Source: GE, PwC report

Economic Benefits of Captive Power in Industrial Estates in Indonesia

BY :MUHAMAD AL AZHARI

NOVEMBER 22, 2016

Jakarta. 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.

Source: World Bank, Connecting East Asia: A New Framework for Infrastructure

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.

Source: MEMR, Masterplan on Indonesia Power Plant Development, PLN RUPTL

Meanwhile, the report also said at the same time, manufacturers are racing against time to take the advantage of Indonesia’s development, particularly outside Java.

With the rising middle-income class in the country, industries are moving towards more value added and manufacturing activities.

Furthermore, a planned infrastructure program is likely to support the development of industrial estates in traditionally undeveloped areas, especially if power, deep-water ports, natural gas and better road and rail infrastructure can be provided.

Captive power can be a solution to address some of the potential risks that manufacturers are facing.

How captive power can be a solution?

A captive power unit is a generator or power plant set up by a company to generate electricity primarily for its own use or for the use of its customers.

There are two types of units: The first type is a captive power plant, designed to service primary power needs. This is typically bigger than 1 megawatt and can run on fossil fuels such as gas, coal, oil or renewable sources of energy.

Captive power plants can be divided into two subcategories: those that are built to supply power to many companies, such as in industrial estates,  In Indonesia, these are referred to as Private Power Utilities.

Captive power plants that are built to supply power solely for the owner’s own use, such as for one factory.

The second type is a backup generator set, which is built for use in the event that other power sources fail and runs only when needed.

These range from smaller household units, 10 kilowatts, to larger industrial backup generator sets, up to 10 megawatts. These need to run on a fuel type which can provide electrical energy on demand, and thus are usually diesel-fired.

While the report suggested that reliable statistics are hard to find, a 2009 estimate placed the total captive power capacity in Indonesia at 16.8 gigawatts, of which 8.5 gigawatts was for primary use, and 7.8 gigawatts for backup power.

The report also highlighted that 49 percent of captive power capacity was in Java.

As noted previously, the timeframe of the 35-gigawatt plan is ambitious, and there are still many areas where captive power plants present a good opportunity, as the 35-gigawatt plan does not include meeting the power needs of those areas.

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