Indonesia's power sector is very attractive, owing to its economic fundamentals and increasing electrification rates. The growing economy and rapid urbanization of Indonesia's population are the main reasons driving electricity demand in the country. According to Frost and Sullivan, the potential investment for power generation is expected to reach nearly US$33.5 billion by 2017. The capital expenditure required on transmission & distribution expansion is about US$11.1 billion. BMI forecasts power generation in Indonesia to grow by 7.9% over 2012. They expect thermal generation to grow by 8.1% from 2011, comprising mainly of 9.8% growth in coal generation. Non-hydropower generation is also set to grow by 10.8% by the end of 2012, as a number of geothermal and wind projects come online.
The power sector is attracting some foreign investors too. Malaysia's Genting unit has clinched a 25-year power purchase agreement (PPA) with PT PLN, Indonesia's state-owned electricity company, to develop a 660MW coal-fired power plant in Banten, West Java. Genting has an effective 95% stake in the project, with the balance 5% held by its local partner PT Hero Inti Pratama. The total cost of the project is estimated at US$ 1 billion. The plant is expected to commence operations from 2017.
Indonesia's parliament passed the land reform legislation, which enables the government to force through purchases of land for infrastructure projects. An Indonesia Infrastructure Guarantee Fund (IIGF) has also been created to act as a credible guarantee provider, protecting the interests of infrastructure investors. The first project by the IIGF is the Central Java IPP, which will be one of the largest coal-fired power plants in Asia with a capacity of 2,000 MW. A consortium comprising of J-Power, Itochu Corporation and Adaro Power won the bid for a 25-year contract to build, own, operate and transfer the new facility. The deal is worth an estimated US$3 billion and will improve access to electricity for 7.5 million people.
Around 10% of on-grid electricity capacity comes from renewable energy sources. The renewable power sector is also seeing significant investments. The International Finance Corporation (IFC) has agreed to buy an 11% stake in PT Medco Power Indonesia in a bid to help the independent power producer (IPP) achieve its growth plans. The investment is part of a US$112M equity investment in Medco Power by a consortium of financial firms. Medco operates natural gas-fired and hydroelectric power plants in Indonesia and is planning to complete five new power projects and take its total generating capacity to 390 MW.
Experts believe that construction of power plants, transmission and distribution lines in Indonesia may bring significant commercial opportunities to companies that supply engineering services and equipment such as turbines, substations, transmission, transformers and distribution equipment. Experts believe that the power sector has an astonishing future ahead and the growth will be propelled primarily by coal-fired generation and non-hydropower generation, as the government seeks to reduce the country's reliance on oil-based generation.
(Source: Insight Alpha)