[SMM Analysis] Indonesia plans to establish a BLU in the energy sector, with coal procurement and DMO mechanisms facing further clarification

The Indonesian government is drafting a presidential regulation (RPerpres) to establish a public service agency in the energy sector (hereinafter referred to as "BLU Energi") responsible for supplying coal and natural gas to power plants to safeguard electricity supply in the public interest. The proposed BLU Energi will operate under the delegation and supervision of the Ministry of Energy and Mineral Resources (ESDM).

The draft presidential regulation has not yet been finalized. However, the procurement and supply management functions assigned to BLU Energi under the draft have drawn market attention to its relationship with the existing domestic coal supply mechanism, particularly the Domestic Market Obligation (DMO), as well as how coal procurement will be implemented in the future.

Functions to be undertaken by BLU Energi

The proposed BLU Energi aims to further strengthen national energy security by ensuring the supply of coal and natural gas for power generation, improving supply efficiency, maintaining affordable electricity prices, and optimizing domestic energy utilization.

Under Article 4, BLU Energi will be responsible for consolidating power plant demand, formulating procurement plans, procuring and distributing coal and natural gas, managing supply, and ensuring supply continuity. It may procure coal and natural gas through long-term contracts or spot contracts and sell them to power plants, while also managing national energy reserves.

[Chart: Objectives for the establishment of BLU Energi under Article 2]

Therefore, the proposed framework will grant BLU Energi a direct role in coal procurement and supply management, rather than limiting it to supply coordination.

With the DMO mechanism already in place, why is BLU Energi needed?

The proposed BLU Energi will adopt a more concentrated approach to managing coal procurement for power generation in the public interest. Under the existing DMO mechanism, coal producers already bear domestic supply obligations based on approved RKABs and government allocations. In contrast, BLU Energi can consolidate power plant demand, procure coal from multiple sources, manage reserves, and allocate supply according to power plant needs.

This has raised market questions about whether BLU Energi will replace, integrate with, or supplement the existing domestic coal procurement mechanism. If BLU Energi primarily integrates existing procurement, its role may focus more on improving supply coordination and ensuring supply continuity without adding new coal supply obligations. However, if BLU Energi's procurement operates independently of the existing DMO allocation mechanism, the final regulation will need to further clarify the relationship between the two mechanisms.

Coal procurement and supply management

Under Article 8, BLU Energi may procure coal from holders of IUP, IUPK, and PKP2B in the production stage, as well as from enterprises holding coal transportation and sales licenses, and may also procure from mines operated by BLU Energi itself or its affiliated enterprises. Natural gas may be sourced from domestic allocation volumes determined by the minister, oil and gas traders, and other sources. The draft also stipulates that procurement will take into account prices determined by the minister and supply reliability.

To ensure supply continuity, BLU Energi may manage reserves, diversify supply sources, reallocate coal among different regions or power plants, and expedite procurement during emergencies or supply disruptions, while determining supply priorities based on power plant demand.

In addition, the draft allows BLU Energi to use hedging instruments to manage coal and natural gas price fluctuations, and to take special measures in the event of force majeure or energy emergencies.

Coal supply contracts signed before the presidential regulation takes effect, as well as existing natural gas allocation, utilization, and pricing arrangements, will remain valid until the relevant contracts or arrangements expire.

Key issues in coal supply and pricing

For the coal market, the biggest unknown at present is how BLU Energi's procurement mechanism will interface with existing DMO requirements.

The draft has not yet clarified whether coal supplied through BLU Energi can be counted toward coal producers' existing DMO obligations. It also remains unclear whether BLU Energi will procure within the existing domestic coal allocation framework or establish additional procurement channels.

If BLU Energi's procurement volume can be counted toward existing DMO obligations, its role may primarily serve as a concentrated procurement and distribution channel for domestic coal. If such procurement is counted separately, coal producers may face additional domestic supply requirements depending on the final regulatory framework. Industry participants have also called for further clarification of the relationship between the proposed procurement mechanism and existing DMO arrangements.

This issue is particularly noteworthy because some coal producers' actual domestic coal allocation volumes may exceed the typical 25% DMO benchmark, depending on government allocations and power plant demand.

Another key issue is how BLU Energi will determine coal procurement prices. Currently, coal used for power generation in the public interest is subject to a regulated pricing mechanism, under which the reference price cap for 6,322 kcal/kg GAR coal is US$70/t FOB vessel. It remains unclear whether BLU Energi's procurement will continue to use the same pricing mechanism or adopt a different one.

For coal producers, how BLU Energi's procurement volume is counted toward DMO and what coal procurement prices apply will affect the allocation of domestic sales volumes and the amount of coal available for export.

Impact on PLN and IPPs

The proposed BLU Energi may also alter existing thermal coal supply arrangements by becoming more involved in coal procurement and distribution.

The draft allows BLU Energi to procure coal and distribute or sell it to power plants based on their demand. This has raised market attention on how coal supply will be allocated between PLN's own power plants and independent power producers (IPPs), particularly given differences in procurement costs, contract structures, and supply requirements.

In addition, the draft allows BLU Energi to use hedging instruments, which implies that the agency may assume some of the commodity price risk arising from coal procurement.

Therefore, the final regulation will need to further clarify how BLU Energi's procurement and distribution functions will interface with existing supply arrangements, and how coal demand from different types of power plants will be handled.

SMM view

SMM believes that for the coal market, the key question is whether BLU Energi will ultimately operate within the existing DMO framework or establish an independent procurement mechanism. This will determine whether BLU Energi primarily consolidates existing domestic coal procurement or adds new procurement channels beyond the existing market.

For coal producers, how BLU Energi's procurement volume is counted toward DMO and what coal procurement prices apply will be particularly important, as these two factors may affect domestic coal supply obligations and the balance between domestic sales and export sales.

As the RPerpres remains under development, BLU Energi's procurement authority, its relationship with existing DMO requirements, and the coal pricing mechanism remain key issues for the market to monitor.