Coal Mining Policies in Indonesia: Coal Price Cap to Be Removed?

Through Energy and Mineral Resource Ministry Regulation No. 19/2018 on the Procedures for Determining Benchmark Prices of Metal and Coal Sales as well as through Energy and Mineral Resource Ministry Regulation No. 1395 K/30/MEM/2018 on the Selling Price of Coal for the Electricity Supply for the Public Interest the Indonesian government had imposed a new set of rules in the coal mining sector, specifically regarding coal that is sold domestically under the DMO.

Under the DMO program, the Indonesian government forces local coal miners to supply 25 percent of their coal output to the domestic market, specifically to coal-fired power plants (PLN being the biggest domestic buyer), as there exist a need for an increase in Indonesia's electricity supply.

One important and controversial new regulation was the price cap on coal that is sold under the DMO. The price cap, which differs per coal type (see table below), ranges between USD $37 - USD $70 per metric ton. The aim of this cap is to provide cheap coal to Indonesian power plant operators. PLN had been complaining that the rapidly rising coal price (currently above USD $100 per metric ton) severely burdens the company's corporate earnings. After all, subsidized electricity rates in Indonesia cannot be adjusted in times of high coal prices because they are set by the central government.

Price Cap Mechanism Under DMO Scheme:

Coal Type (kcal/kg GAR)	Price Cap (USD/ton)	Coal Consumed by PLN (% of PLN's total demand)
>6,000	70	0.8
4,500 - 6,000	43	63.1
<4,500	37	36.1

^{Source: Bisnis Indonesia}

While the price cap is positive for Indonesian power plants, local coal miners are very unhappy about the cap. After several years of low coal prices (which manage to kill plenty of smaller Indonesian coal miners), they finally saw their revenue and profit rising on the back of the strengthening coal price. However, under the DMO scheme they are forced to sell 25 percent of their coal output at home at rather uncompetitive prices, thus limiting their revenue and income.

Arcandra Tahar, Deputy Minister at Indonesia's Energy and Mineral Resources Ministry, stated on Friday (27/07) that the Energy ministry would seek a new formula for the coal price in the DMO program, implying the existing price cap would be scrapped. Main reason being that state revenue is negatively affected by the price cap as the selling price of coal (sold under the DMO) is lower than the market price.

It is expected that the government will introduce a new levy on coal in a bid to generate fresh funds that will be used to subsidize PLN (to cover part of the costs of electricity generation). This levy would be very similar to the palm oil export levies that were introduced by the Indonesian government in mid-2015. Back then the government imposed a USD $50 per metric ton levy on crude palm oil (CPO) exports, and a USD $30 per metric ton levy on exports of processed palm oil products. Proceeds from these levies are (partly) used to finance the government's ambitious biodiesel subsidy program.

Tahar said it is likely that a USD $2 - $3 per metric ton levy will be imposed on coal. He added that it would generate up to USD $1.6 billion per year in new funds, which is more than enough to cover for PLN's electricity subsidies. Contrary to the palm oil levies (which apply to exports), in the case of coal each ton of production is planned to be levied. Tahar added that the new formula would give a boost to state income from non-tax mining revenue and the government's foreign exchange reserves.

Hendra Sinadia, Deputy Executive Director of the Indonesian Coal Mining Association (APBI), is positive about the revision and added that his institution had already proposed such concept.

Indonesian Government's Benchmark Thermal Coal Price (HBA):

Month	2017	2018
January	86.23↓	95.54↑
February	83.32↓	100.69↑
March	81.90↓	101.86↑
April	82.51↑	94.75↓
May	83.81↑	89.53↓
June	75.46↓	96.61↑
July	78.95↑	104.65↑
August	83.97↑
September	92.03↑
October	93.99↑
November	94.84↑
December	94.04↓
Average	85.9↑

 

Month	2012	2013	2014	2015	2016
January	109.29	87.55	81.90	63.84	53.20
February	111.58	88.35	80.44	62.92	50.92
March	112.87	90.09	77.01	67.76	51.62
April	105.61	88.56	74.81	64.48	52.32
May	102.12	85.33	73.60	61.08	51.20
June	96.65	84.87	73.64	59.59	51.87
July	87.56	81.69	72.45	59.16	53.00
August	84.65	76.70	70.29	59.14	58.37
September	86.21	76.89	69.69	58.21	63.93
October	86.04	76.61	67.26	57.39	69.07
November	81.44	78.13	65.70	54.43	84.89
December	81.75	80.31	69.23	53.51	101.69
Average	95.5	82.9	72.6	60.1	61.8

^{in USD/ton
Source: Ministry of Energy and Mineral Resources}

Indonesian Production, Export, Consumption & Price of Coal:

	2014	2015	2016	2017	2018	2019
Production (in million ton)	458	461	456	461	485¹	400¹
Export (in million ton)	382	375	365	364	311¹	160¹
Domestic (in million ton)	76	76	91	97	121¹	240¹
Price (HBA) (in USD/ton)	72.6	60.1	61.8	85.9	-	-

 

	2008	2009	2010	2011	2012	2013
Production (in million ton)	240	254	275	353	412	474
Export (in million ton)	191	198	210	287	345	402
Domestic (in million ton)	49	56	65	66	67	72
Price (HBA) (in USD/ton)	n.a	70.7	91.7	118.4	95.5	82.9

^{¹ government target
Sources: Indonesian Coal Mining Association (APBI) & Ministry of Energy and Mineral Resources}

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