With international coal sales prices rising, Indonesia’s Minister of Energy and Mineral Resources ("MEMR") has taken a step to try and control the supply of coal for domestic power producers.
The MEMR has enacted MEMR Decree No. 1395 K/30/MEM/2018 dated March 9, 2018 regarding Coal Sales Price for Power Generation for the Public Interest, as amended by MEMR Decree No. 1410 K/30/MEM/2018 dated March 12, 2018 ("MEMR 1395/2018, as amended").
Under this decree, the sales price of coal for domestic power producers is set at US$70 per metric ton on a FOB Vessel basis for coal with a standard specification of 6,322 kcal/kg GAR, 8% total moisture, 0.8% total sulfur and 15% ash. The sales price can be adjusted higher or lower according to different coal specifications, and MEMR 1395/2018, as amended, provides several formulas for such adjustments.
For coal sold above or according to the benchmark price, the royalty to be paid to the Indonesian government shall be calculated based on the actual sales price of the coal. If the coal is sold below the benchmark price, the royalty shall be paid based on the benchmark price instead of the actual sales price.
Domestic market obligation
While there is no sanction for failure to comply with the above benchmark price, the Indonesian government does provide an incentive for coal companies fulfilling their domestic market obligation ("DMO") and complying with the coal benchmark price under MEMR 1395, as amended. That incentive is a 10% increase in allowed annual production capacity, as approved by the MEMR or the relevant provincial governor.
Under MEMR Decree No. 23 K/30/MEM/2018 dated January 5, 2018 regarding Determination of Minimum Percentage for Coal Domestic Market Obligation for the Year 2018 ("MEMR 23/2018"), the Indonesian government set a DMO of 25% of total coal production in 2018 for coal mining companies. Failure to comply with the DMO requirement shall subject coal companies to sanctions in the form of a reduction in coal production capacity for 2019 and a reduction in export quota until the DMO is fulfilled.
Unlike previous DMO regulations, which specified the mining companies subject to the DMO requirement and the industries to receive the coal under the DMO, MEMR 23/2018 provides no such instructions. As such, the DMO requirement can be fulfilled not only by selling to domestic power producers at the predetermined price under MEMR 1395/2018, as amended, but also by selling coal to any domestic industry at any price.
It is hoped that the incentive of a 10% increase in allowed coal production capacity will entice coal mining companies to sell coal to domestic power producers at the benchmark price despite soaring international coal prices; especially considering that MEMR 1395/2018, as amended, only allocates 100 million metric tons per year for 2018 and 2019 to be sold to power producers at the benchmark price.