Indonesia’s PLN and the Clean Energy Conundrum

Indonesia’s state-owned electric utility, PLN, posted an after-tax profit of around $1.4 billion in 2023 with total revenue up 36 percent compared to 2019. Like Indonesia’s other state-owned energy major, oil and gas giant Pertamina, it seems that PLN has recovered pretty well from the pandemic. But if we unpack these numbers a bit, they reveal some interesting things.

Like Pertamina, PLN has a mandate from the government to provide its services (in this case electricity) to Indonesian consumers at affordable and stable prices. Differences between the cost of production and the selling price are absorbed by the government through subsidies and other forms of compensation.

The government’s share of this price disparity has increased considerably in the last two years, reaching about $9 billion last year. Without that $9 billion in government aid, PLN would not have been profitable. Without government aid, Indonesian consumers would also likely have had to shoulder a larger share of the financial burden by paying higher electricity rates, something the state has never shown much appetite for.

PLN is expected to buffer consumers against price volatility while also ensuring sufficient new capacity is built to meet demand. When President Joko Widodo took office in 2014, one of his signature campaign promises was to build 35,000 MW of new generating capacity. A lot of this was expected to come from private developers, who typically sell their power to PLN at fixed rates over several decades.

And the plan worked pretty well. Between 2015 and 2023, private developers built over 17,500 MW of new capacity while PLN added an additional 4,800 MW through plants that it owns and operates itself. It’s not quite the 35,000 MW that was envisioned, but still a substantial amount of new capacity.

This upsurge in private investment has shifted the structure of Indonesia’s energy market in a significant way. In 2015, PLN was generating 75 percent of Indonesia’s electricity. By 2023, as these new private power plants came online, PLN’s share of electricity generation fell to 57 percent and if the current trend continues this share will likely keep decreasing in the future.

As a result, PLN’s payments to external power companies have ballooned. In 2016, the utility paid private suppliers around $3.8 billion to buy their power. Last year, it paid $9.9 billion. The logic of this model is that PLN does not need to raise upfront the substantial sums required to build big, capital-intensive power plants. It merely buys the power for the duration of the contract, so the cost can be spread out over many years.

This means that PLN is paying out more these days to purchase electricity generated by private developers and is also expected to absorb price volatility caused by external shocks, without being able to easily raise prices on consumers. Covering this gap is a big part of the reason that government subsidies have increased recently.

Here is where clean energy enters the mix. When we talk about solar power, most of the cost is incurred during the construction phase. Operating costs are very low, and fuel costs are non-existent. And the good news about solar power is that every year it is getting cheaper to build as the price of key components, such as solar panels, goes down.

There are two ways to build more solar. PLN can encourage more external investment by entering into purchase agreements with private developers. Or it can build more solar power plants and operate them itself, or in partnership with private developers. PLN would, generally speaking, prefer the second option.

Analysts sometimes say that PLN is holding up private investment because it lacks the ability to make the regulatory environment attractive to developers. But if the cost of building solar power is really going to get even cheaper in the years ahead, then it makes sense for PLN to prefer building solar itself in order to move away from liability-heavy long-term purchase agreements with private developers. Why get locked into purchase agreements with solar power companies at current prices (say 6 cents per kilowatt hour), when in five years the levelized cost to build and operate its own solar power plants might be half that?

From their perspective, this is perfectly rational. PLN has taken on billions of dollars in new liabilities as part of the 35,000 MW investment boom, and they don’t necessarily want to keep stretching the balance sheet with more long-term purchase agreements as Indonesia pivots toward clean energy. Given the extent to which the utility already relies on government subsidies, building and operating its own fleet of utility-scale solar offers a viable path forward even if it’s not the one that private developers or the market at large would prefer.