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The Indonesian government is considering changing the way it subsidizes electricity, eliminating the direct subsidy to state electricity firm PT Perusahaan Listrik Negara and replacing it with subsidies targeted at lower-income consumers.

The move would allow PLN to raise its prices for most of its customers, after long complaining about being forced to sell electricity at below production costs.

Jacobus Purwono, director general of electricity and energy utilization at the Energy Ministry, said on Tuesday that the new subsidy may take the form of a simple reduction in the monthly power bills of those low-income consumers with low installed capacity.

There are an estimated 18 million such customers.

“The cut may be about Rp 50,000 [$5.35] per customer, so if their bill is Rp 70,000 they would only have to pay Rp 20,000,” Purwono said.

“After that PLN would ask to be reimbursed by the Finance Ministry. But the reimbursement would have to be audited first by the BPK [Supreme Audit Agency].”

On Monday, PLN president director Dahlan Iskan proposed that the current subsidy scheme be replaced by direct assistance for low-income customers, allowing PLN to raise prices to fair market levels for everyone else. Dahlan was speaking to the House of Representatives’ Commission VII, which oversees energy issues.

“We propose that the subsidy is no longer awarded to PLN but to the people directly,” Dahlan said.

PLN has previously proposed that it be allowed to raise electricity rates by 30 percent for the average household and industrial consumers. Rates are set by the government.

The firm proposed four price-hike scenarios for 2010. These consist of a 20 percent increase for household consumers with an installed supply of less than 900 watts in their homes and a 37.5 percent increase for households with an installed supply of up to 6,600 watts.

The charges for both categories of consumer are controlled by the government and are set at a range of Rp 172 to Rp 621 per kilowatt hour.

PLN says a charge of Rp 1,380 per kwh is needed to cover costs.

For consumers with an installed supply of more than 6,600 watts, PLN wants the government to reduce the amount of power that it subsidizes.

Currently, the subsidies are given for consumption of up to 839 kwh per month. Under PLN’s proposal, this would be reduced to 524.5 kwh per month.

For businesses and industry, whose power is unsubsidized, the state utility is proposing a 30 percent rise in charges.

This year, the government set the total electricity subsidy at Rp 35.3 trillion. Together with Rp 2.5 trillion left over from last year, this brings the total subsidy payable in 2010 to Rp 37.8 trillion. PLN has insisted that it needs about Rp 50 trillion to cover operating costs.

The company says that an average increase in charges of 20 percent to 30 percent is necessary if it is to make up the difference.

PLN has been mired in red ink for years, mostly as a result of the fact that it has to supply electricity at below cost.

In 2008, it lost a record Rp 13.1 trillion, although it blamed much of the loss on the rupiah’s plunge against the dollar in the second half of the year.

PLN moved into the black for the first time last year, booking a net profit of around Rp 7 trillion from Rp 140 trillion in revenue, said Setio Anggoro Dewo, PLN’s finance director.

PLN expects to book Rp 12 trillion of net profit this year, helped by lower production costs and an increase in the government’s subsidy.

The House of Representatives in September approved an increase in PLN’s sales-margin subsidy to 5 percent so the utility can expand its power network and solve shortages in Java and Bali.

PLN has allocated Rp 144 trillion from the government subsidy and the power sales for operational expenditure.