Chinese Coal Investments Firing Up the Indonesian Economy
Photo Credit: Antara
By Tai Wei Lim

Chinese Coal Investments Firing Up the Indonesian Economy

Mar. 22, 2018  |     |  0 comments

China appears to find coal energy complementarity and synergy with Indonesia, building power plants there as well as buying its coal resources. Indonesia, an archipelago with vast resources spreading over 13,000 islands, is the cornerstone of Chinese President Xi Jinping’s Belt and Road Initiative (BRI). With Indonesia’s electricity shortages holding back economic development, China is keen to supply its technologies to help Indonesia cope better with the situation.


China is carrying out its coal investments through state-owned enterprises (SOE) and private initiatives. The SOE route is necessary given the scale of the engagement, including building some of the largest power plants in Indonesia. An advantage in working at the government-to-government (G2G) level is the economy of scale, with the Chinese forgoing any additional incentives from the Indonesian government for building the mega projects. Private sector initiatives are smaller and nimbler and can add a private sector contour to the BRI. They are more market sensitive and harness profitability as a priority in doing business.


From the Indonesian perspective: job creation, consistent access to electricity, economic development and industrialization, and the ability to power mineral extraction are major priorities for the government. Job creation has additional spin-offs in terms of generating tax revenue for the government, including the provincial governments. Indonesia wants to achieve middle-income country status and become a major economy in the world. As a disparate far-flung archipelago, the prospects of China building power plants in Indonesia to supply electricity to China is remote. Thus, Chinese importation of energy from Indonesia is still mainly in the form of fossil fuels. However, as Indonesia’s economy takes off, it requires energy resources for its own economic development. Thus, China’s role in supplying sophisticated coal-fired power plants will become increasingly more important than just buying coal from Indonesia.


In other words, the relationship will slowly morph from a consumer and supplier relationship to technological transfers using the turnkey format. The bilateral relationship in this sense is becoming more value-added and will gradually shift from being fossil fuel-dependent to a mutually-reinforcing one that will capitalize on the core strengths of both economies. There have been three phases involved in this process. Before 2015, the first phase had Chinese SOEs proposing and negotiating the sale of coal-fired power plants to the Indonesians. The second stage runs from 2016-20 when some of these Chinese-built coal-fired power plants become operational. And the third phase will commence from 2019 onwards when all the envisioned plants will be progressively completed in phases. By then, the bilateral relationship may once again alter and trend towards more value-added exchanges.


In 2013, Xia Zhong, the Vice President of China Power Investment Corporation, a Chinese SOE, and Indonesian Energy and Mineral Resources Minister Jero Wacik outlined USD 17 billion in investments in Indonesia to build its biggest power plants, including 7,000-megawatt hydropower plants in Kalimantan slated for completion in 2020 that will generate power from the Tayan River in North Kalimantan. China Power’s main products and services are centered in power generation, and it has a total electric power capacity of 80,074 MW, including a 6,000 MW hydropower plant in Myanmar that exports electricity to China. In 2016, work started on the first China-built coal-fired power plant in Bengkulu, the USD 360 million Tenaga Listrik Bengkulu, a joint venture between the Indonesian publicly-listed firm PT Intraco Penta and the Chinese SOE Power Construction Corporation of China (PowerChina), which is slated for completion in 2019. The project has a 25-year turnkey Build-Own-Operate-Transfer (BOOT) format that fits into Indonesian President Joko Widodo’s goal of adding 35,000 MW of power by 2021.

GCL’s president Zhu Gongshan said the lack of power supply in the regions has provided Chinese energy companies with an important opportunity to export technology, employment, and better energy mix abroad.

Bengkulu Governor Ridwan Mukti said that although Bengkulu had plentiful resources like coal, fishery, and agriculture, the power supply shortage has held back investments and fomented a high poverty rate, which parallels China’s economic reforms in the late 1970s where China discovered the importance of basic infrastructure as a necessary ingredient for economic development. Such parallel experiences were shared by Chinese private sector leaders: “According to Zhan Ke, president director of PT GCL Indo Tenaga, a joint venture between GCL and Indonesia Power, the population of Indonesia is three times that of eastern China’s Jiangsu province, yet the installed power-generation capacity is only 560,000 megawatts, half of that in Jiangsu province.”


Indonesian power utility Perusahaan Listrik Negara (PLN) revealed its project in western Sumatra can provide approximately 1.4 GWh of electricity to the Sumatra power grid and shave off 1.7 trillion rupiah (approximately USD 130 million) annually after it is up and running. 75 percent of the funding for the project is from the Industrial and Commercial Bank of China and the Export-Import Bank of China, while the remainder is from private equity of the project stakeholders.


Another project, the 200 MW (1.4 GWh) Kalbar-1 power station managed by Suzhou commercial enterprise Golden Concord Holdings Ltd (GCL) working with Indonesia Power (under the Indonesian power utility group PLN) started in 2016 in West Kalimantan and is slated for completion in 2020. This project is unique because it is a private sector initiative rather than a SOE-led consortium. In fact, GCL is the first commercial firm from China to ink a power-purchase deal with Indonesia.


This project is also important as the company is inserting it under the rubric of the BRI: “Noting the company’s most significant overseas investment along the Belt and Road Initiative, GCL’s president Zhu Gongshan said the lack of power supply in the regions has provided Chinese energy companies with an important opportunity to export technology, employment, and better energy mix abroad.”


West Kalimantan’s power industry at present is served by high quality diesel generators from non-Chinese sources and higher-cost imported equipment from Malaysia. Chinese sources quoting Indonesian government figures dated December 2016 argue that the archipelago is still lacking in power supply to its isolated regions, with 2,519 villages having no access to electricity.


In November 2017, Indonesian Energy and Mineral Resources Minister Ignasius Jonan inked a comprehensive deal with China’s National Energy Administration Director Nur Bekri to enhance collaboration in the field of energy at the 5th Indonesia-China Energy Forum in Jakarta and set up two working groups on oil, gas and coal plus renewable energy for electricity. Chinese firms have started 35,000 MW electricity provision to Indonesia through two engineering, procurement and construction (EPC) arrangements and an independent power producer (IPP) while Corporation of China Ltd. (Chinalco) has partnered with PT Aneka Tambang and PT Inalum to build a smelter in West Kalimantan in a deal that is worth at least USD 1.5-1.8 billion.


If these Chinese investments in Indonesia work well, they could demonstrate a new model of great power economic relations in the East Asian context between the world’s second largest economy and the world’s largest Muslim country. Due to the scale and complexities of the deals, obstacles are unavoidable, and it would be interesting to see how both countries navigate through the issues. These investments also lend credence to the argument that Chinese megaprojects in countries listed within its BRI have already started BRI-related projects even before the BRI is up and running. In other words, China may derive valuable experience from running these public infrastructure projects and then use them as references and applications for other BRI projects. Thus, the Chinese-built and/or Chinese-invested coal plants in Indonesia are valuable as showpieces for the overall BRI.

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