State power utility Perusahaan Listrik Negara has recently come under increasing financial pressure as energy prices soar, and the political climate is heating up ahead of the 2018 local elections and 2019 presidential election. As such, the government has imposed caps on the prices payable for coal to be used for power generation in the public interest. This new policy is incorporated in:
- Government Regulation 8/2018;
- Minister of Energy and Mineral Resources (MEMR) Regulation 19/2018; and
- MEMR Decree 1395 K/30/MEM/2018.
Government Regulation 8/2018 and MEMR Regulation 19/2018 provide the overarching legal basis for the setting of maximum prices for coal to be used for power generation in the public interest, while Decree 1395 K/30/MEM/2018 sets out the technical details of the new pricing policy. The decree was promulgated on March 9 2018 and has retroactive effect from January 1 2018.
Under Decree 1395 K/30/MEM/2018, the price of coal supplied for power generation in the public interest is set at $70 per metric ton free on-board vessel (Coal Price I), where the coal satisfies the following specifications:
- gross calorific value – 6,322 kilocalorie per kilogram;
- total moisture – 8%;
- total sulphur – 0.8%; and
- ash – 15%.
Where the coal's specifications differ from the above and the benchmark price for such coal is equal to or exceeds Coal Price I, the price payable will be calculated based on the formulae set out in Annex I to the decree (Coal Price II). If the benchmark price is lower than Coal Price I, the price will be calculated based on the formulae set out in Annex II to the decree (Coal Price III).
The price caps described above apply only to coal sales in 2018 and 2019, up to a maximum of 100 million metric tons per year.
The MEMR may also authorise an increase in the approved total production volume (up to a maximum of 10%) for miners holding a production operation coal mining licence (IUP OP), a production operation specific coal mining licence (IUPK OP) or a coal mining contract of work production – operation stage (CCOW OP), provided that the miner has met its obligations under the applicable regulations on minimum percentage coal sales to the domestic market and fully complies with the price caps under the decree.
The decree also sets out rules governing the calculation of production fees or royalties by the holders of an IUP OP, IUPK OP or CCOW OP. In the case of Coal Price I and Coal Price II, the amount payable is calculated by multiplying the applicable tariff formula for the calculation of production fees or royalties by the total sales volume and the sale price. In the case of Coal Price III, the amount payable in production fees or royalties is calculated by multiplying the applicable tariff formula by the total sales volume and the applicable Indonesian benchmark price.
The maximum price payable under Decree 1395 K/30/MEM/2018 is 30% less than the Indonesian benchmark price for equivalent coal sold for export in February 2018, which means that the country's coal producers will suffer a substantial cut to their profitability by selling coal for domestic power generation. Unsurprisingly, this shock was reflected on the Indonesia Stock Exchange, where the Mining Index slumped by 3.56% on March 7 2018, shortly after the government announced the new pricing policy. As the coal industry is dominated by locally owned companies and companies listed on the Indonesia Stock Exchange, there is likely to be significant lobbying by the coal industry to reduce or limit the decree's impact.