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Cablegate: Indonesia Enacts a New Electricity Law

VZCZCXRO3209
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #1800/01 3020906
ZNR UUUUU ZZH
R 290906Z OCT 09
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 3682
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS COLL
RUEHJS/AMCONSUL SURABAYA 2556
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 02 JAKARTA 001800

SIPDIS

STATE FOR EAP/MTS
STATE ALSO FOR EEB/ESC/IEC/ENR, S/CIEA
ENERGY FOR PI-32 CUTLER
COMMERCE FOR 4430 NADJMI AND 6930
STATE PASS TO USTR EHLERS AND WEISEL
STATE PASS TO USAID EGAT/ESP/GCC COLLIN GREEN

E.O. 12958: N/A
TAGS: ECON ENRG ETRD ID
SUBJECT: INDONESIA ENACTS A NEW ELECTRICITY LAW

JAKARTA 00001800 001.2 OF 002


1. Indonesia's Parliament recently passed a new electricity law to
increase development of the power sector by allowing local
governments to set local tariff rates and establish companies that
can compete with PLN, the national power utility, in power
generation, transmission, and distribution. The new law enables
regional governments to develop power projects on their own, but
observers are skeptical that the new law will encourage investment.
Legislators hope the law will provide the incentives and competition
that have been lacking since the constitutional court annulled the
previous electricity law in 2002, on the grounds that private sector
competition in that that contravened article 33 of the Indonesia
Constitution.

Legislative Approvals for Electricity Tariff
--------------------------------------------

2. Airlangga Hartanto, Former Chairman of Parliament's Commission 7,
which oversees legislation on oil, gas, mining, and power, stated
that the new electricity law gives local governments the power to
generate, transmit, and distribute electricity, set regional prices
and determine local subsidy levels. Airlangga believes that this
arrangement allows local governments to develop electricity when
PLN, the national electricity monopoly, has been unable or unwilling
to do so.

3. However, some observers are skeptical of the scope of the law's
impact. Officers at the Indonesia Electricity Society (MKI) said
that the law's vague language allowed many groups to believe that it
would advance their causes. But MKI members believed that the only
working model of regional electricity pricing is the island of
Batam, which is a special business processing and export zone.
There are additional problems to electricity competition, including
questions about access to PLN's distribution network, methods to
compute end-user prices if local feed-in tariffs are different from
PLN's tariff, and management of local subsidies.

Renewable Energy Goal
---------------------

4. Despite the uncertainty, Indra Sari, an energy officer at World
Wildlife Fund, believes that the new law raises the opportunity to
develop renewable energy projects. Currently, one of the biggest
obstacles to renewable energy development is PLN's reluctance to
plan for or sign contracts with renewable energy projects. Under
the new law, regional governments can create local government-owned
companies to purchase and distribute the electricity.

5. To make electricity competition work, local governments must
still create rational business incentives to attract investment,
according to Dollaris Riauaty, the Executive Director of
Swisscontact Indonesia, an NGO specializing in poverty reduction and
technical assistance. Key among these incentives is being able to
offer competitive feed-in tariffs, something that Indonesia's
current system of subsidies makes difficult. In the meantime, the
Indonesian government must make a credible road map to develop
renewable energy.

Business Development
--------------------

6. Officers at MKI said, once the implementing regulations clarify
the regional jurisdictions, the new law allows local governments to
extend two new types of permits: electricity business permits for
public distribution, and electricity business permits for industrial
own use. These permits narrowly define the customer base, so that
electricity producers cannot designate both industrial and public
customers. However, MKI was hopeful that the law would increase
energy options for manufacturing in Indonesia. However, the new law
is unclear and industry observers are waiting for clarification in
the implementating regulations.

Role of National Energy Policy
------------------------------

7. The new law mandates that the primary energy sources must be used
optimally in accordance with the National Energy Policy (NEP) and
gives greater priority to new and renewable energy sources. The NEP
itself will be prepared by the National Energy Committee (NEC),
chaired by President Yudhoyono. The GOI has already released its
energy mix target to be achieved in 2025, in which renewable energy
is slated to provide 17% of total energy. The NEC now has the task
of determining the policies that will achieve this goal.


JAKARTA 00001800 002.2 OF 002


HUME

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