Coal price

Construction of power infrastructure — chiefly coal-fired power plants — will remain the primary driver of growth in Indonesia’s energy and utilities sector for the near future, said Fitch Solutions Macro Research in a Jan 16 report. However, there are risks that power projects may be postponed due to the country’s widening current account deficit and a weakening rupiah, which would then cause a drag on growth.

Power infrastructure’s continued dominance

The power sector accounts for over 85 per cent of the total value of all energy and utilities projects, with a total project value of US$64.1 billion, according to Fitch Solutions’ key projects database. State-owned Perusahaan Listrik Negara is involved in the majority of projects that are in the pre-construction and construction phases, and Fitch Solutions expects the government’s investment in energy projects to grow, expanding electricity capacity to keep pace with rapid economic growth.

Fitch Solutions forecasts real growth of 4.6 per cent for the power infrastructure sector in 2019, to average 5 per cent annually between 2019 and 2027. The sector is expected to be the main pillar supporting growth of the overall energy and utilities sector, ahead of the water and pipeline infrastructure sub-sectors.

Given Indonesia’s established coal industry and substantial coal reserves, coal is likely to be “the cost-competitive fuel of choice for electricity generation over the next decade”, expected to account for 53 per cent of generation in 2028, up from 49 per cent in 2018. Coal-fired power plant projects currently in the pre-construction and construction phases are valued at US$28 billion.

Macroeconomic headwinds

However, power infrastructure construction does face the risk of postponed projects amid macroeconomic pressure. In September 2018, in a bid to lower the current account deficit by reducing imported construction materials, the government announced plans to postpone 15,200 megawatts’ (MW) worth of projects — though further action has yet to be taken. The projects are part of Prime Minister Joko Widodo’s flagship 35,000MW electricity procurement plan.

In 2018, a weakening rupiah increased construction costs and widened the current account deficit. Said Fitch Solutions: “We note that a further depreciation of the rupiah may trigger an actual postponement of key power projects that will consequently slow down growth of the power infrastructure sector.”

Water infrastructure growth to stay steady

In the smaller water infrastructure sub-sector, Fitch Solutions expects moderate growth as Indonesia continues to work toward improving rural access to clean water, while building water treatment facilities and upgrading urban sewerage systems. Their database shows 53 projects worth US$4.5 billion currently under planning and construction.

One key project in the water project pipeline is the massive US$652 million Jakarta Sewerage System (Zone 6), accounting for 14 per cent of the total value of water infrastructure projects. Though the project has suffered numerous delays over the years, authorities are negotiating with Japan International Cooperation Agency over a US$280 million loan that will potentially solve financing issues, noted Fitch Solutions.

Fitch Solutions is maintaining its water infrastructure sector growth forecast of 4.2 per cent in 2019, with average annual growth of 4.8 per cent from 2019 to 2027, but will revise this once the Jakarta Sewerage System (Zone 6) project moves into the construction phase.

Source: Asean Business