Powering Asia's sleeping giant

By Lucy Williamson, BBC News, Jakarta 

South East Asia's largest economy is facing a big problem - how much longer can the state electricity company meet the country's growing demand for power? 

In February, the islands of Java and Bali - Indonesia's economic powerhouses - both suffered blackouts. 

The immediate cause, officials said, was bad weather, which meant coal supplies were stuck in ports. But the stoppages highlighted the national grid's inability to keep the lights on, even in the capital, in the face of any kind of hiccup. 

Indonesia's economy is growing at about 6.3% a year. Its demand for electricity is growing even faster. To cope with this, analysts say, the state electricity company PLN needs to add 1500-2000MW a year to its capacity - and it is currently falling far short. 

Fabby Tumiwa, of the Institute for Essential Services Reform, says the situation right now is stable as long as PLN maintains its operations reliably. 

"[But] if you look towards the horizon, you'll see more crises appearing," he says. 

"Even this year or next year, if PLN fails to optimise its maintenance and operations, there's a big possibility of power shortages in Java and Bali." 

Government guarantees? 

According to analysts, maintenance of the state electricity network is not good. 

Many power stations are running at 75% capacity - just under half the country is still without power, and there is already very little room to cope with extra demand from the half that is. 

PLN's spokesman, Ario Subijoko, says the company is struggling against financial constraints. 

"The cost of primary energy sources has increased time and time again, and the state budget gave us less subsidy than we needed, so we've had to lower the output." 

The country's energy minister does not dispute the rate at which demand is growing, or the need to build capacity to meet it. But he says the situation is not serious. 

"There is now a 30% reserve in Java and Bali," he explains. "We lease generators during a crisis, and we have a long-term plan to build 5000MW every year to meet the growth in demand." 

He says Indonesia is in the process of building plants that will produce another 10,000 MW. 

Private companies are meant to be building 10,000 more – which will almost double the country's current capacity. They are due for completion in 2009. 

But these plans have been on the table since the financial crisis hit here in 1997, and having been renegotiated in the years that followed, they're now falling behind schedule again. 

Part of the reason for the delay is that investors have been asking for government guarantees in case their investment goes sour. 

And that really goes to the heart of the problem. 

Indonesia's power sector is in many ways an unattractive one for investors. 

It is inefficient and unprofitable. Prices for the consumer are heavily subsidised by the government; subsidies which make up half PLN's revenue. 

Political risk 

James Booker is a coal-buyer for independent energy company Paiton Energy. He says Indonesia's electricity sector is far more financially challenged than its counterparts elsewhere in Asia. 

And tight purse strings do not help build a strong supply of fuel. 

In today's energy marketplace, where a ton of coal can fetch more than $75 (£37) on the global market, PLN is paying only about $35-40. 

And that is a problem, when high oil prices mean higher mining and transportation costs for producers. 

The solution, according to James Booker and others, is to do away with huge government subsidies on electricity and make the consumer pay the market rate for switching on a light, watching TV or powering a factory. 

This would free up some $650m from the government coffers to invest in renovating the national grid, making it more efficient, a better investment, and better able to pay coal and gas producers a competitive price. 

But doing away with subsidies is a politically risky move. A straw poll on the streets of Jakarta suggested that about 90% of people would not vote for a party that put up the price of power - and national elections are due next year. 

A similar scheme in 2006 that raised the price of oil by more than 100% caused widespread protests. 

So for now, Indonesia's growing economy is likely to keep putting pressure on a crumbling power system. But what effect does a crumbling power system have on the economy? 

Most major companies have their own power supply to turn to in emergencies. But even if business does not stop, the unpredictability and expense weigh against the benefits of investing or expanding here. 

James Castle has been working as a consultant to businesses in Indonesia for 30 years. He believes power insecurity is a "huge drag on the economy" and a significant obstacle to economic growth. 

"It affects not only investment decisions," he says. "It also raises operating costs, impedes the efficient operation of manufacturing businesses and causes excessive consumption of expensive, less environmentally friendly diesel." 

He estimates that an efficient power sector could probably add 0.5% to 1.0% to annual GDP growth. 

PLN's spokesman Ario Subijoko does not dispute that the country's electricity problems are holding up growth. 

"I think it's a logical consequence - energy affects economic growth," he says. 

"We'll try to speed things up but if the situation is difficult, there's not much we can do. If we were one of the rich countries it might not be a problem, but Indonesia?"