The proposed increase in electricity prices this year to help PLN cope with soaring fuel costs has been roundly condemned by both business and household consumers. In response to the widespread protests, the House of Representatives has demanded a special audit of PLN's power production costs before the government and lawmakers decide on whether prices will actually be increased.

Meanwhile, there have been suggestions that the hike could be avoided altogether by boosting efficiency at PLN, such as through increasing the use of cheap natural gas to drive its turbines.

Energy and Mineral Resources Minister Purnomo Yusgiantoro recently spoke with The Jakarta Post's Reiner Simanjuntak and Leony Aurora about the problems facing PLN. The following are excerpts of the interview:

Q: Many people say that the current situation is the result of unsound power planning. Why didn't we build more power plants other than those fired by oil-based fuels when we had the chance?

A: Those who levy such criticism should know that oil-based fuels were then cheap and other primary energy sources could not compete. Even though Indonesia probably has the largest geothermal reserves in the world, this energy was more expensive than the then-subsidized oil. Gas has in the past not been competitive as it follows market prices.

Global crude prices started going up only at the end of 2004, and then soared last year. We couldn't afford the increased subsidies necessary to keep prices down. Now, oil-based fuels are more expensive than gas. We'll need time, however, to switch to other energy sources.

The development of non-oil-based plants in Java is progressing well. Currently, 30 percent of power is generated from oil, but with an additional 2,660 megawatts coming onstream this year from coal- and gas-fired plants, the proportion is declining.

Outside Java is another matter, however. PLN has to build transmission networks funded by the treasury, which in reality has very limited funds at its disposal. There are no transmission networks in mountainous areas of Irian (Papua) and Sulawesi, for example, which means we are only able to establish stand-alone, small-scale power plants. It would be useless to construct big ones as the demand is simply not there.

Small-scale diesel-fired plants are good choices for such projects. We try to construct micro-hydro schemes where possible. The technology for building small-scale coal-fired plants, around 10 MW or 15 MW, has only been developed recently, and we hope to use this to replace the diesel-fired plants.

Q: PLN says that costs will fall in two years as the use of oil-based fuels for power generation declines significantly. Why doesn't the government treat the intervening period as an emergency and shoulder the likely burden? And will prices actually fall in 2008 as costs decline?

A: Costs also depend on the amount of investment that has been made. Java will be the island that sees the greatest impact of declining oil usage. But areas outside Java will still have to rely on stand-alone diesel-fired plants due to the lack of transmission and distribution networks. Our electrification ratio now stands at some 55 percent, which means there are 100 million Indonesians, mostly living in rural areas, who do not enjoy access to electricity. They need to get such access, which means that PLN has to invest, and these costs must eventually be incorporated into power prices.

Q: PLN says that one of the factors that makes it difficult to reduce the level of oil-based fuel usage is a lack of gas. How do you see this problem?

A: A gas supply to a power plant is not something that can be switched on in the blink of an eye. First, the buyer needs to find a gas producer and reserves, negotiate prices, sign a gas sales agreement (GSA), and then get the gas. It's a process that takes several years.

For example, we want to supply gas to a combined-cycle power plant, Tambak Lorok, which now has to burn oil. The gas can be provided from the Muria fields, operated by Shell. A pipeline will be built from Gresik to Cirebon. The question now concerns the GSA with PLN. Otherwise, how are we supposed to pay for this trillion rupiah project? Lenders need market guarantees to extend the sort of money we are talking about here.

There are, however, several constraints as regards supplying gas to the power sector. First, producers usually require a guarantee in the form of a stand-by letter of credit as they are aware that PLN's finances are not so good. Second, the price negotiations. Buyers want to get the gas cheaply, sellers want a good price. It's difficult to arrive at common ground, and thus the negotiations drag on.

Q: There are several power projects that have been put back from 2007 to 2008, again due to the unavailability of gas. How will the government ensure that PLN gets the gas it needs?

A: The main reason for these postponements is the delay in the development of the liquefied natural gas (LNG) terminal in West Java. PLN has yet to secure an LNG supply for the terminal. The government has earmarked 4 trillion cubic feet (tcf) of reserves to be contracted from the Tangguh LNG project for the domestic market, as current contracts already cover the project's cost. The gas won't be free, but it will be available for the domestic market.

However, the discussions between the two parties have yet to start. PLN can't just sit back and complain. The government has opened the doors, but PLN now has to talk to the gas producers to secure its supplies.

Q: How does the government economics team see the President's statement that power price increases should be kept to the minimum?

A: The President's instruction is clear and we must incorporate it into our decision. We are designing various scenarios to minimize the gap between PLN's needs, which stand at Rp 38 trillion (US$4.1 billion), and the subvention of Rp 17 trillion allocated in the state budget. We want the gap to be as small as possible, even zero, so that there will be no need for increases.

We are weighing up various factors, including PLN's finances, the purchasing power of consumers -- those that can afford it should pay more -- and the competitiveness of our industrial sector.

The key term in all these scenarios is production costs. We are waiting for the Supreme Audit Agency (BPK) to finish its cost audit. People say that PLN is inefficient; we will see from the BPK report what the truth is.