Never Waste a Crisis – Indonesia's PLN Needs a Coherent

1 Elrika Hamdi, IEEFA Energy Finance Analyst September 2020 Never Waste a Crisis Indonesia’s PLN Needs a Coherent Strategy to Ride Out the COVID-19 Pandemic Executive Summary The COVID-19 crisis has not been kind to Perusahaan Listrik Negara (PLN), Indonesia’s state-owned power monopoly. Not only was it heavily criticized by customers over a billing fiasco that created nation-wide confusion, but PLN’s financial health and longevity have been critically scrutinized by Indonesia’s House of Representatives in multiple hearings over recent months. This is cause for serious concern. In June, the PLN CEO Zulkifli Zaini conceded before the House of Representatives that PLN’s financial condition is deteriorating. Power demand has fallen sharply due to large-scale social restrictions (PSBB) and Dysfunctional planning PLN’s debt levels are rising as the and governance have company struggles to meet fixed costs.1 Its cash flow problem was worsened by the put the company into fact that the government has only paid strategic paralysis. IDR 7.7 trillion out of IDR 45.4 trillion (USD 3.1 billion) compensation owed to PLN for freezing electricity tariffs since 2017.2 PLN is not alone in this situation. Utilities around the world have seen power consumption nosedive as much as 20.0% since 2019 because of the COVID-19 crisis. But the roots of PLN’s problems are deeper than just the pandemic: PLN’s quiet crisis reflects dysfunctional planning and governance that have put the company into strategic paralysis, unable to change direction or adapt to new market realities. Utilities globally started changing the way they do business years ago. With the advent of transformative innovations in renewable energy technology, storage systems, and smart-grid applications, utilities have embraced change and learned to redefine development goals. Utilities that understood this opportunity acted fast to adapt their system infrastructure to accommodate the new technology. Unfortunately, PLN stands out as laggard, focused on a confused menu of piecemeal generation options rather than holistic planning that provides system-level solutions. What causes this underperformance? Sadly, the single-minded focus on the 35Gigawatt fast- track program has blinded senior planners to new market 1 Medcom.id. Utang Capai Rp 500 Triliun, Dirut Akui Keuangan PLN tak Sehat, 25 June 2020. 2 Bisnis.com. Utang Pemerintah kepada PLN Masih Tersisa Rp 37.72 Triliun. 12 August 2020. Indonesia’s PLN Needs a Coherent Strategy to Ride Out the COVID-19 Pandemic 2 realities that demand a switch from overreliance on inflexible baseload coal to cost- effective modular solutions that flexible renewables can deliver. Despite all the warning signs, senior managers still run the power sector with an old-fashioned, business-as-usual mindset. Unfortunately, a 2010 playbook will not save PLN from falling deeper into a modern-day debt trap. Indulging in an extractive economy mindset that fosters dependence on fossil fuel also won’t save PLN. There has to be a willingness to ask the hard questions when PLN’s ocean of red ink keeps signaling that the utility’s resource-driven development plans are obsolete in a high- technology world. A few weeks ago, video footage showing President Joko Widodo’s exasperation during a Cabinet meeting was leaked. Widodo was seen making a fiery speech showing his frustration with the Cabinet’s slow progress in dealing with the COVID- 19 pandemic. The President forcefully reminded his ministers that the current situation is not business as usual—it is a crisis that demands a swift response and extraordinary efforts from all parties. Jokowi’s speech exemplifies what is needed from PLN. The company needs to seize the moment and change its strategies. Simply conducting business as usual will not work. To ride out the The pessimist complains storm, PLN needs to know when to about the wind; change course and adjust the sails. The time to do it is now. Capital is moving the optimist expects away from fossil fuels and toward it to change; the realist utility-scale renewables. For example, adjusts the sails. the IEA World Energy Investment 2020 report found that investment in fuel – William Arthur Ward supply has received the hardest hit, while investment in utility-scale renewable power has been more resilient.3 The 35 GW Program Has Become a Free Pass To Uncontrolled Growth That PLN Cannot Afford The 35 GW program is a political promise that was meant to embody President Joko Widodo’s (Jokowi’s) ambition to fully electrify Indonesia. There is nothing wrong with the ambition, but the subsequent planning and execution has lacked accountability. Adding generation capacity has become a goal with little attention to long-term financial impacts or new system design options. In the absence of much- needed checks and balances, PLN has been driven to the brink and taxpayers will be left to pay the price. 3 IEA. World Energy Investment 2020. May 2020 Indonesia’s PLN Needs a Coherent Strategy to Ride Out the COVID-19 Pandemic 3 In a recent House of Representatives hearing, PLN chief executive Zulkifli Zaini raised concerns about PLN’s rising debt burden, which rose to IDR 500 trillion (USD34 billion) at the end of 2019. Due to PLN’s heavy capex schedule, growing IPP payments, and weak tariff profile, PLN has had little choice but to fund its 35 GW dreams with IDR 100 trillion of new debt each year for the last five years. According to Zaini, most of these projects were 100% financed by debt since PLN does not have enough internal equity. As a banker, he understands this is not healthy.4 PLN’s debt has grown at an average 15.6% annually since 2015. Its debt to equity ratio has hovered around 50%-70% over the last five years.5 This buildup in PLN’s debt burden was partially engineered in 2015 by a change in accounting treatment which permitted PLN to revalue its assets. This optical change resulted in a doubling of PLN’s fixed assets from IDR 500 trillion to over IDR 1.1 quadrillion. Absent this asset revaluation, PLN’s debt-to-equity ratio would have reached at least 170% by the end of 2019—a level that would well have triggered more oversight. Figure 1: PLN Liabilities Year-on-Year6 Source: PLN Annual Reports. Note: Lease liabilities plummeted in 2016 as a result of the changes in accounting treatment whereby PPA contracts were no longer accounted as leases but instead as sale/purchase of electricity. Meanwhile, both bank loans and bonds payable have more than doubled over the last five years. 4 Medcom. Utang Capai Rp 500 Triliun, Dirut Akui Keuangan PLN tak Sehat. 25 June 2020. 5 Based on PLN Annual Reports 2015-2019. 6 Not including deferred tax liabilities, payables to related parties, employee benefit liabilities, other payables, taxes payable, accrued expenses, customers’ security deposits, project cost payable, deferred revenue, and derivative liabilities. Indonesia’s PLN Needs a Coherent Strategy to Ride Out the COVID-19 Pandemic 4 PLN said in a press release on July 28 that unit demand had grown only 0.9% for the first half of 2020, a relatively small increase from 118,522 GWh in first half of 2019 to 119,651 GWh in the first half of 2020. Even if demand doubles in the second half of the year, total demand growth for 2020 will be nowhere near the 6.2% target forecasted in the 2019 RUPTL (electricity supply business plan). PLN’s CEO has announced several strategies to manage the damage to PLN’s cash flow. The first step would slash capital expenditures by half this year, from an initially earmarked IDR 100 trillion to IDR 53.6 trillion.7 Cutting expenditures to halt unnecessary generation projects is a good starting point for protecting PLN’s financial position from further harm. To be fair, PLN did come up with a new corporate strategy known as “PLN Transformation: Power Beyond Generation.” It emphasizes the development of more green energy, optimizing dispatch, pushing for innovation through PLN’s financial problems digitalization, and focusing on customers. The PLN Green Energy Transformation, as it result from inaccurate stands now, include plans to convert some forecasts and inflexible coal fired-power plants to use biomass co- payment obligations. firing (mostly woodchips), replacing diesel power plants with renewables and gas, installing floating PV on existing dams or ex- coal mines, and a big hydro program for industrial needs. These efforts are well–intentioned and were styled as a change in strategy, but in fact, they are not. The focus on generation-centric planning is out-of-step with the strategies used by successful utilities. Their planning prioritizes system solutions based on cost-effective utility-scale solar and wind units paired with storage and smart grid applications. PLN needs to make sure that the power sector reform is not just cosmetic. The best strategy for PLN would be to rebase their planning framework to focus on more cost-effective grid investments that improve the long-run efficiency of the whole power system. Private sector players cannot invest in the grid and have therefore crowded into the generation sector. This has accentuated PLN’s narrow focus on baseload generation has resulted in excess capacity and a brittle system that lacks flexibility. What’s needed now is a more grid-centric strategy that would permit PLN’s investment to enable a more efficient system. With COVID-19 forcing a re-set of PLN’s growth plan, what is required now is a thorough review of the 35GW dream. This is overdue because Indonesia’s growth profile has flatlined since the target was first set in 2014, when Indonesia’s GDP 7 Jakarta Post.

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