Economic Benefits of Captive Power in Industrial Estates in Indonesia

Economic Benefits of Captive Power in Industrial Estates in Indonesia

Industry players and the government agree that power supply is often a
bottleneck for the development of industrial estates.

Industrial estates, play an important role as one of the key drivers of
economic growth, typically refers to designated areas established
specifically to harbor industrial activities.

Industrial estates provide a focal point for investment in the manufacturing
sector and help integrate supply chains across industries, helping producers
run facilities at economies of scale.

Realizing the importance of reliable power supply for industrial estates,
PricewaterhouseCoopers, or PwC Indonesia was tasked by General Electric
Indonesia to issue a report that explores the benefits of captive power to
the private sector and provide a solution to address power issues, including
blackouts, for tenants within industrial estates. Captive power is defined
as a power supply that is generated by a firm for its own use.

The report, titled "Private Power Utilities: the Economic Benefits of
Captive Power in Industrial Estates in Indonesia," explained the benefits
that captive power can bring to Indonesia, not only to the private sector
but also to the government and Perusahaan Listrik Negara or PLN, were
explored.

"The government of Indonesia has mandated that manufacturing industry
companies are located inside industrial estates and that tenants' basic
needs must be met, for example, water and electricity," Sanny Iskandar, the
chairman of the Indonesian Industrial Estates Association, or HKI, said in
the report foreword.

"Expanding manufacturing activities in industrial estates will be critical
to Indonesia's competitiveness, industrial development and the creation of
well-paying jobs. But, the lack of reliable and universally available power
represents an obstacle to achieving this expansion," he said.

The study by GE and PwC reveals that blackouts as well as brownouts
reduction on the availability of electrical power in a particular area,
damage manufacturing businesses in Indonesia, and may account for at $415
million of business costs annually in key manufacturing sectors.

"For this reason, potential tenants are increasingly evaluating industrial
estates based on their power supply, and a reliable power supply helps
attract tenants," Sanny said.

"Tenants whose activities are particularly power-sensitive require a higher
level of service quality than is standard today. GE and PwC have researched
different ways to develop power projects to meet these needs, and we are
open to any development structures and parties who can fulfil these needs,"
he said.

Catalyst for industry

Minister of Industry Saleh Husin said in the report foreword that a key
policy direction from Industry Ministry's Main Masterplan on National
Industry Development 2015-2035, better known as RIPIN, supports the
development of industrial estates, special economic zone as well as overall
development of the industrial sector.

He said that the plan targets to add 9,000 new large and medium industrial
firms, with half outside Java as well as 20,000 small industrial firms.

"To achieve this growth, abundant and reliable electrical power is
necessary," the minister said.

He explained that even though in past decades, Indonesia has reduced its
shortfall in electricity supply through large investments in power, the
country needs an additional 70.5 gigawatts of additional generating capacity
from 2015-2024.

"As a large investment is required to meet this need, the Indonesian
government has already invited the private sector to participate by
[encouraging] independent power producers to sell to PLN," Saleh said.

"There is also another way in which the private sector could participate to
meet the nation's industry growing needs for power: captive power producers
can sell power to industrial players," he said.

The minister acknowledged that the report highlights how the private sector,
PLN, as well as the government "can benefit by working together to identify
and develop key opportunities for electrical power investment in industrial
estates and special economic zones, with the ultimate objective to drive
economic activity across Indonesia."

Saleh said that he hopes that captive power will prove to be a catalyst for
Indonesia's industry.

"I believe that the use of captive power will help to make this policy a
success and because of that I am glad to have been associated with this
report and welcome what it has to say," he said.

Why captive power?

Captive power can free up limited resources and help to develop industrial
areas, especially in areas where it is both challenging and costly to
connect to the grid.

The government and PLN have made great strides in progressing the
35-gigawatt program. However, investment still lags demand growth. The World
Bank argues in a report, titled "Connecting East Asia: A New Framework for
Infrastructure" that such underinvestment in infrastructure, risks creating
a vicious cycle which could depress growth, revenue and taxes.

The use of industrial captive power can change this vicious cycle into a
virtuous circle, and provide benefits for each stakeholder tenants benefit
from a more reliable power supply; industrial estate, power plant developers
and codevelopers benefit from diversified, stable and sustainable sources of
income; PLN benefits from avoiding grid overload at key locations, and could
also participate in deals to generate incremental revenue such as bulk
buy-back contracts with a margin; and the government benefits from
attracting investment to industrial estates and strategic economic zones and
having flexibility and options in the case of delays to the 35-gigawatt
plan.

The report noted that should the 35-gigawatt plan run smoothly to increase
capacity and reduce the frequency of power interruptions, and even if the
programs are implemented on schedule, there may not be sufficient capacity
to service some industrial estates.

Furthermore, it also noted some potential shortfalls, for example, if the
35-gigawatt plan is delayed by two years, then PLN's existing power grids
will be under extreme stress.

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Link to Original Article:
http://jakartaglobe.id/press-release/economic-benefits-of-captive-power-in-i
ndustrial-estates-in-indonesia/

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John Diecker
APT Consulting Group Co., Ltd.

www.aptthailand.com