Challenges on Sustainable Coal Supply and Proposed Policy Hele Workshop 1

Challenges on Sustainable Coal Supply and Proposed Policy

HELE Coal Technology Workshop World Coal Association

Disclaimer

The materials in this presentation have been prepared by APBI-ICMA (“APBI”).

These materials may contain statements that constitute forward-looking statements. These statements include descriptions regarding the intent, belief or current expectations of either APBI, or those of other third-party entities whose data sources have been published for public use, hence used in this presentation. These statements can be recognized by the use of words such as “expects,” “plan,” “will,”

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Agenda

1

Need for Electricity in Indonesia

2

35 GW Program & Coal’s Important Role

3

Coal Industry Overview & Challenges Faced

Agenda

1

Need for Electricity in Indonesia

2

3

5.5% 7.1%

7.5% 8.0%

6.4% 6.4% 6.4% 6.4% 6.4% 6.4% 217 244 268 292 315 340 366 394 425 457 0 50 100 150 200 250 300 350 400 450 500 0 5 1 5 2 5 3

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 839 932 1,011 1,089 1,162 1,241 1,322 1,409 1,506 1,604

6.2% 6.0% _5.6%

5.0% 4.8% 156 172

186 196 200

0 50 100 150 200 250 300 350 400 450 500 0 0.05 0.1 0.15 0.2 0.25 0.3

2011 2012 2013 2014 2015 646

702

746 779 784

Indonesian Economy & Energy Demand

Source: PLN Business Plan (RUPTL) 2016 – 2025; Central Bureau of Statistics (BPS); Note: PLN is State Electricity Utility

 Energy plays fundamental part in economic growth process. Economic growth needs to be supported by sufficient Electrification Ratio (ER)

 Power consumption is related to productivity level of its population. As countries switch to manufacturing-based economies, power consumption per capita increases

GDP Growth (%)

Electricity Consumption (TWh)

Electricity Consumption per Capita (KWh)

SAIDI = System Average Interruption Duration Index

Deficit Alert Normal

 As can be seen in graph above,

only small parts of Indonesia actually have sufficient supply of electricity

 PLN has traditionally been having problems in providing electricity to its customers, as shown by SAIDI and SAIFI numbers

Sources: PELAYANAN TERPADU SATU PINTU (PTSP) PUSAT KETENAGALISTRIKAN, Jakarta, 28January 2015, PLN 2015 Annual Report

Current Electricity Condition

6.96

4.71

3.85

5.76 5.81 5.31

2010 2011 2012 2013 2014 2015

6.82

4.9

4.22 7.26

5.58 5.97

2010 2011 2012 2013 2014 2015 SAIFI = System Average

Growing Power Demand

As government pushes for infrastructure & industrial development, low electricity consumption and installed capacity levels create significant upside potentials in electricity demand

 Indonesia is behind its ASEAN peers in Electrification Ratio (ER)

 Developed countries tend to have larger electricity consumption per capita

ASEAN Electrification Ratio Comparables Target 2019: >95%

Energy Consumption per Capita (KWh)

Source: PLN Investor Presentation May 2015, RUPTL 2016-2025, MEMR, World Bank, Indexmundi

8,023

7,765

3,724

2,501

1,113

780 528 _{358 166 109}

23 GW

14 GW

4 GW

2 GW

2 GW

- 5 10 15 20 25

Coal-fired

Gas-fired

Hydro

Diesel

Others

Installed Capacity* 46 GW

Indonesian Electricity Development Progress

Coal and gas are largest sources of energy for electricity generation with highest total installed capacity and at most economical price

* Per 2015, excluding rental from 3rd _{party sources ~4 GW}

Installed capacity of power plants increased slowly at 6% CAGR over 2010-2015. PLN installed capacity increased at 5% CAGR, while

IPP increased at 11% CAGR

Installed Capacity 2010 - 2015 Installed Capacity excluding Rental Power as of December 2015

Source: RUPTL 2016 – 2025; Note: IPP is Independent Power Producer

31GW 34GW

37GW

41GW 43GW

46GW

2010 2011 2012 2013 2014 2015

Agenda

1

2

35 GW Program & Coal’s Important Role

3

35 GW Electricity Plan

35 GW Power Projects

Coal Fired Power Plant (CFPP)

Gas & Steam

Power Others

~20 GW ~7.5 GW ~6.5 GW

PLN

2 GW

IPP

18 GW

Project Costs US$ 27 – 36 bln

60% 21% _19%

DEBT (Proj. Financing)

US$ 19 – 25 bln

EQUITY US$ 8 –11 bln

 President Jokowi ‘s Administration committed to adding 35 GW new capacity to current installed capacity of 46 GW to increase ER from currently ~88% to >95% by after 2019

 ~60% of total 35 GW power projects will come from CFPP & this 35 GW require significant participation from private (IPP) at ~53% of project costs vs PLN’s portion of ~47% (inc. transmission)

35 GW Electricity Development Progress

Government’s 35 GW Program

 Only 0.2 GW operational and 8.2 GW under construction out of 35 GW planned  18 GW of power plant projects have not

secured PPA PPA Signed COD Tender Process ~0.2 GW ~10.8 GW

Planning Process ~7.7 GW

35 GW Progress

Source: RUPTL 2016-2025, PLN presentation

Under

Construction ~8.2 GW

Have Not Started Construction

~9.8 GW

31 GW 34 GW

37 GW 41 GW

43 GW 46 GW

2010 2011 2012 2013 2014 2015

Installed Capacity Additional Capacity

30 GW additional capacity planned

15 GW realized additional capacity

RUPTL 2010 – 2019

51 % realized

 Based on RUPTL 2010 – 2019, PLN

planned additional capacity of approx 30 GW for 2010 - 2015 but only realized 15 GW

CFPP Will Drive National Electricity

Planned Year-End Capacity 2025 Installed Capacity Composition

Total installed capacity will grow by 10% CAGR in next 10 years. CFPP installed capacity will grow by 11 % in same period

By 2025, CFPP will make up 46% of all power plants in Indonesia

Source: RUPTL 2016-2025

13%

30%

46%

11%

Renewables Gas Coal Others 35 GW Electricity Program Future Electricity Programs

27 GW 28 GW 31 GW 48 GW 53 GW 55 GW 55 GW 56 GW 56 GW 58 GW

50 GW 54 GW

67 GW

88 GW 94 GW 97 GW

100 GW104 GW

113 GW

126 GW

0 20 40 60 80 100 120 140

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

34 45

53 55 70

88

2010 2011 2012 2013 2014 2015

93 95 109

166 168 170 171 173 175 177

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

11 GW

15 GW 16 GW

20 GW 22 GW 23 GW

26 GW 27 GW

31 GW

48 GW

53 GW 54 GW 55 GW 55 GW 56 GW

58 GW

Coal Requirement for CFPP

Coal requirements for power (million tons)

Installed coal-fired power plants (GW)

CAGR: 21% CAGR: 21%

 Coal consumption has increased by 21% CAGR in past five years

 It is expected to continue to increase by another 21% CAGR from 2016 until 2019, if 20 GW of new CFPP capacity from 35 GW program is installed according to plan

 This assumes each MW requires 3500 - 4000 tons of coal p.a.

35 GW Electricity Program

Source: PWC Report - Supplying and Financing Coal-Fired Power Plants in the 35 GW Program, RUPTL 2016 - 2025

Agenda

1

2

3

Coal Industry Overview & Challenges Faced

11.7 8.3 $97 $59 -20 40 60 80 100 120 -1 4 9 14 19 24 2012 2015

Mineable Reserves (billion tons) NEWC Coal Price

Indonesia’s Coal Reserve

Source: MoMER Strategic Plan (Renstra), PWC Report “Supplying and Financing Coal-Fired Power Plants in the 35 GW Program” Coal Type Reserves

(billion ton) % GAR

Low 9.2 28% <4,700

Medium 20.7 64% 4,700 – 5,700

High 1.6 5% 5,700 – 6,700

Very High 0.9 3% >6,700

Total 32.4 100%

MoMER Data

 Data from MoMER as of 2012 suggests Indonesia has more than sufficient reserves of 32.4 bn tons

 Difficult to validate information, as MoMER does not publish detailed methodology and sources of data

29%

PWC Survey

 Based on PWC survey, mineable reserves in 2015 were reported at 8.3 bn tons, contrasting MoMER figure of 32.4 bn tons

 This was down by 29% from previously reported JORC of 11.7 bn tons in 2012

 Decrease in NEWC coal price has reduced economically mineable reserves

Falling Profitability & Investments

Source: PWC Report “Supplying and Financing Coal-Fired Power Plants in the 35 GW Program”; Bloomberg

 EBITDA fell 74% since 2011, from US$ 6.5 bn to US$ 1.6 bn in 2015

 Capital expenditure (capex) dropped by 79% since 2012 from US$ 1.9 bn to US$ 0.4 bn by end 2015

 Mining industry is expected to decrease capex by further 10-19 % in 2016; this may be approaching the level where investment is not sustaining reserves each year

$121 $97 $85 $71 $59 0 20 40 60 80 100 120 140 0 1 2 3 4 5 6 7 8 9 10

2011 2012 2013 2014 2015

$ b il li o n

Sterilization of Reserves

2011 avg. =

9.6x

2015 avg. =

6.6x

Industry Strip Ratio

 Average strip ratio (SR) has plunged from 9.6x in 2011 to around 6.6x in 2015. SR have likely continued to fall in 2016

 Mine plans are being modified, setting lower strip ratios and reducing reserves to be able to return to profitability

 This is likely to make future reserves more costly to extract, or even uneconomical to extract, which can result in ‘sterilization’ of remaining reserves from mine plan

Source: PWC Report; Annual Reports

-2.0

4.0

6.0 8.0

10.0

12.0

14.0

Adaro ITM Bukit Asam Harum Bayan Toba Bara Baramulti Atlas

Coal Consumption Forecast

 By end-2019, coal consumption for DMO (power) is expected to reach 166 mn tons

 We should see steady increase in coal consumption for DMO (power) going

forward

 Coal consumption for 2016 – 2050 is forecasted to be in range of 350 – 400 million tons per annum

Source: PWC Report; RJPMN (National Medium-Term Development Plan)

Switch to imports

Coal Type 2015 2019 2024 2030 2050

DMO

(Power) 88 166 175 185 226 DMO

(Others) 2 74 78 82 101

Exports 313 160 140 116 36

Uncertain Coal Supply

 Based on PWC’s March 2016 report, current proven coal reserves are at 8.3 bn tons

 Assuming coal reserves of 8.3 billion tons, with annual production forecast of 350-400 mn tons at current coal prices, current coal reserves will run out by 2036

 This is less than 20 years into lifecycle of new CFPP (typically 25-30 years from COD)

Agenda

1

2

3

Long-term average

mining cost (approx $30/ton)

Fixed margin (20% - 25%)

Price at which coal procurers

purchase coal (approx $36-38/ton) Long-term cost-based price contracts between coal

procurers (PLN and IPP) and coal miners.

Cost Based Pricing Policy

Provide predictable and stable returns for miners

Example of how it works? _{Positive effects of policy to miners}

Recovery in investments, encourage life-of-mine planning and stabilize economically mineable reserves

Incentive to invest in IPP

*

*

*

Protects against increase in price of coal

Advantages to Government

Avoids domestic reserve crisis and need to import coal and/or switch to more costly alternatives

*

*



On the recent update, the new minister of mines regulation No. 9/2016

sets out 15-25% range of margin that could be used by coal miners in

proposing coal sales price in Mine-Mouth Power Plant



Detail of cost as stipulated in the regulation should be reasonable.

However, PLN has been asking for review of the margin and cost detail,

which they consider too high



Government is working to find the best solution that would ensure the

reasonable margin for miners while benefiting PLN as the user for

sustainable coal supply



Extensive discussions with relevant government institutions on supply

sustainability to meet coal demand in 35 GW program must be

encouraged to create win-win solution for all stakeholders, including on

the viability of adopting cost plus margin method for all CFPP