Indonesia: Sustainable Energy Access in Eastern Indonesia-Electricity Grid Development Program

Energy / Electricity transmission and distribution

The proposed $600 million result-based loan (RBL) program aims to support the development of electricity distribution networks to connect businesses and households and to enhance the quality of life in Eastern Indonesia by the sustainable use of electricity as a key driver of increased economic activity. The program will complement a proposed sector loan for small- to mid-sized natural gas-fired power stations to deliver more sustainable energy services to communities across Eastern Indonesia. Natural gas is a much cleaner fuel compared to diesel and the quick-responding nature of gas-fired engines and turbines make them a good match for intermittent renewable energy sources such as solar and wind. It is an appropriate transition fuel to move towards a low-carbon energy system. The two loans will help enhance access to sustainable energy services and contribute to climate change mitigation.

The overall investment needs for the government's generation, transmission, and distribution program are $83.5 billion of which $43.5 billion is to come from the private sector (independent power producers) and the balance of $40 billion from the State Electricity Corporation (Perusahaan Listrik Negara or PLN). The government and PLN will not be able to meet the investment needs on their own. PLN has an estimated funding gap of $30.3 billion which will have to be borne by other financing sources including from development partners. In Eastern Indonesia where there are many isolated grids, PLN is already using its own resources to establish 70 kilovolt (kV) and 150 kV backbone transmission systems while seeking support from ADB and other partners to strengthen and expand local distribution networks.

A results-based lending modality will be used for this proposed operation. This will finance a slice of the overall broader program needs as identified in PLN's Electric Power Supply Business Plan (Rencana Usaha Penyediaan Tenaga Listrik or RUPTL) 2015 -2024 for grid development in Eastern Indonesia. 8. A results-based lending modality will be used for this proposed operation for strengthening and developing the electricity distribution network, which involves many small-scale activities and expenditures. This will finance a slice of the overall broader program needs as identified in PLN's RUPTL, 2016 2025 for grid development in Eastern Indonesia. The RBL is a suitable modality for the program as: (i) it allows PLN to use its own program systems, thus providing a platform for institutional strengthening; (ii) it focuses attention on results rather than expenditures, leading to a stronger evaluation culture and in line with the government's intent to move towards performance-based regulation; (iii) it is well-aligned to a broader nationwide PLN program and is, therefore, able to scale up innovations from the RBL program; (iv) it has lower transaction costs associated with program implementation; and (v) it could stimulate cofinancing and donor harmonization with other development partners through a focus on common results. This operation is part of an overall programmatic approach and is embedded within a policy reform framework that is supported by the Sustainable and Inclusive Energy Program policy-based loan and complements the ongoing RBL for grid strengthening in Sumatra. This RBL is included in the Country Operations Business Plan, 2015- 2017 and is integral to the Country Partnership Strategy's goal of closing the energy divide between Western and Eastern Indonesia.

The Indonesian economy is at a major crossroads. Economic growth has decelerated from its peak of 6.4% in 2010 to 4.8% in 2015 mainly due to the drop in commodity prices. Eastern Indonesia has an enormous potential to spur new sources of inclusive growth, in sectors such as fisheries, agro-industry and tourism, but this potential is held back by a lack of key infrastructure including electricity, ports, roads, and communications. Uneven development across provinces has also contributed towards widening regional income disparities with several provinces in Eastern Indonesia significantly lagging behind Java and Bali. To address this, the government has made it a priority to significantly boost and accelerate investment in infrastructure under the current National Medium-Term Development Plan (Rencana Pembangunan Jangka Menengah Nasional, or RPJMN), 2015- 2019 with _outer_ and Eastern regions explicitly included as geographical priorities.

One of the pillars of the government's infrastructure investment plan is to significantly improve access to electricity services, including a nation-wide target of adding 35 gigawatts of new power generation capacity and expand power grids to raise the electrification ratio to 97% by the end of 2019 from a baseline of 84% in 2014. The biggest challenge in meeting these targets is in Eastern Indonesia where power grids across the islands are isolated, of poor quality and underdeveloped. The electrification ratios in some eastern provinces are particularly low West Sulawesi 74%, Southeast Sulawesi 67%, West Nusa Tenggara (Nusa Tenggara Barat, or NTB) 68%, East Nusa Tenggara (Nusa Tenggara Timur, or NTT) 59%, and Papua 44%.

Distribution system strengthened and expanded

Innovation and institutional capacity enhanced

2 pilot smart grids selected, project design developed for Selayar and Sangihe as of 30 June 2018. As of 30 June 2018, 6.298 million PLN customers were connected; 57.78% of total customers use prepaid/smart meters; PLN has prepared and approved the 2016 inventory of used equipment for disposal; 81.54% of distribution contracts were completed on time; 48,467 units of distribution transformers installed; 50,009 ckm of medium voltage (MV) distribution lines installed (of which 6,350 ckm were installed in Lombok and Flores).

Results for the 2nd half of 2018 are currently being verified. Preliminary data suggest that 2018 targets for DLIs 1, 2, 3, 4 and non-DLI 9 were achieved; DLI 5, 6 and 7 were partially achieved; and slow progress was noted on DLI 8. A smart grid site was identified in Semau, Nusa Tenggara while Selayar SG was tendered in Dec 2018.

Loan review mission to be fielded in April 2019 to confirm IVA findings.