Polemic on PLN’s Coal Price
“A nation that cannot control its energy resources will not be able to control its future “
This statement, made by former US President Barack Obama, can be used to shed light on our own energy policy. To what extent is our country able to not only possess, but also control our natural resources?
Currently, the price of coal sold to state owned electricity company PLN is under debate. Energy and Mineral Resources Minister Ignasius Jonan did not agree with the cost-plus price proposal made by PLN.
PLN is still under directions to improve its efficiency (Kompas, 29/9). The debate over PLN\'s coal price is an indication that this country is still immature because the management of coal is not based on a long-term vision.
While other countries are developing new coal technology, we are instead moving backward and are still debating about coal resources and coal prices. In many developed countries, the debate is directed toward the state\'s control of its energy resources, as well as strengthening the state’s geopolitical power regarding energy in pursuance of its national interest. Unfortunately, our debates are limited only to the pride of owning, not controlling, coal resources. It is still far from talking about technology.
At present, coal is a matter of debate as a commodity, not a source of energy. PLN and the ministry are forever arguing about the price of coal supplied to PLN. The question is how should the price dispute be resolved so we can focus on improving the country’s coal technology?
PLN’s coal price
PLN’s coal price policy has often come under scrutiny from the coal mining industry. The assessments are often too critical, especially on issues related to PLN’s plans to cooperate with holders of small-scale mining permits (IUP) to meet the coal needs of its coal-fired power plants.
Conversely, PLN also often criticizes coal-mining companies for focusing too much on prices in negotiations, ignoring the fact that the state electricity company’s selling prices for electricity are often too low compared to its operating costs. PLN also fears that coal miners will export their coal if the coal price increases.
So, it is understandable if PLN chose to establish a coal-trading subsidiary called PLN Batubara (PLNBB) to ensure a sustainable coal supply for its future operation. PLN will also assign the new subsidiary to operate its own coal mines. With this strategy, PLN will be able to ensure a secure coal supply, both in terms of quantity and quality.
Nevertheless, the calls made by Finance Minister Sri Mulyani Indrawati and Minster Jonan to PLN to reduce the coal price should not be interpreted by PLN to immediately acquire coal mines and force suppliers to suppress the coal supply.
There are still many other options the government and PLN could pursue, both in the short-term and the long-term, to minimize price fluctuation. On the supply side, in each contract of work given to mining companies, there is a provision that they should give priority to selling coal to local companies when the domestic supply is disrupted. In fact, the Energy and Mineral Resources Ministry has issued the so-called Domestic Market Obligation (DMO) policy, which requires coal producers to sell part of their production to the domestic market.
PLN\'s corporate move to acquire coal mines at a time when the coal reference price (HBA) has not come into effect is very much different from when the HBA policy comes into effect. On the basis of the HBA, PLN’s automatic coal price must follow the market price. As for the government, with the HBA the government can ensure that its non-tax revenue target can be achieved.
Seeking a solution
The government’s demand that PLN reduce the cost of coal should be immediately fulfilled. It is not only the responsibility of PLN but also the government. By doing so, the wealth of our natural resources, in this case coal, can translate to benefits for all people. In order to minimize price fluctuations, which can have negative impacts on existing mining companies, the pricing policy should be based on medium and long-term approaches.
For the short-term, the HBA should be maintained because its implementation has contributed to improvements in the operation of mining companies. Instead of removing the HBA, the formula for determining the HBA should be corrected. The existing HBA formula, which is based on four main indices, the Indonesian Coal Index/ICI, Platts, New Castle Export Index/NEC and New Castle Global Coal Index/GC, with a 25 percent weight given to each, should be changed. It would be better if the weight of the Indonesian index was more than 25 percent. The weight of the Indonesian index should be increased to 50 percent, while the other 50 percent should be given to international indices. If possible, the weight of the Indonesian index should be increased to 75 percent so the domestic coal price does not fluctuate so much.
With the HBA calculation formulation, price fluctuations are often the result of the impact of Australian coal prices. In China, which has its own index, the price of coal in the domestic market is more controllable. There is difference: The Chinese government has greater control over the national coal production, in contrast to Indonesia’s state-owned coal producer, which is relatively small compared to the total national production.
As one of the world’s major coal exporters, it would be better if the government had its own coal price index. A panel of experts could establish the coal price index to serve the interests of the national coal industry, especially PLN, which is responsible for the provision of electricity.
The Indonesian Coal Index (ICI), with the addition of government index, would be more proportional in the HBA coal price reference, if its weight was increased to 50 percent or 75 percent. With this new formula, price fluctuations could be reduced and PLN would be in a better position to determine the budget for coal purchases.
Long term
During the early development of the coal mining industry in Indonesia, royalty payments were made in an in-kind form. However, in the early 1990s, when most of the first generation work-based contracts for mining companies were in a commissioning production stage, and the coal market was still relatively small, including domestically, the government changed the royalty payment system from an in-kind to an in-cash form.
At present, there has been a major change of the coal market map. Even, in the general energy policy plan (RUEN), national coal production is based on the demand in the domestic market to ensure energy security in the country.
With such a policy, the government should make a blue print for the development of coal infrastructure, such as a coal blending port, as preparation to receive the government’s coal as the result of the implementation of the in-kind based royalty scheme. Without adequate coal distribution facilities, it will be difficult to ensure that all mining companies fulfill their DMO requirements.
With improved coal distribution infrastructure, coal shipments would be less costly and, in the end, it would help PLN to reduce its operating costs.
Finally, with both short and long-term approaches, the coal price in the domestic market would reflect that we are the owners and controllers of our coal resources. This would be unlike the present situation where the determination of the coal price in the domestic market still relies on a price index made by coal importers, which do not have coal resources.
SINGGIH WIDAGDO
The Chairman of the Public Policy Department at the Association of Indonesian Geologists (AGI)