MINING TO ELECTRIFY

Indonesia 2018 | ENERGY & MINING | FOCUS: MINING REGULATION

Indonesia's overhaul of its mining legislation shows promising signs for coal and mineral mining sectors as well as Indonesia's broader electricity generation goals.

The government of Indonesia has a target to reach a 99.7% electrification rate by 2025, which means doubling its energy-generation capacity. Also by 2025, the government plans to diversify its energy generation mix, with 23% coming from renewable sources. While the government aims to increase the proportion of geothermal and other renewable sources in its energy matrix, the role of coal remains essential. In 2017, coal accounted for 49% of Indonesia's overall energy generation. This figure remains unchanged in energy matrix projections, meaning coal and its mining are no less important. In fact, the government is working to make investment in mining, especially coal mining, easier and boost production of coal and minerals.

In early 2017, the Ministry of Energy and Mineral Resources (MEMR) passed regulation No. 34 regarding licensing provisions for the coal and mining industry. It replaces the outdated 2009 regulations and became effective May 9, 2017. According to a KPMG overview of the new regulation, the new framework lays out six licenses in the mineral and coal mining sector and allows online submission of license applications to be processed within two days. It simplifies contract works for mining, dividing operations into two stages: exploration and production.
Other recent legislation includes MEMR regulation No. 11 passed in early 2018. Regulation No. 11 allows foreign investors to bid for large-area mining concessions, namely those with a total area exceeding 500ha. Smaller concessions will first be offered to regional-government-owned companies (BUMD) then national private companies. Large concessions are open to BUMD, state-owned enterprises, national private companies, and foreign companies.
The efforts to increase mining efforts are complemented by downstream investments and regulatory shifts to translate amplified mining capacity into more energy generation. These mining regulatory changes come amidst state-owned electricity company PLN's tendering of power purchase agreements (PPAs) for 12 coal-fired power plants. The plants will augment capacity with an additional 4,650MW of electricity set to come online between 2020 and 2024. Finalization of PPAs came on the heels of a ministerial decree to make Indonesia's power plants more competitive through tariff caps for electricity produced by coal-fired plants.
Amid the regulatory upheavals, though, those in the mining sector stressed the importance of continuity and stability in policy. Eddy Porwanto, CFO of Delta Dunia Makmur, shared his thoughts on the new regulations to secure supply for future coal-fired power plants in an exclusive interview with TBY. He noted, “What is important to us is the stability of the plan. That way we can plan out investment and requirement and daily, weekly, and monthly operations in the field.”
President and CEO of PT Vale Indonesia Nicolas Kanter also emphasized the importance of continuity in mining overall, not just coal mining. Kanter told TBY: “Mining is a long-term industry; therefore, we need consistency of the government and policy. The recent changes create some concern for us in the nickel segment. The government introduced the law and is generalizing minerals into one item.”
On a positive note for investors, the prices of mining commodities saw much improvement in 2016 compared to 2015, according to a PwC study on mining in Indonesia. Coal, in particular, experienced quite a boost. Coal mining companies contributed the most to Indonesia Stock Exchange's YoY growth from 2015 to 2016. Market capitalization of such stocks more than doubled from IDR90 trillion to IDR185 trillion during the same period. Other mining companies posted an overall 59% increase in market capitalization.
These positive signs for Indonesia's mining industry could well reverse the industry's declining contribution to GDP—mining industry's contribution to Indonesian GDP peaked at 6.14% in 2011 steadily falling to 4.23% in 2016—and help the country reach its electrification targets.