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Publications, 4/1/2001

Evaluation of Diesel Power Plants in Four Countries: Indonesia

Secwatt Oy, Sergon Oy

Evaluation Report 2001:4
Ministry for Foreign Affairs, Department for International Development Cooperation
ISBN 951-724-353-7
ISSN 1235-7618

Executive Summary

1. This study is the Indonesia section of the Diesel Power Plant Evaluation in Four Countries. The only diesel power plant project financed with Finnish development co-operation funds in Indonesia is the Scattered Diesel Power Plants Project. The Project was a subproject of a large electrification program for isolated towns included in the Fourth Five Year Plan of the Government of Indonesia (REPELITA 4). The implementation of the Finnish financed subproject was started in 1988 and the plants were commissioned in 1990. The investment costs of the whole Program were US$ 108 million of which the cost of the subproject was US$ 11,8 million. The Finnish financing totalled US$ 10 million (FIM 50,362,800) of which the share of development cooperation funds was FIM 30,000,000 in the form of a development credit. The rest was provided by the Finnish Export Credit Ltd (FEC), currently Sampo Group. Local financing was from Indonesian Government sources.

2. The Finnish supplier, Wärtsilä Corporation (Wärtsilä), has gone through a substantial transformation since the evaluated deliveries were made. After a restructuring of its business, the main corporate body of the group, Metra Corporation, changed its name recently into Wärtsilä Corporation. This was obviously done because the Wärtsilä Diesels now form the core of its production. The Corporation can be currently described as leading global ship power supplier and a major provider of solutions for decentralized power generation and of supporting services. For the electricity sector Wärtsilä delivers gas and oil-fired power plant solutions from 1 MW to 400 MW. These power plants are used for base load, CHP, load management and gas compression applications. Deliveries include turnkey construction and long-term maintenance and even operation. Wärtsilä and Sulzer are the diesel engine brand names of the Corporation. Wärtsilä's 2000 sales were EUR 2,7 billion and profitability was good. It is listed with Helsinki Stockexchange. In Indonesia Wärtsilä has rapidly grown to a clear market leader for medium-speed engines with over 2,500 MW of installed power.

3. Indonesia has large and diverse energy resources, which include oil, natural gas, coal, hydro- and geothermal power. The oil and gas sectors play a critical role in the country's economy and account together for over 85% of commercial energy consumption and for about 20% of the export earnings. The total primary energy supply in 1998 was 123 million toe, which is 0,6 toe per capita.

The electricity subsector has expanded rapidly during the 1980s and 1990s. Electricity sales of PLN grew at an annual rate of about 14% from the beginning of 1980s to the middle of 1990s. During the same period, the number of consumers increased almost six-fold from about 3,2 million to about 21,5 million. In 1999, PLN had 27,5 million consumers.

Despite the impressive achievements only about 40% of rural households have access to electricity services Electrification ratio of Indonesia has reached 52% by the end of 1999. Electricity consumption per capita at 343 kWh/year (1999) is much lower than in many countries with lower per capita GDP. Many businesses rely on captive power generation either completely or to support their services. Outages are common and the quality of electricity is poor due to voltage and frequency fluctuation. The cost of service is high both for industrial and commercial consumers. Poor service level creates major bottlenecks and hampers starting new businesses.

The installed diesel generation capacity was 2,650 MW at the end of 1999, which is 12,9% of the total generating capacity. Outside Java, the importance of diesel generation is higher and the share of the total number and generation capacity are 96,5% and 47% respectively. Diesel generation will continue to play important role in electricity generation especially on many islands although alternative options are actively sought.

4. The end user of the Project, Perusahaan Perseroan (Persero) P.T. Perusahaan Listrik Negara (PLN) is a Government owned Public Utility Company responsible for providing electricity to the citizens of the country. Although PLN has been quite successful in the past, it is not for the time being capable of operating on commercial terms. The Government has in one hand loaded it with social responsibilities and on the other hand controlled the pricing of the services.

This worked for quite sometime fine, but mostly due to the Asian Economic Crisis has resulted to an unbalanced situation where PLN is not capable of meeting neither the demand nor its financial obligations. The required investments cannot be made since the company is practically bankrupted. PLN has made huge and growing losses during 1997, 1998 and 1999. The 1999 loss of Rp 11,368 billion was 71% of the total sales revenue of the year. These figures show that the Company's cost structure is completely off-line with the revenues. On top of that, the financing cost has increased due to deterioration of the currency and penalties of non-performance in debt service and other obligations.

The Government is in principle prepared to take the necessary steps to correct the situation but there is not enough political power under these crisis conditions to do so.

5. The recipient country, Indonesia, has a land area of 1,9 million km2 on a large number of islands. It possesses the world's fourth largest population of 224,8 million (July 2000 est.). Over 60% of the population resides on the island of Java, the centre of the country's economic and political activity. The population growth rate is 1,1%. Indonesia is the largest Islamic country. Regardless of its vast natural resources, Indonesia is a low-income country with GDP - per capita: (ppp) - US$2,800 (1999 est.). The GDP - composition by sector is as follows: agriculture: 21%, industry: 35% and services: 44% (1999 est.). Indonesia experienced a phenomenal three decades long economic growth period up to 1996. It, however, has suffered a lot from the 1997 Asian crisis but is currently showing some signs of recovery. Indonesia's currency the rupiah collapsed in late 1997 and early 1998 causing GDP to contract by an estimated 13,7 percent in 1998 because of Indonesian firms' reliance on short-term dollar-denominated debt and high levels of non-performing loans in the banking sector. Quality of life has in the long run really improved for the majority of Indonesians regardless of the setbacks caused by the crisis but the poor are the most vulnerable under these circumstances and collapsed social systems take long time to mend. Political instability makes the situation worse.

6. Areas of continuing concern include the extent of transparency in government decision-making, systemic corruption fuelled by low wages and widespread poverty, and lack of an effective legal system that encourages the use of personal relationships to get anything done. Transparency International's (TI) new Corruption Perceptions Index (CPI) ranks Indonesia among the 90 listed countries 85th with Angola just a head of Yugoslavia. A recent political decision to decentralize administration, and give political and economic powers to the province level raises new questions and uncertainty especially for foreign investors outside of Jakarta.

7. The evaluated Diesel Plants are located in Poso, Central Sulawesi and Talang Padang, Lampung province on Sumatra. The social structure of Poso regency is somewhat different from a typical Sulawesi locality due to the Government's past resettlement policies. Namely, Poso has been used during the past thirty years as target area when relocating people from the very tightly populated parts of Java and Bali. This together with those who have mowed there on their free will to follow friends and relatives has created a heterogeneous society with strong civil tension and serious unrest. Talang Padang has also been a target area for resettlement, but much earlier and the situation is peaceful. Both areas are poor and badly needing investments.

8. The objective of the Scattered Diesel Power Plant Project was to increase generating capacities in order to:

· Improve the reliability of the supply
· Increase the number of electrified households
· Replace uneconomic captive power

The Scattered Diesel Power Plant Project and the Finnish subproject have contributed naturally very little to the above very broad development objectives. However, improvement has taken place. The reliability of the services has increased, but major problems still exist. The limited access to the services is the major problem for almost all consumers. The total number of consumers has increased from in 4,4 million 1984 to 26,4 million in 1998. The sales to residential consumers were in 1984 about 4,300 GWh and had reached 24,800 GWh in 1998. This indicates that on the average a consumer has even used slightly less than previously although the opportunities to consume electricity has improved. The efficiency of electricity use has improved in Indonesia much less than in OECD countries in general.

9. Oil has still too large role in domestic energy consumption. The distortions in domestic energy pricing have not been removed and the recent economic crisis has even made the situation worse. The introduction of a more efficient way in electricity generation in small isolated power systems has slightly improved the situation and could have given room to development of alternatives in electricity generation. Low pricing of a high value product i.e. electricity, however, does not support the introduction of new generation modes.

10. From the completed limited consumer survey, the Evaluation Team concluded that the role of electricity among the beneficiaries is meaningful and beneficial from education and hygiene points of view, but in no means is the consumer taking full advantage of the possibilities available because of availability of electricity. Very little productive machinery has been bought. One of the reasons may be the traditional behaviour with low awareness of possibilities. An other reason seems to be the lack of opportunities, other than agriculture related, for new business and investments. Talang Padang area is lacking natural resources. However, all the interviewed businesses considered the district to be a growth area and expected their own business to be substantially or at least somewhat bigger in real term during the next five years.

11. From consumers point of view it seems that the Projects in Poso and Talang Padang very clearly brought the electricity service to a new level but the necessary additional investment did not come in time to keep the service continuously up to the standard. Now, after being recently connected to the national grid the role of the Diesel Power Plant in Talang Padang has clearly changed and the meeting the demand has become a more universal capacity allocation problem. Regardless of some major new generating projects under construction the people of Talang Padang as well as the entire Lampung province will suffer from shortages and quality problems for some time before the gap has been closed in the generating capacity. This is a universal problem concerning the entire PLN. In Poso, the situation is different because the civil unrest has stopped and even reversed development for the time being.

12. PLN applies same tariffs in all parts of the country. The pricing is in the private consumer end well under the production cost and cheaper than in most other countries. However, the prices are not very cheap compared with the income level in Talang Padang. Most of the interviewed people responded very negatively to the question: would you use more electricity if the quality were real good but price 50% more? However, some of the businesses were to use more in that case. This proves that electricity still is a marginal product to many people in Talang Padang and that it is not considered an element essential in earning one's livelihood.

13. It was clear from the beginning of the Project that PLN was not building any capacity for major maintenance tasks of diesel engines. It set clear obligations to the seller to guarantee the availability of local service. This approach is appropriate for a large utility with thousands of diesel generator. Wärtsilä used at first a local representative, but has now a subsidiary in Indonesia. Wärtsilä Indonesia has hired local account managers, who have defined PLN area responsibilities. This concept seemed to work very well and received favourable comments from the interviewed PLN staff.

14. The justification of this intervention of MfFA was not clearly expressed in the Appraisal Report. The support to Indonesian energy sector in diversifying energy resources and the support to economic development through the supply of electricity to productive users in urban and rural areas is a very general justification. The Project's contribution to achieve those objectives has been small. On the other hand, the available co-operation mode namely a development credit combined with export credit turns the justification more to export support to Finnish exporter and Finnish products. It was very difficult to penetrate to the Indonesian market in the middle of 80s. The financial arrangement of the Scattered Diesel Power Project seems to have significantly supported Wärtsilä's success. The price level of the products was competitive and no distortions of the market were made. The main competitors offered at least similar financing terms. However, it can be concluded that the Finnish projects served well the development needs of the respective local systems.

This document

Updated 7/20/2006

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