At the end of 2021, coal miners experienced a year-end shocking surprise as the Government issued a total coal export ban. In 2022, on the first week of December, coal miners have to deal with the ministerial decree No. 267/2022 (“Decree No. 267”) which regulates monetary sanction, fines, and compensation related to coal domestic supply. This decree is by far, the most stringent government decree on coal Domestic Market Obligation (DMO). As such, coal miners have to assess the potential impact of the new policy on their 2023 production plan.
DMO regulations
Since 2018, the coal DMO policy has been closely watched by coal business actors. In that year, the Government introduced a capped price/ special coal price for electricity purposes ($70/MT). Previously, the Ministry sets estimated domestic coal demand (DMO) based on proposals from coal domestic users and assigned companies to fulfill the DMO. Following the introduction of the capped price, DMO is set at 25% of the approved coal production, with a sanction on the reduction of the production quota in the following year. In 2020, coal miners were obliged to secure domestic sales contracts with sanctions imposed in the form of compensation payments for the shortfall of the domestic supply.
Since the enactment of the capped price of $70/MT for electricity purposes, the Ministry of Energy and Mineral Resources (“MoEMR”) has been struggling to provide a coal DMO scheme that could guarantee a level playing field for coal miners while ensuring a smooth coal supply to the State Electricity Corporation (PLN). After the introduction of the PLN price, a transfer quota was the preferred scheme, by which coal suppliers that have excess domestic sales could sell the excess. Such a scheme was later suspended in 2019 with a lack of transparency cited as one of the main causes of the suspension
In 2019 the regulator started to draft sanctions, fines, and compensation schemes aimed to fulfill domestic coal supply in the event of a high commodity price. Before the regulation was issued, commodity prices entered into a downturn cycle, triggered by the global economic meltdown and the Pandemic Covid-19 that lasted at least until the end of 2020. During that period, coal miners faced difficult tasks to fulfill their DMO obligation as domestic prices were more attractive. In this circumstance, coal suppliers rushed to supply to the domestic market. As a response, the MoEMR did not impose sanctions on the DMO.
After the 2022 total coal export ban, the Ministry issued Decree No.13/2021 on sanctions, fines, and compensations. As part of the requirement of lifting of coal export ban, the Government required coal exporters to sign a commitment to comply with the sanctions. However, such sanctions, fines, and compensations under Decree No. 13 are deemed as not effective. In the unexpectedly high commodity prices enjoyed by the miners since 2021, there is a valid concern that some miners prefer to export. This may trigger the regulator to impose stricter sanctions to force coal suppliers to perform the DMO obligation.
Constraints From the Supplier’s Perspective
Decree No. 267 was issued with practically less meaningful business actors’ participation. The Minister signed the decree on 21 November after the only public consultation held on 18 November. Decree No. 267 which revoke Ministerial Decree No. 13/2021 does not specify in the detail the calculation scheme and the period for imposing sanctions which might cause uncertainty for coal miners. If sanctions based on the Decree are applied to the calculation of DMO sanctions for the period of 1 January -31 December 31st of 2022, this might be felt unfair by coal producers. In particular, taking into account the timing of the introduction of the Decree at the end of the year. Some coal miners will be struggling as the provision is burdensome for those that have submitted the 2022 Annual Work Plan and Budget (RKAB) which was approved by the Government early this year before the Decree came into effect.
The sanctions mechanism in the form of compensation funds and fines in Decree No. 267 will add more burden for coal miners as the Coal Price Index (HBA) does not reflect the actual coal price for Indonesian suppliers. This is due to the fact that the formula for calculating compensation and fines is based on the difference between Coal Price Reference (HPB)/HBA using the coal domestic price for PLN. The changes in the coal market characteristic trigger “decoupling” between Australian coal indexes (Newcastle and Global Coal) and Indonesian coal indexes (ICI and Platts). As a consequence, coal miners have been paying their royalty obligation much higher than they should pay if the royalties are calculated based on prices that closely mirroring to the actual market prices.
Based on data and information from the MoEMR, not all coal producers that have the coal quality to meet domestic needs can be absorbed by users. Referring to the 2021 production, of 617 MT of coal production, around 240 MT of coal with quality that meets PLN’s needs. Unfortunately, the state electricity agency only absorbed around 125 MT. In addition, there are coal producers whose coal quality does not meet domestic users’ needs. However, under the new DMO ruling, those coal producers are still subject to fines and/or compensation funds. This provision is seen as unfair since the coal price for national electricity purposes capped at $ 70/MT is yet not changed.
In the Decree, the sanctions imposed for failure to comply with the DMO are calculated from the highest total production volume in the approved RKAB or the revised RKAB, not from actual sales. This complicates matters as the amount of coal production and sales are very dependent on various operational and technical aspects in the field which can result in lower production quantities than the approved RKAB. Weather conditions, availability of heavy equipment, the characteristic of different mine locations, natural disasters, and external interference all could affect the actual production volume.
In practice, the realization of the assignment (assignment from the Government to selected coal suppliers to supply to certain coal-fired power plants) is very dependent on various factors, including the availability of ships/barges, the absorption capacity of end users and other factors that are beyond the control of coal producers. Provisions in Decree No. 267 do not take into account the above constraints that will be impacting coal miners because they must pay sanctions for quantities that are not successfully produced or for assignments that cannot be realized until the end of the year. Such sanctions may be perceived by coal suppliers as not in line with the spirit and objective to ensure domestic coal demand and fairness.
As aforementioned, the task of the MoEMR is not easy to ensure the sustainability of the domestic coal supply while providing a level playing field rule for all coal miners, particularly during the high commodity prices. The Government is doing its best efforts to avoid imposing another total export ban while ensuring the availability of coal at PLN’s stockpiles. Approaching the end of the year 2022, it is reported that PLN’s stockpiles are safe. Therefore, the urgency of the issuance of the Decree No. 267 which could impose sanctions on the DMO performance in the period of 2022 made some coal miners nervous in entering the new year 2023.
In the first quarter of 2023, the Government is expected to launch the General Services Agency (BLU) for coal DMO. If this plan is materialized then Decree No. 267 may no longer be implemented as the BLU scheme will take over the existing DMO scheme. However, before the BLU is in place, fixing the new HBA/HPB formula is crucial. As such, coal business actors have been expecting a new decision on this critical issue. Again, intense communication between the Government, coal miners and the PLN is highly required to resolve the matters.
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(*) Executive director of the Indonesian Coal Mining Association (APBI-ICMA), Secretary General of Indonesian Nickel Miners Association Struggle (APNIPER – for Sustainability), Vice Chairman of the Permanent Committee on Business Licensing Compliance of KADIN Indonesia, and Member of the Energy and Mineral Resources Committee of the Indonesian Employers Association (APINDO). The opinions expressed are his personal view.
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