The Indonesian government has introduced a new pricing formula for domestic thermal coal to ensure sufficient supply for about 20,000 MW that is planned to be added to the country’s generating capacity by 2020.
The formula, announced by the Ministry of Energy and Mineral Resources, is intended to encourage coal miners to stay in business in the face of continuing low international prices, which last year led to a fall in the country’s output.
Coal production in 2015 shrank by 14.4% to 392 million tonnes from 458 million tonnes in 2014, the ministry said earlier this year. The drop was caused by some companies either cutting back output or closing mines to reduce losses.
Meanwhile, domestic coal consumption last year grew almost 15% to 87.5 million tonnes owing primarily to higher electricity demand and production, the ministry said.
The new guaranteed pricing formula, which at this stage will be only for domestically consumed coal bought on fixed-term contracts by mine-mouth power plants, guarantees a profit margin for producers of between 15% and 25% after production costs, the ministry said.
The rate was agreed in talks between state-owned electricity company PLN, the Indonesian Coal Mining Association and independent power producers, the Jakarta Post said.
It follows a study published earlier this year by the mining association and PwC which said at current international commercial prices only 7-8 billion tonnes of Indonesia’s 32 billion tonnes of reserves would be economically recoverable.
The study said the economically viable reserves would be exhausted by 2033, the Post reported.
Coal is designed to be the main fuel in the government’s programme to add 35,000 MW of new capacity across the country by 2020, supplying about 20,000 MW of the total, previous reports said.
An unspecified percentage of this new capacity will come from mine-head power plants now being planned by coal-mining companies seeking to diversify in order to remain profitable.
Indonesia’s economy is one of the fastest expanding in East Asia. However, 25% of the country’s 250 million people remain off-grid and President Joko Widodo has pledged to connect the entire country by 2024.