Renewable Energy In Indonesia.
Legal News & Analysis - Asia Pacific - Indonesia - Energy & Project Finance
17 December, 2018
Renewable Energy in Indonesia
There are various forms of renewable energy resources available in Indonesia, ranging from hydro to geothermal power. Despite this, coal remains as the main resource for power plants in the country.
Recent initiatives suggest that the Indonesian government is seeking to diversify its energy sources. Notably, the Minister of Energy and Mineral Resources issued the new Plan for the Provision of Electricity (“RUPTL”) 2018-2027 which includes a focus to increase renewable energy output.
So whilst traditional sources of power generation are dominant, this 10-year electricity development plan includes a specific focus on the development of renewable energy sources.
We set out below a brief summary of the regulatory regime for the renewable sector in Indonesia and some topical issues relating to the renewables sector.
The country’s power generation composition by source of energy, as of November 2017, was as follows:
|Potential||Installed Capacity (MW)||Exploited (%)|
|Solar||207,898 MW (4.8 kWh/m2/day)||78.5||0.04|
|Wind||60,647 MW (> 4m/s)||3.1||0.01|
|Sea wave||17,989 MW||0.3||0.00|
|Mini/ micro hydro||19,385 MW||197.4||1.00|
PLN’s plan for the development of renewable energy under the RUPTL 2018-2027 (in MW/MWe) can be summarised as follows:
How does the system work?
The country’s power generation composition by source of energy, as of November 2017, was as follows:
PT Perusahaan Listrik Negara (“PLN”), the state-owned operator, owns the vast majority of the power generation capacity, production and transmission networks for electricity. In addition to PLN’s own generation, the Government has, for a number of decades, licensed independent power producers (“IPPs”) to generate electricity for use in Indonesia. The licences allow the IPPs to generate a stated amount of electricity for use in Indonesia. This electricity must be sold under a power purchase agreement (“PPA”) between the IPP and the relevant buyer of electricity which, in practice, is usually PLN. The price at which electricity may be supplied to PLN must be approved by the Minister. Consumer tariff rates do not cover the cost of generation. As PLN performs a “Public Sector Obligation”, the Government provides substantial subsidies for the difference between generating costs and consumer tariffs. As at November 2017, total installed power generation capacity in Indonesia had the following breakdown of ownership:
- PLN (state-owned operator) – 40,286 MW (73.8%)
- IPPs – 10,457 MW (19.2%)
- Lease (private power utilities) – 3,835 MW (7.0%)
Overview of recent developments in renewables
Under the National Energy Policy (2014), 23% of all electricity must be procured from renewable sources of energy by 2025. The 2018-2027 RUPTL stated a 23% renewables target by 2025. However, despite the increased number of PPAs signed by PLN this target is unlikely to be achieved by the Government.
From 2014 to 2016, tariff regulations were issued for geothermal, mini-hydro, solar, waste to energy, biomass and biogas IPPs. Wind only became subject to a regulated tariff regime in 2017 (see below). Progress has been sluggish due to resistance from PLN owing to the subsidy required to support these tariff regimes. In December 2016, the Indonesian Parliament rejected a proposed renewable energy subsidy to PLN. In 2017, new regulations were released, capping renewables tariffs by reference to PLN generation costs (see below); this was designed to avoid a subsidy to PLN from renewables development.
In 2017, a Presidential Regulation implementing the 2014 National Energy Policy was issued, providing the general long term policy at the national level regarding energy management. This regulation sets out the policy and strategy on national energy management until 2050 (to be revised every five years).
New tariff and procurement regime for renewable energy
Minister of Energy and Mineral Resources No. 50 of 2017 (“Regulation 50/2017”)
Regulation 50/2017, took effect on 8 August 2017 and revoked the previous MEMR Regulations No. 12 of 2017 (“Regulation 12/2017”) and No. 43 of 2017. This regime applies to solar PV, hydro, wind, biomass, biogas, waste to energy, geothermal and wave and tidal. Tariffs are indexed to PLN’s generation costs, both locally within the relevant region and nationally. Pursuant to Regulation 50/2017: (i) if the local generation cost is higher than the national average, the tariff is capped at 85% or 100% of the local generation cost; and (ii) if the local generation cost is the same as or lower than the national average, the tariff will be determined by agreement of the parties.
The method of procurement applicable for the different renewable energy projects (i.e. solar PV, wind, hydro, biomass, biogas and wave & tidal) under Regulation 50/2017 is the direct selection method. However, for municipal solid waste and geothermal, the procurement is to be made in accordance with applicable laws and regulations. The regulation does not provide details of what is involved in a direct selection process, although it does state that PLN must prepare and publish technical guidelines on the implementation of direct selection method of procurement. Typically, a direct selection process in the power sector involves a competitive tender process involving a minimum of two bidders.
We have set out below a summary of the regulations on setting PLN’s generation costs (“BPP”) for the purposes of this calculation. Exceptions apply to waste to energy and geothermal, in particular in the Sumatra, Java and Bali regions. This new tariff regime does not apply to PPAs already signed, as these will be grandfathered using existing tariffs. The focus is on using renewables in regions where it can lower (or at least not increase)
PLN’s generation costs
The Minister of Energy and Mineral Resources (“MEMR”) has also issued a new regulation on the mechanism for setting PLN’s BPP for particular procurement, both locally and nationally. The BPP will be set annually by MEMR on the basis of a proposal from PLN which references the BPP from the previous year (i.e, the "BPP" for 2017 will be applied for procurement from April 2018 to March 2019). This regulation does not set out a formula or components for calculating the BPP – it merely stipulates numbers – and there is no BPP for particular energy sources. This means renewables energy needs to compete with other cheaper electricity sources, such as coal, because pricing will be linked to the BPP which includes all energy sources, rather than having a specific feed-in tariff for renewable energy.
MEMR has separately set the actual BPP of PLN for 2018, which is valid from 1 April 2018 until 30 March 2019, that will be used as the reference in procurement documents during that period. The national BPP is set at USc7.66/kWh, and there are separate local BPP for different regions in Indonesia. If there is any region that does not have a BPP, then the BPP will refer to the highest BPP stipulated in the Minister’s decision.
Government incentives and tax breaks
Under Presidential Regulation No. 4 of 2016 on the Development of Electrical Infrastructure as amended by Presidential Regulation No. 14 of 2017 (“Perpres No. 4”), power projects may obtain incentives from the central and/or regional government in the form of, among other things: (i) fiscal incentives; (ii) facilities for licensing and non-licensing; and (iii) subsidies.
In addition, based on MOF Regulation No.130/PMK.08/ 2016 on the Granting of Government Guarantees for the Acceleration of the Development of Electrical Infrastructure (“Regulation 130/2016”), there are two types of fiscal guarantee provided by the Government to support acceleration of power infrastructure development. The first type is the loan guarantee for loans to PLN for development of its own power infrastructure. The second type is the business viability guarantee for IPPs to secure certain payment obligations of PLN. In order to obtain the guarantees as mentioned above, the power projects will have to be included on a list drawn up by PLN.
This list is officially approved by the Ministry of Energy and Mineral Resources, and forwarded to the Directorate General of Risk and Financing Management.
The Government has provided: (i) income tax incentives in the form of reductions in taxable income, extended tax loss carry- forward period, accelerated depreciation and amortisation rates, and dividend WHT concessions; and (ii) various concessions on import duties and taxes. However, the ability of Government to achieve its new renewables target may depend on the willingness of the Government to provide further incentives (fiscal incentives or subsidies) to renewables developers.
Foreign ownership limits for small-scale renewables and shareholder structuring
Restrictions on foreign direct investment into a foreign capital investment company are set out in the Presidential Regulation No. 44 of 2016:
The requirement that smaller-scale renewable projects (other than geothermal projects) between 1 MW and 10 MW are subject to a majority domestic ownership requirement gives rise to investment viability and operational challenges for prospective foreign sponsors in these types of projects. However, the Indonesian investment law (Law No. 25 of 2007) does not require that an Investor’s economic benefits and returns must correspond to its shareholding portion. It is therefore open to sponsors to seek to:
There are various possible ways to do this (non-voting shares, preference shares, shareholder loans and service agreements, etc.), each raising different issues under Indonesian law that need to be assessed and managed.
- Electricity generation capacity of <1 MW – reserved for 100% national ownership
- Electricity generation capacity of 1 MW-10 MW – maximum foreign ownership is 49%
- Electricity generation capacity of >10 MW – maximum foreign ownership is 95%, or 100% during the concession period if tender is carried out through the PPP mechanism
- Geothermal power plants less than or equal to 10 MW (open up to 67%)
- re-distribute the economic risks and returns from the project; and
- despite their 49% shareholding, exercise effective management and operational control over the project company.
New tariff regime
Whilst the Government’s desire to adopt a pricing structure for renewables that assists in reducing the existing average cost of generation (and in turn reducing the subsidy dependency of "PLN") is laudable, it remains debatable as to whether benchmarking renewables against the cost of generation from other energy sources at a particular point in time is a legitimate comparison. In particular, this methodology, in comparing the cost of procuring renewables generation against (for example) the cost of procuring coal-fired power generation at a point in time, arguably does not take proper account of either fluctuations in fossil fuel prices (which are passed through to PLN and included in the cost of generation) over time or indirect environmental costs of continued reliance on fossil fuels in the fuel mix.
Risk allocation under the Power Purchase Agreement
Regulation of the Minister of Energy and Mineral Resources No.10 of 2017 on Basic Provisions of Power Purchase Agreement (“Regulation 10/2017”) which prescribes certain PPA risk allocation concepts that PLN must follow for certain power projects was amended by Minister of Energy and Mineral Resources Regulation No. 49/2017 (“Regulation 49/2017”) and Minister of Energy and Mineral Resources Regulation No. 10/2018 (Regulation 10/2018). Regulation 10/2017 caused much consternation in the industry, as it appears to codify certain risk allocation principles – particularly with regard to political risk and PLN grid risk – that roll back safeguards that have for years underpinned the bankability of Indonesian PPAs. As a result, Regulation 49/2017 and Regulation 10/2018 were introduced to improve upon the position surrounding risk allocation principles with regards to political risks and government related force majeure for the IPPs. However, there are still some concerns affecting the IPPs under Regulation 10/2017 which remains unchanged in Regulation 49/2017 and Regulation 10/2018 including the absence of deemed dispatch payments to IPPs where a force majeure event affects PLN’s electricity grids.
Regulation 10/2017 (as amended by Regulation 49/2017 and Regulation 10/2018) only applies to new PPAs to be entered into by PLN and importantly for the renewables sector does not apply to “intermittent” power generation projects (e.g. solar and wind projects), mini-hydro projects below 10 MW, biomass power projects and municipal waste to energy projects. However, Regulation 10/2017 (as amended by Regulation 49/2017 and Regulation 10/2018) will still apply to, for example, large-scale hydro projects and geothermal projects.
Even though Regulation 10/2017 (as amended by Regulation 49/2017 and Regulation 10/2018) does not apply to many PPAs in the renewables sector (on the basis that these will be separately regulated), it remains to be seem how the PPA form will be rolled out by PLN across these renewables sectors. To date, PPAs in the smaller-scale renewables space (such as mini- hydro and solar PPAs) have been short-form PPAs that do not in any event reflect an internationally bankable risk allocation on issues such as political risk and PLN grid risk.
Indonesian Law No. 7 of 2011 on Currency, together with the implementing regulations issued by Bank Indonesia, imposes certain currency restrictions, including that Rupiah must be used to settle financial obligations within the territory of Indonesia.
PBI 17/3/2015 also provides that business entities must also state the price for goods and/or services only in IDR. It is further clarified by SEBI 17/11 that business entities are prohibited from stating the price for goods and/or services simultaneously in both IDR and foreign currency (dual quotation).
BPP figures are denominated in USD and IDR which leaves open the possibility to denominate the tariff in the PPA in USD under Regulation 50/2017 although payable in Rupiah. For recent large-scale power projects, PLN has accommodated sponsor and lender concerns on currency risk inherent in this arrangement by entering into a tripartite converting agreement with a local bank under which PLN will guarantee the USD amount on conversion back from Rupiah. However, we expect that PLN may be reluctant to offer this concession for the smaller-scale renewables developments, and accordingly residual currency risks will need to be assessed and managed carefully by the sponsors.
Land acquisition and spatial layout plans
Power and infrastructure projects in Indonesia continue to be plagued by land acquisition problems, particularly in the populated areas of Java Island.
In 2012, Indonesia enacted a new regulatory framework governing land procurement in the public interest. Power plants and electricity transmission distribution fall within the scope of this law. The recent successful application of these regulations in the context of the Central Java IPP project has given renewed hope that these new laws can actually deliver large-scale infrastructure projects that would once have been incapable of development.
However, another key problem in this area is the misalignment between the national and regional spatial layout plans. The Government has recently introduced amendments to the spatial planning regulatory framework to accelerate amendments to spatial plans and potentially for strategic projects to proceed on the basis of their inclusion in the national spatial layout plan. Nevertheless, only time will tell if these changes will in practice facilitate the issuance of local permits, such as location permits required for land acquisition, that have been held up due to misalignment between the national and regional spatial layout plans.
For further information, please contact:
David Holme, Senior Foreign Legal Advisor, Partner, Linklaters