Insight: Blackout: The real culprits behind the power crisis

Lin Che Wei , Jakarta | Mon, 09/08/2008 10:51 AM | Headlines

Indonesians have been plunged into a blackout emergency, thanks to insufficient power to meet existing -- and growing -- demand.

The public is quick to point the finger at the government and the failure of its state-owned electricity company, PLN.

But contrary to the common perception that the current power crisis is the result of corruption and an inefficient power provider, the plight is primarily the result of an inappropriate electricity subsidy scheme, underinvestment in capital spending and an unbalanced pattern of consumption.

The first and the biggest problem in the power sector is the flaw in the electricity subsidy system, which has not achieved its objective of enhancing national and economic development. The data in PLN's latest annual report are astounding.

Basically, the country and PLN have subsidized every single customer regardless of their economic status. A 2007 report on electricity subsidies shows that the rates paid by all segments of PLN customers (household, commercial, industry and public) are below the cost of producing the electricity. Prices that do not incorporate the production and supply costs will lead to an inefficient allocation of resources and market distortion.

We do understand the subsidies might be necessary to protect some kinds of employment in selective sectors, to stimulate regional and rural economic development or as a form of welfare support for specific social groups such as the poorest of the poor, public facilities and small and medium enterprises.

However, to provide a subsidy to all classes and types of customers regardless of their financial position is obviously absurd. Providing such subsidies is a suboptimal policy that leads to inefficiency of resource allocation. If the government wants to keep the electricity subsidy, it is essential that the costs and benefits be effectively monitored to ensure that the rationale remains valid. It is high time to look at the whole electricity subsidy program.

Charging customers a low price leads to PLN's second problem, that is, underinvestment in the power sector. PLN's current installed capacity of about 25,222 megawatts (MW) and the capacity of about 4,126 MW contracted from IPP are not enough to meet peak demand outside the main grid of Java and Bali.

Underinvestment is obvious as PLN's installed capacity increased by only 4.4 percent per annum -- outstripped by the growth of connected capacity, which grew by 5.5 percent per annum to reach 56,549 MW in 2007. This obviously has put a limit on growth in PLN's customer base (the number of customers increased by only 3.8 percent CAGR for the past four years).

The third problem is the consumption pattern of the various customers, which leads to erratic electricity demand. To reach an efficient system for electricity provision, we need to consider the basic point that power cannot be stored.

Hence, electricity is produced and distributed based on demand. The system can operate efficiently at a cost-effective price only if there is a well-distributed load composition that leads to a stable rate of power production. Looking at the typical daily load curve of PLN, one can conclude that the biggest problem of the demand is that the peak load is mainly caused by the disproportionate consumption between households and businesses.

Consequently, there is a sharp surge during the peak period from 6 p.m. to 2 a.m. This disparity is more apparent outside Java, Madura and Bali. A possible solution would be to implement an industrial policy that could raise consumption to narrow the usage gap between peak and off-peak times throughout the day to level consumption with that of households.

Attempts by the government and PLN to encourage energy-saving practices among consumers are not enough to solve the electricity woes. Solving the electricity problem requires major reform: The government needs to embark on an electricity subsidy reform to revamp its outdated subsidy mechanism, accelerate investment in the power sector and, most importantly, adopt an industrial policy that leads to a more balanced load factor.

The government exists to make things better for its people. Inaction during a time of crisis is unacceptable. Thus, reviewing the current subsidy system, which causes inefficient allocation, and creating an appropriate framework to accelerate investment in the power sector are clearly priorities.

The writer is a professional writer from Independent Research & Advisory Indonesia.

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