Strengthening of Rupiah Potentially Reduces Electricity Rates

JAKARTA – Minister of Energy and Mineral Resources (ESDM) Ignasius Jonan stressed that there would be no increase in electricity rates until the end of 2019. The assertion remained consistent with the policies of the Joko Widodo Government delivered at the beginning of 2017.
Fahmy Radhi, an observer of Energy and Mining Economics at the University of Gadjah Mada, said at that time, the consideration was not because it was almost the same as the political year, but rather to ease the burden of the people, whose purchasing power was low and keep inflation at around three percent per year. The policy is not to increase electricity rates until the end of 2019, according to Fahmy, causing electricity supply costs (BPP) to be higher than the electricity tariff set in 2017-2019.

Consequently, said Fahmy, the Government must allocate a number of funds for compensation of Rp. 7.45 trillion and subsidies of Rp. 15.72 trillion, which are charged to the current state budget. To reduce the burden on the state budget for the 2020 period, the government will adjust electricity tariffs through the application of automatic adjustment for 12 electricity customer groups.

Fahmy said automatic adjustment is a mechanism for automatically adjusting electricity tariffs, which are used by the State Electricity Company (PLN) in determining the increase or decrease in electricity tariffs. The basis used in is the BPP determinant variable, consisting of Indonesian Crude Price (ICP), inflation, and the rupiah exchange rate against the US dollar (US), as well as primary energy prices.

“Adjustment of the automatic electricity tariff based on the determinant variables can cause electricity tariffs to rise, but electricity rates can also decrease compared to the previous electricity tariff, depending on the size of the determinant variable,” he said in a press release.

Fahmy said that looking at the BPP electricity at this time it seems that the magnitude of all the determinants will reduce the amount of the electricity BPP. The rupiah middle rate against the dollar (US) during July 2019 tends to strengthen reaching an average of Rp. 14.148 per one US dollar stronger than the assumption of the 2019 State Budget and the PLN RKAP set at Rp. 15 thousand per one US dollar.

According to him, ICP also tends to fall in the range of 61 US dollars per barrel, lower than the ICP assumption price in the APBN set at 70 US dollars per barrel. July inflation is also predicted to be low at only 0.12 percent per month, or around 3.12 percent YOY during 2019. In addition to these three indicators, primary energy costs that determine electricity HPP tend to be constant, even some primary energy prices decline.

Based on Minister of Energy and Mineral Resources Decree No. 1395K / 30 / MEM / 2018 which stipulates the Domestic Market Obligation (DMO), the price of coal sold to PLN is set at 70 dollars per ton, which is imposed as of March 12, 2018 until now. With the DMO Coal price, the BPP load can indeed be reduced.

The price of gas, which is another primary energy, said Fahmy, is set at eight percent from the mouth of the gas well or a maximum of 14.5 percent in the power plant gate plant, so the price is lower. “Efficiency carried out by PLN, such as network losses and financial operations, has also reduced electricity HPP during 2019,” he said.

Based on the downward trend in ICP, the strengthening of the rupiah exchange rate against the US dollar, and inflation stability, the decline in primary energy prices, mainly coal and gas prices, and the efficiency carried out by PLN so far, the electricity BPP should experience a significant decline. Fahmy said that with the decrease in the electricity BPP, the determination of tariffs using automatic adjustment would have lowered electricity rates by 2020.

According to Fahmy, the drop in electricity rates in 2020 will provide various benefits for consumers and the Indonesian economy. The burden of consumer spending will decrease, so that it can increase people’s purchasing power, which has the potential to increase Indonesia’s economic growth.

“The reduction in electricity tariffs will further reduce the inflation rate, which can reduce prices of basic necessities. For industrial consumers, the reduction in electricity tariffs will reduce the cost of selling products and services, thereby increasing the competitiveness of products and services in the domestic market and market export, “he said.

The reduction in tariffs based on a decrease in the electricity BPP will not be detrimental to PLN, even PLN will still obtain a margin from the sale of electricity which the electricity tariff is set above the electricity cellphone. According to Fahmy with the various benefits and PLN still obtaining a margin, the electricity tariff must be lowered in early 2020.

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