Patchy Power Challenges Indonesia Minerals Goal: Southeast Asia

May 07, 2014 2:32 am ET

May 7 (Bloomberg) -- The challenge of supplying power across an archipelago of more than 17,000 islands is complicating Indonesia’s goal of getting more out of its scattered mineral resources.

While almost 80 percent of Indonesia’s electricity capacity is in the islands of Java and Bali, the majority of its most abundant minerals such as bauxite and nickel are found in provinces including Sulawesi, Halmahera and Kalimantan. That’s testing PT Perusahaan Listrik Negara, the state utility, which received requests from 25 companies to supply new mineral- processing plants with power as of last month.

“The problem is smelters are often located in remote areas where power stations and infrastructure are lacking,” Jarman, the director general of electricity at the energy and mineral ministry, said in an interview in Jakarta.

Indonesia, the biggest producer of mined nickel, banned mineral ore exports in January to boost investment in the smelters and refineries needed to process raw materials locally into higher-value commodities. By 2030, the plants needed to turn the nation’s ore into metals will require additional power equivalent to 13 percent of current capacity, putting a strain on the electricity network in Southeast Asia’s largest economy.

The country had 49,630 megawatts of generation capacity as of March, government data show. More than 20 percent of the population was without electricity as of last year with Listrik Negara aiming to increase coverage to almost 98 percent by 2022, it said in its energy supply plan for 2013-2022.

Mineral Reserves

Sulawesi has more than 72 percent of Indonesia’s total mineable nickel reserves of almost 121 million metric tons, according to data on the Geology Agency’s website. The island of Halmahera in North Maluku province has about 28 percent. For bauxite, a raw material for aluminum, 92 percent of the 30 million tons of mineable reserves are in West Kalimantan and the rest is in Riau province.

“Investors want electricity in the mines, for example nickel mines in Halmahera island, but we don’t have the capacity needed there,” Nur Pamudji, the president director of Listrik Negara, said April 15 in Jakarta. Building smelters will be feasible in Java where power supply is abundant, he said.

Nickel prices have rallied 33 percent this year, the most among the six main metals traded on the London Metal Exchange, on concern Indonesia’s export ban will lead to a global shortfall. It has prompted buyers in Japan and China to scour the globe for alternative supply sources for the material used to make stainless steel. The metal was at $18,616 a ton today, heading for the highest close since February last year.

Private Supply

While companies may prefer to have processing facilities close to the mines, they can build the plants on islands where there is sufficient electricity, and ship the ore from further afield, according to Jarman.

“Smelters can be built in Java,” he said April 28. “The plants don’t have to be in remote areas. The important thing is minerals are being processed in the country.”

Processors can also build their own power stations or invite private utilities to supply electricity to them, he said.

State-owned PT Aneka Tambang has a plant with generating capacity of 150 megawatts to operate three ferro-nickel facilities in Sulawesi, Tato Miraza, Antam’s president director, said April 30. Brazil’s Vale SA, the world’s biggest iron ore producer, operates three hydropower plants to run its furnaces at a nickel facility on the same island, according to the company website.

Power Needs

Indonesia will need additional power generation capacity of 6.58 gigawatts by 2030 to run new smelters, Marzan Iskandar, the head of the Agency for the Assessment and Application of Technology, or BPPT, said on Dec. 16. There are 63 companies planning to build smelters by 2017 with 20 scheduled to be completed this year, according to data from the energy and mineral resources ministry.

“Building smelters near mines has challenges including limited electricity supply, poor infrastructure and a lack of workers,” Syahrir Abubakar, the Jakarta-based executive director of the Indonesia Mining Association, said May 2. “Listrik Negara is ready with supply only for East Java and South Sulawesi.”

Generation capacity is already trailing demand outside Java and Bali, according to the state utility. Power consumption in Kalimantan is increasing about 10 percent a year while capacity grows by about 1 percent annually. In Sumatra, demand is expanding by about 9.6 percent a year and generation by 5.2 percent, according to its estimates.

Road Network

Nationwide electricity consumption is forecast to increase by 8.4 percent a year to reach 386 terawatt hours in 2022, up from 189 terawatt hours in 2013, Listrik Negara’s electricity supply plan shows.

The country’s road network in remote areas is not good enough for the utility to install electricity infrastructure, according to Pamudji. “This is the problem with increasing the electrification ratio in an archipelago nation,” he said.

Indonesia needs to invest $125.2 billion, or $12.5 billion a year, to build electricity infrastructure over the next decade, according to Listrik Negara’s plan. The utility got 101 trillion rupiah ($8.8 billion) of electricity subsidies last year, according to the company’s earnings report. About 7 percent is for investment, Pamudji said.

“It’s not enough,” he said. “Listrik Negara needs to take sub-loans from the government or sell more bonds.”

About 80 percent of the 686 members of the Indonesian Association of Minerals Entrepreneurs have ceased operations since the export ban because they don’t have processing capacity, said Poltak Sitanggang, the chairman of the group. At least one manganese smelter in East Nusa Tenggara has sat idle since 2012 because of a lack of electricity supply, he said.

“Smelters that have been built will turn into junk,” he said in an April 29 interview.

--With assistance from Yudith Ho in Jakarta.