[SMM Analysis] Indonesia Drafts Energy Sector BLU, Raising Questions Over Coal Procurement and DMO Framework

The Indonesian Government is drafting a Presidential Regulation (RPerpres) on the establishment of an Energy Sector Public Service Agency (BLU Energi hereinafter) to provide coal and natural gas to power plants for public-interest electricity generation. The proposed BLU would operate under the assignment and oversight of the Ministry of Energy and Mineral Resources (ESDM).

The draft regulation has not yet been finalised. However, its proposed procurement and supply management functions raise questions over how BLU Energi would interact with existing domestic coal supply mechanisms, particularly the Domestic Market Obligation (DMO), and how coal procurement would be implemented in practice.

BLU Energi's Proposed Role

The proposed BLU aims to strengthen national energy security by ensuring coal and natural gas availability for power generation, improving supply efficiency, maintaining affordable electricity costs and optimising domestic energy utilisation.

Under Article 4, BLU Energi would be responsible for reconciling power plant requirements, planning procurement, procuring and distributing coal and natural gas, managing supplies and ensuring supply continuity. It would be able to purchase coal and gas and sell them to power plants through long-term or spot contracts, while also managing national stockpiles.

The proposed framework would therefore give BLU Energi a role beyond supply coordination, allowing it to participate directly in the procurement, management and distribution of coal to power plants.

Why BLU Energi If the DMO Already Exists?

The proposed BLU would introduce a more centralised approach to coal procurement for public-interest power generation. Under the existing DMO framework, coal producers are already subject to domestic supply requirements linked to their approved RKAB and government assignments. BLU Energi would instead be able to reconcile power plant requirements, procure coal from multiple sources, manage reserves and distribute supply according to power plant needs.

This raises the question of whether BLU Energi is intended to replace, consolidate or supplement existing domestic coal procurement arrangements. If the BLU mainly consolidates existing procurement, its role could be to improve coordination and supply continuity without creating an additional coal obligation. If BLU procurement operates separately from existing DMO assignments, however, the final regulation would need to clarify how the two mechanisms would interact.

Coal Procurement and Supply Management

Under Article 8, BLU Energi could procure coal from production-stage IUP, IUPK and PKP2B holders, coal transportation and sales permit holders, as well as mines operated by BLU Energi or its affiliates. Natural gas could be obtained from domestic allocations determined by the Minister, oil and gas trading companies and other sources. The draft also states that procurement would consider ministerial price determinations and supply reliability.

To ensure supply continuity, BLU Energi could manage reserves, diversify supply sources, transfer coal between regions or power plants, expedite procurement during emergencies or supply disruptions, and prioritise distribution based on power plant requirements.

The draft would also allow BLU Energi to use hedging instruments to manage coal and natural gas price fluctuations and take extraordinary measures during force majeure or energy emergencies.

Existing coal supply contracts and gas allocation, utilisation and pricing determinations made before the Perpres takes effect would remain valid until their respective expiry dates.

Key Issues for Coal Supply and Pricing

The main uncertainty for the coal market is how BLU Energi's procurement would interact with existing DMO requirements.

The draft does not clearly specify whether coal supplied through BLU Energi would count towards a producer's existing DMO obligation. It also remains unclear whether BLU Energi would procure coal within the existing domestic allocation framework or establish an additional procurement channel.

If BLU Energi purchases are counted towards existing DMO obligations, the BLU could mainly function as a centralised procurement and distribution channel for domestic coal. If the purchases are treated separately, coal producers could potentially face additional domestic supply requirements, depending on the final regulatory framework. Industry representatives have also called for greater clarity on the proposed procurement and DMO mechanism.

The issue is particularly relevant as actual domestic coal allocations for some producers can exceed the general 25% DMO benchmark, depending on government assignments and power plant requirements.

Another key issue is how BLU Energi would determine its coal purchase price. Coal supplied for public-interest electricity generation is currently subject to a regulated pricing framework, with the reference price capped at US$70/t FOB vessel for coal at 6,322kcal/kg GAR under the prevailing regulation. It remains unclear whether BLU Energi's procurement would follow the same framework or use another pricing mechanism.

For coal miners, the final treatment of BLU purchases under DMO and the applicable procurement price would affect the allocation of domestic sales and the volume of coal available for export.

Implications for PLN and IPPs

The proposed BLU could also change the existing coal supply chain for power generation by centralising procurement and distribution.

The draft allows BLU Energi to purchase coal and subsequently distribute or sell it to power plants based on their requirements. This raises questions over how supply would be allocated between PLN-owned power plants and independent power producers (IPPs), particularly where procurement costs, contract structures and supply requirements differ.

The provision allowing BLU Energi to use hedging instruments is also notable, as it suggests that the agency could potentially take on part of the commodity price risk associated with coal procurement.

The final regulation would therefore need to clarify how BLU Energi's procurement and distribution functions would interact with existing supply arrangements and how different power plant requirements would be handled.

SMM View

SMM believes the key issue for the coal market is whether BLU Energi will operate within the existing DMO framework or establish a separate procurement mechanism. This will determine whether the BLU mainly centralises existing domestic coal supply or introduces an additional layer of procurement into the market.

For coal miners, the treatment of BLU purchases under DMO and the applicable coal purchase price will be particularly important, as these factors could affect domestic allocation requirements and the balance between domestic and export sales.

As the RPerpres remains under development, the scope of BLU Energi's procurement authority, its relationship with existing DMO requirements and its pricing mechanism remain key areas to watch.