By Muklis Ali and Adhityani Arga

JAKARTA, Feb 28 (Reuters) - Sudden blackouts on two key Indonesian islands last week may be just the start of a spiralling two-year power crisis that could stymie economic growth, curtail resource exports and trigger social unrest.

Outages on the main commercial islands of Java and Bali, the country's worst since a day-long blackout brought Jakarta to a halt in August 2005, were due to storms that hit coal deliveries and exposed the precarious balance of Indonesia's power supply.

After chronic underinvestment and steadily growing demand from an economy growing at its fastest pace in a decade, analysts now see a crisis on the horizon for the world's fourth-most populous nation, which holds elections next year.

"The situation in Indonesia is worse than anywhere else in Asia," says Joseph Jacobelli, head of Asia-Pacific utilities research at Merrill Lynch.

Jakarta has managed to stave off the kind of supply crises seen in China and India in recent years, but as growth picked up after the 1997-98 financial crisis, plants built in the previous decade are showing their age and straining to meet demand.

Officials said the blackouts were due not to a lack of power plant capacity but of fuel -- ships carrying coal from Kalimantan were unable to reach port and unload their cargoes due to stormy weather, forcing two major power plants to cut production as their coal stocks dwindled to only two or three days.

State electricity firm PT Perusahaan Listrik Negara (PLN) staged planned powercuts in Jakarta's commercial and residential areas over the weekend in order to save precious supplies.

Critics blamed the crisis on poor planning, and said that PLN should have been better prepared, with larger stockpiles. The firm may now require plants to double stocks to 30 days.

But even with sufficient fuel supplies, Indonesia is already struggling to meet peak period demand, officials say, a situation set to worsen until new plants are built by 2010 -- provided the government can overcome a legacy of investor resistance.

"Indonesia will inevitably face more power shortages. The political will to tackle the problem is there, but efforts are too few and too late," says Citigroup economist Anton Gunawan.

The interim choices are clear but costly -- buy more diesel and fuel oil to revive expensive oil-fired generators; limit coal exports to ensure domestic supplies; or reduce the government's popularity by instituting more rolling blackouts.

SUPPLY STRAIN

Of the 17,500 megawatts (MW) installed capacity on Java and Bali, about three-quarters of the country's total, only about 15,500 MW is in operation since many of the plants are old and inefficient, said a PLN official, who declined to be named.

With evening demand peaking at 15,200 MW, they operate at a razor-sharp 2 percent supply cushion, a dire situation made worse when plants shut for maintenance or repairs. At peak times, demand can exceed capacity, the PLN official said.

Given its abundant natural resources, Indonesia should be well placed to meet its own energy needs. It is Asia's only OPEC member, the world's second-biggest liquefied natural gas (LNG) producer, and the biggest thermal coal exporter.

But last week's blackouts showed the need to address energy policy urgently to keep Asia-Pacific's sixth-largest economy ticking along after last year's 6.3 percent growth -- its fastest in a decade but still trailing giants China and India.

President Susilo Bambang Yudhoyono wants to attract billions of dollars of investment for infrastructure, including the power sector, to spur economic growth and reduce high unemployment.

But the power industry is one of many infrastructure woes plaguing this sprawling archipelago of 226 million people, along with unsafe ferries, single-track railways and scruffy airports.

In August 2007, PLN signed power plant deals worth around $2 billion with China's Shanghai Electric Corp and Dongfang Electric Corp as part of Indonesia's plan to build 10,000 MW of additional capacity, an increase of 42 percent nationwide.

EXPORT CURB, POLITICAL STRAIN

But apart from the estimated $20 billion it will take to build new plants and upgrade the grid, those investments require fuel, which will mean less coal, LNG and oil for export.

Indonesia expects to burn 60-65 million tonnes of coal a year by 2010, up from 29 million tonnes now. But some in the industry are already bracing for export curbs like those China imposed in January, when a shortage of domestic coal caused widespread blackouts in the midst of its worst winter in 50 years.

"We are calculating whether we should have one month of coal stocks or one-and-a-half months or two months in future for our coal-fired power plants," said PLN spokesman Mulyo Adji.

"We have to calculate the economic risk too. Because having too much stock means we have to invest in storage."

For Indonesia's main coal and gas producers, such as top coal miner PT Bumi Resources <BUMI.JK>, that could mean being forced to cut back higher-priced exports for cheaper domestic sales.

The energy crisis also has potential political and economic costs, as Indonesia heads for elections in 2009.

University students in Medan on resource-rich Sumatra island, protested outside local government offices because they said the frequent blackouts -- which last up to four hours -- are affecting their studies, the Jakarta Post reported this week.

The vital tourism industry on Bali is also alarmed, fearing a further blow to a reputation already tarnished by deadly bomb attacks in recent years, on top of higher costs if they have to buy stand-alone diesel generators to keep the lights on.

"There were losses, and the smaller hotels and restaurants are the worst hit," said Perry Markus, Secretary General of the Indonesian Hotel and Restaurant Association's Bali chapter.

If the blackouts continue, "it would affect our image as a tourism spot." (Additional reporting by Harry Suhartono; Writing by Sara Webb; Editing by Jonathan Leff and Ramthan Hussain) (([email protected], +6221 384-6364)

Keywords: INDONESIA POWER/