Indonesia has installed electrical generating capacity estimated at 24.7 gigawatts, with 80 percent coming from thermal (oil, gas, and coal) sources, 18% from hydropower, and 2% from geothermal. Prior to the Asian financial crisis, Indonesia had plans for a rapid expansion of power generation, based mainly on opening up Indonesias power market to Independent Power Producers (IPPs). The crisis led to severe financial strains on state-utility Perusahaan Listrik Negara (PLN), which made it difficult to pay for all of the power for which it had signed contracts with IPPs. PLN has over $5 billion in debt, which has grown markedly in terms of local currency due to the decline in the value of the rupiah. The Indonesian government has been unwilling to take over the commercial debts of PLN.

Indonesia is facing an electricity supply crisis, due to underinvestment in power generation capacity. Intermittent blackouts are a problem across Java. Demand for electrical power is expected to grow by approximately 6-7 percent per year. The majority of Indonesias electricity generation is currently fueled by oil, but efforts are underway to shift generation to lower-cost coal and gas-powered facilities. Hydropower also is being expanded. Sumitomos 1,320-MW Tanjung Jati B plant in Central Java, a 730-MW plant at Cilegon in West Java financed by Mitsubishi, and a Chinese-funded 600-MW station at Cilacap on the southern coast are all due to be commissioned in mid-2006. However, after these projects are completed, after long delays, there is a lack of adequate new capacity "in the pipeline" to meet the countrys needs.
In January 2003, the World Bank announced that it was planning to finance three micro-hydropower plants in the Indonesian province of Papua (Irian Jaya). A feasibility study on all of the areas water sources has already been conducted, and the results are being studied. By building these facilities, the World Bank hopes to improve services to the local population as well as to encourage development activities in the province.

In October 2003, the World Bank approved a $141 million loan to Indonesia for the purpose of improving the power sector on Java and Bali, which use approximately 80% of Indonesias power generation capacity. The project includes support for a corporate and financial restructuring plan for PLN and technical assistance for a restructuring program for state gas company, Perusahaan Gas Negara (PGN), that will provide for increased natural gas supplies for electricity generation. The restructuring plan requires that PLN must restructure two of its subsidiaries, PT Indonesia Power and PT Pembangkit Jawa Bali (PJB). The two together supply about 80% of the power supply for Java and Bali, according to reports.
In 2003, the government renegotiated 26 power plant projects with the IPPs. Of those, five projects will be taken over by the government, in cooperation with PLN and Pertamina. Legislation enected in September 2002, which would have facilitated competition in electricity generation by 2007, was overturned by the Indonesian constitutional court in December 2004. Substitute legislation was enacted in February 2005 which clears the way for full private ownership of electricity generation assets. The Indonesian government sees the need for 24 gigawatts of additional generating capacity by 2013, but foreign investors have largely avoided the Indonesian power sector in recent years due to the poor financial condition of PLN and the uncertain legal climate.

Aside from the lack of adequate investment in generating capacity, long-haul transmission also remains a problem. For example, the 3,200-MW Paiton power plant in East Java, which is the countrys largest, has inadequate transmission lines to central and western Java, preventing transmission of electricity from an area with a local surplus to an area with inadequate supplies.