Indonesia Would Benefit from Removing Coal Price Cap: report

18 trillion IDR consumer subsidy locks in air pollution, raises costs of renewable energy

Jakarta, May 7, 2019 – A new report calls for the Government of Indonesia to remove its price cap on mandatory sales of local coal to Perusahaan Listrik Negara (PLN), the state-owned electricity company.

Released by the International Institute for Sustainable Development (IISD), Indonesia's Coal Price Cap: A barrier to renewable energy deployment highlights alternative strategies to sustain PLN’s finances without harming the integration of renewable energy with its health and environmental benefits.

“Reducing fuel costs of coal generators through price-capped coal while at the same time indexing renewable energy prices at levels often lower than those paid to coal generators greatly disadvantages renewables,” says Richard Bridle, lead author of the report. “The key message of these policies is that coal generation receives special support, so it’s clear why PLN continues to pursue large-scale coal projects.”

The report examines the pros and cons of five alternative strategies to shore up PLN’s finances:

1. Increasing electricity tariffs across the board while removing coal price cap
2. Reducing the numbers of consumers able to access discounted tariffs (better targeting)
3. Replacing coal cap with an equivalent charge on the sale of coal and a technology-neutral payment to PLN
4. Removing the link between average generation cost (BPP) and procurement of new renewable generators. Set a target for procuring generation and allow the market to drive down prices
5. Implementing the “polluter pays” principle. Increase taxes and charges on environmentally harmful activities and use the revenues to fund PLN in a technologically neutral way

“For renewable power to scale up to a place where it’s cost competitive for consumers, improving air quality and reducing health costs, the coal price cap needs to be removed,” says Bridle. ”Indonesia already has an aggressive target for increasing renewable energy use and removing the coal price gap would be a key step to secure this legacy.”

Will this increase prices for consumers?

• Consumer price rises may well be part of the reforms, but removal of subsidies frees up spending for other priorities. In 2015, the removal of gasoline and diesel subsidies freed up IDR 211 trillion (USD 15.6 billion) to fund a wide range of infrastructure and government programmes;
• Subsidising coal is a very blunt instrument. The same funds could make a much greater fiscal impact if the subsidies were targeted to people and programmes where they are needed most;  
• To completely avoid price rises for consumers, an equivalent tax could replace the coal price cap. Revenues could fund a range of electricity generators without focussing all support on coal.