based on RUPTL 2015
In 2024, CO2 emissions per kWh would decline by around 5% from 0.85 kg CO 2/ kWh to 0.81 kg CO2/
kWh. Utilizing USC technology would save 5.8m tons of coal consumption (converted at 5,100 kcal/kg)
for a reduction of USD460m in fuel costs3.
2. Obtaining power sources for frequency modulation
Coal-fired thermal power is inferior to other power sources in ability to adjust output fluctuations in
short time frames. It lacks responsiveness to changes in supply and demand, resulting in large frequency
fluctuations in the system and raises concerns of a decline in power quality.
Figure below shows startup time after eight hours shut-down and the rate at which output changes
during operation for major types of power generation.
3
Calculated based on RUPTL 2015, assuming following; Coal Sub bituminous 80 USD/ton、5,100 kcal/kg、1.57 USC/Mcal
9
Figure 11. Startup time after eight hours shut down and rate of output change
Source: Calculated by TEPCO study team based on RUPTL 2015
Hydropower is vastly superior in its ability to adjust output capacity in short periods of time, followed by
combined cycle (C/C) plants which use gas and diesel, and gas turbine (GT) plants. To keep frequencies
constantly within standard boundaries, it is necessary to develop frequency modulating energy sources
that can change output in short time frames. Possible candidates are shown in Figure 12 below.
Figure 12. Candidates for frequency modulating power sources

Priority Policy Problems
1 Development of reservoir hydropower Limited availability of suitable land for
economically viable reservoir hydropower
2 Development of pumped storage To adjust input when pumping, necessary to
hydropower introduce variable speed pumping
3 Development of C/C or GT plants that use Higher fuel costs so not very economical
gas or diesel
The RUPTL 2015 report itself considers pumped storage hydropower as a frequency modulating power
source, but with a traditional pumped storage hydropower system, it is possible to adjust frequencies
during the power generation stage, but not in the water pumping stage. There are machines that can
adjust frequency in the pumping stage–variable speed pumps–which are spreading in Japan and Europe.
10
Future plans for pumped storage hydropower development in Indonesia should examine the precise
impact of introducing variable speed pumping machinery and consider them as an option.
3. Achieving supply reliability in central Jakarta

Figure 13 shows the power transmission system in central Jakarta in 2014. Power flows are more or less
unidirectional from south or east of the city toward the center.
Figure 13. Power transmission system in central Jakarta (2014)
500kV Transmission
line (2014)
- Legend -
Existing line
Existing Substation
Figure 14 shows the power transmission system in central Jakarta in 2024.
Figure 14. Power transmission system in central Jakarta (2024)

500kV Transmission
line (2024)
- Legend -
Existing
New (overhead)
New (Underground)
New (HVDC)
Substation
11
In 2024, 500 kV transmission lines surrounding the city center will have been completed, and power
supply will come toward the city center from the nearby vicinity from various directions. If this system is
constructed, the central Jakarta load will be supplied from at least two or more directions, and a
considerable improvement in supply reliability can be expected. However, urbanization is already
advanced and it is extremely difficult to construct further overhead power lines. Underground power
cables between Muarakarang and Muara Tawar are being considered, and there is a high likelihood that
other new power lines will have to be underground as well.
Underground power cables incur construction costs several times those of overhead power lines. It is
necessary to consider strategies that will reduce civil engineering costs such as coordinating works with
plans for other public infrastructure such as gas, water, and subway lines and installing power lines at
the same time as other public works are being undertaken.
Figure 15. Cross-section of passageway with underground transmission cables in Tokyo Metropolitan area
Source: TEPCO website
地中送電線が通る道路の断面図 Cross-section: road with underground transmission cables

車道 Road
土被 Earth
管路引入れ式地中送電線 Ducted underground transmission cables
電話線 Telephone lines
ガス管 Gas pipe
水道管 Water pipe
共同溝 Utility tunnel
下水管 Sewage pipe
下水道管など Sewage pipes, etc.
洞道式地中送電線 Underground transmission cables in utility tunnel
ガス管または水道管 Gas or water pipes
地下鉄 Subway
12
II. Case studies of state-owned enterprise subsidy reform and
implications for Indonesia
A. The importance of stable management of electricity sector
Foreign investors, especially in manufacturing sector, are interested in Indonesia because it has
abundant young and quality labor force. However, they are anxious about the infrastructure
development in future. Meanwhile, the present Indonesian administration, at its inauguration, has set a
goal to attain the average economic growth of 7% for the initial 5 years through rural development, job
creation and industrial development. Departing from the “Middle Income Trap” and building a
sustainable growth model will be a key to attain the goal.
In order to manage the “Middle Income Trap”, quality in infrastructure (for electricity, in particular) will
be necessary. In addition, sustainable and foreseeable power sector operation is an important agenda to
achieve sustainable economic growth. As to the power sector, the perception that PLN’s operation will
be sustainable for the long time should be shared by those who are interested in Indonesian power
sector.
From the point of view of consumer protection, the level of retail tariffs might be reduced through the
injection of subsidies although electricity supply costs, in nature, shall be fully recovered through tariffs.
However, an extravagant subsidy policy heavily affecting a nation’s financial condition would prejudice
the sustainability of the sector. Relationship between nation’s socio-economic goals and the power
sector can be described as follows.
Figure 16. Relationship between Socio-Economic Goals & the Power Sector
Overall Goal
・Social stability
・Sustainable economic growth
Specific Goals
・Right fiscal management
・Infrastructure development
・Investment promotion, job creation, etc.
Actions for the power sector
1. Subsidy reduction
2. Tariff increase
3. Effective electricity infrastructure development
13
To ensure a stable electricity supply-demand condition, balanced coordination between costs (PPA
prices) and tariffs is imperative. The policy where electricity tariffs are set low through the subsidies can
secure certain sustainability of the sector and the financial soundness of PLN. However, it does not
provide ‘real’ sustainability of the sector since it adversely affects the nation’s financial condition.
Therefore, an appropriate balance model which does not heavily rely on subsidies shall be pursued.
Figure 17. Balance between revenues and costs
Retail tariffs
(Revenues)
＜ PPA prices
(Costs)
Since, in nature, electricity is a Since the electricity industry requires the

commodity with low price elasticity, any economy of scale for decreasing cost, it is
deficits can be recovered through rate necessary to present reasonably high
increase, which, however, cannot be
＝
demand and prices based on the nationwide
easily made in terms of customer & mid- to long-term perspectives. However,
protection. due to the constraints of public procurement,
an appropriate PPA price shall be
determined for each project.
Subsidies
Can be biased (cannot be reduced) for VS Can be biased (reduced) to ensure a sustainable
political reasons financial structure
To structure an appropriate balance model, a set of policies taking into account the interests of various
stakeholders are required. The tariff increase and the reduction in electricity generation cost impose
different influences on electricity consumers, electric utilities and foreign investors (IPPs), respectively.
Figure 18. Relationship of main players
Foreign Investors PLN Consumers

（IPPs）
Pleased to conclude a Unwillingness to pay more

favorable PPA (selling price)
As seen in the Figure above, PLN faces with a dilemma between the interests of consumers and foreign
investors. If it is to meet the consumers’ interest, it will aggravate financial condition. Without favorable
14
PPAs with foreign investors, investment will stagnate. As a result, excessive pursuit of lower PPA prices
might impede the accomplishment of mid- to long-term electricity supply-demand balance (the power
development plan).
Any deficits of an IPP player incurred by a negative margin would risk the possibility of secure project
implementation, and accordingly, nonattainment of the nationwide and mid- to long-term power
development plan might occur.
Failure to implement PDP steadily may cause insufficient investment and severe economic damage. As
was previously mentioned, pursuing cost reduction, without selecting a sustainable balance model and
IPPs sustaining it, may cause limited number of bidders, procurement of low-spec technologies, low load
factor and forced outages. Consequently, the power development plan (PDP) cannot be implemented as
initially planned, and the jeopardized nation’s creditworthiness on its capability to execute plans will
lead to failure to attract FDI in addition to that economic stagnation will take place due to electricity
supply shortage.
In an attempt to evaluate creditworthiness of a bidder, it is worthwhile considering its track record of

project completion and actual load factor of the projects it completed as well as its default risk at a
tender stage. Steady implementation of both generation and T&D development plans yields high cost
efficiency of the power sector.
Figure 19. The importance of the steady implementation of PDP
Adequate electricity supply Achievement of socio-

Steady
economic growth
implementation of the
power development
Retention of
plan Successful investment
creditworthiness on plan
execution attraction
Present
Electricity supply shortage Stagnation of socio-

economic growth
Failure to attain PDP /
Delayed
implementation of
PDP Jeopardized
Inadequate investment
creditworthiness on plan attraction
execution
Necessary to carefully look at potential lost profits
Meanwhile, it should be noted that additional actions except for subsidy injection will be necessary for
steady implementation of the power development plan. In order to ensure successful implementation of
PDP which can be attained upon sustainable growth, stable electricity supply-demand structure and an
15
appropriate balance model, in particular, it is necessary to obtain the public acceptance and to take
additional measures except for subsidy injection for simultaneous attainment of subsidy reduction and
tariff increase.
Figure 20. Issues to be considered in the balance of Revenues and costs
Considering the recent development in fuel market, falling fuel prices offers a great chance to reduce
spending on electricity subsidies. Fuel prices significantly decreased in 2015 compared with 2013-14.
Given that the fuel prices continue to be at the level in 2015, in the power sector, the opportunity cost
reduction as of 2020 amounts to 5,111 million.
Figure 21. Fuel Cost for Power Generation
Million USD Fuel prices

continue to be
25,000
at the level in
2014
20,000
5,111 million USD
15,000
10,000
Fuel prices
continue to be
5,000 at the level in
2015
0
y2015 y2016 y2017 y2018 y2019 y2020
* Estimated using the statistics of international fuel prices and RUPTL 2015
As to the cost structure, generating cost per kWh has increased up to 2015 due to the increase of the
fuel price, but it is estimated to decline along with the increase of the coal-fired power plants.
16
Under this favorable market condition, benefit by cost reduction can be used for financial robustness of
PLN and investment for securing stable power system. Benefits gained by the fuel price decline should
be firstly used for subsidy cut, and then, for PLN’s internal reserve and effective investment, when
considering fuel price trend in middle and long term future, rather than electricity tariff reduction.
In the meantime, government subsidy for PLN which weighs 30% of its income is uncertainty for the
investors. This subsidy weighs a large portion to PLN’s income, and the subsidy of 100 Trillion Rupiah has
become one of the most important policy issues.
Continuous financial robustness of PLN is very important both for subsidy reform and invitation of the
investors. We should regard the financial robustness of PLN as very important issue when implementing
subsidy reduction policy.
It is easy to understand the above point by thinking how financial institutions or investors will assess PLN
as a borrower or contract partner for long-term power purchasing agreements. When financial
institutions lend money to an ordinary business corporation, they assess the company’s debt repayment
capacity over the loan period. They assess the borrower’s ability in “flow” and “stock” terms. That is,
whether the borrower is able to generate a continuous sustainable flow of earnings, and whether in
unforeseen circumstances they have a stock of resources to maintain adequate financial strength.
Similarly, investors in the infrastructure sector assess whether their counterpart in a long-term power
purchase agreement will be able to cover its contract obligations. A rating from a ratings agency is this
sort of evaluation from a third-party viewpoint. When executing an infrastructure project, investors and
financial institutions take these assessments from ratings agencies as third-party opinions. The ratings
agencies also evaluate a business in terms of both stock and flows in a similar manner to a financial
institution to estimate the probability that the organization will be able to cover its liabilities.
That is, maintaining strong creditworthiness (credit rating) is desirable if a power company (an off-taker)
wishes to attract significant private-sector investors when executing a power generation project. Large-
scale projects in particular have a long payback period so creditworthiness is even more important in
attracting investors. For example, according to an assessment by the OECD affiliated IEA (International
Energy Agency), the bigger the coal-fired power plant, the lower the generation costs, but the larger the
initial costs and the longer between construction and recovering the initial investment. For investors
and financial institutions the risk of debt default is higher than a project with small initial costs and a
short payback period.
From the viewpoint of energy policymakers, there is a strong need to reduce electricity costs from a
policy perspective, but if the power off-taker is not considered creditworthy enough, it is also necessary
to continue providing some sort of credit enhancement such as a government guarantee.
To get an idea of the magnitude of this risk, we consider the importance of PLN’s creditworthiness using
a model case based on PLN’s current credit rating.
According to June 2014 material by major credit rating agency Moody’s, assuming support from the
Indonesian government, PLN’s credit rating would be Baa3, the same as Indonesia’s foreign currency
17
denominated and the country’s own local currency denominated sovereign risk (Baa3: investment
grade). Without the Indonesian government’s support, it would be Ba2 (not investment grade).
Based on historical data, entities rated Ba2 have a 30% chance of debt default within 15 years. For an
investor considering a major infrastructure investment with a long payback period this is a large risk4.
Figure below shows Moody’s’ published cumulative default probabilities for entities rated Baa and Ba.
Figure 22. Cumulative default probabilities (%, based on 1983-2010 history)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Baa 0.202 0.561 0.998 1.501 2.06 2.66 3.175 3.71 4.26 4.89 5.541 6.225 7.079 8.004 8.881
Ba 1.197 3.437 6.183 9.067 11.51 13.757 15.76 17.675 19.526 21.337 23.003 24.843 26.653 28.663 30.722
Figure 23. Cumulative default probabilities over time (based on 1983-2010 history)
35
30
25
20
％
Baa
15
Ba
10
5
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Years
Source: Moody’s “Special Comment- Corporate Default and Recovery Rates, 1920-2020”
Here we give a concrete example and consider debt default risk. Assume there is a project expected to
generate power sales revenue of $100 million per annum over a 15-year period. We next consider
whether the purchaser has a credit rating with: 1) absolutely no default risk; 2) a Baa credit rating; or 3)
a Ba credit rating.
From Figure 23 above, we derive expected annual revenue flows as shown in Figure 24 below. This
analysis assumes that if there are any missed debt repayments, there are no further cash flows.
4
https://www.moodys.com/research/Moodys-affirms-PLNs-ratings--PR_303016
18
Figure 24. Annual cash flows
120
100
80
60
40
20
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Expected Revenue (No default risk)

Expected Revenue (Baa rating)
Expected Revenue (Ba rating)
Source: Estimates by Ernst & Young ShinNihon LLC
Next, assuming a discount rate of 10% and calculating default risk, expected revenues in the Baa case
are 97% of those from the riskless case (essentially no major difference between the cases), but with a
Ba rating, the figure becomes 86.7%, for a large decline in expected revenues.
Figure 25. Annual cash flows in different ratings

100
90 Expected Revenue (No
80 default risk)
70
60 Expected Revenue (Baa
50 rating)
40
30
Expected Revenue (Ba
20 rating)
10
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Specific estimated cash flows in each case are shown in the following Figure 26
19
Figure 26. Cash flows by case
Present Ratio
discounted value
No default risk 760.6 100.0
Baa 738.2 97.0
Ba 659.5 86.7
To encourage investments by private sector investors, it is important that the financial health of the
electricity sector be maintained and improved during the subsidy reform process. The key to this is
electricity tariff hikes. Also, as long as the power companies are insufficiently creditworthy, there needs
to be commitment from the government to enhance their creditworthiness.
Concerning the subsidy, percentage of the subsidy is larger in smaller sized users. Subsidy amount is set
by the category. Electricity subsidy is decided as national budget every year by taking into account the
cost to be covered and also the margin. Margin is considered to cover the necessary investment. In 2014,
Margin rate was set to be 7% of the costs.
Figure 27. Subsidy and electricity tariff per kWh by category (2014)
1800
1600
1400
1200
1000
800
600 subsidy
400
200 tariff
0
cost
R : Household, B：Business, I：Industry, S：Social, P：Government
Island areas have larger percentage of small sized users while the urban areas with large sized users get
most of the subsidy amount. In urban area, a great amount of the subsidy is provided to middle-large
sized users, and the government has made efforts to reduce the amount by raising electricity tariff.
20
Figure 28. Electricity subsidy by area (2014）
25,000.0 100%
90%
20,000.0 80%
70%
15,000.0 60%
50%
10,000.0 40%
30%
5,000.0 20%
10%
0.0 0%
middle/high
voltage
Low voltage
percentage
of low
voltage
Indonesian Government currently plans to reduce the subsidy by gradually raising the electricity tariff.
MEMR (ESDM) made a plan to reduce the subsidy by tariff category focusing on large sized users and
has made subsidy reduction roadmap. Also, it is planned to raise the electricity tariff adjusting with the
changes in various cost factors. Recently, it is planned to introduce financial support for low income
population in a form different from the current electricity subsidy. PBR (Performance Base Ratemaking)
is also planned to be implemented to facilitate PLN’s efficient business operation.
These actions are consistent with the international best practices. To make the subsidy reform
successful, related organizations should build and share the vision for ensuring stable and sustainable
power system in addition to the actions already taken as above.
21
Figure 29. Attainment of economic goal and Power Development Plan
Sustainable Growth and public welfare
Stable power system

Innovation by foreign investment
Consistent implementation of the plans
Balanced income and expenditure in mid-long term

Sharing the vision such as an appropriate portfolio of
Generation and transmission
Strengthening financial robustness in the situation of this Implementation of the highly efficient and frontier
fuel price drop technologies with focusing on total life cycle cost
ü Gradual increase of retail electricity tariff ü Application of Yen loan and Private Sector
ü Ensuring subsidy reform（Performance Based Investment Finance（USC,
Regulation） transmission/distribution network, geothermal,
ü Compensation for low income users small scale hydro, renewables）
ü Ensuring transparent bidding process with
foreseeable regulations (such as non-
discrimination policy national treatment）
B. State-owned enterprises subsidy reform best practice in selected

countries
The Indonesian government is working to reduce subsidies to PLN, which are a drain on public finances.
The keys to subsidy reform for Indonesia are reducing subsidies while also allowing sufficient power
tariff increases to improve PLN’s financial health. The reasons are twofold. This is necessary for PLN
itself to invest in electricity assets, and to attract investors who sell electricity from their power projects
to PLN. In other words, subsidy reform is not just a means to improve finances by reducing subsidies,
but tariff increases also play a role in improving the financial situation of the electricity sector overall,
which should not be overlooked.
22
In many countries around the world the government bears some of the burden of public utility costs
through subsidies. A typical subsidy scheme in the electricity sector is one whereby the government fills
the gap between average selling prices and costs. However, subsidies sometimes lead to excess power
consumption by users and a notable increase in the financial burden. As a result, subsidies are a large
burden on finances not just for Indonesia but in many other countries, and some of these are working to
reduce subsidies and raise tariffs.
Still, according to analysis by the World Bank and others, in many cases these initiatives fail for the
following reasons.
· The government has not provided sufficient information regarding the true state of subsidies to
citizens
· Citizens have lost faith in the government, or are unable to keep up with government reforms
· The low-income demographic affected by tariff hikes opposes the increases
· Tariff hikes raise concerns of inflation and loss of international competitiveness of the country’s
own industries
Cases of successful subsidy reform have the following five factors in common.
· Subsidy reform is implemented as part of comprehensive energy plans

· A government that has a high level of support communicates appropriately with the people
· There is an appropriate price setting mechanism (e.g. cost pass-through scheme)
· Implementation occurs in conjunction with management reform initiatives of state-owned
enterprises (cost cuts)
· Implementation occurs in conjunction with measures to protect the low-income demographic
that is affected by tariff hikes
Recent moves by the Indonesian government regarding subsidies to PLN are largely consistent with the
success stories. The government appears to have a good chance of succeeding in its drive to abolish
subsidies and reduce the burden on the public purse.
However, all of the above success factors are important. Subsidy reform does not always succeed. For
example, if a determined government actively campaigns for the need for tariff hikes to the people and
succeeds in reducing subsidies, but the tariff-setting mechanism is not clearly defined to reflect changes
in costs and the organizations responsible for tariff approval are not independent of government
pressure, it may fail. Even if the subsidy burden is drastically reduced, it may increase again during an
economic slowdown. Armenia succeeded in sharply cutting subsidies in the late 1990s and establishing a
tariff regulator independent of the government. However, because the tariff-setting mechanism does
not appropriately reflect costs, losses in the electricity sector are again rising. In the Philippines as well,
while an independent regulatory body had the authority to approve electricity tariffs, it was not able to
adequately exercise its authority and tariff hikes were at times delayed.
This section below highlights four success stories of subsidy reduction in the electricity sector: in
Armenia, Brazil, Kenya, and the Philippines.
23
1. Armenia
Armenia is a small country with a population of three million that gained its independence from the
former Soviet Union in 1991. For some time after independence the country’s electricity sector was
operated by a vertically integrated power company. However, household electricity rates in Armenia
were held down at levels insufficient to recover operating costs and depreciation expenses. This
situation persisted with the result that the power company’s losses mounted. Also, there were many
cases of unpaid bills and power theft. As of 1996, roughly 40% of power tariffs were uncollected. The
power company’s losses reached 20% of GDP in 1994. To make up for these, the treasury provided low-
interest finance to the power company; improving the sector’s finances became a matter of urgency.
Figure 30. Armenia: economic growth rate (%) and per capita GDP (USD)
20 4500
15 4000
10 3500
3000
5
2500
0
2000
-5
1500
-10 1000
-15 500
-20 0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Per-capita GDP (USD: RHS) Real GDP (% chg.: LHS)
Source: IMF
As losses continued to mount, the Armenian government decided to raise household electricity rates to
the level where costs could be recovered in stages over 1995-1999. These tariff hikes succeeded, and
household tariffs became consistent with other categories and government subsidies were abolished.
Further, while hikes were implemented, as discussed later, the electricity sector was reformed and
made more cost efficient. From 1999 through 2009, when they increased due to higher gas prices,
electricity rates were unchanged.
24
Figure 31. Armenia: standard power tariffs (AMD/kWh)
Source: IMF, World Economic Outlook
“Lifeline” tariffs for people on low incomes while household power tariffs were being hiked were
abolished in 1999. In lieu of these, as part of the review of the social security system by the government,
other measures were put in place to support the low-income demographic.
Also, before electricity reform, there were cases of fraudulent collusion between meter readers (also
responsible for collecting tariffs) and households. After payments were shifted to post offices and banks,
and there was strict enforcement of power supply disconnection to those who did not pay their bills,
collection rates improved markedly. This also helped contribute to shrinking losses in the electricity
sector. A big factor behind the success of these initiatives was that the Armenian government was able
to use the tariffs collected to reduce power outages that had been frequent and increased electricity
supplies which it used to appeal to the people.
Underlying progress in tariff hikes and revised collection measures was the Armenian government’s far-
reaching reform of the power sector. In 1997 the government enacted a new energy law and separated
the Armenian power sector into generation, transmission, and distribution segments. This reflected a
growing conviction that it would be necessary to build an efficient energy system that separated
generation, transmission, and distribution in the face of a deepening energy crisis in the early 1990s
following independence. Further, the splitting off of generation, transmission, and distribution occurred
at the same time as the establishment of the Public Services Regulatory Commission (PSRM) that had
authority for tariff regulation and approval in the power sector.
25
Figure 32. Armenia: electricity business structure
Network operator (load dispatch)
Settlement center
Public Services Regulatory Commission

(wholesale settlement)
Hydro Thermal Nuclear

power power power
plants plants plants
High-voltage transmission network
Electric Networks of Armenia
End-user
Note: solid lines are power, dotted lines are cash flows, double lines are regulatory/supervisory
relationships
Source: Japan Electric Power Information Center. INC
Note that while power tariff hikes in the late 1990s resulted in major reductions in electricity sector
debts, in recent years there is once again the need for a review of power tariffs.
That is, amid rising power supply costs, the Armenian government is overly focused on the affordability
of electricity tariffs for its citizens. As a result there is once again a gap between tariffs and costs. There
are three factors behind rising costs: 1) rising gas prices from the late 2000s; 2) a 30% appreciation of
the US dollar against the Armenian currency due to an economic recession following the collapse of
Lehman Brothers; and 3) increases in unit supply costs of electricity due to falling power consumption in
the recession. The currency had a significant impact because thermal power plant fuel purchases and
debt payments are denominated in US dollars, and thus constitute a major factor in cost increases.
Armenia will have to replace aging electricity equipment in the future; how to fund this is an important
issue. To cover the increased investment costs, large increases in electricity tariffs will be unavoidable.
The World Bank (2013) and others have pointed out that the first element in a price rise strategy is to
have the Public Services Regulatory Commission structure a mechanism whereby changes in marginal
costs flow through to electricity tariffs in a timely and appropriate manner. Also, because large rises in
tariffs have a major impact on consumers, a series of price rises is desirable. Furthermore, they point out
26
that it is important to set tariffs to reflect seasonality, time of day the electricity is being used, and fixed
costs5.
2. Brazil
In the 1980s Brazil’s economy suffered from low growth and a rising budget deficit. Specifically, real GDP
stagnated at an average growth rate of 3% and inflation neared 300%, the budget deficit averaged
around 5% of GDP, and the ratio of net government debt to GDP neared 40% in 1989.
Figure 33. Brazil: economic growth rate (%) and per capita GDP (USD)
20 4500
15 4000
10 3500
3000
5
2500
0
2000
-5
1500
-10 1000
-15 500
-20 0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Per-capita GDP (USD: RHS) Real GDP (% chg.: LHS)
Source: IMF
Figure 34. Brazil: inflation rate (%)

3500
3000
2500
2000
1500 CPI (%)
1000
500
0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Source: IMF
5
World Bank (2013), “Republic of Armenia: Power Sector Tariff Study”
International Monetary Fund (2013), “Case Studies on Energy Subsidy Reform: Lessons and Implications”
Inogate (2015), “A Review of Energy Tariffs in Inogate Partner Countries”
Overseas Power Research Team (2015), “Electricity Business in Overseas Countries”
27
Meanwhile, during this period electricity was being supplied below costs, and the sector relied on
government budgets to make up the shortfall, leading to the need to raise tariffs. However, the
regulatory authorities that approved tariff hikes were under political pressure to keep consumer price
rises under control, so it was impossible to raise tariffs sufficiently, and electricity sector debts mounted.
During this period, the parlous state of power sector finances meant that it was unable to invest
adequately to accommodate future demand growth. In these circumstances, the Brazilian government
decided to sell power assets to the private sector and reduce the debt burden. In 1993 regulations that
mandated a 10% return on capital in the power business and uniform nationwide tariffs were scrapped
to smooth the way for privatization. In 1998, the government decided to unbundle the power sector to
make power tariffs more transparent.
State-based distribution companies comprised a large proportion of the power asset selloff. These had
excess facilities and were overstaffed, and suffered large power transmission losses under a high cost
structure. The Brazilian government moved to privatize the distribution companies in Sao Paulo and in
Rio de Janeiro first. The strategy aimed at major improvements in profit margins through management
reform at the distribution companies. In addition, it was hoped that the improved creditworthiness of
the distribution companies that purchased power from the power generation companies would
encourage the latter to invest. Further, while embarking on the strategy to privatize the distribution
companies, the government overhauled the tariff-setting mechanism to reflect costs.
However, despite participation from private-sector companies thanks to such reforms, investment in the
generation sector was still inadequate, and in 2001 when hydropower capacity declined due to a
drought, the electricity supply/demand balance tightened. This resulted in an allocation regime for
electricity supplies, and major power blackouts were unavoidable. Because the Brazilian electricity
sector was mainly dependent on hydropower, it was structurally very vulnerable to environmental
conditions.
The Brazilian government approved sharp hikes in power tariffs so that the distribution companies could
cover losses suffered under the allocation system. Meanwhile, electricity was supplied at no cost to the
low-income demographic, funded by the tariffs collected.
By adopting these policies the government succeeded in raising electricity rates and reducing
government debt. Success factors included a settling down in inflation from 2000, which created an
environment where it was easier to raise tariffs; strong support for the administration accompanying a
recovery in economic growth; and policies to compensate the low-income demographic for electricity
rate hikes.
28
Figure 35. Brazil: electricity tariffs
140
120
100
80
60
40
20
0
2003 2004 2005 2006 2007 2008
Electricity Tariff (Base 100=2013)

Note: based to 100 in 2013
Source: ANLEE
The Brazilian electricity sector today still depends to a large extent on hydropower plants. A drought in
2014 saw declining output from hydropower plants and a surge in electricity market prices while tariffs
were held flat, leading to deterioration in the earnings environment for the distribution companies. In
response, the Brazilian government was forced to announce support policies to rescue the distribution
companies6. To eliminate the likelihood that the electricity sector will be an increasing burden on
government finances, it is necessary not just to construct a mechanism whereby power supply costs are
accurately reflected in power tariffs, but it is also necessary to create and implement comprehensive
power plans including the share of various energy sources.
Figure 36. Brazil: share of hydropower (%)

100
90
80
70
60
50
40
30
20
10
0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Hydropower Production (% of total)
Source: World Bank
6
Reference material: International Monetary Fund (2013), “Case Studies on Energy Subsidy Reform: Lessons and
Implications”
29
3. Kenya
In Kenya from the start of the 2000s the electricity supply network was well established and demand
also increased sharply amid continuing strong economic growth. However, because power generation
investment was not sufficient to cope with growth in electricity demand, shortfalls arose and there were
mounting concerns that this would be a constraint on future economic growth. During this period,
before the onset of notable electricity shortages, tariffs were insufficient to recoup power supply costs,
so power companies involved in the sector were in a weak financial condition.
Against this backdrop, the Kenyan government investigated rationalizing the sector from the mid-1990s.
It unbundled generation from transmission and distribution and implemented policies to promote the
entry of private-sector IPP operators into the generation segment.
The current power sector is comprised of KPLC (Kenya Power and Lighting Company) in the transmission
and distribution business and KenGen (The Kenya Generating Company), a spinoff from KPLC, on the
generating side. KenGen has about 75% of installed capacity, with six independent power generation
operators accounting for the remaining 25%. KPLC and KenGen, who hold the keys to the power sector,
are both private-sector companies listed on the Nairobi Stock Exchange. KenGen and the IPPs supply
power to KPLC under power supply contracts. At one time, both KPLC and KenGen were 100% owned by
the government, but they have each been partially privatized.
Figure 37. Kenya: economic growth rate (%) and per capita GDP (USD)
9 1400
8 1200
7
1000
6
5 800
4 600
3
400
2
1 200
0 0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Per-capita GDP (USD: RHS)

Real GDP Growth (% chg.: LHS)
Source: IMF
While sector reform proceeded, the tight power supply situation persisted, and in 2005 the Kenyan
government embarked on root and branch reform of electricity tariffs. Specifically, the country created
an automatic pass-through tariff-setting system reflecting long-run marginal costs, fuel costs, and
currency fluctuations. The calculations include a mechanism to reflect domestic inflation rates every six
months, which is posted on the Energy Regulatory Commission (ERC) website. Revisions to electricity
tariffs are approved by the ERC and set independent of political pressure. Approval of tariff hikes is
granted on the presumption that services will improve.
30
In Kenya the Energy Ministry is responsible for setting electricity policy. The abovementioned ERC was
established in 2007. The organization is independent of the energy minister and is responsible for
regulating power tariffs, issuing electricity business licenses, and producing technical standards and
supply regulations. Further, there is an Energy Tribunal in case of disputes between power sector
business operators and the ERC.
In this manner, power tariff-setting mechanisms were overhauled and the power companies’ margins
improved drastically. In 2008 there were no subsidies or fiscal support measures to power companies.
There was a marked impact from the power companies themselves improving their tariff collection
systems. Figure 24 shows electricity tariff reforms over the relevant period.
Figure 38. Average electricity tariffs for users

Year USD/kWh
2000 0.07
2006 0.15
2009 0.19
Source: IMF (2013)
According to the IMF, underlying the successful raising of tariffs was a shared understanding among
concerned parties that: “in order to attract foreign investors and maintain economic growth it was
important that KenGen and KPLC’s finances were sound and power tariff systems had to reflect true
electricity costs.” Further, for consumers whose monthly usage was less than 50 kWh, the government
established “lifeline” tariffs; this was considered important in gaining the people’s understanding.
Over 50% of installed capacity was from hydropower, followed by thermal and geothermal sources. As a
result the sector is structurally vulnerable to drought. While continuing to improve financial health of
the electricity sector, Kenya will have to further diversify its energy sources in the future7.
Figure 39. Share of hydropower generation in Kenya

100
80
60
40
20
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Hydropower Production (% of total)

Source: World Bank
7
Overseas Power Research eam (2015), “Electricity Business in Overseas Countries”
31
4. The Philippines
Starting in the 1990s the Philippines suffered from a shortage of power supply. At that time, the state-
owned power company NPC (National Power Corporation) had a monopoly in generation and
transmission. However, the company was not able to invest enough in generation to meet growing
electricity demand accompanying economic growth, leading to the tight supply/balance demand
situation. In these circumstances, the Philippines government liberalized the generation sector and
encouraged the participation of independent power producers (IPPs).
NPC was the counterpart for the IPPs’ power sales agreements. The government encouraged IPPs to
enter the sector in a short time frame, and NPC signed expensive, long-term, dollar-denominated power
purchase agreements (PPAs). Further, the contracts favored the IPP operators. In addition to high power
tariffs, under take-or-pay clauses in the PPAs, NPC had to pay the IPPs even if demand was insufficient
and it did not actually transmit any electricity. Due to the need to increase supply capacity in a short
time frame, many of the IPP investors established small-scale gas turbine power plants.
As a result of these deals, energy investment progressed and capacity shortfalls were eliminated.
However, while electricity charges paid to the IPPs were set high, selling prices to the distribution
companies were held low as a matter of policy, and NPC’s financial position deteriorated markedly.
Under these circumstances, when the Asian currency crisis occurred and the Philippines currency
plunged amid a slowdown in demand, NPC’s financial condition worsened even further. The fiscal
burden of supporting NPC’s finances increased dramatically, heightening the need for reform in the
electricity sector.
Figure 40. Philippines: GDP growth and budget balance

10
8
6
4
2
0
-2
-4
-6
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Budget Balance (% of GDP)

Real GDP (% chg.)
Source: World Bank, “World Development Indicators”
32
To cope with the increasing fiscal burden from NPC, the Philippines government enacted the EPIRA
(Electric Power Industry Reform Act), a law to reform the power industry, in 2001. This marked the start
of the government’s efforts to fundamentally reform the power sector. Specifically, the country
embarked on the following initiatives.
· Splitting up NPC (separating generation and transmission)

· Selling NPC’s assets to the private sector (generation, transmission)
· Unbundling power tariffs (making the costs of generation, transmission, and distribution
transparent)
· Establishing an independent regulator in charge of tariff approval etc. (ERC: Energy Regulatory
Commission)
· Establishing a wholesale electricity transaction market (WESM: Wholesale Electricity Spot
Market)
· Deregulating the retail market (in future)
The fundamental aim of these reforms was to cut the government’s power sector-related debt and
reduce the amount of subsidies it paid, but there was no immediate impact. It has been pointed out that
the independent regulator had limited administrative capabilities. As a result, fiscal support for NPC
reached 1.5% of GDP.
In these circumstances, then President Arroyo was concerned about the budget, and immediately after
the 2004 presidential election announced a sweeping package to improve the budget balance, including
increased VAT (value added tax) rates and constrained fiscal expenditures. The package included a 30%
hike in electricity tariffs implemented from 2004 through 2005. As a result, the fiscal drag from NPC
shrank to 0.2% of GDP. This is a good example of the need for strong political willpower when raising
electricity tariffs and reducing subsidies. It is not enough to establish an independent regulator. For the
sake of reference, the figure below shows residential electricity rates from Meralco8, the largest energy
distributor, and NPC’s power generation charges in the 2000s. Both of these tariffs are approved by ERC,
the regulator.
Figure 41. Retail electricity rates and generation charges (Peso/KWh)

12
10
8
6
4
2
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
MERALCO (Average Residential Rate: Peso/kWh)
Source: Meralco, NPC
8
Meralco is the largest distribution company in the Philippines which supply electricity in the greater Manila area.
The sales of the electricity in 2014 was 35,160GWh, and the revenue is 2,623PHP in the same year.
33
The key that enabled sharp electricity rate hikes was making costs transparent by unbundling power
tariffs, while at the same time providing lifeline tariffs to those on low incomes below the actual supply
cost, to help them absorb the impact of price increases. Funding for the difference between the lifeline
tariffs and costs was via a universal charge for all users included in electricity rates. According to the
Philippines government, lifeline tariffs at a 5-50% discount to ordinary tariffs were provided to some
three million low-income households9.
Figure 28 shows a breakdown of power charges by Meralco, the largest supplier in the Manila district, in
2014.
Figure 42. Breakdown of average power charges (2014)

Item Peso/kWh Share
Meralco (distribution, supply) 1.61 17.1%
Generation 5.34 56.7%
Transmission 0.92 9.8%
Taxes, etc. 1.11 11.8%
System losses 0.44 4.7%
Total 9.42 100.0%
Source: Meralco, “Power to All - 2014 Meralco Annual Report”
C. Subsidy reform for PLN: background and current status

1. Background to subsidy reform for PLN
Subsidies for PLN are a major burden on government finances in Indonesia, but reform is progressing.
PLN is a state-owned enterprise (SOE) set up to supply electricity in the public interest. Under the new
Electricity Law (No. 30/2009) it is obliged to supply power at a “reasonable” price. Therefore, it is forced
to sell power cheaper than the economic cost. The difference between the reasonable price and the
economic cost of power, with an appropriate operating margin added on, is paid by way of a
government subsidy every year.
9
Meralco (2015 ), “Meralco Annual Report 2014”
34
At the start of the 2000s there was a series of power tariff hikes and government subsidies to PLN were
around 3-4 trillion rupiah. However, subsequently fuel prices surged as oil prices climbed and the
government reduced subsidies for petroleum products, resulting in an accompanying increase in
government subsidies to PLN. In 2009, they decreased temporarily due to a fall in fuel prices and
improvements in fuel conversion, but then started increasing again. In 2012 subsidies reached 103
trillion rupiah. Since 2012, power subsidies to PLN have been roughly around 100 trillion rupiah.
Figure 43. PLN: power subsidies (trillion rupiah)

120
100
80
60
40
20
0
2002200320042005200620072008200920102011201220132014
Source: PLN, “Annual Report 2014”
2. PLN’s revenue structure

Government subsidies form a large share of PLN’s revenue. In 2014 they accounted for around 34% of
sales at 100 trillion rupiah. The Indonesian government views reducing subsidies as a key budget priority.
Electricity subsidies are not just to cover cost shortfalls but are set as part of the government budget
every year with due consideration to required returns (margins). This is so that PLN will have enough
capital to carry out necessary investments. In 2014, the operating margin that was deemed sufficient for
PLN to have sufficient investment funds was set at 7%.
Electricity subsidy calculations are determined via a Ministry of Finance ordinance. For each tariff
classification, electricity sales prices and generation costs are compared. When the electricity selling
price is low, subsidies are calculated based on the gap. Due to this mechanism, power tariffs were held
low even while fuel prices surged.
Thanks to government subsidies, there are no issues with PLN’s fiscal soundness from a cashflow perspective, but
as rapid growth in electricity demand continues, so does growth in fixed assets. The relatively slow growth in
equity means that the equity ratio is declining. Also, the DSCR (debt service coverage ratio: an indicator of debt-
servicing capacity) is trending at around 1.5x.
35
Figure 44. PLN: equity and fixed assets (trillion rupiah)
600
400
Fixed Assets
200 Equity
0
2010 2011 2012 2013 2014
Figure 45. PLN: equity ratio and DSCR

2.0 45
40
1.5 35
30
25
1.0
20
15
0.5 10
5
0.0 0
2010 2011 2012 2013 2014
DSCR (LHS) Equity Ratio (RHS)

Note: electricity subsidies are set by user category. The calculation formula is as follows.
Σ (average selling price (Rp/kWh) - basic electricity production cost [incl. margin] (Rp/kWh)) x electricity sales (kWh)
The smaller the user, the lower the electricity tariff. As a result, the subsidy per unit of consumption for
such consumers is relatively high.
36
3. Position of electricity subsidies in context of overall energy subsidies
In Indonesia, energy subsidies are structured as shown in Figure below.
Figure 46. Structure of energy subsidies
2013 annual 2014 revised 2015 revised

accounts budget budget
Fuel subsidies (trillion

210.0 246.5 81.8
rupiah)
(Billion USD) 20.1 19.7 6.5
Electricity subsidies
100.0 103.8 76.6
(trillion rupiah)
(Billion USD) 9.6 8.3 6.1
Fiscal revenues (trillion

1439.0 1635.0 1769.0
rupiah)
Fiscal expenditures
1650.0 1877.0 1995.0
(trillion rupiah)
Fiscal balance (trillion

20.3 19.3 18.1
rupiah)
Fiscal deficit (% of GDP) 2.3 2.4 1.9
Source: International Institution for Sustainable Development (2015)
Since his election in 2014, President Joko has implemented aggressive cuts to fuel and electricity
subsidies. On a budget basis, fuel subsidies for 2015 were 81.8 trillion rupiah (-66.8% YoY) and electricity
subsidies were 76.6 trillion rupiah (-26.2% YoY). While subsidies in 2015 declined sharply from 2014, the
aggregate of fuel and power subsidies was 158.4 trillion rupiah, roughly 8% of the national budget, so
they still have a large budget presence. The breakdown of Indonesian fiscal spending in 2014 and 2015 is
shown in Figure below.
37
Figure 47. Breakdown of government expenditure in 2014 budget
personnel
14%
fuel subisidies
transfers to 14%
regional gov'ts
32%
electricity
subsidies
6%
interest other
social
7% subsidies
spending
6% capital other ordinary 3%
spending expenses
8% 10%
Source: IMF (2015)
Figure 48. Breakdown of government expenditure in 2015 budget
personnel fuel subsidies

15% 4%
transfers to electricity
regional gov'ts subsidies
36% 3%
interest other subsidies
8% 3%
other ordinary
social spending expenses
capital spending
7% 12%
12%
Source: IMF (2015)
The amount spent on subsidies depends to a large degree on international energy prices and the
movement of the rupiah against the US dollar. Considering that these are highly volatile, it is necessary
to reduce subsidies as much as possible to stabilize the Indonesian government’s finances.
For reference purposes, the IMF’s forecasts for revenue and expenditures and energy subsidies and
development through 2020 are shown in the figure below.
38
Figure 49. Forecast for Indonesia’s revenue and expenditures (share of GDP, %)
2012 2013 2014 2015 2016 2017 2018 2019 2020
Fiscal revenue 16.3 15.8 15.2 13.5 14.1 14.4 14.7 14.8 14.9
Fiscal expenditure 18.1 18.2 17.5 15.9 16.4 16.4 16.4 16.5 16.6
Of which energy
3.7 3.4 3.4 1.0 0.9 0.4 0.1 0.1 0.1
subsidies
Of which development
2.7 3.0 2.5 3.0 3.4 3.7 3.9 4.1 4.1
spending
Primary balance -0.6 -1.1 -0.9 -1.1 -0.8 -0.6 -0.4 -0.4 -0.3
Central government debts

24.0 26.1 26.1 26.8 26.8 26.5 26.1 25.5 25.0
(outstanding)
Source: IMF (2015)
4. Support from the World Bank

The World Bank is supporting the Indonesian government in its efforts to reduce electricity subsidies.
The Indonesian government’s initiatives are consistent with successful cases in other countries.
Indonesia appears to have learned from success stories in other countries analyzed by the World Bank
and the IMF. According to Indonesian government officials, the World Bank is working to introduce PBR
(performance-based rating) to enhance management efficiency at PLN in conjunction with subsidy
reform. Indonesian government officials and PLN have indicated their readiness to take on board advice
regarding subsidy reductions and the financial health of the power sector from organizations other than
the World Bank as well10.
5. PLN subsidy reforms: current status and plans

Under the subsidy reduction roadmap produced by the Ministry of Energy and Mineral Resources,
subsidies to PLN will reduce in stages over 2013-2018. Currently, reductions of subsidies by category are
steadily underway.
Electricity tariff hikes are occurring at the same time as subsidy cuts. In May 2014 there was a hike of at
least 38.9% for contracted capacity greater than 200 kVa for industrial users, followed by hikes of 8.6%
each in two-month intervals. Users consuming over 30,000 kVA faced a price hike of 64.7%, followed by
13.3% hikes in two-month intervals. Price hikes are starting with medium and large users, placing a
heavy burden on major industries. Electricity tariff hikes for industry are forecast to total 8.85 trillion
rupiah annually.
From May 2014, announcements regarding tariffs have been posted monthly on PLN’s website.
10
Based on a 2015 field survey
39
Figure 50. Recent PLN electricity tariff revisions
Source: IISD
According to officials from the Ministry of Energy and Mineral Resources, these electricity tariff hikes are
likely to continue on schedule under the new administration, which is very keen on subsidy reform11.
In 2015, a price-adjustment mechanism was introduced in electricity tariffs for heavy power users to
reflect variations in individual cost categories. Under this, tariffs are adjusted by the government every
month to reflect consumer price inflation, currency fluctuations, and oil prices in Indonesia.
There were concerns that tariff hikes for industrial electricity would reduce the relative attractiveness of
operating in Indonesia for foreign companies. However, the sensitivity of electricity consumers to
energy costs is declining amid falling international energy prices. Further, the fuel cost portion which is
passed through to power tariffs is falling, so these concerns are not present for now.
The Indonesian government’s plans for power subsidies are shown in Figure40 below (includes some
estimates).
11
40
Figure 51. Electricity subsidy reduction plans
120
100
80
60
40
20
0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Source: Ernst & Young ShinNihon LLC with estimates based on materials from the Ministry of Energy
and Mineral Resources
III. Laws and regulations pertaining to electricity business in

Indonesia
A. Institutional challenges in implementing 35 GW Electricity Program
The key challenges from an institutional viewpoint in attracting domestic and foreign investors to
implement the 35 GW Electricity Program are as shown below.
· Government guarantees
· Land acquisition
· Local content regulations
The figure below shows forecast risks and standard business scheme for operating an IPP business
overseas. In general, a global enterprises running an IPP business in emerging economies such as
Indonesia covers off-taker risk with a guarantee from the country’s finance ministry, and then uses
insurance from a public sector financial organization (a trade insurer or export-import bank) to cover
political risk. Alternatively, financial services such as insurance or credit are available and the company is
able to structure a project finance deal from commercial financial institutions that cover these risks.
When Japanese companies operate an IPP project in Indonesia with PLN as the off-taker, it is usual for
the lenders to seek a government guarantee from the Indonesian finance ministry. A government
guarantee can be considered a prerequisite for running an IPP project.
41
Figure 52. Potential risks when running a cross-border power business
Avoidable? Risk type Typical status in Indonesia
Yes Sponsor risk Avoidable by participation of quality Japanese and local companies
Yes Completion risk Avoidable by employing reliable EPC company
Yes Operating risk Avoidable by employing company with operational track record
Maybe Fuel supply risk If fuel supplier from private sector, stable supply may be an issue in some cases
Yes Market risk Avoidable by using availability payments
Maybe Offtake risk In general, project finance schemes cannot absorb all of PLN's credit risk so
government guarantee mechanism necessary
Maybe Currency risk Avoidable with extended warranty from lender if there is a government
guarantee
Yes Cash flow risk Avoidable to some extent with availability payments. Extended warranty also an
option.
Maybe Country risk Avoidable with extended warranty from lender if there is a government
guarantee
Maybe Other (land acquisition Up till now business operator has been responsible for land acquisition; risk is
etc.) high
Source: EY ShinNihon LLC study team
Figure 53. Standard IPP project scheme
Source:EY ShinNihon study team
42
Nonetheless, recently there are cases where Indonesian infrastructure projects have been put together
without a government guarantee, and some in the 35 GW Electricity Program have been tendered for
without a government guarantee. This kind of attitude increases the risk of IPP projects in Indonesia and
is an important issue for Japanese companies operating there.
Land acquisition is an important issue in infrastructure development. In the Indonesian electricity

project sector, the Electricity Law requires IPP operators to acquire land. It is not held to be the
government’s responsibility, so for foreign operators in particular this is a high hurdle. Land has not
been acquired for the Batang coal-fired power plant project that Itochu and J-Power have invested in.
The acquisition deadline for launching operations in 2016 has been extended on numerous occasions.
Although this project does not involve the displacement of residents it has faced opposition from NGOs
and locals. Even more than four years after the PPA agreements were concluded in 2011, the land has
still not been acquired. As this case shows, land acquisition and expropriation are particularly difficult in
Indonesia and a major concern for operators considering investing, despite recent governments efforts
to mediate this issue.
In recent years local content regulations have also become an issue that global companies have to
consider when investing in the electricity sector. The regulations were introduced with the aim of
fostering the development of the domestic Indonesian industry. The electricity sector is subject to these
regulations. Local procurement ratios come into effect above a certain threshold value of materials
procured. These rules apply even to ultra-supercritical thermal power plants that require technically
sophisticated materials which are in reality difficult to procure locally in Indonesia, creating a situation
where it is difficult to comply with regulations.
B. Government guarantees
1. Legislation regarding government guarantees for power projects
The legislation that governs government guarantees for power projects in Indonesia can be broadly
divided into those under the Electricity Law and those under the PPP Law.
In Indonesia, private-sector capital has been utilized in the electricity sector through the IPP format from
before the advent of the PPP legal framework. The participation of private-sector capital in the
electricity business is recognized and specified under the Electricity Law that governs the sector. In the
context of the Electricity Law, there is an institutional arrangement for government guarantees known
as BVGL (Business Viability Guarantee Letter). Even now, when the government guarantee mechanism
has been established through the PPP legislative arrangements, it is more common for the Electricity
Law arrangements to be used for government guarantees in power projects.
In the context of the Electricity Law, PLN is designated as the party responsible for implementing PLN’s
power developments under a presidential regulation (2010) for the FTP2 (Second Fast Track Program).
43
This indicates that the Indonesian government will support viability of power projects developed by PLN.
Under the presidential regulation, the finance minister is responsible for specifying exactly what
“government support” means. Accordingly, under Finance Ministerial Regulation 173/2014, projects
listed under FTP2 will be granted BVGLs from the government of Indonesia through Ministry of Finance.
Projects that are included as FTP2 projects are specified by a regulation from the Minister of Energy and
Mineral Resources12. The “viability guarantee” is a government guarantee covering the risk of PLN’s
bankruptcy or withdrawal from a project in a PPA between a private-sector power generation company
and PLN. Guarantees regarding default payments depend on considerations specific to each project and
apply to the preparation, construction and operating periods.
Government guarantees set out under Finance Ministerial Regulation 173/2014 were set to expire on 31
December 2014, but reflecting delays in implementing FTP2, the deadline was extended to 31 December
2019, so projects on the FTP2 least are still covered by government guarantees.
Meanwhile, in the context of the PPP Law, following a Presidential Regulation regarding PPPs in 2005,
the Indonesia Infrastructure Guarantee Fund (IIGF) was established in 2010 and the procedures for
applying for government guarantees from IIGF were specified. According to the PDP law, projects in the
PPP Book issued by BAPPENAS (Badan Perencanaan Pembangunan Nasional, the National Development
Planning Agency) with the approval of the finance minister may have government guarantees. A project
must be listed in the PPP book to apply for a guarantee from the IIGF.
The PPP Law stipulates that the government may provide government guarantees to PPP projects. It also
stipulates that the minister responsible for finances may specify standards and procedures regarding the
provision of government guarantees. The minister responsible (as well as head of organization and head
of region) designates infrastructure projects that are to be provided in cooperation with the private
sector (PPP projects) and creates a candidate list for PPP projects and submits it to BAPPENAS, the
National Development Planning Agency. Based on the projects submitted from the relevant minister,
BAPPENAS prepares a national government list of PPP projects, and the BAPPENAS minister decides
which projects to list in the PPP book depending on the maturity of the project.
When requesting a guarantee from IIGF, those in charge of the project must submit an application
before completing procurement procedures. Specific details of the guarantee (risk allocation plans,
government support, and scope of guarantee coverage [type of risk, allocation and period]) and financial
forecasts for the project and draft contracts must be submitted. Based on these proposals, IIGF is
responsible for ascertaining the project’s technical and financial feasibility, the details of agreements
setting out risk allocation, and whether the guarantee amount is appropriate for IIGF’s funding ability
(Presidential Order 78/2010). Once a project has been listed in the PPP book, IIGF must decide whether
it is possible to provide a guarantee based on the results of its investigation.
12
MEMR Decree15/2010, 01/2012
44
Figure 54. Overview of legal arrangements regarding government guarantees of power projects
Source:EY ShinNihon study team
The 2,000 MW coal-fired power plant project in central Java that Itochu and J-Power invested in is the
first to receive a government guarantee from IIGF and the Finance Ministry under the PPP legal
arrangements. Further, as of January 2016, Sumsel 9 and10, where bidding has been delayed, were also
expected to receive government guarantees under the PPP Law.
Meanwhile, projects listed under the Fast Track Program are covered by BVGL arrangements under the
Electricity Law.
Figure 55. Projects with government guarantees
Source: EY ShinNihon LLC study team based on press reports
45
2. Status of government guarantees and Indonesian government stance
Japanese companies often state that they are unable to raise project finance without government
guarantees, so cannot participate in IPP projects in particular. The Indonesian government is not
necessarily always keen to provide government guarantees and in recent years there been several cases
of power projects being structured without them. As an example, the Batang IPP won an order in
February 2014 for a USD730 million (roughly JPY86 billion) 600 MW coal-fired power plant project with
no government guarantee. Financial institutions that participated in the deal were Malaysia’s Export
Import Bank, CIMB Bank, Citibank, and RHB Bank, with Herbin Electric (China) as the EPC contractor.
In January 2014 Finnvera, the Finnish Export Credit Agency (ECA), extended a guarantee over buyers
credit worth EUR160 million (roughly JPY20 billion) over 12 years to Standard Chartered Bank, again
without a government guarantee. This project involved the ECA guaranteeing finance directly to PLN
with no government guarantee. The then PLN president, Nur Pamudji, commented that “this
demonstrates that ECA has assessed PLN’s creditworthiness favorably”.13 While this is a small project, in
2014 the Rajamandala hydropower project was financed by JBIC and Mizuho Bank with guarantees
worth USD 200 million (around JPY 24 billion) from MIGA and no Indonesian government guarantee.
Outside of power projects, in September 2015 a Chinese consortium received an order to build a high-
speed railway and did not seek a government guarantee. Among projects under the current 35 GW
Electricity Program, it was clear at the time of accepting bids that there will be no government
guarantees involved in the Jawa-7 power plant. In December 2015 China’s China Shenhua Energy
Company received an approximately USD2 billion (JPY240 billion) order for the 2,000 MW Jawa-7 power
plant.
Neither the Indonesian government nor PLN is keen for government guarantees on power projects for
several reasons. As it builds its track record, as shown above, PLN is becoming more confident of being
able to secure finance without government guarantees; obtaining government guarantees involves
complicated, time-consuming procedures and negotiations with the finance ministry; and Indonesia’s
finances are strained so it wants to limit the generation of contingent liabilities. As long as the finance
ministry does not refuse, FTP2 projects are covered by government guarantees, but the general
consensus is that subsequent projects are unlikely to have a government guarantee. The Indonesian
government appears to be keeping an eye on the market’s attitude to see to what extent ECAs and
market financial institutions are willing to extend finance without government guarantees14.
In 2015, there was a Presidential Regulation (82/2015: issued 15 July) regarding central government
guarantees for infrastructure finance that involve direct loans from international financial institutions to
state-owned enterprises as part of a new system. This enabled government guarantees for direct loans
from international financial institutions to SOEs. The intent was to enable SOEs to procure low-cost
funds.
The government guarantees cover funding to SOEs as well as state-owned infrastructure finance
companies who obtain finance that they provide to SOEs. In this case, the credit extended to the
13
PLN HP http://www.pln.co.id/eng/?p=3095
14
46
relevant state-owned infrastructure finance companies is also subject to government guarantee. The
conditions for providing a government guarantee are as follows:
i. The relevant SOE must be 100% state operated or other SOEs with 100% of shares owned by the
government.
ii. The SOE must have sound finances and evaluated to have capacity to repay loans
iii. Relevant infrastructure projects must be included in the government’s infrastructure project list
and be confirmed by a feasibility study to be economically and financially viable
iv. However, conditions i and iii do not apply to SOEs that provide infrastructure as stipulated by
Presidential Regulation
The state-owned infrastructure finance companies must have sound finances and the loans must be to
procure funds for the SOEs’ small and medium infrastructure projects.
When an SOE applies for a government guarantee after receiving a Statement of Interest from an
international financial institution, the SOE submits an application to the finance minister. Upon receipt,
the finance minister conducts an investigation and if a guarantee will be provided, the minister provides
a Letter of Interest (guarantee document) to the lender (international financial institution). As of
September, there had not yet been any applications by a state-owned enterprise. Furthermore, direct
loan funds from an ECA (such as Japan’s JBIC) were not covered by a government guarantee15. We
understand that detailed rules will be contained in a Ministry of Finance Regulation.
C. Land acquisition
1. History and status of laws regarding land acquisition
Indonesia historically has seen many examples where land acquisition process has delayed the
construction of power plants and transmission lines. This issue hindered foreign investment for a long
time, especially in the power sector. Under the Electricity Law, there was a large burden on private-
sector companies, which were required to acquire the land for IPP projects.
Regulations regarding the acquisition of land for public infrastructure are set out in Presidential
Regulation 36/2005. Subsequently in 2006, regulations were revised in Presidential Regulation 65/2006
(the so-called old Land Acquisition Law) but investor dissatisfaction regarding the unclear status of
operational regulations remained.
Figure 56. Overview of land acquisition legal framework

Law Gist
Presidential Regulation Presidential Regulation issued in 2005. Responsibility for land acquisition
36/2005 was unclear.
Presidential Regulation Presidential Regulation issued in 2006. Amendment version of Presidential
65/2006 Regulation 36/2005. Contained more specific land acquisition provisions (the
so-called old Land Acquisition Law).
Presidential Regulation Presidential Regulation issued in 2010. Specified that land acquisition must
13/2010 be complete before bidding on PPP projects.
15
47
Law for Acquisition of Land New land acquisition law that came into force from January 2012. Clarified
for Development in the Public rules regarding land acquisition procedures.
Interest. (Regulation 2/2012)
Presidential Regulation Presidential Regulation issued in 2012. Specified implementation rules for
71/2012 the new land acquisition law.
National Land Agency Following Presidential Regulation 71, gave details of the implementation
Regulation 5/2012 process under land acquisition regulations.
Presidential Regulation Presidential Regulation issued in 2015. Gave private companies the authority
30/2015 to purchase land in place of government agencies (under an agreement).
National Land Agency New regulations to alter prevailing technical guidelines regarding land
Regulation 6/2015 acquisition.
Source: Dr. Ir. Bastary Pandji Indra,“PPP POLICY AND REGULATION IN INDONESIA” (2011)
Note: Based on laws posted on Indonesian government website at

http://indonesia.go.id/en/lpnk/badan-pertanahan-nasional
In 2012, in light of these issues, a new land acquisition law (formally known as Law for Acquisition of
Land for Development in the Public Interest) was created with the aim of making the land acquisition
framework simpler and more transparent. Subsequently, Presidential Regulation 71/2012 set out
detailed implementation processes. Through this, the organizations responsible for land acquisition
activities were clarified. During the preparation period the local authorities (primarily governors) were
made responsible for land acquisition, with the national land agency responsible during the execution
and handover stages.
Further, under the new regulations, responsibility for actually obtaining the land was transferred from
the project developers to the government. However, the new land acquisition law stipulated that the
old land acquisition law would apply until 31 December 2014 to IPP projects that had already
commenced acquiring land as of 7 August 2012, when the new law came into effect. Therefore, private-
sector operators were not immediately relieved of the onerous task of obtaining land. The PPP Law
stipulates that land for infrastructure projects must be ready before bidding, which also affects entities
involved in land acquisition in the electricity business.
Figure 51 below shows the main details of the new land acquisition law (Law 2/2012) and
implementation guidelines (Presidential Regulation 71/2012).
Figure 57. Land Acquisition Law (Law 2/2012) and implementation guidelines (Presidential Regulation
71/2012)
Key provisions Overview
Maximum period Investors commented that regulations up until now had not clarified how long it would take to
for land acquire land, and further that the time required to complete a land acquisition was too long
acquisition under the current arrangements.
In response, in addition to clarifying the land acquisition process, the law specified the period
between receiving land acquisition documents and completion of registration. This made it
easier for investors to estimate how long it would take to complete the land acquisition
process.
Land acquisition period (from receiving land acquisition plans to completing land registration
48
· If there are no objections to plans: approximately 319 days (minimum)
· If there are objections to plans: approximately 583 days (maximum)
When building Even if a land registration certificate has not yet been issued, the law stipulates that
construction can construction of buildings may be commenced on the acquired land once the land has been
begin on transferred
purchased land
Clarification of Land acquisition process divided into four stages: planning, preparation, execution, and
land acquisition delivery. Clarifying which organization is responsible for each process made it easier for
process and investors to proceed with land acquisition plans.
organizations
responsible
Responsibilities Responsibility for planning and preparation stages consolidated under BPN (National Land
of National Land Agency). The law stipulated that BPN takes the initiative in executing the land acquisition
Agency (BPN) process, starting with negotiations between landowners and investors and final delivery to
investors.
Clarifying land Those eligible for compensation for land acquisition had been hitherto vague or limited. The
ownership new laws made land ownership clearer. (Indigenous people and owners of buildings
constructed in the relevant area became eligible for compensation.)
Public appraiser Presidential Regulation enabled public appraisers licensed by the Ministry of Finance to
eligibility and appraise fair value of the land, in addition to real estate appraisers. Further, the regulation
appointment stipulated that the appraiser would be appointed through a competitive process.
Treatment if the The regulation stipulated that even if the land had been used as collateral for a loan, once the
land had been compensation for land acquisition was received, land title would be extinguished. For example
used for loan if the land title was transferred for a project in the public interest, under the regulations the
collateral bank would automatically lose its collection rights on the loan collateral. (However, under the
regulations, additional provisions such as that the receipt of compensation money would be
“conditional on approval of the lender” could be incorporated in the loan contract.)
Small lot land For purchases under 1 ha in size, the regulations permit the direct purchase of the land from
purchases the landowner through a sale and purchase agreement or other mechanism. However, in cases
where the landowners refused to sell the land it was not clear whether compulsory acquisition
processes would apply.
Land purchases SOEs that have special agreements (“special assignments”) with the government were
by state-owned permitted to acquire land on the government’s behalf. However, the regulations did not define
enterprises what was meant by “special assignment” and specifically what sort of land acquisition relevant
SOEs would be involved in or what the implementation guidelines would be. In particular, for
power projects, the regulations were unclear as to whether PLN would be able to acquire land
in cooperation with private-sector operators on behalf of the government.
Source: Based on “Law No. 2 of 2012 on Land Acquisition for Public Interest Development”,
Hadiputranto, Hadinoto & Partners (2012) “Implementing Regulation of New Land Acquisition Law
Finally Issued”
2. Roles and procedures for related organizations

The establishment of the new land acquisition law meant that the government’s practical
responsibilities in regard to power project land acquisitions were clarified. As the authority in charge,
the National Land Agency was responsible for facilitating the basic land acquisition process. The same
law also stipulated that SOEs with special assignment under an agreement with the government were
entitled to purchase land on the government’s behalf. However, the exact definition of “special
assignment” and detailed implementation guidelines for the purchase of land by SOEs was not specified,
and it was not clear what authority PLN had in relation to acquiring land for power projects.
49
The most important regulation regarding land acquisitions created in recent years is Presidential
Regulation 30/2015. Laws established prior to this stipulated the details of implementation regulations
for land acquisition by PLN, but the 2015 law recognizes that if there was an agreement between a
private-sector operator and a specific government organization including state owned enterprises, it had
the authority to purchase land.
Figure below shows the main points of Presidential Regulation 30/2015.
Figure 58. Main provisions of Presidential Regulation 30/2015

Key regulations Gist
Private-sector operators Previously, only specified government entities including SOEs were subject to
may be included in land the Land Acquisition Law. Under the new regulations, if private-sector entities
acquisition schemes had agreements with a specific government entity, including SOEs, they would
have the authority to participate in land acquisition as part of a public
infrastructure supply program
New funding model Previously, only the government was allowed to fund land acquisition. Specified
government entities excluding SOEs had to procure funds from the relevant
state or regional budgets. SOEs meanwhile were able to use funds from their
own budgets.
Under the new regulations, private-sector entities with an agreement with
specified government entities (excluding SOEs) could provide funding. Such
funds have to be repaid after land acquisition by the relevant government entity
from budget funds, with the relevant expenses calculated based on investment
return rates.
Application to existing Previously, the old 1960 Land Acquisition Law applied to infrastructure projects
projects where more than 75% of the land had been acquired. If less than 75% of the
land had been acquired, a request to apply the new Land Acquisition Law had to
be submitted and the process started over from scratch. Many investors
complained that the difficulty resulting from partially remaining regulations was
unfair.
The new regulations stipulated that not only new projects, but projects that
started before the new Land Acquisition Law came into effect (7 August 2012)
were subject to the new Land Acquisition Law, including those where 75% of the
land had been acquired.
Source: Based on Presidential Regulation No. 30 of 2015, Corrs Chambers Westgarth (2015),
“INFRASTRUCTURE IN INDONESIA: WILL RECENT REFORMS MAKE THINGS EASIER?”
Figure below shows organizations that are involved in land acquisition for power projects. As mentioned,
in the preparation phase, regional authorities (primarily state governors) have jurisdiction; during the
planning phase and in the execution and delivery phases, the National Land Agency has jurisdiction.
Figure 59. Organizations involved in land acquisition and their roles

Relevant organization Role
Local authority (governor) Has jurisdiction over land use permits in each region. Receives land acquisition
plans from developers and has jurisdiction over the preparation stage of land
acquisition.
National Land Agency Government organization reporting to the President that was established via
(BPN) Presidential Regulation 10/2006. Aim is to execute policies related to land,
50
including land development.
PLN State-owned electricity enterprise. As the organization implementing electricity
policies, it coordinates between the National Land Agency and developers.
Further, jurisdiction and implementation regarding land acquisition in the four phases of planning,
preparation, execution, and delivery are regulated under the new Land Acquisition Law.
Figure below shows the land acquisition process.
Figure 60. Land acquisition process
Source: Based on “Law No. 2 of 2012 on Land Acquisition for Public Interest Development”,
Hadiputranto, Hadinoto, & Partners (2012) “Implementing Regulation of New Land Acquisition Law
Finally Issued”
First, in the planning stage, the project operator (institution) creates a business plan, as well as a plan for
acquiring the land needed to execute the plan. Next, the operator submits the land acquisition plan to
the local authority. The local authority puts together a preparation team engaged in detailed land
acquisition planning and delivers modifications to the relevant region, conducts a preliminary survey,
and holds public hearings. Once these have been completed, the land to be acquired is specified and
announcements made. This is the preparation phase.
After the local authority has drafted the land acquisition plan, this is submitted to the National Land
Agency (BPN) and the contents are verified and amended as necessary. Next, an appraiser who will
calculate the amount of compensation is chosen. Then, negotiations must occur with the landowners
regarding the amount and method of compensation. As mentioned previously, under the new land
acquisition law and the subsequent Presidential Regulation, if there are certain agreements between
51
private-sector operators and PLN, they may be permitted to acquire land on the government’s behalf.
The regulations assume that on occasion there will be proactive land acquisition processes so that
private-sector operators can move swiftly to develop a project.
In these cases, the private-sector operator will have to advance a certain amount of funds for
compensation and other payments, but the regulations stipulate that these funds must be repaid from
the budget of the related government entity following land acquisition.
If the amount of compensation for landowners is determined by a court ordered compromise, this will
be in the final delivery stage. In this case BPN has jurisdiction, and the transfer of land to the operator
and issuance and registration of land ownership certificates bring the series of processes to an end.
While land acquisition laws are better developed than previously, land acquisition is still not proceeding
smoothly in actuality. PLN, the entity responsible for implementing electricity policy, has a program to
facilitate land acquisition. Figure 55 below sets out details of this program.
Figure 61. PLN’s land acquisition program

Item Overview
Application of new · Recommendation to government: proclaim priority provisions in the new Land
Land Acquisition Law Acquisition Law regarding implementation guidelines for other sectors such as
(2/2012) with clear forestry, transport, and state budgets
implementation · Recommendation to government: simplify land acquisition process or proclaim
guidelines regulations to improve the process (Presidential Regulations 71/2012, 40/2014,
99/2014 and 30/2015)
Application of special · In light of costs and benefits, carry out land acquisition through market
schemes mechanisms with the involvement of business operators
· Make efficient use of real estate purchasing agents in the land acquisition
process
· Proactively offer landowners chance to participate in IPP projects
Improve coordination · Running social awareness campaigns to further the understanding of
among various indigenous people and other stakeholders regarding new land acquisition
institutions and · Recommendation to government: proclaim regulations to establish public
stakeholders organizations that will take the initiative in order to accelerate land acquisition
and license approval for electricity programs
Coordinate legal · Simplify licensing and coordinate central and regional government regulations
requirements and (reducing number of permits, etc.) (e.g. environmental approvals and permits
practical operations to install transmission lines)
and simplify licensing · Recommendation to government: draft regulations for early granting of licenses
so licenses are finalized during project development

3. Operation of legal system regarding land acquisition

The government is more heavily involved in land acquisition than previously. The burden on business
operators is thus lessened. However, even after the land acquisition role has passed to the government,
cases where the necessary land has been purchased by the bidding stage are scarce. In some cases,
opposition from local residents after bids have been received has stymied progress in land acquisition so
the project cannot raise finance and thus does not materialize. When it takes more than one year to
52
acquire the necessary licenses and obtain the land, EPC operators’ estimates of project costs expire. The
resulting alterations to initial estimates may mean the project cannot be financed.
For land acquisition to proceed smoothly, in some cases the IPP operators do not rely just on the
government or PLN and become involved themselves. We understand that while the land agency is
legally responsible for negotiations, in actuality the final decision often rests with the state governor or
other local government head.
The reason that residents are often stridently opposed to land purchases is that the benefits of building
electricity facilities are unclear while the damage is clearly apparent, such as the loss of land and decline
in collateral values, so in some circumstances it is hard to reach an agreement. On occasion, in addition
to compensation payments, there are measures to contribute to the region such as the provision of
micro-finance or job placements.
One project that has gathered a lot of attention regarding land acquisition is the Batang coal-fired power
plant in central Java that J-Power and Itochu have invested in. The main points are summarized below.
Case study: land acquisition for central Java Batang coal-fired power plant
Consortium of J-Power and Itochu (PT Bhimasena Power Indonesia) to develop a large-scale
coal-fired power plant with two 1,000 MW units.
After operators selected in 2011, development began from 2012. Total project cost forecast at
roughly JPY400 billion.
Project required the acquisition of a total of 226 ha of land in three sections in the Batang
region.
Land acquisition encountering difficulties due to an opposition campaign from local residents
who fear negative impact on their livelihoods from environmental damage and impact on
farmlands and fishing grounds.
Startup was initially scheduled for 2016 but since development started in 2012, construction
start has been delayed. In July 2014 the operators declared force majeure due to inability to
complete land purchase.
On 30 June 2014, the Central Java Governor issued an administrative order approving PLN’s
compulsory acquisition of a total of 12.51 ha of land that the landowners were refusing to sell.
This gives PLN the power to legally evict the local residents.
On August 28, 2015, President Joko visited the project land and declared the start of
construction. Under his firm initiative, the purchasing process has speeded up, but as of January
2016 the government is still in the process of acquiring the land for the power plant.
Source: based on various press reports
53
This project was promoted under the PPP Law and is to be Indonesia’s first ultra-supercritical coal-fired
power plant. The Indonesian government is aggressively supporting the land acquisition, recently in
particular.
It is desirable for the government to spearhead the land acquisition processes. It is easier for investors
to bid if the land purchase has already been completed. As seen in several projects already, investors are
attracted when the Indonesian government completes the land acquisition process ahead of time.
Also, one idea is to introduce incentives for the local community when constructing power plants or
installing transmission lines to counter opposition from local residents. For example, Japan (under the
“three electric power law grants”) provides funds to local governments in return for having power plants
in the region and has fixed asset tax schemes. These are examples of such initiatives.
A simple example of the application of grants from the three electric power laws is the case of
Higashidori village in Aomori Prefecture.
Case study: Higashidori village
Higashidori is a village facing the Pacific Ocean and the Tsugaru Strait in the north-east of the Shimokita
Peninsula. Population, 6,812 (May 1, 2015 estimate); area 295.27 km².
The village has industries such as fishing, cement, and mining but is extremely reliant on the energy
industry based on a nuclear power plant. When the village was established, there were several small
hamlets scattered here and there, no defined town center, and no roads to speak of, so the town hall
was located in neighboring Tanabu Village (became Tanabu-Cho in 1988, currently Mutsu City; prior to
1988, there was no town hall in the village).
The funds for the construction of the town hall and community center came mainly from three electric
power law system grants to attract the Higashidori nuclear power plant.
The nuclear fuel taxes paid by Japan Nuclear Fuel to Aomori Prefecture reached roughly JPY15bn (fiscal
2010), accounting for more than 10% of the prefecture’s tax revenue. The company is also paying
subsidies to the Tsugaru district for urban revitalization, whose electricity industry does not have any
nuclear power facilities.
The development of these regions could not have occurred without grants from attracting power plants
which have played a major contribution in fostering their economies.
54
D. Local content regulations
1. Overview of relevant laws

Indonesia has local content regulations that mandate local procurement with the aim of fostering
industry development.
Indonesia’s Ministry of Industry has issued a Ministerial Regulation mandating that electricity
infrastructure operators engaged in public infrastructure businesses who receive grants from the
national or regional government budgets, or finance or assistance from overseas countries, must
procure goods and services from Indonesia (Regulation 48/M-IND/PER/4/2010, in force from 19 April
2010). Electricity infrastructure as referred to herein includes generators, electricity transmission
systems, and distribution networks. The TKDN (Tingkat Komponen Dalam Negeri: level of domestic
components) specifies the proportion of local goods and services that must be used for each power
infrastructure project and varies depending on the type of project. Specifically there are the following six
types of power infrastructure project: 1) coal-fired thermal power plants; 2) hydropower plants; 3)
geothermal power plants; 4) gas-fired thermal power plants; 5) solar power plants; and 6) power
generation and distribution networks16. TKDNs are stipulated for projects by type in chapter 2 of the
ministerial regulation.
In 2012 “Guidelines related to using domestic products in electric power infrastructure development”
(Regulation 54/M-IND/PER/3/2012) was issued. This regulation stipulated procurement ratios by
product, and punishments are clearly stipulated for failure to meet regulations including fines or
placement on a blacklist.
Figure 62. Overview of local content guidelines for electricity infrastructure developments
Regulation Details
DCL: Level of Examples of key products Products Services Products &
Domestic services
Component Coal-fired power plants > 600 MW 36.10% 71.33% 38.21%
Gas combined power plants > 300 MW 25.63% 71.53% 30.22%
275 kV/500 kV transmission lines 68.23 % 100% 74.59%
Fines Fines equivalent to 10% of contract value levied (maximum for failure to meet 5%)
Failure to have Registration on blacklist (until project completed)
over 5% local
content
Source: No. 54/M-IND/PER/3/2012
For example, for a coal-fired thermal plant bigger than 600 MW, there is an overall 38.21% local content
requirement, with fines levied for every 0.01% shortfall of the threshold. The high 30% range is difficult
to achieve given Indonesia’s current product availability and pricing. This is a major barrier to the
participation of Japanese and other overseas companies.
16
Source: Japan Machinery Center for Trade and Investment (2014)
55
Figure 63. Examples of Indonesia’s local content goods/services regulations
Year enacted Law number Details
2010 No.48/M-IND/PER/4/2010 2010 Ministry of Industry Regulation. Electricity
infrastructure operators required to use Indonesian
products and services.
2012 No.54/M-IND/PER/3/2012 2012 Ministry of Industry Regulation. Stipulated specific
figures for local content ratios and fines related to 2010
local content regulations.
2014 No.02/M-IND/PER/1/2014 2014 Ministry of Industry Regulation. Stipulated increased
use of Indonesian products and services by the
government.
Source: based on 2014 survey by Japan Machinery Center for Trade and Investment
2. Relevant entities and their roles

Local content regulations in the electricity industry are regulations from the Ministry of Industry. The
Indonesia Investment Coordinating Board has jurisdiction over implementing the regulations, but in
terms of discussions regarding local content in power projects, PLN, which has jurisdiction over our
procurement, is the contract entity.
Figure 64. Local content regulations: Relevant entities

Relevant agency Role
Ministry of Industry Issues regulations regarding local content regulations in power industry
BKPM; Government agency involved in investment approvals and consultation (excluding
Indonesia Investment the oil, gas and finance sectors). Under regulations from the Ministry of Industry,
Coordinating Board has jurisdiction over implementing local content regulations in the power industry.
PLN In line with regulations from the Ministry of Industry, procures electric power-
related materials.
3. Operational issues
Domestic content ratios under the regulations are indeed high considering the products and prices
available to procure currently in Indonesia; they are generally unattainable. The denominator is the total
value of the EPC contract, so calculating using the value of the limited amount of locally procured goods
as the numerator cannot help but result in an insignificant percentage.
Further, there are also detailed regulations as to what constitutes local procurement in terms of
materials and investment ratios, which makes for a complicated system. In these circumstances, some
companies are calling for a simple system that reflects the actual situation17.
Local content regulations were introduced to foster the development of Indonesian industry, but
applying them to sophisticated technological materials such as those used in ultra-supercritical thermal
power plants, where local procurement is difficult to actually implement, leads to questionable side
effects. Meanwhile, for relatively simple construction materials such as balance of plant (BOP)
17
56
equipment, the insistence on fostering local industries and working to boost local content has some
merit as an argument. However, no matter how much BOP equipment is procured domestically it will
only account for a limited proportion of the entire procurement amount and it is very difficult for power
projects to meet the local content regulations the Indonesian government sets, according to some
companies.
IV. Workshops in Indonesia

In this research project, two workshops were held in Jakarta co-organized by Indonesia and Japan
government agencies, to discuss on power sector development in Indonesia.
A. The First Workshop

The first workshop titled “Indonesia-Japan Workshop on Power Sector Development” was held on
10th December 2015 at Gran Melia Hotel, Jakarta. This workshop was co-organized by the Ministry of
Energy and Mineral Resources of Indonesia and the Ministry of Economy, Trade and Industry of Japan.
We welcomed more than 50 participants including the guests from the Ministry of Energy and Mineral
Resources, PLN、BAPPENAS、BKPM、Ministry of Economy, Trade and Industry and other Japanese
government organizations and Private companies. This workshop discussed on the power development
plan in Indonesia as well as the expectations from Japan to Indonesia.
Figure 65. Programme of the first workshop
57
Figure 66. Photos of the first workshop
B. The Second Workshop

The second workshop was held on 10th February 2016 at Gran Melia Jakarta. We had more than 75
participants from the organizations including MEMR, PLN, MOF, BAPPENAS and from Japan. This
workshop consisted of two sessions; finance and technical solutions. Presentations included subsidy
reform, government guarantee, realization of the transmission projects and possibility of introducing
efficient generating equipment. In the Q&A and discussion at the venue, discussions were made on
power sector privatization, subsidy reform and electricity tariff increase and necessity of strengthening
transmission system in Indonesia.
Figure 67. Programme of the second workshop
58
Figure 68. Photos of the second workshop
V. Conclusion
Reflecting recent global economic developments, the Indonesian economy is slowing down, but on
average it has grown at a sustained rapid pace over the past several years. There have been two
domestic demand growth drivers of the economy: capital investment and consumption.
In the electricity sector government has produced the 35 GW Electricity Project and there are proactive
steps such as subsidy reform to reduce the fiscal burden. The 35 GW Electricity Project has extremely
ambitious targets. If the plan is implemented to schedule, electricity supply capacity is forecast to be
more than adequate.
Subsidy reform involves reducing the burden on the public purse from subsidy expenditures with the
aim of increasing investment in social infrastructure. At the same time it aims to maintain and bolster
the fiscal strength of the state-owned electricity company PLN, which necessitates an appropriate
increase in power tariffs. To assure the long-run soundness of PLN’s finances, it is essential to attract IPP
operators and raise power tariffs while gaining the understanding of the populace.
Current subsidy reform initiatives by the Indonesian government—explanations to the people, having a
tariffs strategy, and lessening the impact on the low-income demographic—are largely consistent with
success stories in other countries. Recent falls in commodity prices have reduced inflationary pressures
so subsidy reform looks likely to succeed. Considering the rapid speed of the decline in oil prices, one
option is to limit the pass-through of fuel cost declines in power tariffs and use that portion to reduce
subsidies, to secure internal reserves, and enable PLN to allocate this toward high-quality power
generation and transmission investments. With higher credibility of PLN, it can attract more credible
investors and it will enable appropriate realization of 35GW power development plan. On the contrary,
rough and fast procurement of low quality infrastructure will lead to the delay in the plan realization.
For attracting more credible investors, it may be important to secure transparent bidding process. It
could be also discussed government support for establishing more firm finance structure may be needed
when PLN credibility is in the stage of development.
59
Introduction of highly efficient clean coal technology power plant equipment
While the Indonesian government has a policy of increasing the share of coal in power generation, the
country said it would aggressively push for the introduction of clean coal technology (CCT) in view of
environmental considerations. To reduce electricity unit generating costs and adopt coal-fired power
plants, it is recommended that the country use highly efficient large-scale facilities. The introduction of
highly efficient ultra-supercritical facilities would limit the burden on the environment and cut power
sector costs, as well as enable electricity subsidies to be reduced.
In addition to highly efficient power generation technologies such as ultra-supercritical equipment,

Japan has sophisticated technology such as desulfurization and smoke and soot removing equipment.
Also, the country has an abundant track record of employing this equipment and technology both at
home and abroad. If Indonesia were to incorporate desulfurization and smoke and soot removing
equipment technology in its existing coal-fired power facilities, there is a possibility of Japanese
participation.
Also, Japan could provide its technology for integrated coal gasification combined cycle (IGCC) power,
one of the country’s strengths. Indonesia has a strong desire to exploit the low-grade (subbituminous)
coal produced domestically, and IGCC enables this, so is a technology that matches the country’s needs.
Therefore, Japan could contribute to the Indonesian electricity sector in the fields of highly efficient
coal-fired power plant equipment and environmental equipment.
Further, if these power generation facilities were introduced, it is possible that official support funding
from the Japanese government could be applied. This provides a useful option for Indonesia from the
viewpoint of being able to secure low-interest, creditworthy funding sources. Currently, international
financial institutions such as the World Bank and the Asian Development Bank do not support coal-fired
power so Japan could potentially play a major role by supporting with its public monies.
Introduction of highly efficient transmission lines
Indonesia has a long, narrow, east-west geography, with economic activity concentrated in Jakarta.
Therefore, transmission lines from the power source to demand centers are lengthy, resulting in large
transmission losses. The introduction of high-voltage, high-capacity efficient transmission lines would
reduce transmission losses and enable effective use of capacity with the result that PLN and the
Indonesian government’s finances would improve. Further, rural electrification is an important issue for
the Joko administration, which is likely to proceed with installing electricity transmission and
distribution networks in the countryside.
Japan has sophisticated technology for low-loss transmission lines and a long history of installing them
domestically, so could cooperate in the area of transmission lines. Further, Japanese public funding
assistance could be employed to fund some of the huge costs involved in installing transmission lines.
60
Introducing variable-speed pumped storage technology
Indonesia has plans to introduce coal-fired power on a large scale, but this has a weakness: inability to
change output capacity over short frames. Hydropower has a strong advantage that could compensate
for this shortcoming, followed by combined cycle (C/C) and gas turbine (GT) power plants fueled by gas
or diesel. We propose introducing hydropower into the Indonesian electricity system, specifically
variable-speed pumped storage technology, which can modulate frequencies during pumping. Japan has
a track record of installation and operation of variable-speed pumped storage technology so could assist
with its adoption.
Laying underground transmission lines
It would be desirable to supply power from a number of directions to Jakarta to boost supply reliability
to the central Jakarta district, and this is planned under RUPTL. However, Jakarta has already developed
as a major metropolitan area, and it is difficult to install new overhead transmission lines, so there is a
high probability that underground transmission lines will be used. Carrying out installation work at the
same time as work on Jakarta’s MRT would help defray civil engineering costs. In Japan there are
companies with experience in other countries installing underground transmission lines that run parallel
to associated infrastructure. They could potentially help in the installation of underground transmission
lines in the future.
Financial support
Japan could provide financial support via tools such as ODA or yen loans, as well as direct loans to PLN.
Indonesia has established a mechanism whereby direct loans to PLN from international institutions are
government guaranteed. Utilizing the system in future could be a useful tool in developing electricity
infrastructure.
Also, under current conditions when government guarantees are not actively utilized, there is some
benefit from supporting investment from private sector companies in riskier projects. If JBIC and other
public-sector financial institutions are able to provide insurance or finance to IPP projects were PLN is
the off-taker without guarantees from the Indonesian government, this could encourage the entry of IPP
operators to invest in the projects, leading to the provision of high quality infrastructure to Indonesia.
The improvement in the Indonesian power sector investment environment should attract quality
operators, leading to expanding investment in manufacturing and other industries and job creation. To
remove the bottlenecks in the Indonesian electricity infrastructure, Japan has a major role to play by
further building on the good relationships constructed over a long period of time while keeping in mind
lessons from the high-growth period.
61

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Fiscal 2015 Overseas Development Planning Study Project for

Establishing Business Bases and Capturing the Overseas

Study on Business Base Development in Indonesia

Ministry of Economy, Trade and Industry

1. Power Development Plan

Figure 1. Demand assumptions

Source: RUPTL 2015

Source: RUPTL 2015

Demand and supply capacity

Figure 3. Relationship between demand and supply capacity

Source: RUPTL 2015

Figure 4. Fuel prices

2. Supply-demand operation simulation results considering RUPTL 2015 development

Energy source composition

Figure 6. CO2 emissions

Source: Calculated by TEPCO study team based on PDP in RUPTL 2015

Source: Calculated by TEPCO study team based on PDP in RUPTL 2015

Figure 8. Intraregional transmission volumes (maximum values)

Source: Calculated by TEPCO study team based on PDP in RUPTL 2015

JKB and West Region

West and Central Regions

Central and East Regions

1. Developing efficient coal-fired thermal power

Figure 9. Steam conditions of pulverized coal-fired power plant technologies

Source: Calculated by TEPCO study team based on RUPTL 2015

2. Obtaining power sources for frequency modulation

Source: Calculated by TEPCO study team based on RUPTL 2015

Figure 12. Candidates for frequency modulating power sources

3. Achieving supply reliability in central Jakarta

Figure 13. Power transmission system in central Jakarta (2014)

Figure 14 shows the power transmission system in central Jakarta in 2024.

Figure 14. Power transmission system in central Jakarta (2024)

Source: TEPCO website

地中送電線が通る道路の断面図 Cross-section: road with underground transmission cables

Figure 17. Balance between revenues and costs

Since, in nature, electricity is a Since the electricity industry requires the

Figure 18. Relationship of main players

Foreign Investors PLN Consumers

Pleased to conclude a Unwillingness to pay more

In an attempt to evaluate creditworthiness of a bidder, it is worthwhile considering its track record of

Figure 19. The importance of the steady implementation of PDP

Adequate electricity supply Achievement of socio-

Electricity supply shortage Stagnation of socio-

Necessary to carefully look at potential lost profits

Figure 20. Issues to be considered in the balance of Revenues and costs

Figure 21. Fuel Cost for Power Generation

Million USD Fuel prices

Figure 22. Cumulative default probabilities (%, based on 1983-2010 history)

Expected Revenue (No default risk)

Source: Estimates by Ernst & Young ShinNihon LLC

Figure 25. Annual cash flows in different ratings

Source: Estimates by Ernst & Young ShinNihon LLC

No default risk 760.6 100.0

Baa 738.2 97.0

Source: Estimates by Ernst & Young ShinNihon LLC

R : Household, B：Business, I：Industry, S：Social, P：Government

Sustainable Growth and public welfare

Stable power system

Consistent implementation of the plans

Balanced income and expenditure in mid-long term

B. State-owned enterprises subsidy reform best practice in selected

· Subsidy reform is implemented as part of comprehensive energy plans

Per-capita GDP (USD: RHS) Real GDP (% chg.: LHS)

Source: IMF, World Economic Outlook