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Committee Suggests New Coal Price Formula for Power Plants

The Energy and Mineral Resources Ministry should make changes to a ministerial regulation on coal prices for mine-mouth power plants to appease both the government and state-owned electricity company PLN, the National Exploration Committee (KEN) has said.

The ministry and PLN have been at loggerheads over the regulation, issued earlier this year, over the pricing formula for coal delivered to mine-mouth power plants, which included a margin of 15 to 25 percent of the total production cost.

As a compromise, KEN has suggested a number of revisions to the regulation, which include allowing large-scale mine-mouth power plants with 100 megawatt (MW) to 1000 MW capacity to set prices based on a business-to-business system.

“However, the control over conservation should remain in the hands of the Energy and Mineral Resources Ministry so that our reserves will not be depleted due to cheap prices that are advantageous for companies,” KEN chairman Andang Bachtiar said on Tuesday.

Meanwhile, small-scale power plants with a 7 MW to 25 MW capacity should be allowed to buy coal with a 15 to 25 percent margin as they have a small demand of only 35,000 tons to 125,000 tons per annum. However, Andang also suggested that the power plants be given an additional fee set by an independent consultant in order to ensure transparency.

Fear of overselling coal is one of the reasons the government has insisted on the 15 to 25 percent price margin. The Energy and Mineral Resources Ministry’s coal and mineral director general, Bambang Gatot Ariyono, said if the prices were reduced further, then Indonesia’s reserves could be depleted within a short period of time.

“We have to consider our reserves. If we continue to reduce the prices then our reserves will disappear. Is there any guarantee that the change will allow our reserves to be there for the next 50 years? We need a margin,” he said, adding that there were no plans to change the price margin.

PLN has claimed that margins have resulted in prices that are too high considering the low coal price experienced throughout the year. President director Sofyan Basir said the margin could be reduced even further to a maximum of 15 percent.

Coal prices continue to remain sluggish amid overproduction and slow demand from major coal importer China.

Reuters reported that the price of Asian benchmark Newcastle thermal coal went up to US$62.23 per metric ton by mid-July from its 2016 low of $47.37. However, this is still less than half the post-2008 recession peak of around $136 per metric ton in February 2011.

Meanwhile, Indonesia’s coal reference price (HBA) for July also rose to $53 per metric ton from $51.81 per metric ton the previous year.

Settling the conflict while also preserving the country’s reserves is crucial to the government’s energy plans, especially for the ambitious 35,000 MW electricity procurement project, which will rely on coal for 55.6 percent of its energy source.

Government data suggests that Indonesia had around 32.2 billion tons of coal reserves in 2014.

However, another study by the Indonesian Mining Association and PricewaterhouseCoopers shows that declining prices have made only 7.3 to 8.3 billion tons of coal economically viable to mine. The preliminary projection indicates that these reserves will be depleted within the next two decades, forcing the country to start importing coal by 2030.

KEN also emphasized the importance of hiring an independent consultant to fix the prices as this would ensure transparency between all parties.

“There must always be transparency surrounding price-fixing between the ministry, PLN and coal suppliers,” Andang said.