Pricing in Indonesia's Electricity Power Services

Abstract

Indonesian electric power sector has been struggling to meet the increasing demand of electric power. With an average economic annual growth of 6% and growing population, Indonesia has been experiencing power crisis for around a decade. This paper focuses on one of the key problems that need to be addressed by adopting more market-friendly regulations in Indonesia's electricity sector: the tariff structure that is not economically sustainable. It argues that the existing electricity tariff structure fails to generate sufficient revenue to cover PLN's operational costs, not to mention for expansion and new investments. The move toward cheaper natural gases and coals as sources of power is not rapid enough to cater for growing demand, partly due to lack of investment financing. Therefore, PLN and the government need to change their tariff structure to represent the cost of operation. First, the government needs to reintroduce automatic tariff adjustment that ensures financial stability of PLN. Second, tariff structure should incorporate the difference between peak and off-peak time to discourage inefficient use of electricity power especially during high demand period. Third, it is necessary to limit subsidy only to specific few groups.