New And Renewable Energy Bill: Attempt At A Breakthrough In The Indonesian Energy Sector.
Legal News & Analysis - Asia Pacific - Indonesia - Energy & Project Finance
9 December 2020
Following the enactment of the Omnibus Law recently, the Indonesian House of Representatives (“DPR”) is now preparing to enact the New and Renewable Energy Bill (“Bill”). The draft Bill has been discussed since 2017 and has now become a priority in the Indonesian legislative program for 2020.
Currently, the provisions on New and Renewable Energy (“NRE”) are mainly stipulated in Law No. 30 of 2007 on Energy, and partially under separate sectoral laws, including Law No. 30 of 2009 on Electricity (“Electricity Law”), Law No. 21 of 2014 on Geothermal Energy (“Geothermal Law”), Law No. 10 of 1997 on Nuclear Energy, Law No. 22 of 2001 (“Oil and Gas Law”) and Law No. 4 of 2009 on Mineral and Coal Mining (“Mining Law”). Most of the provisions are discrete as these laws were issued in different years and focused on a specific sector. These laws need to be rejuvenated to keep abreast of recent trends in the development of the NRE market and Indonesia’s commitment to reducing its greenhouse gas emission under the Paris Agreement, ratified under Law No. 16 of 2016, and to meeting Indonesia’s energy demand.
Due to the importance of the Bill to the domestic needs of NRE as alternative energy sources to fossil fuel, we will discuss the key provisions brought about by the Bill in some detail below:
The Bill defines new energy as any energy derived or produced from a new processing technology of non-renewable and renewable energy sources. The definition itself does not explicitly mention nuclear energy but in the operating provision of the Bill, it is stated that sources of new energy comprise nuclear and other new energy sources.
Nuclear energy generation is divided into nuclear power and heating plants. The development, operation, and decommissioning of nuclear power can only be carried out by a specialized state-owned enterprise with prior approval from the DPR. Private entities and other state-owned enterprises may only carry the development, operation, and decommissioning of nuclear heating plants.
The Bill also designates a nuclear supervising agency (“NSA”), which is directly responsible to the President on the safety and security aspects of a nuclear plant. Furthermore, the President has also established a nuclear advisory assembly to guide government policy on the safety and sustainability of national nuclear development.
The central government is authorized to license nuclear business; before a business license is issued, a nuclear business entity must obtain nuclear safety and security clearance from the NSA.
NRE (other than nuclear)
The Bill does not specify the types of new energy sources that will be regulated under the law. Generally, it may cover all energy sources other than nuclear, coal, and oil and gas. Unlike new energy, the Bill specifies the types of renewable energy, which includes, geothermal, wind, biomass, solar, hydro energy, and waste-to-energy.
Private entities may engage in NRE business after obtaining a business license from the central or regional authority as appropriate. The division of authority between central and regional governments for business licensing is still unclear.
The scope of NRE business covers: (i) power generation; (ii) industry support business; (iii) transportation; and (iv) other activities. NRE also can be exported after obtaining an export permit from the Minister of Trade based on a recommendation from the Minister of Energy and Mineral Resources and subject to the applicable export tax. Furthermore, NRE development must also meet national or international technological standards after following technology screening and independent technology due diligence.
The Bill gives an incentive to business players in renewable energy, as PT PLN (Persero), the Indonesian state-owned enterprise in the electricity business, is obliged to purchase electricity generated from renewable energy. Furthermore, the Central Government may instruct PT PLN (Persero) and PT Pertamina (Persero) or other business entities in the oil and gas business to purchase electricity or fuel from a producer using NRE sources. The price and mechanism for the purchase of NRE sources are further set out in a Government Regulation.
The provisions on NRE business would need to be further detailed in the implementing regulations as it has not yet addressed the possibility of the dualism of business licensing between the provision of the Bill and other sectoral laws e.g., the Electricity, Geothermal, Oil and Gas and Mining laws.
Renewable Energy Portfolio Standard (REPS)
The Bill introduces a new requirement for power plant companies that generate electricity from fossil fuels (e.g., coal and diesel power plants) to meet the REPS. The Bill defines REPS as the minimum standard for a business entity that generates electricity from non-renewable energy sources to generate electricity from renewable energy sources. If a power plant company fails to meet the REPS, it must purchase a Renewable Energy Certificate.
This new requirement seems to have a significant impact on existing fossil fuel power plant companies as they are forced to invest in and diversify their electricity generation to renewable energy sources. They are also obliged to periodically report on their plans to provide renewable energy.
Furthermore, a company engaged in the oil fossil fuel business is required to blend its fuel with plant-based fuel sources. It is unclear how blending should actually be implemented, particularly whether it means selling two types of fuel i.e., fossil and plant-based fuel, or both types must be combined all together.
At the moment, it is still unclear how the REPS will be implemented and how the Government will establish the “carbon offset” infrastructure adopted in the Paris Agreement. Previously, the Government introduced a National Carbon Scheme (SKN) but certification and trading of this certificate are merely voluntary.
The Bill also sets out administrative sanctions on companies that do not comply with the above REPS obligation as a written warning, suspension of business activities, fines, or cessation of business activities.
The Bill provides that the NRE tariff must be stipulated by the Central Government as: (i) a tariff based on type, characteristics, technology, location or power plant installed capacity from renewable energy sources; (ii) plant-based fuel index market price; (iii) a tender mechanism.
The Bill also gives a notable incentive to renewable power plant companies that could increase the bankability of NRE projects. It is stipulated that if the electricity tariff of renewable power plant companies is more than the base cost of the state-owned company’s power plant, the Central Government is obliged to reimburse the difference between the renewable energy tariff and the applicable base cost of a state-owned company’s power plant.
Furthermore, the price of fossil fuel that has been blended with plant-based fuel is determined according to (i) production cost; (ii) index market price of plant-based fuel blended with fossil fuel; (iii) distribution and processing cost of plant-based fuel; (iv) state subsidy.
Central Government and Regional Government, in accordance with their authority, may offer fiscal or non-fiscal incentives within a certain period to:
NRE business entities; and
Fossil fuel electricity business entities that meet the REPS.
The details of incentives will be set out in a Government Regulation;
The Bill obliges the Central or Regional Government to procure the NRE fund in order to accelerate the transformation from non-renewable to renewable energy sources in accordance with the national energy policy target. The source of the NRE’s fund is sourced from (i) regional/state budget; (ii) NRE export tax; (iii) carbon trading fund; (iv) new energy certificate fund; and (v) other sources. The Ministry of Finance is authorized to manage and administer the NRE fund.
The Government and lawmakers are moving in the right direction to regulate NRE as dedicated law. It aims to create a more supportive climate for investment in NRE, which is expected to follow the international trend in the shifting of energy resources from fossil fuels to NRE.
However, the Bill itself is still far from final as it still needs to be detailed further, particularly on the new instruments introduced in the Bill, and on tariffs and incentives. These matters are essential, not only to NRE business players but the existing conventional or non-renewable energy business players that will also be affected.