Indonesia's push for electrification and its impact on domestic coal – report

Indonesia's consumption of domestic coal for power generation will almost double from 84 Mt in 2018 to 157 Mt by 2027. This increases power generation's share of domestic consumption from 18.5% to 33.6%, which is likely to displace export tonnage.

Another factor contributing to the higher coal consumption is that Indonesia's new power plants are designed to consume lower energy coal. This means more coal will be required per unit of electricity generated.

This increase in domestic consumption combined with potential government efforts to conserve coal reserves represents a downside risk for Indonesian exports.

Indonesia’s electrification programme to drive domestic coal demand

Indonesia has been trying to accelerate electrification to meet the demands of its growing population and rapid industrialisation. Under the RUPTL, 58 greenfield coal-fired power plants are due to come online in the period to 2027, causing coal-fire capacity to more than double from 24,418 MW in 2018 to 51,800 MW in 2027. This will be the largest factor driving the increase in domestic coal consumption, causing coal consumption for power generation to grow at an 8.3% CAGR between now and 2027.Indonesia provides limited incentives, such as tax allowances and holidays, for renewable energy.

However, recent electricity demand growth has been below expectations. In 2017 state electricity company Perusahaan Listrik Negara (PLN) achieved sales growth of only 3.1% compared with its target of 8.3%. This prompted the government to lower its capacity forecast over the next 10 years by 22 GW in the RUPTL.

As a result some major power projects have been cancelled or delayed. However, coal's cost competitiveness means that most of the delayed projects are gas-powered plants. The latest RUPTL shows that potential coal capacity has been reduced by 5 GW, whereas gas and renewables capacity have been reduced by 10 GW and 6.7 GW respectively.

Despite Indonesia’s push for more renewables and cleaner energy, we expect coal to still dominate the fuel mix at more than 60% from now until 2027. This is due to better coal economics and relatively unsupportive renewable energy policies.

Trends contributing to increase in coal consumption for power generation

Another reason for the rise in domestic consumption is that Indonesia's reserves of higher calorific value coal are declining. Currently, 62% of reserves comprise of lignite, a lower energy coal. As such, more coal needs to be burnt to generate the same amount of electricity to compensate for its lower energy value.

New power plants are being designed to suit the declining average calorific value in Indonesia. Older power plants were designed to consume coal of above 5,000 kcal/kg GAR. However, newer power plants are equipped to use an average coal quality of 4,000 kcal/kg GAR, more closely matching the availability of coal in Indonesia. This includes mine-mouth power plants in South Sumatra, which has an abundance of lower-ranked coal.

The shortage of higher calorific value coal is also impacting existing plants. In the last couple of years, imports of coal from Australia have increased and are on track to exceed 3 Mt in 2018. This includes both metallurgical and thermal coal with some of the thermal coal imported to satisfy demand from these older plants. However we expect imports of coal by power utilities to abate. This is because some existing power plants are instead switching to lower calorific value coals. The relative affordability of lower-ranked coals has seen some utilities willing to accept a derating of their plants and lower efficiencies in return for lower fuel costs. This move to consumption of lower calorific coal in existing plants is also contributing to the increase in coal burn.

Combining all these trends, we expect Indonesia's consumption of domestic coal for coal-fired power plants to potentially almost double from 83 Mt in 2018 to 157 Mt by 2027. Current domestic consumption is 18.5% of total Indonesian coal production. This share could increase to 33.6% by 2027, possibly displacing tonnes from the seaborne market.

We estimate Indonesia's domestic coal consumption for power generation to double from 2018 to 2027, increasing its share compared to the total consumption from 18.5% to 33.6%.

Potential risks

A potential upside risk for domestic coal usage could come from the implementation of the Ministerial Decree No 1953 K/06/MEM/2018 that was passed in July 2018. Despite the push for more renewables to be included in the energy mix, this policy is setting a higher barrier to entry for renewable energy to gain traction in the market. For example, the decree requires 50% of the hired engineers in this relatively new industry to be locals. Indonesia also provides limited incentives, such as tax allowances and holidays, for renewable generation. Most importantly, the amount of cost of generation provision – a price cap for any kind of electricity tariffs to be paid by the government in different regional grids, colloquially known as BPP – is restricting investment in renewable energy.

Conversely, potential downside risk exists for seaborne exports from Indonesia. From time to time, the Indonesian government limits production with the aim of ensuring adequate coal is reserved for the future. This, combined with the domestic market obligation, could limit the availability of exports, especially when domestic consumption is set to expand.

However, coal's run in the domestic power generation mix will not go unchallenged. Gas and renewables are likely to slowly displace coal in the long run and we do not expect any investment in new coal-fired capacity in Indonesia from 2027 onwards. Until then, coal will remain king in Indonesia.
(By Wood Mackenzie Research Analyst, Vicky Adijanto)