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▲ One of the two hydroelectric power plants in Asahan hydropower plant No.2 Tangga Hydropower plant. Photo/JSCE
From Asahan River to
Kayan River:
Reflections on
Driving Industrial
Upgrading in
Indonesia through a
River
Xi Deng
Green Energy, EV, Circular Economy, Mining... To do well,
to do good, to feel good!
3 articles
July 12, 2023
This year marks the 40th anniversary of the operation
of the Asahan Aluminum Smelter Plant (Inalum).
Located in North Sumatra, this project was the largest
investment by Japan in Southeast Asia at that time and
the first aluminum smelter plant (225,000 tons/year) in
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the region. It was accompanied by two cascade
hydropower plants built on the Asahan River: the
Asahan Hydroelectric Plant No.2 (with a total installed
capacity of 603 MW). This project represented an
important attempt to secure raw material supply for
Japan, and drive resource-based industrialization in
Indonesia’s perspective, with certain lessons to be
learned for similar future projects.
▲ The catalytic effect of The impact of the Asahan aluminum smelter on
downstream & related industries in North Sumatra appears
limited.Photo/Inalum
According to an announcement on the official website
of the Indonesian Presidential Office, on February 28th
of this year, President Joko Widodo visited the
Kalimantan Industrial Park (KIPI) and introduced to the
press the park's plans to incorporate three major
industries: EV batteries, petrochemicals, and aluminum
smelters. The aim is to develop KIPI into the world's
largest green industrial park, which represents the
future of Indonesia. By utilizing green energy,
renewable energy, and hydropower from the Kayan
and Mendarang Rivers, the products from this park will
also be environmentally friendly. If properly developed,
it is expected to attract various industries and
investments.
▲ Pres. Jokowi: KIPI Industrial Park is all about going green. Photo/Sekretariat
Presiden.
Can the hope for industrial upgrading
and regional development in Indonesia
rely on just one river?
As per the plan, to provide reliable green energy to the
KIPI, which focuses on industries such as lithium-ion
batteries, petrochemicals, and aluminum smelters,
hydropower is currently the only viable option. The
power demand for the petrochemical industry is not
significant. For example, a large-scale petrochemical
project with a refining capacity of 10 million tons and
an ethylene production capacity of 800,000 tons would
require a conventional coal-fired power plant with a
capacity of around 100 MW. The major electricity
consumers would be the lithium-ion battery
manufacturers and aluminum smelters. For instance,
producing one ton of aluminum requires
approximately 14,000 kWh of electricity, so an annual
production capacity of 500,000 tons would need 7
billion kWh of electricity. This would require a largescale hydropower plant with a capacity of over 1,000
MW, along with corresponding solar power plants with
an installed capacity of approximately 6,000-7,000
MW, occupying an area of 10,000 hectares (KIPI's
planned area is about 13,000 hectares). Additionally,
energy storage facilities would also need to be
implemented.
The previous hope for industrial upgrading and
regional development centered around the Asahan
aluminum smelter project on the Asahan River.
▲ The upstream of the Asahan River is Lake Toba, which has a surface area of
1,130 square kilometers. Photo/JSCE
▲ The Sigara-gura hydropower plant (286 MW) is one of the cascade
hydropower plants in the Asahan 2 Hydropower Project. Photo/JSCE
However, it seems that the Asahan Aluminum Smelter
Plant has not had a significantly catalytic effect on the
downstream industries in Indonesia or the
development of related industries in North Sumatra:
The lack of a sizable industrial base undermines
the pioneering role of the Asahan Aluminum
Smelter Plant. Large-scale industries account for a
low proportion of North Sumatra's GDP, with the
region's industries mainly focusing on mining,
palm oil, and oil extraction, which are not directly
related to aluminum products and do not
complement them.
The plant's impact on the upstream and
downstream industries in North Sumatra is not
significant. The downstream industries of the
aluminum smelter plant include various aluminum
fabrication plants, and consumer markets (such as
rail transportation, construction, automotive, and
power sectors), which are primarily concentrated
in Java Island, where there is a large pool of skilled
labor and convenient transportation.
Transportation requirements for finished
aluminum products (such as aluminum alloy frame
for doors and windows) are much higher than
those for aluminum ingots, which limits the
clustering of downstream enterprises in North
Sumatra. Similarly, due to poor inland
transportation in Kalimantan, the alumina
enterprises concentrated in West Kalimantan need
to rely on maritime transportation to deliver their
products to the aluminum smelter plant in North
Kalimantan, which may incur higher transportation
costs compared to those to West Java.
The focus is on local resources rather than
demand. It is said that the Asahan Aluminum
Smelter Plant was located in North Sumatra
because of the abundant and economically viable
hydropower resources in the Asahan River, thanks
to the presence of Lake Toba, Indonesia's largest
lake. However, the project did not consider
whether North Sumatra itself was qualified to be
the hub radiating to the upstream and
downstream of the aluminum industry chain. This
decision was mainly based on the local resources
without considering the demand side, as the
alumina raw materials were imported from
Australia, and 60%-66% of the produced
aluminum ingots were exported out of Indonesia.
The employment effect is not significant.
Throughout the 9-year construction period, only
12,000 workers were hired, and the operational
phase of the aluminum smelter plant employed
just over 2,000 people. With an investment of $1.6
billion, the project created temporary employment
for over 12,000 people and long-term
employment for just over 2,000 people.
To achieve the desired effects of a "resource-based
industrialization" as a strategy for economic growth,
the pioneer industry either should not be of a large
scale or should be located adjacent to a core economic
area to benefit from the agglomeration economy or
integrate into it (Richardson & Richardson, 1975).
Hydropower, it's not easy to say "I love
you"
▲ On January 18, 2014, the groundbreaking ceremony for the Kayan
Hydropower Plant (6080MW) took place. Photo/Xi Deng
The Mendarang Induk Hydropower Plant (1375MW) is
a joint development between Sarawak Energy, the sole
electricity company in Malaysia's Sarawak state, and
Adaro, the Indonesian coal mining giant. Considering
the situation of the industrial estate and the
hydropower plant, the following observations can be
made:
Power demand is not strong. Hydropower
accounts for 77% of Sarawak Energy's energy mix,
which is their banner and image. Sarawak Energy's
hydropower expansion strategy seems to be more
supply-driven rather than demand-driven. Sarawak
Energy currently has an installed capacity of
5,646MW (additional capacity from the ongoing
construction of Kidurong Combined Cycle Power
Plant with 842MW and Baleh Hydropower Plant
with 1,285MW scheduled for 2023 and 2027,
respectively) and has already signed power
purchase agreements (PPAs) for 2,930MW,
resulting in a seemly oversupply. Adaro and
Sarawak Energy's hydropower joint venture
company would need to sign PPAs with the KIPI or
the aluminum smelter to secure financing. The
aluminum smelter is reportedly set to start
operations in 2025, while the hydropower plant
will take another ten years to become operational.
Engineering the PPA agreement will require some
effort. Adaro is unlikely to allow Sarawak Energy to
participate in the revenue share from aluminum
sales, so Sarawak Energy's source of profit would
only be the hydropower plant (Sarawak Energy
currently sells electricity at an average price of
around 5.9 US cents). Additionally, the three major
industries to be introduced to KIPI do not possess
the inherent driving force and external conditions
that facilitated the development of the stainless
steel industry in the Morowali Industrial Park.
Therefore, the industrial park would likely require
significant effort to attract these industries.
Hydropower generation costs may be higher.
Aluminum smelting is an energy-intensive industry
and is highly sensitive to energy costs, with
electricity costs accounting for 30%-40% of
aluminum production costs. For an aluminum
smelter with an annual capacity of 500,000 tons, a
difference of one cent (1/100 U.S. Dollar) in
electricity price amounts to 70 million US dollars in
electricity expenses. Looking at the PLTU Jawa 5
and PLTU Jawa 7, two 2x1000MW ultra-
supercritical coal-fired power plants in Indonesia,
the electricity tariff (for the first ten years) can be
as low as 4.2 US cents/kWh. If Adaro uses its own
coal mines in Kalimantan to build coal-fired power
plants at the mine mouth, the generation cost can
be lower than 4.2 US cents/kWh. In comparison,
the current ceiling tariff for large-scale
hydropower projects by Indonesia's state
electricity company (PLN) is 7.41 US cents/kWh for
the first ten years (in the Kalimantan region) and
4.21 US cents/kWh for the subsequent twenty
years (Why such a large difference in electricity
prices? Because large-scale hydropower projects
involve long construction period and significant
investments, the electricity price is higher in the
first ten years, which is favorable for independent
power producers to repay loans). Furthermore,
there is a considerable possibility of potential cost
overruns for large-scale hydropower projects (the
hydropower plants associated with the Asahan
aluminum smelter had a cost overrun of 31%). For
comparison, in Yunnan, China, which is the world's
largest base for hydropower-based aluminum
smelters, the government supplies electricity at a
price of 0.25 RMB/kWh (approximately 3.5 US
cents/kWh), and there is no need to build their
own hydropower plants.
High requirements for the operation and
management of hydropower plants and the
power grid. On the evening of June 27, 2013,
Sarawak Energy's power grid experienced a
blackout, resulting in the temporary shutdown of
all five power plants under its control. This incident
also caused damage to the electrolytic cells of
Press Metal Bhd's Mukah aluminum smelter, the
largest aluminum smelter in Southeast Asia,
leading to a five-month production halt (with an
additional four months to restore production
capacity- Press Metal's 2013 financial report). It
was preliminarily determined that the tripping of
three units at the Bakun Hydropower Plant
resulted in an unexpected drop of power supply of
650,000 kilowatts.
Hydropower plant construction takes a long
time. Just across the border, there are two
hydropower plants in Sarawak with similar
installed capacity and dam types: the Bakun
Hydropower Plant (2400MW) and the Baleh
Hydropower Plant (1285MW). The former took 9
years to complete, while the latter started
construction in 2017 and is expected to be
completed in 2027 (comparable coal-fired power
plants with similar installed capacity take 4 years
to construct). The long construction period is due
to significant opportunity costs, as capitalists
understand the principle of early production for
early returns. Additionally, there is a high level of
uncertainty due to the significant impact of global
market (the Asahan aluminum smelter project took
9 years to complete and experienced significant
losses due to fluctuations in international
aluminum prices and a sharp appreciation of the
Japanese Yen).
Low power stability. Industries such as aluminum
smelter have high requirements for stable and
reliable power, raw materials, and production.
Without a robust power grid and other power
sources for regulation and backup, smelter or
industrial park that rely solely on a direct-supply of
hydropower, which naturally exhibits seasonal flow
fluctuation, may face low reliability. The Asahan
aluminum smelter's associated hydropower plants
consist of two stages (two hydropower plants) and
benefit from the presence of Lake Toba,
Indonesia's largest lake, which provides multi-year
regulation capabilities (the Asahan River has a
large flow, and as a result, the Asahan No.1 and
No.3 hydropower plants were subsequently built.
Even though, a decrease in Lake Toba's water level
from the second half of 1987 to early 1988
resulted in reduced production of the smelter).
Regarding the KIPI's aluminum smelter and its
accompanying hydropower plant, several key points
can be identified:
Prioritize the construction of coal-fired power
plants. Currently, with Adaro's investment-grade
credit rating (BBB-), as long as they can obtain
loans or issue corporate bond, the electricityintensive aluminum smelter plant is likely to use
coal-fired power. The development of hydropower
will proceed step by step, and at this stage,
hydropower can only play a role in promotion and
persuasion for financing institutions and
stakeholders (it is also a practical need for listed
companies to achieve ESG performance, which
applies to Sarawak Energy as well).
The aluminum smelter plant may not be
necessarily located within the KIPI. West
Kalimantan and Bintan of Riau Islands are
gathering places for bauxite, the raw material for
aluminum, and are also production bases for
alumina, the immediate feedstock for aluminum.
By claiming that the aluminum smelter will be
located in the KIPI and will use green hydropower
in the future, it might be easier for Adaro to
facilitate financing for the coal-fired power plant in
the guise of future green energy. If Adaro can
secure loans for the coal-fired power plant, they
may choose a location close to both the coal mine
and the alumina plant, where land acquisition is
easier, to build the aluminum smelter plant.
The Mendarang Hydroelectric Power Plant may
become part of Sarawak and Sabah power grids.
This might be the starting point for SEB's
investment in the hydropower plant. Currently,
Sarawak Energy is working on interconnecting the
power grids of Sarawak and Sabah, and then
connecting them to the power grid of Kalimantan
(transmission to West Kalimantan was already
established in 2016), gradually achieving the
integration of the Borneo power grid and
ultimately realizing the strategic goal of becoming
the "battery of ASEAN." This approach not only
benefits the improvement of power quality for
major power consumers within the network,
including the KIPI aluminum smelter, but also
facilitates power consumption.
Immigration and land acquisition as well as
environmental protection should not be
underestimated. Firstly, as an energy-intensive
project, aluminum smelters attract attention and
differ from Adaro's low-profile coal mining
operations. Secondly, the joint development of
Southeast Asia's largest hydropower station
involves large concrete-faced rockfill dam
(requiring extensive local excavation of dam fill
materials), coupled with their large reservoir
capacity (resulting in significant submerged areas)
and location in tropical rainforests, as well as the
presence of traditional longhouses belonging to
the Dayak indigenous people, are all key factors
that resonate strongly with NGOs and
environmentalists.
IN CONCLUSION, Electrolytic aluminum
production is among the highest
contributors to carbon dioxide (CO2)
emissions in the metallurgical industry. With
its reliance on coal-fired power plants for
electricity, the aluminum smelting process
emits approximately 11-13 tons of CO2 per
ton of aluminum produced. In contrast,
hydropower has nearly zero emissions. In
the context of carbon reduction and various
specific policies such as the EU carbon
tariffs, it becomes more meaningful to use
clean energy sources for powering electric
vehicle batteries. Despite the significant
challenges involved, the development of
low-carbon and green energy sources such
as hydropower, wind power, and solar
energy is a trend and a future necessity.
Perhaps, this is what President Joko Widodo
meant when he emphasized that the KIPI is
the "future of Indonesia."
Published by
Xi Deng
3
Green Energy, EV, Circular Economy, Mining... To do well, to do good, to …
articles
Published • 3m
My write-up examines the challenges faced in Indonesia's industrialization
process through a retrospective analysis of the Asahan project. It highlights
issues such as electricity demand, generation costs, grid management, and
carbon emissions. These challenges require collective efforts from the
government, businesses, and related stakeholders to address them and
promote sustainable development and green industrialization.
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Xi Deng
Green Energy, EV, Circular Economy, Mining... To do well, to do good, to
feel good!
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