INTERVIEW: PLN outlines primary energy strategy (Full version)

The following is the full version of the interview given by Nur Pamudji, energy primary director of state owned electricity PT Perusahaan Listrik Negara (PLN) to Petromindo.com?s reporter Bernard Lubis. The interview took place earlier this month and the shorter version of the interview was published on March 31, 2009.

Question: What?s PT PLN?s primary energy provision strategy?

Answer: Primary energies that I handle are gas, coal and oil-based fuel. As far as gas is concerned, PLN has been given a privilege by BPMIGAS.

Does PLN have a privilege?

It does. Privileges (of using gas) have been given to fertilizer industry, oil lifting activities, electricity generation. For instance, if there are new gas sources that have been discovered, PLN is usually given the opportunity to buy through a simple procedure through direct appointment. The process can be quick. We only need to negotiate. Still, there is a wide gap between supply and demand. We need 2,300 mmcfd. I will give later the figures. But, the demand has never been fulfilled. PLN, for instance, can use gas but is forced to use HSD (high speed diesel) for the Tambak Lorok power plant in Semarang. This is because there aren?t yet supplies from Kepodang field. The same thing happens to our power plants in Gresik, Muara Tawar, Tanjung Priok, Muara Karang and Belawan. There aren?t enough gas supplies. These are several examples of power plants that should have used gas rather than HSD. We finally try unconventional ways in finding gas sources outside gas pipelines.

Could you given an illustration of costs of burning oil-based fuels and burning gas at combined cycle power plants, and how much do they cost?

HSD burning costs us US$16-17 per mmbtu, while the cost of gas is $3, 4 or 5 per mmbtu.

So, the cost (of burning HSD) is three times as much?

Yes, around three times.

In terms of production costs per kWh, how?s the difference?

If they use gas, the production cost varies depending on the location of the power plants, but they are less than Rp 400 per kWh. Among the cheapest ones is the Cilegon power plant. Its production cost is Rp 300 per kWh. Meanwhile, the highest production cost of the power plants that use HSD is one third of the price of the fuel. If the price of HSD is now Rp 5,300 per liter, the production cost of the power plant using the fuel is about Rp 1,700 per kWh.

So costly!

It is

So, how much does PLN squander for HSD?

(Laughing) It can be seen in the PLN?s budget for HSD every year. That is why we have been trying to find new sources, such LNG terminal. Initially, we were asked last year by the government, in a partnership with (state owned oil and gas firm) PT Pertamina and (state owned gas distribution firm) PT PGN, to develop an LNG receiving terminal in Jakarta. Over time, we drew back, leaving Pertamina and PGN (to continue the project).

What are the reasons behind the withdrawal?

Just in order to make the procedure simple. If there are three parties, the legal procedure will become more complicated. For instance, (in case the partnership consists of three parties and) if you want to buy furniture for the office, you need signatures from the three parties. This is only about office furniture. It will turn more complicated when it comes to other matters.

What kind of agreement had the consortium of PLN, PGN and Pertamina signed?

Nothing. (Before PLN decided to withdraw from the consortium) we had only made preparations for a negotiation scheduled to be held end of February.

How much gas does PLN plan to buy from the LNG terminals?

From (the LNG terminal planned to be built by PGN and Pertamina in) Jakarta, 400 mmcfd, (from the terminal to be built by PGN in) Belawan 150 mmcfd. With regards volume from (the LNG terminal to be built by Pertamina in) East Java, we are now having talks with Pertamin about the optimal volume

So, how long will it take for PLN to finish the conversion program from oil-based fuels to gas?

The target is that gas from the LNG receiving terminals will flow in by September 2012, either from Belawan and Jakarta. That does not mean the problem is over because, for instance, there isn?t yet any solution regarding gas supplies to the Tambak Lorok power plant. With regards gas from the Kepodang field of Petronas, it is not clear yet who will build the pipeline to transmit the gas. Will it be built by Petronas or will it become part of the Kalimantan-Central Java pipeline? We are waiting for the government to make a decision.

How much does Kepodang gas cost?

Less than $5 per mmbtu.

How about the prices of other gas for PLN? Other parties will likely use the buying price of PLN from the LNG receiving terminals as reference.

It depends on the sources of the gas. If it is sourced from the domestic market, the government may reportedly regulate the prices, because the gas belongs to (oil and gas upstream sector regulator) BPMIGAS. If it is sourced from outside the country or imported, we shall be exposed to international prices. We still have a lot of domestic gas, for instance Matindok, Masela, IDD.

The problem is that they (the gas producers or distributors) are reluctant to sell their gas on the domestic market because their prices are expensive given the fact that the gas is sourced from deep water or from LNG floating terminals. They say the domestic price, for instance $5, is not economical. PLN is long known to be only willing to buy cheap gas. What would PLN do rather than burning HSD?

We have to have a long-term perspective, 10 years. We also have other primary energy sources. Coal, for instance. It competes with gas. We shall optimize the efforts of finding the list of cost system development. If we want to add the capacity by several thousands of MW for several years to come, what is the most optimal fuel? Coal or gas? Of course, it is not only gas or only coal. Both can be developed. How much gas or coal we are going to use? In fact, we have a lot of coal. But, we can?t neglect gas because in our electricity system, there are power plants which operate as ? using our terminology ? mid-level load carrier and peak load carrier, for which the best fuel is gas. This is because gas-fired power plants can quickly increase and decrease their capacity. Furthermore, in order to control of the quality, that is the per-second frequency, 50 frequencies per second, it?s better to use gas-fired power plants because they can quickly balance the demand and supply. That is we still need gas-fired power plants in our electricity system.

Is it also the reason that the new power plant development plans still include energy mix?

It is. It has been indicated in the RUPTL (The Plans of Electricity Provision Efforts proposed by PLN) which is in the process of gaining approval from the government. (The RUPTL) makes clear the planned development of coal, pipelined gas, LNG-fired power plants. All (of the fuel) has a place (in the RUPTL). We realize that pipelined gas is limited in amount. That?s why we include LNG into the 10-year plan.

Does PLN still pursue the program of converting to MFO (marine fuel oil) from HSD?

The program was triggered by the big difference between the prices of HSD and MFO. HSD used to cost Rp 5,000 something while MFO cost Rp 3,000 something. But now the MFO price has increased to a level almost comparable to the HSD price. We are evaluating the MFO-HSD conversion program. Our pilot project is the diesel-fired Matarm power plant in Lombok. Is it more profitable using MFO? It has turned out that the use of MFO results in an increase in maintenance costs. We shall audit the additional maintenance costs as a result of the use of MFO rather than HSD.

What?s more important is the conversion of the use of HSD into gas, which is in this respect the compressed natural gas (CNG) or Mini LNG. For instance, PLN has gas on the islands of Java, Sumatra and Kalimantan. We then tap some of the gas and carry them to Ambon, Kupang, Kendari or Mataram where the use of HSD is high. We plan to start the program in 2012.

How do you convert the machines?

It is easy to convert the machines. It is as easy as converting HSD to gas. The fuel system is very simple. And we have made it for the use of pipelined gas in several places, for instance Teluk Lembu in Payo Selincah and Belawan.

What is more difficult to do is the application of CNG or Mini LNG technology. We are still in the process of learning this. This is a new technology.

Who are you cooperating with?

There are some companies who have the technology. We have assigned our subsidiary PT Indonesia Power to examine which technology is the most economical to be applied, CNG or Mini LNG? First of all, the technology will be applied at the gas-turbine PLTG Pemoran in Singaraja, Bali. The procurement process is in progress. Our target is that the project will run in 2011. The idea is that we shall carry gas that belongs to us from the island of Java. The volume is only 20 mmcfd. The gas will be in the form of CNG or Mini LNG.

Are there already vendors of the technology?

There have been several proposals sent to PLN. We shall hold a tender. It would be better.

So PLN will need only to wait for the arrival of the LNG?

Yes, we will.

Is it true that your overall maintenance cost will be less if using gas?

It is. For example, the capacity of a power plant with a capacity of 140 MW will be stable if it uses gas. The capacity will however decline to 130 MW if it uses HSD, because HSD is a liquid which needs first to be converted into steam before being used. Meanwhile, gas can be directly used. The other advantage of gas is that it has a higher energy solidity compared to HSD. Also, power plants that use gas have lower maintenance costs.

The consumption of HSD will thus decrease. What is your target?

Now, HSD accounts for 15 percent of the fuel consumption of PLN. We target to lower it to 5 percent in five years to come. The use of coal which now reaches 45 percent will be increased to 50 percent within five years. As we already know, coal will fulfill the needs of additional capacities resulting form the 10,000 MW power plant development crash programs.

Are there negotiations for gas supplies now in progress?

There are several. (We are negotiating for gas supplies) from the LNG receiving terminals to be built in Jakarta and Medan. Also, from the Semberah TAC in Kalimantan for a small volume, And in Jambi, from Sungai Gelam, The volume is also small, only 2.5 mmcfd. There is nothing significant right now.

With ConocoPhillips?

Thus far, there isn?t yet any signal (for negotiations with ConocoPhilips). We have signed contracts for gas supplies from, for instance Terang Sirasun and Batur fields (in East Java) but they have not yet come on stream, and (for gas supplies from) Cepu, which involves a big volume, able to generate 500 MW. The problem is the gas (from Cepu) has a high CO2 content, which means even though the volume is big, its calorific value is only 600, compared with 1300 (if it had no high CO2 content).

Does PLN have plans to build new gas fired power plants in the future?

We have. We have a commitment to get gas supplies from HESS?s Jambi Merang field. Initially, the gas would be supplied from the SSWJ pipeline to Java. We finally decided to use it in Sumatra. PLN will build a PLTG (gas fired power plant) there.

Is it an IPP power plant?

The scheme could be IPP (Independent Power Producer), BOO (Build Operate and Own). PLN will only lease the machine.

We move to the topic of coal. First, what is PLN?s policy regarding coal provision? Secondly, what is the portion of coal-fired power plants in the energy mix scheme?

PLN?s coal fired power plants can be divided into two. First, the power plants that use low rank coal. Secondly, the power plants that use coal of 5,000 kcal/kg. PLN will continue building power plants that consume coal of 5,000 kcal/kg or higher.

Why not only low rank coal?

Let me explain. We shall the PLTU Pemalang with the capacity of 2x1,000 MW. We shall use supercritical technology. We know that the technology only uses coal of 5,000 kcal/kg or higher.

Why do you choose supercritical technology?

Because its efficiency level is high. If compared with those fired by low rank coal using coal of the same volume, power plants equipped with supercritical machine have a higher capacity in terms of kWh.

Does supercritical technology fit only big-scale power plants?

Normally, it does. We shall no long build small-scale power plants on the island of Java. The power plant must have a minimum capacity of 600, 800 and 1,000 MW.

Can we thus assume that you shall only use supercritical technology on the island of Java?

That?s right. (The power plants that will be equipped with supercritical technology are) for examples, the PLTU New Paiton, better known as Paiton 3, the PLTU Pemalang and the PLTU Indramayu. All of the units have the capacity of 400 MW or higher. At present, we are auctioning PLTU Pemalang, while PLTU Indramayu is in the process of study.

What is the coal consumption of PLN as well as IPP?

Coal consumption for this year is (projected to reach) 40 million tons, including 30 million tons by PLN and 10 million tons by IPP. Last year?s consumption of PLN alone was 23 million tons.

Are you going to apply supercritical technology outside Java as well?

No. Outside Java, the unit size is between 200 MW and 400 MW. Besides, we shall develop more mine-mouth power plants, especially in Sumatra, using IPP scheme.

All will be IPPs?

Not all. Some will be owned by PLN.

In Java, all will be IPPs?

Not all. Let?s check the data later. Pemalang (power plant will be built using) PPP (Public Private Partnership) scheme.

PLN will become the largest coal offtaker in the world. What are the preparations that have been made by PLN? By the way, the loading and offloading costs of Suralaya (coal-fired power plant) are quite high. What is the benchmark that will be used by PLN?

We?ll be facing many challenges as the largest coal offtaker. For instance, loading and offloading facilities. We realize that PLN has to add unloading facilities at Suralaya. We shall add the facilities and is making preparations for that. We shall add the facilities later this year. We have procured the equipment and need only to install them. We need more time as far as other power plants are concerned. The PLTU Labuan, for instance, has been operating for only several months. We shall add reserve facilities at Labuan, for instance jetty. Thanks to the jetty, barges will be able to berth and trucks can carry coal from the barges.

Are you going to apply a similar plan to other power plants?

For the moment, only PLTU Labuan.

Will PLN set up a subsidiary especially assigned to handle coal and oil-based fuel supplies to PLN?

What we have been thinking about is (coal subsidiary) PT PLN Batubara. PT PLN Batubara was established last year and has started doing its job. The scheme for PT PLN Batubara is that, first, it will make acquisitions, secondly, do operational cooperation with coal mining companies and, third, carry out coal trading activities. The coal trading activities will be carried out by buying coal through auctions and delivering it to PLN. The trading activity is temporary in nature and thus far it has been carried out twice to supply coal-fired power plants in Java. Furthermore, PLN Batubara will cooperate with mine owners in managing mines outside Java. I shall tell you the names (of the mine owners) later. We hope the mines will supply coal to coal fired power plants outside Java.

How much coal will be handled by PLN Batubara?

Between 2 and 3 million tons for this year.

And the ultimate goal, how many percent of the total PLN needs will be supplied by PT PLN Batubara?

On the long run, PLN Batubara will function primarily to secure coal supplies to PLN. The objective is not to look for profits but to secure supplies for PLN. We once experienced the period where PLN was facing difficulties to get coal supplies. PLN usually faces difficulties to get supplies whenever the international price is high. We hope PLN Batubara will be experienced in handling such problems.

The next question is regarding transportation. PLN once had a plan to acquire PT Bahtera Adiguna. What is the progress? And, will PLN pursue its plan of being engaged in transportation sector?

The main job of PLN is to provide electricity, not coal mining or transportation. That?s the focus of PLN. With regards PT Bahtera Adiguna, we were assigned by the Ministry of State Enterprises to enhance the performance of PT Bahtera Adiguna. Once again, it is an assignment (from the government). The process of transferring (PT Bahtera Adiguna to PLN) is now in progress. That means the transfer has not been done yet. Once it has been transferred, it will become a subsidiary of PLN.

We have heard that there has been a government regulation requiring PLN to negotiate coal prices every year. Is it true or not?

I?ve never heard about it. What is clear is there are coal purchasing contracts whose prices should be negotiated every year, for instance (the coal contract supply for) Suralaya power plant.

How about new contracts?

With regards contracts for 10,000 MW power plants, the price formula has been fixed and is valid for 20 years.

Except for (state owned coal mining company) PTBA (Batubara Bukit Asam)?

No. IPPs will also do the same thing: negotiate the price every year in accordance with the contract. Under the pass-through mechanism, PLN has to approve of the coal price. We thus look like making negotiations. Coal contracts for the 10,000 MW are however different. Thus as far as I know there isn?t such a regulation as you just mentioned.

How many power plants of the 10,000 MW program that have come into operation? How about their coal supplies? Many parties have doubt about their coal supplies.

Only one has started operation, that is PLTU Labuan. I am not saying that supplies are of coal to Labuan are smooth. We are still in the early period, where we still need to make adjustments. Once again, I am not satisfied yet with the performance of coal suppliers there.

It was reported that PLTU Suralaya lacked coal stocks. Now, it is said to have excess stocks.

There isn?t excess stock right now. The stock is enough for 20 days of consumption.

For how many days do you want the stock endure?

Generally, one month on average. In certain months, prior to the arrival of the monsoon season, we need to have larger stock.

In total, how much does PLN spend for fuels per year?

Rp 70 trillion or US$7.8 billion.

And the spending is mostly for what?

For HSD. A total of Rp 18 trillion is spent for the purchase of coal, Rp 40 trillion for oil-based fuels and the rest for gas. The portion of water and geothermal steam is small.

How?s about the conversion of HSD to geothermal?

Basically, our policy is whenever an opportunity presents itself for us to replace HSD with other cheaper energy, we shall take it. Our principle is list cost system expansion. We can achieve a lowest cost using the lowest cost energy. For instance, in Ambon, we shall buy electricity from a private producer that generates power using geothermal steam. The price is 11 cents per kWh. It does not mean however that we shall scrap the HSD-fired power plants there. I am afraid if the HSD-power plants are scrapped, there will be a long line of potential customers that we can?t serve.

Taking lessons from the past experiences, where Suralaya, for instance, often experienced coal supply shortage and PLN had to cry for supplies, has PLN made efforts to give it a more equal position against coal suppliers in the contract?

It?s true that PLN is sometimes in a weak position against the suppliers. Ideally, both of them should be equal. Still, we can say that PLN remains a very strong magnet. If PLN ?s attractions are declining, we shall improve it.

Now, there has been a domestic market obligation (DMO) for coal.

We have been asked by the government to submit our coal needs for 2011. There, we shall specify the volume of PLNs? coal needs that can fulfilled by the government.

That means PLN shall not absorb any DMO coal this year?

The DMO should be able to strengthen the bargaining position of PLN, including in setting the price. Has the DMO strengthened PLN?s bargaining position in terms of price and supply?

The DMO regulation is made by the government. Thus far, we don?t have any experiences that can be evaluated. Until this year, PLN only utilizes coal from the existing Coal Sales and Purchase Agreement, no coal from DMO. In my opinion, the DMO regulation will benefit PLN. We shall certainly take the opportunity. (end)