The Indonesian Coal Mining Association (APBI) has thrown its support behind a proposal from state electricity company PLN for a fixed coal-price mechanism in order to ensure the industry’s long-term sustainability amid volatility in global prices, The Jakarta Post reported Wednesday.
At present, PLN and various independent power producers (IPPs) operate coal-fired power plants with a total capacity of around 30,000 megawatts (MW), 55.6 percent of the national electricity generation.
As a result, coal accounts for 55 percent of PLN’s electricity supply costs (BPP), meaning that every increase in global coal prices is a problem for the company.
Therefore, PLN has proposed limiting coal prices by implementing a cost-based pricing policy, through which PLN will be able to buy coal under the domestic market obligation (DMO) based on the calculation of mining costs plus profit margin, while ignoring volatility in global prices.
“By using such a mechanism, it is going to be more predictable for all coal miners as it will provide stable profit margins in the long run,” APBI deputy executive director Hendra Sinadia said on Tuesday.
“However, miners won’t get so much when coal prices are high like today.”
Indonesia’s coal reference price (HBA) has averaged US$83.13 per ton since the start of this year, a 53.8 percent increase compared to the same period last year.
Nonetheless, Hendra said many coal miners preferred the certainty provided through the fixed-price mechanism.
“We proposed such a scheme to PLN when coal prices were in free-fall, but the company rejected it. Now when the prices are high, PLN is the one coming to us to propose it,” Hendra said.
Meanwhile, the APBI has proposed the use of an adjustment formula to determine the minimum coal price, which considers average long-term mining costs, acceptable margins and market-price fluctuation.
Based on the association’s calculation, long-term average mining costs can amount to around $30 per ton, while the acceptable fixed margins will stand at between 15 percent and 25 percent.
By implementing such a formula, Hendra said many investors would be more interested in investing in power plant projects and even in conducting exploration activities to enhance the country’s coal reserves in the long run.
Indonesia’s potential coal resources amount to 128.06 billion tons, with proven reserves of 28.46 billion tons by the end of 2016. Most of the reserves are located in Kalimantan and Sumatra.
The country produced 434 million tons of coal last year, surpassing the initial target of 419 million tons. Of the figure, 124 million tons were absorbed in the domestic market, while 310 million tons were shipped overseas. Meanwhile, according to PLN’s latest electricity procurement business plan (RUPTL), there will be an additional 31,900 MW of coal-fired power plants in the 2017-2026 period.
Hence, PLN has estimated that its coal consumption will soar to more than 150 million tons a year by 2020 from the current 86 million tons a year.
Subsequently, PLN plans to acquire at least one coal mine before the end of this year in order to preserve long-term affordable supplies for its coal-fired power plants. By doing so, the company will also be able to use the fixed-price mechanism with its own mines.
“The hike in global coal prices has cost us trillions of rupiah,” PLN president director Sofyan Basir said. “That’s why we need all the support to maintain the coal prices.”