A Coal Geologists’ View of the New Energy Policy [Coal Asia Vol. 42]
A Coal Geologists’ View of the New Energy Policy
By Ian Wollff
The author is an expatriate principal geologist of about 28 years experience in the Indonesian exploration & mining industry, and is employed by an international consultant company.
Setting the scene
The Indonesian House of Representatives approved the draft Regulation of the National Energy Policy (NEP) on the 28th January 2014. There were some earnest debates, particularly from the PDIP members about the nature of the “benefit”, as shared between the state and private companies. The Parliament attendance reached a quorum of 312 out of 360.
On the 18 February 2014 the Commission VII appointed eight new members to the National Energy Board (NEB). Apparently it took some effort for 301 of the 560 members to be present for the approval process. The NEB members are now;
- Two (2) persons from academia are: Prof. Ir. Rinaldi Dalimi, M.Sc., Ph.D. ( electrical engineer) and Dr. Ir. Tumiran, M.Eng.(electrical engineer & information science)
- Two (2) people from the industry are: Ir. Abadi Purnomo Dipl. Geoth. En.Tech.(Geothermal engineer) , and Ir. Achdiat Atmawinata (Mechanical Engineer)
- Two (2) persons from consumers are: Ir. Dwi Hary Soeryadi, M.MT. (Asparindo-traditional market association) and Prof. Dr. Ir. Siregar Abduh
- One (1) person from the technology is: Dr. Ir. Andang Bachtiar, M.Sc.(Oil geologist – Chairman of IAGI).
- One (1) person from the Environment is: Sonny Keraf, Ph.D.(Philosophy – ex Minister of Environment).
Minister of Energy and Mineral Resources, Jero Wacik, will serve as executive director of the NEB. The Boards tenure is from 2014 to 2019.
The National Energy Board has the following duties: 1.Designing and formulating a National Energy Policy to be adopted by the government with the approval of the House of Representatives; 2. Establish General Plan of National Energy (RUEN); 3. Establish mitigation measures and Emergency Energy Crisis Conditions (Krisdaern), and 4. Oversee the implementation of policies in the energy sector across all sectors. Additionally, NEB is also responsible for managing the provisions regarding the type, amount, time, and location design of the energy buffer. The NEP shall set the policy to be achieved by 2050.
Unlike the ministerial implementing regulations that can be prepared one evening and applied the next morning, the NEP is a parliamentary approved regulation (Peraturan Pemerintah) that requires a more involved and timely process. It is understood that after Parliamentary approval the regulation was sent for further regulatory process, however the State Secretariat was concerned with some provisions and has sent it to the Ministry of Mines and Energy for comment or possible redrafting. If there are substantial variations it will be re-presented to Parliament or if no significant changes it may go the State Secretariat. The previous NEP of 2006 is declared invalid and the new policy comes into force on the date of enactment. However the implementing regulations of the Presidential Decree No. 5 of 2006 on NEP remain in effect as long as it is not in conflict with the new NEP.
In passing such policy we may consider;
- The low attendance for both the NEB and NEP passage through parliament may reflect the parliamentarian’s preference to prepare for the approaching elections, or the apparent mundane nature of this matter.
- That the NEB and NEB were approved only months before an election, and may be an effort to demonstrate an overall increase in performance of the parliament as a last minute effort to improve the politician’s track record for election imaging.
- That installing a new NEB and passing the NEP just before an election, that is sure to change the parliament, represents an overprinting of this parliament’s outlook on the next government. Surely it would be more appropriate to wait for a few more months so the incoming parliament can install the NEB and NEP to reflect the outlook of the concurrent parliament over its five year tender.
The following review of the NEP is based upon the draft regulation available from the web site www.hukumonline.com (PP_KEN_F 2014.PDF) and an informal English translation. The reader is advised to read the draft and final version when issued.
NEP interpretation from a coal exploration outlook
1. The purpose.
Article 2 defines the National Energy Policy (NEP), though Article 5 restates the policy in terms of its implementation as; “National energy policy is structured as a guideline to provide direction of national energy management in order to realize energy independence and energy security to support sustainable national development”. The first emphasis here is the policy is a guideline, and presumably all other government departments as well as industry and the people of Indonesia should consider this policy in their actions. The second emphasis is the importance of “development”, meaning the NEP should result in Indonesia moving forward, not just conserving the status quo.
2. Encourage Exploration and Resource definition.
Article 6a – “energy resources are not used as a mere commodity exports but as a national capital development”, and Article 9a (national energy objectives) – “Realization bare paradigm that energy source is the capital of national development”. It is clear that energy sources (coal, gas, oil etc) are indeed valid commodity exports. The term “capital” would appear to reflect the importance of Reserves & Resources, and thus the importance of ongoing exploration to expand and further quantify such Reserves and Resources in adding to national capital. This is somewhat different to the recent change in the mineral industry, where the export ban on raw ore has lead to the national capital of Reserves of bauxite, nickel etc to be downgraded to Resources, and thus the nation has lost significant mineral “capital”.
Article 10 (1)a (availability of energy) – “Improve resource exploration, potential and / or proven reserves of energy, both of the type of fossil and renewable energy and energy bare”. This is a clear directive to conduct more coal exploration, and to improve the definition of coal resources and reserves.
Article 10(1)e. (availability of energy) – “Achieving a balance between the rate of increase of fossil energy reserves with a maximum production rate”. We may consider that simply saving all the present coal reserves for the future is not enough, as such a plan will eventually consume all reserves, whether it is in 40 or 400 years. As coal is consumed we need to actively encourage more exploration and improve our ability to exploit the next generation of extraction technology. Introducing fees, land restrictions or other barriers to exploration and mining may be seen as not acting in the best interests of the NEP, whereas providing incentives for exploration and future mining would support the NEP.
3. Prioritize Exploration.
Article 10 (2). (Availability of energy) – “In order to realize the availability of energy to the national requirements …… if there is an overlap of land use in the provision of energy, then the precedence that has national security value and / or a higher strategic value.” The earlier regulations that prioritize land use for mining would appear to be reaffirmed here.
Article 11(1)d. (Priority of energy development) “energy development and energy resources are prioritized to meet domestic energy needs”. The Domestic Market Obligations are to be applied to all energy resources. This does not exclude coal export.
Article 11(1)e. (Priority of energy development) “industrial development with high energy needs prioritized in areas rich in energy resources.”High energy industrial needs are to be developed close to areas of the energy resources. This policy seems to suggest that factories should be built in Sumatra or East Kalimantan, rather than in Java. However this may not be in harmony with other present Spatial Planning policies.
Article 12 (2)d. “(priority principles) “using coal as the mainstay of the national energy supply.”A clear statement that coal is to be the main energy supply resource, and thus we can assume other policies and regulations should recognize this important priority of coal.
Article 19 (3) (Environment & Safety) “energy management activities including but not limited to exploration, production, transportation, transmission and utilization of energy required to consider the factors of health, safety, and social impact while maintaining environmental functions.” This appears consistent with present regulations that support the coal industry best practices.
4. Not to hinder exploration.
Article 7- “Source of energy and / or energy resources devoted to development capital for the maximum benefit of the people, by optimizing their use for national economic development, the creation of value added in the domestic and employment”. Here the term “maximum benefit of the people” must include the Indonesian people in the energy resource sector. Thus regulations that hinder exploration and mining for energy sources anywhere in Indonesia may be considered as in non compliance with the NEP. The Extractive Industries Transparency Initiative (EITI) program that examines the funds paid by the resource industry and received by the Government is herein encouraged. The EITI is also to verify that such Government funds are spent by the government on the people’s well fare. Thus EITI is a very important component of demonstrating the governments ongoing compliance with the NEP.
Article 9 (f)3 (mix of primary energy) – “The role of coal in 2025 at least 30 (thirty) percent, and by 2050 at least 25 (twenty five) percent.” We may consider that government policies or NGO activities may be seen as non compliance with the NEP should they reduce the capacity of the coal exploration and mining industry for not meeting such objectives.
Article 23 (2)b. (Strengthening Infrastructure). “develop supporting infrastructure includes the coal industry, transport, stockpiling and blending to create an efficient market and can supply domestic needs continuous.” Thus some regional government policies restrictions on new coal ports or use of public roads should be lifted.
Article 24 (2) g. (Strengthen industry) “provide greater opportunity for national companies in the management of oil, gas and coal.” Thus lifting the moratorium on applications for new coal IUP’s should be encouraged.
5. Diversification of coal.
Article 12(1)i. (Use of energy resources) “utilization of new energy sources in the form of liquid, namely coal and liquefied hydrogen, for transport”. This implies research into coal liquefaction and such is to be actively encouraged.
Article 18 (2)d. (Diversification) “increased use of low quality coal for steam power plant mine mouth, coal and coal liquefied and gasification.” Repeat of long term energy goals to use more low quality coal for mine mouth power plants etc. This does not define what low quality is. We may hope the implementation may be encouraged through subsidies, or perhaps through lower royalty or tax rate.
Article 18 (2)e. (Diversification) “increased use of medium and high quality coal for power generation in the country.”. This does not define what medium and high quality is. This seems to be a policy shift, where previous concept was to use low quality coal for domestic consumption, and to use high quality coal for export earnings. Perhaps PT. Bukit Asam Tbk may need to review its policy on exports of high quality coal.
6. Compensation and pricing.
The Article 1.34 (Definitions) “Fair economics is a value / cost reflects costs including environmental costs of energy production and energy conservation and sustainability costs are assessed based on the ability of the investment community.” However the appending explanation is slightly different “The definition of fair economic value is a value / cost reflects the cost of energy production, including the cost of environmental and conservation costs and benefits assessed by the ability of the community and established by the Government.” Apparently this term of “fair economic value” was hotly debated in the parliament, wherein we shall have to wait and see how the implementing regulations treat this important issue.
Article 19 (4) (Environment & Safety) “Each activity is the provision and utilization of energy required to implement the prevention, reduction, response and recovery effects, as well as fair compensation for the affected parties.”This appears to apply to the production of energy (not resources) and may open the door for a carbon tax, or to support more effort to improve the welfare of people living close to power plants etc.
Article 20 (3) (Price & fairness) “Realize that the coal market is regulated through domestic coal price setting by the government through the establishment of an efficient market.” We shall wait and see how the implementing regulation applies this policy. Perhaps this is reflected in the present policy for low quality coal for mine mouth power to be priced on a cost plus bases, and to use the Coal Price Index for other coal. The Mines Department’s recent review of the four international coal price indices on monthly spot coal prices may be an example of how to define an “efficient market”.
Article 20 (4) a. (Price & fairness). Electricity market….“setting the price of a certain primary energy (coal, gas, water and geothermal) for power generation”. Perhaps this will emphasize Independent Power Projects (IPP) need to resolve long term power price before construction – and include suitable variations related to the changes in coal getting costs etc.
7. Conservation of coal resources.
Article10 (1)d. (availability of energy) – “Reduce fossil energy exports gradually mainly gas and coal and set a deadline for the start stop exports”. This is a critical policy that is apparently deliberately vague, perhaps to allow politicians to appear nationalistic, but not responsible to explain further.
Article 17 (1). (Conservation and diversification). “Energy conservation is done both in the upstream and downstream, covering the management of energy resources, and all phases of exploration, production, transportation, distribution and utilization of energy and energy sources.” All commercial exploration, production and transportation of coal is largely undertaken in an efficient manner wherein such efficiency is in line with energy conservation. Perhaps the government can enhance energy efficiency by more readily allowing land allocation for direct overland haulage and the use of public roads for coal haulage. Perhaps the Central Kalimantan government’s plans to substitute rail for barging on the Upper Barito may not comply with this policy.
Article 17 (2) (Conservation and diversification) “Management …. is directed to ensure that the supply and utilization of energy resources while maintaining and improving the quality and diversity of the value of the energy resources.” This would appear to be support for the present coal mines and encouragement to develop new mines, particularly in diverse locations.
Article 17 (3). (Conservation and diversification). “Conservation of energy resources implemented with cross-sector approach, including adjustments to the national spatial planning and environmental capacity.” Perhaps this can mean that forestry exclusion zones should be revised to allow for coal mining, hydro electricity and such. It may also allow power lines to travel through forestry restriction areas to ensure less transmission losses etc.
Article 19 (1) (Environment & Safety) “national energy management is aligned with the direction of sustainable development, conservation of natural resources, conservation of energy resources, and environmental pollution control.” Best practices in coal mines is to back fill voids during mining, however to follow this policy and conserve natural resources it may be better to not back fill, thereby not sterilizing future options to deepen the open pit mines !
Overview
Much of the NEP recognizes the use of energy resources of gas and coal to deliver energy for the ongoing goals of Indonesia’s development. Indonesia has seen the nation’s oil and gas production dropping, and fears the same may happen with coal. This outlook of diminishing energy resources is the rationale behind the adoption of some of the policy aspects on energy resources. The NEP also recognizes that conservation by itself is not enough, and properly defining the nation’s current resources, plus further exploration and development technology are an essential component of Indonesia’s long term energy supply.
The NEP also recognizes the need to continue to export gas and coal as a significant part of Indonesia’s development. The continued export income contributes to the nation’s balance of payments and the well being of the people in so many mining districts.
The sudden cessation of nickel and bauxite ores sparked significant concern by some of Indonesia’s neighbors over their lost production capacity and employment etc. Indonesia stated it wanted such smelting factories to be developed in Indonesia, and for Indonesians to derive the additional benefit instead of, or in competition to, its neighbors. The NEP recognizes that gas and coal are not simply commodities like other minerals, but have a special place as energy resources. The option to cut off exports of gas and coal will have a much more profound impact on Indonesia’s ASEAN neighbors, from power black outs to lost industries, and may lead some ASEAN politicians towards a more rigorous rhetoric and confrontation with Indonesia, perhaps setting off broader trade embargo wars. Indonesia has outgrown its early nationalism development, and is a member of the wider world community.
Conclusion
We have see other reasonable regulations introduced by Parliament only to be significantly redirected through the implementing regulations, and we have seen the disharmony between competing ministries thwart good national policy. We hope the new incoming government will act responsibly towards the NEP and further encourage the coal exploration and coal mining industries