NEWS DETAIL

12 Mar 2018
Government Caps Prices of Coal for Power Generation

 

A. Introduction

 

With state power utility Perusahaan Listrik Negara (“PLN”) coming under increasing financial pressure as energy prices soar and the political temperature heating up ahead of local elections this year and a presidential election next year, the Government has opted to impose caps on the prices payable for coal to be used for power generation in the public interest. This new policy is incorporated in three newly issued regulations, namely, Government Regulation No.  8 of 2018 (GR 8/2018), Minister of Energy & Mineral Resources Regulation No. 19 of 2018, and Minister of Energy & Mineral Resources Decree No. 1395 K/30/MEN/2018 (“Decree No. 1395”).

 

Government Regulation No. 8 of 2018 and Minister of Energy & Mineral Resources Regulation No. 19 of 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 No. 1395 sets out the technical details of the new pricing policy. Decree No. 1395, which was promulgated on 9 March 2018, is of retroactive effect to 1 January 2018.

 

B. Decree No. 1395: Key Provisions

 

Under Decree 1395, the price of coal supplied for power generation in the public interest is set at USD 70 per metric ton Free on Board Vessel ("Coal Price I"), where the coal satisfies the following specifications:

 

  1. Calorific value: 6,322 kcal/kg GAR:
  2. Total Moisture: 8%;
  3. Total Sulphur: 0.8%; and
  4. Ash: 15%.

 

Should the coal’s specifications differ from the above, and the benchmark price for such coal be equal to or exceed Coal Price I, then the price payable will be calculated based on the formulae set out in Annex I to MEMR Decree 1395 ("Coal Price II"), while if the benchmark price is lower than the Fixed Coal Price, the price is to be calculated based on formulae set out in Annex II to Decree 1395 ("Coal Price III").

 

The price caps described above are only applicable to coal sales in 2018 and 2019, up to a maximum of 100 million metric tons per year.

 

The MEMR may also authorize an increase in production volume of up to a maximum of 10% over the approved total production volume for miners holding a Production Operation Coal Mining License (“IUP OP”), Production Operation Specific Coal Mining License (“IUPK OP”), or a Coal Mining Contract of Work – Production Operation Stage (“CCOW OP”), provided that the miner has abided by its obligations under the applicable regulations on minimum percentage coal sales to the domestic market, and fully complies with the price caps under Decree 1395.

 

Decree 1395 also sets out rules governing the calculation of production fees or royalties by the holders of IUP OP, IUPK OP and 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 selling price, while 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 (“HBA”).

 

C. ABNR Commentary

 

The maximum price payable under Decree 1395 is 30% below the HBA for equivalent coal sold for export in February 2018, meaning that the country’s coal producers will suffer a substantial cut to their profitability by selling coal for domestic power generation. Not surprisingly, this shock was reflected on the Indonesia Stock Exchange, where the Mining Index slumped by 3.56% on Wednesday, 7 March 2018, shortly after the new pricing policy was announced by the Government. As the coal industry is dominated by locally owned companies or companies listed on the Indonesia Stock Exchange, it is likely that there will be furious lobbying by the coal industry to reduce or limit the impact of Decree 1395. (By: Giffy Pardede: gpardede@abnrlaw.com & Rendi Prahara Septiawedi: rseptiawedi@abnrlaw.com)