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BUILDING THE FUTURE OF INDONESIA IN REMOTE AREAS Artissa Panjaitan This preview is part of ICCC Low Emission Development Strategy cluster study, titled “Renewed Perspectives on How to Attract Renewable Energy Investments Feasibility Study: Crop to Energy Case”. 1. BACKGROUND Indonesia still has about 25% of unelectrified households1 (HH) after 68 years of independence. Almost all of unelectrified households are in remote, spread-out and sparsely populated areas. In addition, among the 75%, many areas still have limited hours of electricity service. Electric power solutions to develop Indonesia’s remote areas must be strategically prioritized in order to integrate all citizens into the wealth of growth2. In so doing, Indonesia will accelerate the Human Development Index (HDI) improvement and its resilience to food and energy security threats in the less developed parts of the country.

1

In 2010, Statistical Yearbook of Indonesia by BPS, the number of households = 61,164,600 with an average size of 3.9 persons per household.

2

Reduced income gap, modern healthcare & education facilities, telecommunication services, village & government administrations, access to distribution of local produce.

3

The smallest number of population in a regency in Aceh province still has about 30,000 people in which a small village only had about 200 inhabitants, while in East Kalimantan province the smallest regency only had 15,000 people.

4

Current Indonesia’s policy is not attractive to State-owned Electricity Company or Public Private Partnership interest.

Figure 1. Electrification Ratios of households by each province.

Policies must dedicate sufficient resources to help resolve the obvious challenges in promoting electrification to remote, scattered & sparsely populated areas3. Some of clear issues include: building small capacity power plants into areas where PLN’s grid is absent; subsidizing consumers’ buying power in the early stage and allowing their access to financial system; and improving the Renewable Energy investment risk/return profile4.

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2. SOLVING THE STRATEGIC PUZZLE – ELECTRICITY FOR REMOTE INDONESIA a. Economic Benefits Providing electricity to all remote locations in Indonesia would require a policy to improve investment attractiveness without putting excessive burden on the country’s budget. In fact, it will benefit the country more than what will be invested in the consumer intervention process. There are obvious but latent opportunities in the remote areas for agriculture, forestry, fishery and tourism sectors. Logically, due to the small-scale electricity demand characteristics and diverse local Renewable Energy (RE) types, Investment Attractiveness will be a function of nationally accepted Return On Investment (ROI) benchmark and size of investment opportunities, instead of just a simple Feed In Tariff scheme. This scheme of ROI target is already implemented in the case of toll road investments. In order to reduce risk elements in cost and logistics, the primary energy source must be locally available with proven conversion technology. The use of locally available primary energy will also allow job openings for local people to share the wealth of development.

Figure 2 – Benefits of Rural Electricity for Indonesia.

With 25% of the population is still unelectrified, Indonesia’s average electricity consumption per capita is still lower than Vietnam’s. Figure 2 also reflects electricity consumptions positively correlate with income per capita. Therefore, the solution for electrification of Indonesia’s remote areas is a way to: stimulate economic growth, fundamentally improve the country’s capacity in global competitiveness and sustain the national security. Electrification of remote areas will help mobilize valuable resources from more developed Indonesian areas to remote ones, to provide basic functions of a modern society, such as for: education, healthcare, telecommunication, financial services and village administration.

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Building the Future of Indonesia in Its Remote Areas

Without these basic functions, about 25% of Indonesia’s natural and human resources will not be optimally participate in the country’s growth. Indonesia average household electricity consumption reported in 2012 PLN Statistics is lower than the number we analyzed from international consumption/capita reports (2008). Despite of government subsidy, PLN’s number translates to electricity consumption of 4.3 kWh/day/HH only5. This number indicates a significant part of the electrified households still have low consumption instead of just limited service hours.

Figure 3 – Demand charactristics of electricity market in remote areas with 500 HH.

To understand the remote area electricity demand characteristics, we try to simulate the electricity demand from a 500-household village with 24-hour low-voltage electricity grid and some basic village services, such as: school, medical clinic, internet-telco services, village & governmental administration and security/police station (see Figure 3). The simulation gives us an electricity demand indication from households, commercial and village-services at around 85%, 10% and 5% corresponding proportion. The over-all average electricity consumption born by the 500 households is at 5.6 kWh/day/HH, with peak-to-base-load ratio is around 5 and the Capacity Utilization of 2 x 160 kVA power plant at only 43%.6 The electricity demand characteristics necessitate power plants with fast Transient Time. It means that Indonesia’s remote areas require gas- or liquid-fueled energy conversion engines. However, to meet the demand for a 24-hour service from locally generated energy using established technology, the remote locations will be best powered by internal combustion biogas engines with biomass supplies from energy crops (“Crop to Energy”). Combinations of biogas engines with hydro power7 as well as solar panels will also be a possible solution but with a risk of more complex and expensive operations. This is a case where low emission technology is more feasible for remote areas than fossil fuels without considering the value of carbon/emission trading. Crop to Energy biogas power solutions will be in parallel with some other policies to ensure: land availability, supply of suitable (licensed) energy crops, standardized energy conversion technology8 and attractive Investment ROI. This Crop to Energy concept will also ensure the channel of wealth distribution and a means of promoting local economic activity in each village. However, we hypothesize that it will be necessary to build a mechanism to secure developer’s portion of feedstock farms and the purchasing price of feedstock from near-by farmers.

5 Average

bill size of registered 46.219.780 HH = 4.3 kWh/day/HH x Rp. 631.66 /kWh x 30 days = Rp. 81,043 per month. The reality of current electricity spending in remote areas will be less than this average.

6A

200-household village will have electricity demand profile from household, commercial and village services at around 68%, 19% and 13% respectively. The set up will require a 2 x 80 kVA power plants.

7 Indonesia’s

remote highlands will have hydro and solar power potentials but with more difficult terrains to grow energy crops.

8 This

initiative to electrify remote Indonesia would also be able to develop new industries, such as: biogas energy conversion technology & equipment, energy crop farming and financial transactions in remote areas.

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At 0.64 kW/HH installed capacity with a peak load design at about 80–85% of the installed capacity, the 15 million unelectrified households will need a total installed capacity of 9.6–10 GW. This total capacity will require about US$ 25–30 billion capital expenditures which probably would be better accompanied by Over-The-Counter (OTC) or development equity markets. By taking in to account the electricity consumption of 15 million households at 5-6 kWh/day and the average US$ 3.5/kWh economic productivity, electrification of remote Indonesia can be projected to create US$ 100 billion GDP. b. The Right Pricing for the Right Product This study is seeking for a solution to attract RE investments into Indonesia. So far, there have not been strong interest to invest in either hydro (as the most established RE technology) or biomass/biogas power. The possible explanation for such is the imbalance of investment risk and return profile which also includes intransparency/difficulty of getting the permits. To understand the risk and return profile of current RE investment, we analyze policies of mini hydro and biomass/biogas against other sources of power.

Figure 4 – Understanding Indonesian policy in developing RE power from Hydro Power PPA.

Under current Mini-Hydro (1 < capacity ≤ 10 MW) PPA pricing policy, it suggests that price differentiation of Mini-Hydro is generally based on groups of low and medium voltage (figure 4A). As such, there is no price overlap between the 2 types of supply voltage. This price differentiation may not be suitable if we take ROI as the main objective instead of Feed In Tariff (FIT) in attracting RE investments. By setting ROI target, low population remote areas with big energy potentials could be developed using medium voltage grid (instead of small scale low voltage power) for transmission to development in near-by more populated areas. PLN’s hydro power average cost is relatively flat and still cheap (figure 4B). But, the policy of fixed Mini-Hydro PPA prices (figure 4A) over the period of PPA (20 years) and by setting price coefficients for 4 regions, i.e. Java (base price), Sumatera & Sulawesi, Kalimantan & West Nusa Tenggara & East Nusa Tenggara, Maluku & Papua have the following policy weaknesses and appeared as unattractive risks:

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Building the Future of Indonesia in Its Remote Areas

1. These price coefficients for each geographical zone do not reflect the actual difference of investment risks9 at each location and, therefore, have little relevance/incentive to attract investors to remote areas inland of Sumatera, Kalimantan, Sulawesi, West Nusa Tenggara, East Nusa Tenggara, Maluku and especially Papua. 2. PLN’s average total cost (figure 4B) follows cost inflation that since 2011 it is already more expensive than the fixed medium-voltage Mini-Hydro PPA price for developers in all regions10. a. Under the fixed price PPA scheme, any investor (interested to invest in Mini Hydro several years after the regulation is set) would lose investment attractiveness due to inflation of capital expenditure in equipment price and construction costs. b. Low-Voltage Mini-Hydro power prices in Java, Bali, Sumatera and Sulawesi are now below the national average cost of PLN. c. It seems PLN provides little- or no-incentive for mitigation actions in power generation by Mini Hydro developers. This is in contrast to inflation adjustment and heavy consumer subsidy applied to diesel (fossil fuel) power generators. 3. PLN’s 2012 average cost in coal-powered electricity-generation is sending the “Wrong Product” signal since it is more expensive than the purchase price from medium-voltage Mini-Hydro developers in Java, Sumatera and Sulawesi. a. This is a message that “green energy” of hydro is not the “right product” for investors or at least coal power is preferred by PLN in Java, Sumatera and Sulawesi. b. While for example Nias island (North Sumatera Province), Buton island (South-east Sulawesi Province) or deep inland of Sumatera and Sulawesi still have no electricity, the locally generated Hydro power potentials in there will remain unattractive at current PPA price since they carry even higher costs to develop compared to near-by places to PLN’s grid. 4. Figure 4B shows that diesel and natural gas power (18.2% of total production11) are above PLN’s average cost and have dragged PLN’s cost even more expensive than PLN’s geothermal cost. 9 Technical, product, market, social, security risk.

a. Strategic actions to replace existing diesel power with cheaper and reliable technology is an urgent matter. b. RE power for remote areas, both for those unelectrified and to replace diesel power, will give even more significant impacts in emission reduction and cost of electricity. c. Powering up remote Indonesia for 25% of the households (2013) in the next 10 years at 5.6 kWh/day/HH will eventually generate 30,660 GWh12. This figure is larger than the total of currently generated diesel and gas power.

10 The policy for a fixed Mini Hydro selling price to

PLN was signed on November 13, 2009 during the drop of global energy costs.

11 Natural Gas and Diesel electricity productions

are 5668.0 GWh, 3484.5 GWh (owned generators) + 18070.8 GWh (rented generators) from the total production (includes IPP) of 200,317.6 GWh.

12 At 70% life cycle assessment emission reduction

from diesel power base, this number translates to 12.5 million ton CO2e per year.

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Having analyzed the policy of Mini Hydro PPA price, we observe the same principle is applied on Biomass/Biogas power price regulation13 (figure 5). The policy of fixed PPA prices makes biomass/biogas medium-voltage power in Sumatera, Java, Madura, Bali, Kalimantan, Sulawesi, NTB and NTT cheaper than 2012 PLN’s average cost. It seems PLN provides little- or no-incentive for low emission power generation by biomass/ biogas developers in areas where biomass crop can be grown to power-up most of unelectrified Indonesians.

Figure 5 – Understanding PPA pricing policy for Biomass/Biogas power.

The fixed price PPA scheme seems to have been initiated using the same principle of PLN’s hydro-power cost and the model of “waste to energy” where the biomass fuel is assumed from non-price competitive materials. While we do not see competitive use of the farm land and the crops for biomass fuel in remote areas at the start of power plants, the future potential of the land after some economic development will demand for a fuel price adjustment. There would also be a complexity to adjust based on inflation. So, we need to investigate existing policies to accommodate price inflation in public services. ROI of biomass/biogas investment is a measure of all factors from revenue, cost, tax and invested capital and it can be compared to other opportunities available to investors. As indicated in the last paragraph of section 2.a., the economic value creation in government intervention would justify the policy. We believe government intervention can be done in all elements of ROI determinants to meet requirements from efficient investors. To gauge the expected ROI, we will compare it with Government and PLN bond yields and the perspective of average equity return from the Equity Index.

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13 The regulation was issued on January 31, 2012.


Building the Future of Indonesia in Its Remote Areas

We shall also investigate how to build an attractive (hypothetical) PPA price curve in the next Focus Group Discussion. We hypothesize that an attractive offer to investors would require the shape of PPA price curve that pays about 50 – 60% of capital expenditure in the first 5 years of operation. c. Getting Implementation of Investment Policy At this stage of the study, we estimate the minimum size to attract investments in remote areas would be between 3 and 5 MW. The nature of remote areas with scattered and sparsely populated settlements would need a cluster of villages (figure 6) to meet such minimum capacity. The clusters will need about 4500 to 8000 households and between 150 – 250 ha for fast-growing and high-energy-content crop farms, owned by the developer, either in a region (kabupaten) or sub-region (kecamatan) set-up. Optimization of clusters, energycrop farms and local grids will be studied by investors and regulators.

Figure 6 – Hub & spoke concept to optimize capacity and investment.

Standardization of engine capacity would also be a method to optimize investments and make financial institutions more easily identify/calculate the associated risks. Standard engine sizes will also help supporting-domestic-industries grow to sustain the policy. A non-economical site will possibly make the population to relocate voluntarily in order to receive electricity services. Our study will try to indicate the industry standards that need to be developed for this policy. The “hub and spoke” arrangement will put a pool of technicians, service & maintenance schedules as well as spare parts at a more efficient level. Accelerating the implementation of this policy will also need streamlining the process and screening of prospective investors. Current experience demonstrates the weakness in awarding RE investment license whereby many of licenses did not materialize and cause delays in development of unelectrified areas. Some of delinquency incidents occurred due to complexity in RE investment process/arrangements. The complexity can be seen in the figure 7 on the next page which indicates a high pre-operating costs if not streamlined. To streamline the process, we hypothesize the need to have a One Gate Office that will

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Building the Future of Indonesia in Its Remote Areas

Figure 7 â&#x20AC;&#x201C; Complexity of RE investment arrangement leading to One Gate service model.

arrange the administrative process and able to validate the Feasibility Study and Operating Reports submitted by RE developers. This office will be managed by technical, financial, legal and administrative staffs with direct linkages to regulators, local licensing authorities and investment communities. The office will also help announce: results of technical and financial audits, upcoming opportunities, status of applications and implementations. Finally, this study will produce a policy paper/memo. The dissemination of results will be managed accordingly. ICCC will collaborate with other parties to promote the results of this study to electrify Indonesiaâ&#x20AC;&#x2122;s remote areas.

About the Author Artissa Panjaitan is the Coordinator of Low Emission Development Strategy (LEDS) cluster in ICCC. LEDS cluster primarily focuses on mitigation aspects of power (electricity), transportation and agriculture developments. Contact: apanjaitan@gmail.com

Established in October 2011 under the US-Indonesia Comprehensive Partnership, the Indonesia Climate Change Center (ICCC) is a platform of network that reaches scientist communities, international organizations, Indonesia ministries, and academics to encourage robust science-policy linkages in support of actions to deal with issues on climate change in Indonesia. ICCC works through four program clusters, which are Peatland and Peatland Mapping; Low Emission Development Strategies (LEDS); Measurement, Reporting and Verification (MRV); and Climate Resilience. Feedback and suggestion can be sent to email info@iccc-network.net or address Gedung Badan Pengkajian dan Penerapan Teknologi (BPPT) 1, 16th Fl. Jl. M.H.Thamrin 8, Jakarta 10340. Further information of ICCC is available on www.ICCC-network. net.

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Building the Future of Indonesia in Remote Areas  

This publication has been updated. Please use update version: http://issuu.com/i_c_c_c/docs/20141001_building_the_future_of_ind

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