Release: Fitch: Electricity tariff increase a positive step for PLN

Fitch Ratings-Jakarta/Sydney/Singapore-17 June 2010: Fitch Ratings has today commented that although the upcoming increase in Indonesia's electricity prices is positive for PT Perusahaan Listrik Negara (PLN), the introduction of fully cost-reflective tariffs will remain a challenge for the government. The Minister for Energy and Mineral Resources has announced that electricity tariffs will be increased by an average of 10% from 1 July 2010 which Fitch expects will improve PLN's operating margins and the funding position for its substantial investment program.

"An increase in Indonesian electricity tariffs is long-overdue as PLN has not even been able to recover its generation costs" notes Simon Wong, Director in Fitch's Asia-Pacific Energy & Utilities team. "However, the government's desire to scrap electricity and fuel subsidies by 2014-2015 will require further electricity tariffs hikes and for PLN to substantially reduce its generation costs," adds Mr Wong.

Historically, PLN has relied on state subsidies to cover the short-fall between electricity tariff charges set by the government and its cost of production. The revised 2010 state budget allocated IDR55.2trn for electricity subsidy for 2010 (2009: IDR47.6trn). However Fitch notes that subsidies are likely to be reduced in the future, increasing the necessity for PLN to reduce its dependency on oil-based generation in favour of cheaper alternatives, such as coal-fired and gas-fired plants. The Indonesian government wants to scrap electricity and fuel subsidies by 2014-2015 to promote energy efficiency and reduce the financial burden on the state.

"Electricity reforms allowing PLN to reflect its cost of production will be politically challenging and therefore an economic pricing model will be extremely difficult to implement in the medium term," notes Jessie Wahab, Director in Fitch's Asia Pacific Corporate team. "As PLN's current tariffs are less than half of its production costs, a move to economic pricing would be difficult for many customers to bear. A move to cost-reflective pricing is likely to require the government to provide financial support the country's poorest people which make up half of PLN's 40 million customers. However, Fitch would support the phasing-in of economic pricing and a subsequent transfer of required government subsidy from PLN to the neediest consumers," adds Ms Wahab.

As almost 35% of PLN's generating capacity is oil-fired, the company's operating cost base is very exposed to rises in the market price of fuel oil. Although oil prices have fallen from their peak in mid-2008, reducing the pressure on PLN's margins, the company will continue to be constrained by its relatively expensive capacity mix. Upon completion of the Fast Track Program to build 10,000MW of a new coal-fired plant and PLN's plan to replace some of its oil-fired plant with gas-fired plant, PLN forecasts that the generation fuel mix share of coal, gas and oil will be 57%, 23% and 8%, respectively in 2012.

PLN has a substantial capex program to reduce existing severe power shortages, and to meet domestic electricity demand, which is expected to grow at 9% per annum until 2018. Its capex programs include investments in new generation capacity (the Fast Track Program), and enhancing its transmission and distribution networks to reduce transmission losses and to expand coverage. As PLN's investment programmes are largely debt-funded, Fitch expects its stand-alone credit metrics to remain weak, especially during periods of escalating fuel costs. Nevertheless, Fitch sees the tariff increases as a positive step for PLN and the Indonesian electricity industry. (end of release)