Alternative Energy & Power 2021

Last Updated July 20, 2021

Indonesia

Law and Practice

Authors



ABNR Counsellors at Law was established in Jakarta in 1967 and is one of the largest independent full-service law firms in Indonesia, and the sole Indonesian member of the world’s largest law firm association, Lex Mundi. ABNR has played a major role in the financing of most significant Indonesian power projects. It has advised on project finance aspects, including financing structures involving BOT and BOO, and issues relating to government guarantees. ABNR has also advised on gold, copper and coal mining projects, including the regulatory and licensing framework of these industries. It also assists mining service companies with contracts and compliance with tender procedures.

The electricity industry in Indonesia is governed by Law No 30 of 2009 concerning Electricity (the “Electricity Law”) as amended by Law No 11 of 2020 on Job Creation (the “Job Creation Law”), which revokes the previous law (Law No 15 of 1985 – “Law 15/1985”). 

Under Law 15/1985, PT PLN (Persero) (PLN) held the sole right to provide electricity in Indonesia. This was based on Article 33 of Indonesia’s 1945 Constitution, which provides that the State must control all natural resources and production sectors deemed essential for the welfare of the people. Under Law 15/1985, PLN monopolised the electricity sector in Indonesia. 

Under the Electricity Law and Government Regulation No 5 of 2021 concerning Risk-Based Business Licensing (“GR 5/2021”), a company that has a business license for electricity supply (Izin Usaha Penyediaan Tenaga Listrik or IUPTL), Business Identification Number (NIB) and Certificate of Standard can supply electricity for the public interest. PLN is granted "first priority position" to do business in supplying electricity for the public interest, but other companies holding an IUPTL can also supply electricity for the public interest. Furthermore, with the issuance of (i) Government Regulation No 25 of 2021 on the Management of Energy and Mineral Resources (“GR 25/2021”); and (ii) Government Regulation No 14 of 2012 concerning the Electricity Supply Business, as amended by Government Regulation No 23 of 2014 (“GR 14/2012 as amended”), and its implementing minister regulations – namely Minister of Energy and Mineral Resources Regulation No 35 of 2013 concerning Procedures for Obtaining Permits for Electricity Business, as amended by Minister of Energy and Mineral Resources Regulation No 12 of 2016 (“MEMR Regulation 35/2013 as amended”) – private companies are permitted to sell electricity to the public or directly to consumers, subject to obtaining an Electricity Business Area Stipulation based on Minister of Energy and Mineral Resources Regulation No 28 of 2012 concerning Application Procedures for Electricity Business Areas to Supply Electricity for the Public Interest, as amended by Minister of Energy and Mineral Resources Regulation No 7 of 2016. 

Electricity Supply Business

The electricity supply business for the public interest in Indonesia consists of power generation, transmission, distribution, and/or power sales. 

Furthermore, the Electricity Law and GR 14/2012 as amended stipulate that a (private) power company may carry out all of the above activities in an integrated manner. However, the undertaking of the foregoing types of electricity supply business under the Electricity Law is subject to Constitutional Court Decision No 111/PUU-XIII/2015, dated 14 December 2016 (“Constitutional Court Decision”), which ruled that the concept of “unbundling” is unconstitutional. It is understood that the government of Indonesia (GoI), through the Ministry of Energy and Mineral Resources (MEMR), generally interprets the unbundling concept referred to in the Constitutional Court Decision as meaning the business of providing or supplying electrical power directly to end consumers (vertical unbundling). 

It should be noted that this view has never been tested by the court, as there have been no subsequent challenges to the way in which the power business is currently carried out by GoI/MEMR, PLN and private electricity developers, nor to its compliance with the Constitutional Court Decision. In current practice, the power industry in Indonesia consists of the following: 

  • disaggregated entities for each of generation, transmission, distribution and sale, with most – if not all – of them engaging in the power generation activities with PLN as the off-taker; or 
  • private power companies that carry out all of the above electricity supply operations (power generation, transmission and distribution) in an integrated manner and within one single entity to supply or sell to end consumers (bundled) (“Integrated Power Company”). 

Industrial Supply

Most, if not all, Integrated Power Companies in Indonesia supply electricity to industrial areas that are identified in their Stipulation of Business Area, which are issued by the Online Single Submission (OSS) on behalf of MEMR as stipulated under Minister of Energy and Mineral Resources Regulation No 39 of 2018 concerning Electronically Integrated Business Licensing Service in The Electricity Sector (“MEMR Regulation 39/2018”) (Integrated Power Company holding a Stipulation of Business Area hereinafter referred to as private power utility company (“PPU”)). 

PLN is currently the sole state-owned company that owns and operates power generation, transmission and distribution facilities in Indonesia in order to fulfil the main purpose of its establishment – ie, providing electricity to the public. Other state-owned companies in the energy sector, such as PT Pertamina (Persero) and PT Geothermal Nusantara (Persero) (previously known as PT Geo Dipa Energi), own and operate power generation facilities and sell the electricity produced to PLN as an off-taker. 

Power Generation

Investor-owned companies or Independent Power Producers (IPPs) in Indonesia mostly engage solely in power generation activity. By and large, these IPPs own and operate power generation facilities for a limited duration only – ie, for the duration of the power purchase agreement (PPA) with PLN – since almost all IPP projects with PLN as off-taker are developed under the build, own, operate and transfer (BOOT) scheme, except for:

  • a handful of power projects (with relatively small to medium size capacity) developed under build, operate and owned (BOO) schemes with PLN that existed before the enactment of Minister of Energy and Mineral Resources Regulation No 10 of 2017 concerning Principles of Power Purchase Agreements as amended by Minister of Energy and Mineral Resources Regulation No 49 of 2017 and Minister of Energy and Mineral Resources Regulation No 10 of 2018 (collectively “MEMR Regulation 10/2017 as amended”), which requires PPAs with PLN to be based on the BOOT scheme with an exception for renewable based energy power plants in which the PPA can be based on BOO scheme pursuant to MEMR Regulation No 4 of 2020 concerning second amendment to the MEMR Regulation 50/2017 (as defined below); and
  • renewable energy power generation which use BOO scheme as regulated under Minister of Energy and Mineral Resources Regulation No 50 of 2017 concerning Utilisation of Renewable Energy for the Supply of Electricity Power, as amended by Minister of Energy and Mineral Resources Regulation No 53 of 2018 and Minister of Energy and Mineral Resources Regulation No 4 of 2020 (“MEMR Regulation 50/2017 as amended”).

There are hundreds of (power generation) IPPs in Indonesia but PT Paiton Energy, PT Cirebon Electric Power, PT Jawa Power and PT Central Java Power are currently the four largest IPPs in Indonesia that supply electricity to PLN. The list will soon be expanded to include PT Bhimasena Power Indonesia, PT Bhumi Jati Power and PT Cirebon Energy Prasarana, among others, once their respective power projects have reached commercial operation. 

In addition to IPPs, there are also PPUs in Indonesia that sell electricity to end-use consumers in industrial areas, with the largest being PT Cikarang Listrindo Tbk. 

The Investment List

Foreign direct investment in Indonesia is subject to Presidential Regulation No 10 of 2021 regarding Business Fields for Investment as amended by Presidential Regulation No 49 of 2021 or “Investment List”. Under the Investment List, certain lines of business are 100% closed for foreign direct investment (FDI) or subject to specific requirements, such as:

  • open to FDI but subject to maximum foreign shareholding limit;
  • open to FDI but subject to special approval from the relevant ministry;
  • only open for greenfield FDI in specific provinces.

A power generation activity with capacity above 1 MW, power plant transmission and distribution business activities as well as integrated power generation and distribution activities are open for 100% foreign shareholding.   

PT PMA Rights and Protections

PT PMAs are generally treated the same as domestic investment or local limited liability companies, with their rights and protections regulated principally under Law No 25 of 2007 concerning Capital Investment as amended by Job Creation Law (“Investment Law”). The Investment Law is silent on protection against seizure and confiscation but, in general, seizure and confiscation can only be conducted based upon a court decision. In respect of expropriation, the term used in the Investment Law is the nationalisation or takeover of property rights of the investor. Under the Investment Law, the GoI shall not conduct the nationalisation or takeover of property rights of the investor, unless by law. 

If the GoI does nationalise a PT PMA or acquire the property rights of the investor, it must compensate the investor in an amount based on market prices.   

In the event of a dispute between the GoI and the foreign investor, the Investment Law provides that the parties can resolve the dispute through international arbitration to be agreed by the parties. Please note that Indonesia is a party to the ICSID (International Centre for the Settlement of Investment Disputes) Convention.   

Encouraging Foreign Investment

To encourage foreign investment, various facilities may be provided by the GoI for power sector investors, namely: 

  • income tax relief through a reduction of net income to a specified extent of the total investments made within a defined period; 
  • exemptions or relief on import duty for production capital goods, machines, or equipment not yet produced domestically in Indonesia; 
  • exemptions or relief on import duty for production raw materials or components for a defined period, subject to specified requirements; 
  • exemptions or deferment of VAT for a defined period in relation to the importation of production capital goods or machines or equipment not yet produced domestically; and 
  • accelerated depreciation or amortisation. 

Sale of Power Industry Assets

Generally, there are no restrictions on the sale of power industry assets or businesses for pure private power projects (not involving PLN as the off-taker), save for general restrictions and requirements that are applicable to all PT PMA that wish to sell their businesses, or conduct amalgamations (the Company Law does not recognise the term "amalgamation" – the closest term in the Company Law is "consolidation") and mergers. The procedures for selling a company assets or business, consolidations and mergers are regulated under Law No 40 of 2007 concerning Limited Liability Companies as amended by Job Creation Law (the “Company Law”). In general, any plans for mergers/consolidations must initially be announced in a newspaper with national circulation and to the employees at least 30 days before the General Meeting of Shareholders (GMS) to approve the merger/consolidation, and the deed of merger/consolidation must be submitted to the Ministry of Law and Human Rights (MOLHR) for approval, and notified to MEMR; the surviving or new company must also make a post-merger/post-consolidation announcement. 

The shareholding composition after these processes must take into consideration the Negative List applicable to each power business activity. The process normally takes around three to six months to complete. The selling of assets that constitute more than 50% of the net assets of the company based on the book value as per the latest balance sheet adopted by the GMS must be approved by the GMS with at least three quarters of the total shares having voting rights being present or represented at the GMS, and a resolution shall be valid if it is approved by at least three quarters of the total votes cast, unless the articles of association provide for a greater quorum for attendance and/or for the requirements for adoption of a resolution of the GMS. 

Power Projects

For power projects with PLN acting as the off-taker, the sale of generation, transmission and distribution assets and the amalgamation or merger of power industry entities are restricted contractually and by regulations. In PPAs under the BOO scheme, the restrictions are normally contractual, whereby the IPP must obtain prior approval from PLN before it can sell the generation, transmission and distribution assets or conduct an amalgamation or merger. In PPAs under the BOOT scheme, the general rule is that power industry entities are not allowed to sell the power generation facilities, unless for the enforcement of securities held by the senior lenders of the project and with prior written consent from PLN, given that the power generation facilities are owned by the IPP only for the duration of the PPA and must be transferred to PLN at the end of the PPA. 

The transmission facilities or assets all belong to PLN. Furthermore, in a BOOT scheme power project with PLN, in order to ring fence the assets before they are transferred to PLN at the end of the PPA, PLN would normally require the sponsors to establish a special purpose company to act as the project company that directly owns and operates the project. A standard PPA with PLN will normally have the following provisions: 

“Except as otherwise provided in this Agreement, SELLER shall not (a) engage in any business activity other than as reasonably required to perform its obligations and enjoy its rights under the Project Documents to which it is a party, or (b) enter into any agreement of merger, consolidation or amalgamation with any entity, or (c) except as may otherwise be required by the Finance Parties for the purpose of enforcing SELLER’s payment obligation to the Finance Parties, dispose of all or substantially all of its assets.”

In addition, any transfer of shares in IPPs under a BOOT scheme with PLN is subject to restriction as set out under Minister of Energy and Mineral Resources Regulation No 48 of 2017 concerning the Supervision of Business Activities in Energy and Mineral Resources Sector (“MEMR Regulation 48/2017”). In this regard, MEMR Regulation 48/2017 differentiates between transfers of shares for non-geothermal IPPS and for geothermal IPPs. 

Non-geothermal IPPs

For non-geothermal IPPs, written approval must be obtained from PLN for a transfer of shares prior to the Commercial Operation Date (COD), with such transfers in any case only being allowed where the transfer is to affiliated parties whose shares are more than 90% owned by an equity financier or sponsor of the IPP which is an Indonesian legal entity that carries out permanent and continuous business activities in Indonesia. In other words, the transfer of shares to non-affiliated parties is not permitted even with approval from PLN. Subsequently, after the transfer of shares, the non-geothermal IPP must notify MEMR no later than five business days from the date the MOLHR provided its receipt of notification of the change of shareholding. 

For geothermal IPPs, MEMR Regulation 48/2017 distinguishes between a public and private sale of shares, and provides that geothermal IPPs may transfer shares on the stock exchange once the exploration phase is complete, subject to the Minister’s approval prior to the initial public offering (IPO), or before the transfer of share ownership is recorded on the stock exchange. Discussions with the Director General of New Renewable Energy and Energy Conservation (EBTKE) have clarified that the Minister’s approval will be required both prior to a geothermal IPP’s IPO and before the transfer of ownership is recorded on the stock exchange for all secondary offerings and rights issuances. MEMR will issue its approval or rejection of a geothermal IPP for the transfer of shares through public trade within 14 business days of receiving all required documentation. 

It is unclear whether the prohibition on the transfer of shares during the exploration phase applies to private sales. However, it is understood that the current applicable view from EBTKE is that a geothermal IPP can privately transfer its shares during the exploration phase and the exploitation phase. Geothermal IPPs must notify MEMR of the transfer within five business days of providing notice to and/or obtaining approval from the MOLHR. 

MEMR – in particular the Directorate General of Electricity (DGE) – generally oversees and administers the electricity supply and development of transmission facilities. The ownership and operation of transmission and distribution facilities for public interest are currently monopolised by PLN. Independent or privately owned and operated transmission lines are limited to those in industrial areas where the supply of electricity is provided by a PPU, instead of PLN. 

The implementation of electricity supply business activities must be based on National Electricity General Plan (Rencana Umum Ketenagalistrikan Nasional or RUKN) determined by MEMR. RUKN must be used as the basis to prepare Regional Electricity General Plan (Rencana Umum Ketenagalistrikan Daerah) and long-term power supply business plan (Rencana Usaha Penyediaan Tenaga Listrik or RUPTL). PLN is responsible for preparing RUPTL, which includes generation and transmission planning and development within the Indonesian territory to make sure there is an adequate supply of electricity for public interest. The RUPTL is periodically updated by PLN, and such updates have to be approved by MEMR or the Governor in accordance with its authority. GR 25/2021 allows RUKN and General Regional Electricity Plan to be updated through processes of review.   

As the regulator, and through various regulations, MEMR/DGE sets out and enforces the system reliability standards and safety for all kinds of power facilities, including generation, transmission and distribution.

On 24 February 2020, the Minister of Energy and Mineral Resources issued the second amendment to MEMR Regulation 50/2017 with Regulation No 4 of 2020 (“MEMR Regulation 4/2020”). Significant change with the issuance of MEMR Regulation 4/2020 is that for renewable energy-based power plants, PLN and the IPP is no longer obliged to enter into a PPA with the BOOT scheme and instead the PPA can be based on the BOO scheme.

On 2 November 2020, the GoI enacted the Job Creation Law amending several provisions of the Electricity Law, which was followed by the enactment of GR 25/2021 as one of its implementing regulations in the energy sector and GR 5/2021. With respect to power generation activities, there are some changes to details with respect to issuance of Stipulation of Business Area, which must meet the following criteria:

  • inability of the holder of an already existing business area (“Existing Holder”) to provide electricity; 
  • inability of Existing Holder to meet the required quality and reliability standards; 
  • the obligation of the Existing Holder to return part or all of their legal territory to the Minister; 
  • there is no Existing Holder in the same area proposed by a new business entity; and/or 
  • the business area proposed by a business entity is an integrated area that manages energy resources in an integrated manner in accordance with the electricity requirement patterns of businesses. 

Furthermore, GR 25/2021 also stipulates that the changes of business area can be carried out in the form of:

  • expansion of the scope of a business area for a holder of Stipulation of Business Area in the event the holder of business area adjacent to it is unable to provide electricity within its business area; or
  • reduction of business area of the Existing Holder in the event the Existing Holder unable to provide electricity in some part of its business area; or
  • other changes based on the above criteria. 

Instead of a policy, the material changes in the Indonesian power industry are due to the recent implementation of a regulation issued in 2016: Presidential Regulation No 4 of 2016 concerning Acceleration of Electricity Infrastructure Development as amended by Presidential Regulation No 14 of 2017 (“PR 4/2016”). Under PR 4/2016, power projects are developed through a joint venture with PLN, through its subsidiary, and a private power developer, with PLN’s subsidiary holding a minimum of 51% shares in the joint venture company. The joint venture company acts as the project company and enters into a power purchase agreement with PLN. Currently, the mechanism under which PR 4/2016 is implemented is limited to coal and gas power plants. However, the possibility that PLN will apply PR 4/2016 in the procurement of renewable energy-based power plants cannot be ruled out. 

Further, the GoI (in particular the regional government) is currently pushing for the development of a waste-to-energy plant to help resolve municipal waste management problems in big cities in Indonesia. PLN is assigned by the GoI to purchase the electricity produced by the waste-to-energy plants developed by a business entity appointed by the relevant regional government (through tender process) as part of the management of the municipal solid waste in the region. 

The power industry in Indonesia is heavily regulated by the GoI, including as regards licensing, power purchase agreements with PLN, and electricity prices and tariffs for power generation, transmission, distribution and sale to end consumers. The reason for this is found in the 1945 Constitution (the “Constitution”), which generally provides that the utilisation and management of mineral resources (including electricity) shall be under the control of the GoI and shall be used to promote the welfare of the Indonesian people to the maximum extent possible. 

The wholesale price of electricity is regulated under the Electricity Law and GR 14/2012 as amended, and is set by price regulation and subject to initial approval being obtained from MEMR if sold to PLN, or from the Governor/Regent (according to its authority) if the electricity produced is sold to another IUPTL holder whose licence is issued by the Governor/Regent.   

The power industry in Indonesia is based on the capacity market, with almost all electricity produced by power generation companies being sold to PLN, which has the obligation to provide electricity to all Indonesian people and which naturally monopolises the sale of electricity to end consumers. Only a very small percentage of electricity is produced, distributed and sold directly to end consumers by PPUs in industrial areas so it is not known whether it can be considered an energy market, considering as well that the electricity price to the end consumer in such an arrangement is subject to price regulation as it must be approved by the Governor/Regent (according to its authority).   

Electricity Purchase Price

In respect of the electricity purchase price for IPP projects with PLN, the GoI does not determine the exact electricity purchase price, instead providing benchmarks for electricity purchase prices based on the primary cost of power generation by PLN (Biaya Pokok Penyediaan Pembangkitan PLN or PLN BPP) in the local and national electricity systems. PLN BPP is prepared by PLN annually, to be further approved and published by MEMR. The PLN BPP that is used to determine electricity purchase prices is determined by MEMR in the previous year. The final agreed electricity purchase price must be approved by MEMR before PLN and the IPP sign the PPA. The benchmark formula for electricity purchase prices is regulated under several MEMR Regulations, namely: 

  • MEMR Regulation 50/2017 as amended;
  • Minister of Energy and Mineral Resources Regulation No 19 of 2017 concerning Utilisation of Coal for Power Plant and Purchase of Excess Power (“MEMR Regulation 19/2017”) for coal-fired power plants (both mine mouth and non-mine mouth); and 
  • Minister of Energy and Mineral Resources Regulation No 45 of 2017 concerning Utilisation of Natural Gas for Power Plant, as amended by Minister of Energy and Mineral Resources No 10 of 2020 (“MEMR Regulation 45/2017 as amended”) for gas-fired power plants.

The Electricity Law opens up the possibility for the export and import of electricity to and from other jurisdictions. Government Regulation No 42 of 2012 concerning Cross-country Sales and Purchases of Electricity (“GR No 42/2012”) provides that the export or sale of electricity to another jurisdiction or country may be conducted on the following conditions: 

  • that the need for electricity in the local and the surrounding areas has been met;
  • that the selling price of electricity does not contain any subsidy; and 
  • that it will not disturb the quality and reliability of the local electricity supply. 

Given that Indonesia still suffers from an electricity shortage overall, it is unlikely that the country will export electricity in the near future. 

Purchase of Electricity from Other Jurisdictions

The import or purchase of electricity from other jurisdictions or countries may be conducted on the following conditions: 

  • local demand for electricity has not been fulfilled (with the benchmark being that the reserve capacity is less than 30% of peak load); 
  • it is only to support the fulfilment of local needs for electricity (meaning that the import of electricity shall not be the main source of supply to fulfil the local needs for electricity); 
  • it does not harm the interests of the state and the nation related to sovereignty, security and economic development; 
  • it is intended to improve the quality and reliability of the local electricity supply; 
  • it does not neglect the development of domestic electricity supply capability; and 
  • it does not cause dependence on electricity supply from abroad so that if such supply is cut off, the local power system can still be functionalised to provide the electricity. 

As far as is known, there are no IPPs that engage in the import of electricity, given the conditions above that must be met cumulatively. If the business of the export and import of electricity does take off in Indonesia, the electricity purchase price for the import and the electricity selling price for the export must be approved by the MEMR.

Based on RUKN of 2019–38, the projection of the composition of the fuel mix of power generation in Indonesia by 2025 will be 55% from coal, 22% from gas, 23% from renewable energy and 0.4% from diesel fuel. Furthermore, by 2038, it is expected that the portion of renewable energy will increase, which will make the composition of the fuel mix of power generation 47% from coal, 25% from gas, 28% from renewable energy and 0.1% from diesel fuel. Based on recent publication issued by National Energy Council (Dewan Energi Nasional), the provisional calculation results of the New and Renewable Primary Energy Mix in Semester 1 2020 amounted to 10.77%-10.90%. 

Electricity supply in Indonesia is essentially controlled by PLN and MEMR. Every supply of electricity in Indonesia must be based on PLN’s RUPTL and RUKN. If there is a limit to electricity supply in Indonesia, it is not due to lack of demand in the market but more to the inability of PLN to absorb all of the electricity supplied by power generation IPPs due to deficiencies in transmission and distribution facilities to distribute and sell the electricity to end consumers. 

The Electricity Law provides the opportunity for the private sector to participate in the power supply business in Indonesia, including wholesale supply to PLN through a certain procurement mechanism (tender, direct selection or direct appointment). PLN generally still holds the monopoly for the supply to end consumers, and the market itself is heavily regulated for the reason mentioned in 1.8 Unique Aspects of the Power Industry. The Constitution does not allow the GoI to create a fully competitive market in the electricity sector, as seen from the fact that the electricity purchase price and electricity tariff charged to end consumers must be approved by the GoI and the House of Representative. 

The competitive market in Indonesia is supervised by the Indonesian Competition Commission (Komisi Pengawas Persaingan Usaha or KPPU). Pursuant to Law No 5 of 1999 concerning the Ban on Monopolistic Practices and Unfair Business Competition, KPPU acts as the agency that conducts surveillance of the market, which has the authority to determine whether or not there is an unfair business competition.

Currently, there are no specific laws or policies that regulate climate change in relation to the power industry. Prior to ratifying the Paris Agreement by virtue of Law No 16 of 2016 regarding the Ratification of Paris Agreement to the United Nations Framework Convention on Climate Change, the GoI attempted to raise awareness of the climate change issue by issuing Minister of Environmental and Forestry Affairs Regulation No P.39/Menlhk-Setjen/2015 on the environmental programme for 2015-19, including but not limited to a programme to reduce the area of forest fires that occurred during 2015, and the “Kampung Iklim” programme, as further described in this Section. 

There is also an effort to utilise production forest (hutan produksi) and protected forest (hutan lindung) areas to absorb and store carbon dioxide as regulated under Minister of Forestry Regulation No P.36/Menhut-II/2009 as last amended by Minister of Environmental and Forestry Affairs No P.8/Menlhk-II/2015 which can be applied by a businessperson who hold a business licence in forestry sectors.

Although the GoI has also not yet enacted the carbon tax or a cap-and-trade system, Indonesia has taken several steps to cut carbon emissions such as:

  • the establishment of the Peatland Special Taskforce to reduce and mitigate peatland fires and to restore the function of peatland, energy conservation in the industrial sector, and the “Kampung Iklim” programme, which was initiated in 2012 in order to recognise the active participation of local communities in implementing actions of climate change mitigation and adaptation; and
  • counter-mitigation in the energy sector by using CCT (clean coal technology) and renewable energy as further stated in Indonesia's Nationally Determined Contribution as an inseparable part of Indonesia's ratification of the Paris Agreement. 

Despite the GoI’s effort to increase the use of alternative energies, fossil fuels still play a major role in energy production, particularly coal. Based on Presidential Regulation No 22 of 2017 concerning the National Energy General Plan (“PR 22/2017”), an important factor is that the technology to develop renewable resources as alternative sources of energy is much more expensive than is the case for fossil fuels. This has retarded the development and utilisation of renewable energy and made it less attractive than fossil fuels. 

As such, until now power generation in Indonesia has been dependent on fossil fuels, and there are currently no specific programmes that encourage or require the early retirement of carbon-based generation. 

In the power sector, one of the ways in which the GoI encourages the development of alternative energy resources is to provide a special portion of 25% of the total capacity to be developed in the ambitious 35,000 MW programme for renewable energy. One of the implementing programmes for the 35,000 MW project in boosting clean energy is “Indonesia Terang” (Bright Indonesia), which aims to provide electricity in rural villages and areas that is generated from clean energy, such as mini-hydro, solar and wind power plants. 

The GoI also continuously encourages the utilisation of renewable energy resources as an alternative option to coal, by issuing MEMR Regulation 50/2017 as amended, which sets clearer grounds for renewable energy resources utilisation for power supply and contains provisions relating to, among other things, the procurement and pricing formulas. By issuing this regulation, the GoI hopes that renewable energy will attract more interest from potential power developers, rather than coal. The types of energy governed under MEMR Regulation 50/2017 as amended are solar, wind, biomass, biogas, waste, geothermal, seawater (by utilising movements and difference in the temperature of sea layers) and vegetable oil. 

There have been discussions between GoI and relevant stakeholders (including House of Representative) with respect to the bill on renewable energy as well as the draft of the presidential regulation on electricity purchase from a renewable energy-based power plant. Although the bill and the draft presidential regulation have been circulating in public, it is unclear when the GoI will issue or enact these regulations. 

Fiscal and Non-fiscal Incentives

Based on Government Regulation No 79 of 2014 on National Energy Policy (“GR 79/2014”), the GoI and regional governments provide fiscal and non-fiscal incentives to encourage the development of renewable energy. The incentives are provided for the development, management and utilisation of renewable energy, especially for small-scale projects that are located in remote areas, so that its economic value can compete with conventional energy. 

Furthermore, under Presidential Regulation No 4 of 2016 on Accelerating the Development of Electricity Infrastructure , as amended by Presidential Regulation No 14 of 2017 (“PR No 4/2016 as amended”), the GoI may provide support by providing fiscal incentives, easy processes for licences and permits, subsidies and prioritisation of land procurement. 

Government Guarantee or Support

Under Ministry of Finance Regulation No 130/PMK.08/2016 as amended by Ministry of Finance Regulation No 135 PMK.O8/2019 (“MoF Regulation 130/2016”) GoI provides two forms of government guarantee or government support, being a Loan Guarantee and a Business Viability Guarantee Letter (BVGL). The Loan Guarantee is a guarantee provided by GoI in relation to construction of power plants by PLN, while a BVGL is a guarantee issued in favour of an IPP by providing assurance to support PLN in connection with certain payment obligations of PLN to the IPP under the PPA. 

As provided under Minister of Finance Regulation No 21/PMK.011/2010, the fiscal facilities provided by GoI for renewable energy business are income tax facilities (eg, reduction of 30% of net income (for six years), escalated depreciation and amortisation, and compensation for loss occurring for more than five years but not more than ten years tax holiday), tax holiday (eg, exemption from tax from five to ten years as of the commercial production and 50% reduction of tax from outstanding income tax for two years), VAT exemption and exemption of import duty. 

The principal laws governing the construction and operation of generation facilities are as follows:

  • the Electricity Law, GR 25/2021, GR 14/2012 as amended and MEMR Regulation 35/2013 as amended; and 
  • Law No 32 of 2009 on Environmental Protection and Management as amended by the Job Creation Law (“Environmental Law”) and Government Regulation No 22 of 2021 concerning Implementation of Management and Protection of Environment (“GR 22/2021”). 

To avoid confusion, in Indonesia construction and operations in the civil works field are regulated by the Minister of Public Works and Housing (MPWH), while construction and operations in the power generation field are regulated by MEMR. Should the appointed construction company perform both civil works and power generation works, then such construction company is required to obtain all major licences, as listed below. If the appointed construction company will only perform the construction and operation of power generation works, such company only needs to obtain the major licences for electricity works. It should be noted that an owner of power generation facilities is required to obtain an Environmental Approval (Persetujuan Lingkungan) and Building Construction Approval (Persetujuan Bangunan Gedung) before the construction of the power generation facilities can commence or be operated. 

Construction Regulations

An EPC contractor in the power industry is subject to Law No 2 of 2017 concerning Construction as amended by the Job Creation Law and its implementing regulations, as well as additional requirements under the foregoing electricity regulations, including local content requirement for electricity infrastructure as stipulated in Minister of Industry Regulation No 54/M-IND/PER/3/2012 as amended by Minister of Industry Regulation No 05/M-IND/PER/2/2017. Specifically, for solar power generation, the local content requirement is regulated under Minister of Industry Regulation No 04/M-IND/PER/2/2017.   

For civil works, the major licences are as follows: 

  • Certification of Business Entity (Sertifikasi Badan Usaha or SBU) issued by Construction Service Business Entity Certification Agency (Lembaga Sertifikasi Badan Usaha Jasa Konstruksi);
  • NIB and Certificate of Standard issued by OSS on behalf of MPWH; and 
  • Permit for Representative of Foreign Construction Business Entity (Izin Perwakilan Badan Usaha Jasa Konstruksi Asing or IPBUJKA) issued by OSS on behalf of MPWH. 

The IPBUJKA is required by a foreign construction business entity that does not wish to establish a limited liability company under Indonesian Law. Nonetheless, in order to undertake construction services, an IPBUJKA holder is required to enter into a joint operation agreement with a local construction company.

Electricity Works 

For electricity works, the major licences are the NIB and Certificate of Standard issued by OSS. For certain electricity supporting activities, the Supporting Electricity Business Licence (Perizinan Berusaha untuk kegiatan usaha Jasa Penunjang Tenaga Listrik or IUJPTL) must also be obtained. 

Separated Construction and Generation

It is common practice in Indonesia for the construction and operation of power generation facilities to be conducted by separate companies that are appointed by the project company. If the project company does not independently construct and operate the power generation facility, it is not required to obtain the above licences. The major licences for a project company are the Electricity Supply Business Licences (Perizinan Berusaha untuk kegiatan usaha Penyediaan Tenaga Listrik or IUPTL), NIB and Certificate of Standard issued by OSS.

Currently most if not all approvals necessary to construct and operate a generation facility are applied for and obtained through OSS. A brief description of the process for obtaining major licences to construct and operate a generation facility (including approvals of the EPC contractor) is set out below. 

Location Permit

In order to obtain or acquire land for the project, the relevant project company must first obtain a permit for land acquisition – the so-called Location Permit (Izin Lokasi). A Location Permit is not evidence of an entitlement to land, but merely constitutes the right for its holder to acquire the land area as stipulated in the Location Permit in accordance with the prevailing laws and regulations. The holder of a Location Permit is permitted to procure plots of land as indicated in the Location Permit in the following manners: 

  • if the plots of land are owned by existing third parties: on the basis of an agreement with the owners of the lands by way of a selling-buying transaction; or 
  • if the plots of land are owned by the State: on the basis of the submission of an application to the State (in which a certain contribution will need to be paid to the State). 

The holder of a Location Permit has priority, but not an exclusive right to acquire the land in the designated area as stated in the Location Permit. In principle, the original landowner still has the freedom to sell his/her land to any other interested party. 

The applicant for a Location Permit is required to submit their application to register the Location Permit electronically through the OSS system by providing, among other things, the NIB and a sketch or map of the land, including coordinates of the requested location. 

Environmental Approval (Persetujuan Lingkungan

As of the enactment of the Job Creation Law and GR 22/2021, the GoI is no longer issuing an Environmental Permit and instead it issues environmental approval, which consists of:

  • an environmental feasibility decree or AMDAL approval (for businesses and/or activities which are subject to the obligation to prepare an Environmental Impact Analysis (AMDAL documents)); or
  • a Statement of Capability in Environmental Management (for businesses and/or activities that are subject to the Environmental and Social Impact Assessment or Environmental and Social Impact Assessment (Upaya Pengelolaan Lingkungan Hidup dan Upaya Pemantauan Lingkungan Hidup or “UKL-UPL”)). The foregoing serves as Environmental Approval (Persetujuan Lingkungan). Environmental Approval is one of the prerequisites for the issuance of business licences or government approvals. 

Pursuant to Regulation of the Minister of Environmental Affairs and Forestry No P.22/MENLHK/SETJEN/KUM.1/7/2018 concerning Norm, Standard, Procedure and Criteria of the Electronically Integrated Business Licensing Service Within the Ministry of Environmental Affairs and Forestry as amended by Minister of Environmental Affairs and Forestry No P.5/MENLHK/SETJEN/KUM.1/1/2020 (“Regulation 22/2018 as amended”), the application of obtaining Environmental Approval shall be accompanied by a document affirming the suitability of the project, with the spatial planning.   

Generally, the process to prepare AMDAL documents and obtain the approval is as follows. 

  • AMDAL Preparation: at this stage, the businessperson is required to prepare AMDAL documents, namely:
    1. Terms of Reference (Kerangka Acuan) (“ToR”) form;
    2. Environmental Impact Statement (Analisis Dampak Lingkungan or ANDAL); and
    3. Environmental Management Plan (Rencana Pengelolaan Lingkungan or RKL) and Environmental Monitoring Plan (Rencana Pemantauan Lingkungan or RPL).
  • The AMDAL documents shall be evaluated by a team consisting of relevant government officials (on behalf of the Minister, governor or regent/mayor). The evaluation covers:
    1. administrative matters (eg, initial approval of the relevant business and/or validity of competence certificates of parties which prepare the AMDAL); and
    2. substantive matters (ie, project phase test, quality review test for ANDAL and RKL-RPL documents and technical approvals). 
  • Based on the above evaluation and assessment, the Minister of Environmental Affairs/Governor/Regent will issue Environmental Feasibility Decree (AMDAL approval) or an Environment Infeasibility Decree (AMDAL rejection) no later than 10 business days after receiving the result of evaluation and assessment.

Business Licence and Commercial or Operational Licence

An IPP is required to obtain a Business Licence (ie, IUPTL) and a Commercial or Operational Licence (ie, Certificate of Operation Installation Worthiness – Sertifikat Laik Operasi and Certificate of Standard). To obtain these licences, the applicant must fulfil certain administrative and technical requirements under MEMR Reg. 39/2018 and submit the application through OSS. The process to obtain each licence can take up to 30 business days after all completed documents have been submitted and accepted. 

PBG 

Any company or person that constructs buildings must obtain approval to construct such buildings, in the form of a Building Construction Approval (Persetujuan Bangunan Gedung) or PBG. The general procedures for obtaining an PMB are based on Government Regulation No 16 of 2021 concerning Building in conjunction with MPW Regulation No 19/PRT/M/2018 concerning Implementation of Building Construction Permit and Building Functions Worthiness Certificate through Electronic Integrated Business Licensing Services. 

A company can apply for the PBG through the Building Management Information System (SIMB). The application must be accompanied with evidence of land right/ownership or a land utilisation agreement, information regarding the owner of the relevant building/structure, and a technical plan of the building/structure, including structural drawings, utility system drawings, architecture drawings, etc. 

Once the building has been constructed, the relevant company should apply for Building Functions Worthiness Certificate (Sertifikat Laik Fungsi) and Building Ownership Certificate (Surat Bukti Kepemilikan Bangunan Gedung). 

Contractor’s Major Licences

SBU

According to GR No 22 of 2020 concerning Implementation Regulation of Law No 2 of 2017 concerning Construction Services as amended by Government Regulation No 14 of 2021, BUJKA can only carry out construction services with category of (i) high risk; (ii) high technology; and/or (iii) high cost. Furthermore, LPJK Regulation No 1/2015 concerning Registration of Foreign Construction Service Business Entity, a Badan Usaha Jasa Konstruksi Asing (BUJKA) can only be given with an SBU for a “large” qualification, specifically large 2 (B2) for the implementation and integrated of construction work and large (B) for the planning and supervision of construction. 

The qualification of BUJKA is determined by several factors, namely net assets, experience and manpower. To obtain an SBU, BUJKA must become a member of a construction association (“Association”) that is acknowledged by LPJK. As a technical matter, in the application for an SBU, BUJKA must submit the required documents to LPJK through the Association, which will then conduct a preliminary verification upon the required documents before it will send them to LPJK. 

Business Licence and Commercial or Operational Licence

Pursuant to Government Regulation No 62 of 2012 regarding Supporting Businesses in the Electricity Sector in conjunction with (i) GR 25/2021 and (ii) GR 5/2021, a company that conducts electricity supporting business services is required to obtain a NIB, a Business Licence (ie, IUJPTL) for certain activities such as construction or installation of power plant and operation and maintenance of power plant, and a Certificate of Standard. To obtain these licences, an application must be submitted to OSS, accompanied by the administrative and technical requirements as stipulated in the regulation. A Business Licence will be issued by MEMR and/or the Governor according to their authority via OSS. A Certificate of Standard will be issued by OSS, however it is still unclear on the procedure and requirement to obtain this new Certificate of Standard. 

Based on the regulation, the process of obtaining a Business Licence (ie, IUJPTL) shall take up to 60 business days after all completed documents have been submitted and accepted, while the process of obtaining a Commercial or Operational Licence (ie, SBU) shall take up to 40 business days after all completed documents have been submitted and accepted. 

The time required from the early development of a project up to the starting of construction may be one to two years. 

It is quite difficult to generalise the terms and conditions imposed in all the approvals, since the coverage and purpose of issuance of each approval are different, thus creating different obligations in each approval. However, usually each approval will commit the holder to do the following, among others:

  • submit a periodic report on its activity to the issuing authority of the approval holder;
  • seek approval and/or report to the issuing authority if there are any changes in the project or the project company;
  • conduct its activity only within the approved area; and 
  • utilise domestic goods in accordance with the applicable regulations. 

The acquisition of land for public interest is regulated under Law No 2 of 2012 as amended by the Job Creation Law (“Law 2/2012”) and its implementing regulations, namely Government Regulation No 19 of 2021 concerning Management of Land Acquisition for the Development of Public Interest (“GR 19/2021”). Electricity infrastructure falls under the category of development of public interest-related matters as described under this law. 

Under GR 19/2021, to implement the acquisition, the GoI or appointed state-owned entities (PLN in the power sector) shall provide compensation to the landowner in the form of:

  • cash payment; 
  • replacement land; 
  • resettlement; 
  • shares ownership; or 
  • another form as agreed by the parties. 

In practice, the most common form of compensation is cash payment. 

BPN issued the implementing regulation for Regulation No 71/2012, as amended – namely, Head of BPN Regulation No 5 of 2012 as amended by Head of BPN Regulation No 6 of 2015 and No 22/2015 (“Regulation No 5/2012, as amended”). Although Regulation No 5/2012, as amended was issued before the enactment of GR 19/2021, it is still applicable as long as it does not conflict with GR 19/2021. In accordance with Regulation No 5/2012, as amended, the entity acquiring the land can be granted a right to manage (Hak Pengelolaan or HPL), a right to build on (Hak Guna Bangunan or HGB), or a right to use (Hak Pakai or HP) the land. PLN can obtain either a HPL, HGB or HP. 

Procedure for the Acquisition of Land

In general, the procedure for the acquisition of land for public interest consists of planning, preparation, implementation and hand-over of the land certificate to PLN. 

During the preparation stage, the government must conduct a public consultation between its Preparation Team and the landowners and the local community in order for the relevant local government to issue a location stipulation. 

Once the parties reach an agreement on the location for a planned development, minutes of the agreement will be made. PLN will then apply for a location stipulation to the Governor, who will issue a decision letter on the location stipulation (“Location Stipulation”). 

The Governor and PLN will announce the Location Stipulation for development in public interest. 

Objection or disagreement

If there is an objection or disagreement from the landowners or the community, a second public consultation must be held. If there is still an objection during the second public consultation, PLN will report the objection to the provincial Governor through the Preparation Team. The Governor will then form an Appeal Assessment Team to assess the objection. Based on the recommendation from the Appeal Assessment Team, the Governor will issue a letter of acceptance or rejection of the objection. If the Governor accepts the appeal, PLN must cancel the development plan or move the location of the development elsewhere. 

Most power projects are established based on the BOOT scheme, so there is no decommissioning obligation for a power company as the power generation facilities will be transferred to PLN (a state-owned enterprise) after the end of the PPA. Furthermore, there is no specific regulation with respect to the decommissioning of a generation facility, although any activities (including decommissioning) that may have an impact on the environment are supervised by the Ministry of Environmental and Forestry Affairs and its regional offices. 

In addition to the laws listed in 4.1 Principal Laws Governing the Construction and Operation of Generation Facilities, the construction and operation of transmission lines are also subject to technical regulations issued by MEMR. 

For the regulatory process, see 4.2 Regulatory Process for Obtaining All Approvals to Construct and Operate Generation Facilities, as the licences/approvals required for transmission lines are generally the same as for power generation facilities. From the EPC contractor’s perspective, the major approvals for the construction of transmission lines are SBU and IUJPTL, with the main difference being the description and list of competencies under the SBU and IUJPTL. 

See 4.3 Terms and Conditions Imposed in Approvals to Construct and Operate Generation Facilities for the obligations that apply to an IUJPTL holder. The operation of transmission lines and associated facilities in Indonesia is currently monopolised by PLN (save for in an industrial area where the electricity is supplied by PPU) and thus, as far as is known, no IUPTL transmission has ever been issued to private power entities. 

See 4.4 Proponent's Eminent Domain, Condemnation or Expropriation Rights

Specifically, for the compensation of land, buildings or plants in the area under the transmission lines, the transmission entity is not required to obtain the land title; however, it is necessary to provide compensation for the economic loss to the owner of the land, building and/or plant. 

The calculation of the compensation amount shall take into account the total land area under the transmission lines, and the total area of the building and plants or vegetation below the transmission lines. Specifically for land and buildings below the transmission lines, the regulation provides that compensation is in the amount of 15% of the total land area multiplied by market value, where the market value is determined by independent public appraisal. 

The prevailing regulations are silent on whether the provider of a transmission service has monopoly rights in certain territory. In general, private sector involvement in the electricity sector in Indonesia has mainly been limited to power generation, where an IPP enters into a PPA with either PLN or PPU, which directly supplies or sells electricity to an end consumer in an industrial area where PLN voluntarily “releases” its first priority position. 

The transmission network, on the other hand, remains under the de facto monopoly of PLN, notwithstanding that under the Electricity Law the private sector is legally permitted to access the transmission network and grid assets. Private sector involvement in the transmission network is currently limited (but not "legally restricted") to the following: 

  • the construction of transmission lines by an IPP in order to connect the new power plant to the closest PLN substation, which will be immediately transferred to PLN on the completion of construction; and 
  • the construction and maintenance of the transmission lines/network in an industrial area in which power generation and the supply of electricity is conducted by a PPU, in which case the PPU has monopoly rights to generate, transmit and supply the electricity within its concession area granted under the Stipulation of Business Area. 

MEMR Regulation No 1 of 2015 regarding Joint Co-operation in the Provision of Electricity and Joint Utilisation of Electricity Network as partially revoked by MEMR Regulation 19/2017 (“MEMR Regulation 1/2015”) allows IPPs and PPUs to use the existing transmission and distribution network of other PPUs, the holder of a power transmission business licence or PLN, by entering into a power wheeling agreement with the PPU/IUPTL transmission holder or PLN. 

Under MEMR Regulation 1/2015, the transmission charges and terms of service are determined based on negotiation and agreement between the transmission entity and the users. Nonetheless, the agreed price must be approved by the MEMR or the Governor (as relevant), who will issue approval of the lease price no later than 30 business days after the submission of the proposed lease price by the transmission entity. 

The current applicable regulations are silent on whether there is a right of appeal to challenge the decision of the regulator in setting rates of service. However, the decision of authority can generally be challenged or appealed to the Administrative Court. Furthermore, MEMR Regulation 1/2015 stipulates that the relevant parties are allowed to conduct a renegotiation if MEMR or the Governor rejects the agreed price.

Principally, transmission service shall be provided on a non-discriminatory basis. Under MEMR Regulation 1/2015, any potential users of transmission services can submit an application to use transmission facilities to the transmission entity, providing a carbon copy to MEMR. The owner of transmission networks must approve or reject such application no later than five business days after the submission has been completely received by the transmission entity. 

If the transmission entity approves the application, it can enter into negotiation with the applicant, which shall be completed no later than 30 business days after the approval date. If the transmission entity rejects the application, it must provide a written explanation.

See 4.1 Principal Laws Governing the Construction and Operation of Generation Facilities

See 4.2 Regulatory Process for Obtaining All Approvals to Construct and Operate Generation Facilities

See 4.3 Terms and Conditions Imposed in Approvals to Construct and Operate Generation Facilities for the obligations that apply to IUPTL and IUJPTL holders. The operation of distribution facilities in Indonesia is currently monopolised by PLN (save for in an industrial area where the electricity is supplied by PPU) and thus, as far as is known, no IUPTL Distribution has ever been issued to private power entities. 

See 4.4 Proponent's Eminent Domain, Condemnation or Expropriation Rights.

Based on GR 14/2012 as amended in conjunction with GR 25/2021, in addition to the requirement to have or hold IUPTL Distribution, electricity distribution entities must also obtain a Stipulation of Business Area (for distribution) from MEMR. The electricity distribution entities shall have a monopoly right to provide a distribution service within its concession area as stated in its Stipulation of Business Area. 

GR 14/2012 as amended and MEMR Regulation 1/2015 provides that IPPs and PPUs are allowed to use existing transmission and distribution networks of other PPUs, the holder of an electricity distribution business licence (IUPTL Distribution) or PLN, by entering into a power wheeling agreement with the PPU/IUPTL Distribution holder or PLN. The terms of service shall be based on the agreement between the parties, and the system charge or lease/wheeling price must be approved by MEMR.

The terms of service shall be based on the agreement between the parties. The system charge/price must be approved by MEMR or the Governor (in accordance with its authority). The regulation does not provide any guidelines on determining the system charge submitted to MEMR/the Governor to be approved.

In principle, a distribution service shall be provided on a non-discriminatory basis. The approved system charge is a non-discriminatory rate and shall be applicable for all services provided under the same or similar terms and conditions within the Business Area of the IUPTL Distribution holder as well as in a joint/shared used distribution system of the IUPTL Distribution holder by other IUPTL holders. The current applicable regulations are silent on whether there is a right of appeal to challenge the decision of the regulator in setting the rates of service, but the decision of the authority can generally be challenged or appealed to the Administrative Court. 

ABNR Counsellors at Law

GRAHA CIMB NIAGA
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Author Business Card

Trends and Developments


Authors



UMBRA – Strategic Legal Solutions is an independent law firm established by lawyers from one of the leading law firms in Indonesia. Since its introduction in 2017, UMBRA has demonstrated an unprecedented growth in the Indonesian legal industry, becoming the fastest growing law firm in Indonesia. The firm comprises 58 talented lawyers who are frequently recognised in prominent international legal directories. Power has always been at the core of the firm’s practice. It embraces the dynamic and multifaceted nature of the industry by growing its expertise to encompass all kinds of power projects. UMBRA has extensive experience in the Indonesian power sector, having represented over 12,500 MW combined capacity from a wide variety of power, energy, natural resources, and infrastructure projects.

New and Renewable Energy Is the New Sought-After Energy in Indonesia

Background

Indonesia has committed to various energy targets globally and nationally. As part of the Paris Climate Agreement, Indonesia has committed to reducing greenhouse gas (GHG) emissions by 29% from their baseline emissions level by 2030 (and by 41% conditional on international support). Particularly for the energy sector, Indonesia has committed to reducing GHG emissions by 314–398 million tonnes by 2030. Under its General Plans of Energy and National Energy Policy, Indonesia has also set a target of 23% new and renewable energy (NRE) in the energy mix by 2025 and 31% by 2050.

Indonesia has seen tangible results in its effort to achieve those targets. As of 2020, Indonesia has 10,467 MW of NRE power plants in place, reaching 11.31% of its 23% NRE target by 2025. To achieve its target, Indonesia needs ambitious and carefully designed plans. The country aims to add another 905,73 MW of NRE power plants in 2021 and increase NRE investment by approximately 50% to USD2.05 billion.

The energy development shows that Indonesia is focusing more on new and renewable energy as an alternative energy source. The most recent target committed to by Indonesia is net-zero emissions by 2070 with a detailed plan on how to achieve it. This will include, among other things, the phasing out of coal-fired power plants by 2060 and massive development of NRE power plants.

Overview of Indonesia’s energy sector regulatory framework

The current regulatory framework on electricity in Indonesia is provided under Law No 30 of 2009 on Electricity Business (2009 Electricity Law) as most recently amended by Law No 11 of 2020 on Job Creation (Omnibus Law) (Electricity Law) and its main implementing regulations, among others:

  • Government Regulation No 25 of 2021 on the Implementation of Energy and Mineral Resources Sector (GR 25/2021);
  • Government Regulation No 14 of 2012 (as amended by Government Regulation No 23 of 2014) on Electricity Business Provision (GR 14/2012); and
  • Government Regulation No 62 of 2012 on Electricity Support Business (GR 62/2012).

Last year, the Omnibus Law was enacted which amended, among others, the 2009 Electricity Law. The main revisions concern the simplification of licences, control and commercialisation, the shifting of certain regional government role(s) to the central government, prioritisation of domestic goods, some changes on the role of the House of Representatives (DPR) related to the electricity sector, and changes to imposition of sanctions rules.       

The transition of the Indonesian energy sector towards more sustainable energy sources

A "greener" National Electricity Supply Business Plan

The National Electricity Supply Business Plan (RUPTL) is a living document that, essentially, sets out a ten-year electricity development plan covering, among others, future electricity expansion plans, demand forecasts, and electricity projects of the Indonesian state-owned electricity company (PLN) as a state-owned utility offtaker. Every supply business activity for public interest must comply with RUPTL, making RUPTL a critical document for Indonesia’s energy development.

The effective RUPTL is currently the 2019–28 RUPTL. The 2021–30 RUPTL is under review and is expected to be issued soon. It was reported that the Indonesian government is drafting the 2021–30 RUPTL with the 23% NRE target and net-zero emissions in mind. The 2021–30 RUPTL is expected to allocate 48% or 19,899 MW for NRE power plants and 52% or 21,069 MW for fossil power plants. This is a huge improvement from 30% or 16,761 MW and 70% or 39,633 MW for NRE power plants and fossil power plants, respectively, under the 2019–28 RUPTL. The increased percentage of NRE power plants aims to accelerate the achievement of the 23% NRE target by 2025.

The Directorate General of Electricity of the Ministry of Energy and Mineral Resources (MEMR) further indicated that the 52% allocation for fossil power plants will not be for new fossil power plants, but only for fossil power plants that have secured financing, signed a power purchase agreement, or commenced construction. The 2021–30 RUPTL projects that such coal-fired power plants will be installed until 2027 and a small amount, of 20 MW, in 2029. Starting from 2030 and until 2060, the Indonesian government will commence gradual retirement for subcritical coal-fired power plants, supercritical coal-fired power plants, and ultra-supercritical coal-fired power plants. This phasing out plan is designed to ensure transition to alternative energy such as NRE and achieve net-zero emissions by 2070.

The MEMR has formulated several action plans to realise the 2021–30 RUPTL:

  • prioritise the economical NRE power plants to avoid increasing Biaya Pokok Penyediaan (the BPP), the average electricity generation cost of the PLN, determined annually;
  • prioritise the development of solar power plants;
  • encourage the development of co-firing for coal-fired power plants; and
  • evaluate geothermal and hydroelectric power plants to ensure a more realistic commercial operation date for each plant.

New NRE concepts under the NRE Bill and NRE Presidential Regulation

The Indonesian Government is expected to soon sign a draft Presidential Regulation on renewable energy purchase (Draft PR) and has been discussing an NRE Bill.

The DPR will replace the current pricing scheme, which is based on the BPP, with a feed-in tariff (FIT), highest benchmark price, and agreed price between parties. It also determines different procurement mechanisms – direct appointment, direct selection, and assignment – for certain types of renewable energy power plants, unlike the current procurement mechanism which only allows direct selection except for certain conditions where direct appointment is allowed.

Meanwhile, the NRE Bill introduces several new concepts. Among these, the most important are set out below

I – Renewable energy portfolio standard (REPS)

The NRE Bill will be the first regulatory instrument to stipulate a REPS. The NRE Bill makes the REPS mandatory for business entities in the electricity sector utilising non-renewable energy. If a business entity fails to meet the REPS, it will be obliged to purchase a renewable energy certificate. The NRE Bill also provides incentives for business entities in the electricity sector utilising non-renewable energy that meets the REPS.

II – The NRE fund

The intention of the NRE fund is to provide further support for the development of NRE through financing from various sources. The NRE Bill provides a variety of sources for the NRE fund, such as the state and regional revenue and expenditure budget, an export levy on non-renewable energy, a carbon trading fund, and a renewable energy certification scheme.

The NRE Bill envisions utilising the NRE fund for the following purposes: (i) financing of NRE infrastructure, (ii) financing of NRE incentives, (iii) compensation for business entities that develop NRE, (iv) research and development of NRE, (v) development of human resource capacity and capability in the NRE sector, and (vi) subsidies for renewable energy prices that cannot compete with non-renewable energy prices.

III – Selling price and procurement mechanism

The NRE Bill determines a selling price scheme for renewable energy, based on the FIT, the market index price for biofuels, and reverse auction. The NRE Bill also provides that selling price schemes consider an internal investment rate of return of at least 4% above the prevailing interest rate for commercial investments. Further elaboration is needed on how the reverse auction mechanism will work.

Other than the above, in line with Law No 30 of 2007 on Energy, the NRE Bill and DPR categorise nuclear power as one of the new energy sources.

The power wheeling scheme

MEMR Regulation No 1 of 2015 on Joint Co-operation in the Provision of Electricity and Joint Utilisation of Electricity Network (MEMR 1/2015) allows an Electricity Supply Business Licence (IUPTL) transmission/distribution holders, an integrated IUPTL holder, and an operational permit holder to use existing transmission and distribution networks owned by other Integrated IUPTL holders and the holder of a power transmission/ distribution business licence, by entering into a power wheeling agreement.

Under MEMR 1/2015, the power wheeling scheme is conducted in accordance with network capacity and network rules and other technical agreements should be outlined in a mutual agreement. MEMR 1/2015 also provides that this co-operation does not need a new IUPTL. Furthermore, the network rental fee follows the applicable fee to the transmission/distribution entity as the lessor who has obtained approval from the relevant authority. However, market reaction indicates that MEMR 1/2015 has not been well implemented. Some stakeholders believe the difficulty in the implementation is due to the lack of detailed provisions, for instance, regarding the tariff formulation and the responsible party for the transmission network damages. In response, it is reported that the MEMR is currently revising MEMR 1/2015.

Development of solar power plants

I – Rooftop photovoltaic solar panels

The Indonesian government issued MEMR Regulation 49/2018 on rooftop photovoltaic (PV) solar panel utilisation by the PLN’s consumers, as most recently amended by MEMR Regulation No 16 of 2019 (MEMR 49/2018), which aims to incentivise investment in rooftop solar energy but has so far fallen short.

MEMR 49/2018 sets out several concepts for installation and operation of a rooftop PV solar system, including a 65% credit for energy exported to PLN system. Under MEMR 49/2018, any electricity which is exported to PLN system by the PLN’s customers installing PV solar power system (PLN PV Customers) will only be priced at 65% of the PLN's applicable tariffs. On a monthly basis, electricity exported to PLN system (as recorded in the export-import kWh meters) will be multiplied by 65% which equally applies to all allowed capacity.

The MEMR is currently drafting the revision of MEMR 49/2018 which, among other things, sets out the following.

  • The provisions provided will not be only for the PLN PV Customers, but also for the non-PLN PV Customers.
  • The multiplier factor proposed will be more than 65% which will be divided into two, namely, if the PV solar rooftop:
    1. is equipped with batteries, the export exchange rate can reach 90%; and
    2. is without batteries, the export exchange rate is valued at 75%.

Furthermore, the MEMR will set out more provisions on incentives for the development of rooftop PV solar panels.

II – Floating PV solar panels: limitations on the use and function of reservoirs for floating solar power plants

In 2021, the MEMR is targeting developing a potential 28 GW of energy from floating PV solar panels across 28 different locations in Indonesia, the majority of which are in Java and Bali with a total capacity of 1.919 MW.

For years, despite having a huge potential for serving as an excellent location for PV solar projects, the use of reservoirs surfaces has never taken off due to a regulatory hurdle, namely, limitations on the use and function of reservoirs which created uncertainty over whether the reservoir surfaces could indeed be used for PV solar projects.

Previously, the Ministry of Public Works and Public Housing (MPWH) Regulation No 27/PRT/M/2015 on Dams (MPWH 27/2015) only allowed limited activities within a reservoir pool (waduk) which did not include installation/development of floating PV solar projects. MPWH 27/2015 also restricted any party from constructing anything that was not in accordance with the reservoir purposes, which did not include PV solar PV projects, dealing the final blow to any potential development of PV solar PV projects on reservoirs.

This issue has been finally resolved by MPWH No 6 of 2020 (MPWH 6/2020) as an amendment of MPWH 27/2015 which expressly allows the use of space on reservoir surface for floating PV solar panels (though limited to 5% of the total water surface area at normal level). It is suspected that this limitation is intended to preserve the biodiversity and environmental balance of the reservoirs. This requirement would most probably limit the areas that can be used for building large scale PV solar projects and developers may have to act on the basis of first come, first serve.

Development of electric vehicles

Electric vehicles in Indonesia have shown a rapid development in the past few years. As of April 2021, 112 charging stations have been built across 83 locations in Indonesia. An additional 254,181 battery electric vehicles (BEV), 24,720 charging stations, 805,000 electric motorcycles, and 67,000 battery replacement stations will be built before 2030 to further accelerate electric vehicle development in Indonesia, which will require INR12 trillion rupiahs (approximately USD800 billion) in investment. As a response to this, there have also been significant movements in Indonesia’s electric vehicle market. Big motor companies such as Toyota, Hyundai, and Tesla have invested billions to develop electric vehicles in Indonesia.

Such massive development is only attainable due to the support of multiple laws and regulations. Within the last three years, the Indonesian Government has issued a variety of legal frameworks starting from a Presidential Regulation in 2019 on the acceleration of the BEV programme followed by the implementation of Ministerial Regulations regulating BEVs and the charging stations themselves as well as content and incentives. To support the development of the domestic market, the Ministry of Industry Regulation No 28 of 2020 on BEV in Completely Knocked Down and Incompletely Knocked Down Condition (MoI 28/2020) obliges BEV industry players to carry out domestic manufacturing, to prioritise domestic production, and to comply with local content requirements set out further in MoI 28/2020.

MEMR Regulation No 13 of 2020 on Charging Infrastructures Provision for BEV (MEMR 13/2020) stipulates conditions relating to charging stations for BEVs, namely, recharging stations and battery replacement stations – each with its own business model and requires licences stipulated further in MEMR 13/2020. Fiscal and non-fiscal incentives are provided for business entities who carry out activities related to charging stations and other parties who help advance BEV development – through facilitation of a connection fee for charging stations and incentives on import duties, for example.

Furthermore, given that Indonesia has the largest reserves of nickel, which is a primary component for lithium-ion batteries, in the world in 2019, the Indonesian government is striving to make Indonesia a large producer and exporter of BEV. The Indonesian government has formed a battery holding company, namely the Indonesia Battery Corporation (IBC) with four state-owned enterprises which needs investment of USD17 billion to create an integrated cradle-to-grave industry for BEV. An industry for raw material for electric vehicle batteries is currently under construction in Maluku and a battery industry is soon to be constructed in West Java. Plans for other industries such as nickel ore mining, smelting, battery precursor production, cathode production, and cell and pack technology are underway as well.

Other developments in the Indonesian energy sector

I – Conversion from diesel power plants to NRE power plants

The MEMR is currently preparing a Ministerial Decree which will mandate the PLN to convert its existing diesel power plants to NRE power plants. At least 5,200 diesel power plants across 2,130 locations are planned to be converted to NRE power plants.

The PLN is considering three conversion models:

  • a complete conversion to solar power plants with battery storage or a hybrid between solar and diesel power plants more than 15 years old;
  • a hybrid between solar or wind (30–40%), battery storage (10%) and diesel power plants less than 15 years old (50–60%), and
  • a complete conversion to wind, biomass, or mine mouth power plants or a hybrid between any of those three types and diesel power plants less than 15 years old.

The decision on which conversion model to be used depends on the energy potential in each area.

The PLN plans to partner up with other entities to implement the conversion programme and will open the tender soon. In order to carry out the conversion, the PLN will also prepare an action plan and an economic and technical study to understand the relevant plant efficiency, the availability of local NRE, and the BPP. Not only will the conversion programme help to achieve the Indonesian 23% NRE target by 2025, but it is also expected to help lower the BPP and reduce oil imports.

II – Co-firing for coal-fired power plants

One of the programmes designed by the Indonesian government to increase NRE projects is biomass co-firing for existing coal-fired power plants. Biomass co-firing refers to the combustion of biomass with other fuels, in this case coal. The PLN has included co-firing as part of their "green booster" programme and set a target to convert 52 coal-fired power plants they own, equivalent to 18,895 MW, across 51 locations.

As of April 2021, eight existing coal-fired power plants have commercially operated with biomass co-firing and 35 coal-fired power plants have undergone trials of biomass co-firing. The biomass used for the co-firing varies, and may include wood pellets, sawdust, or coconut shell. On the supply side, the PLN intends to maintain the availability of biomass and to prevent increased BPP by co-operating with large biomass suppliers and supporting small and medium-scale biomass businesses.

Multiple regulations have been established or are underway to support co-firing for coal-fired power plants. The Indonesian National standard (SNI) – a standard determined by the Indonesian government for certain products – for biomass pellets for power plants has been established and the SNI for solid recovered fuel is expected to be established this year.

The MEMR is also drafting a Ministerial Regulation on biomass co-firing for coal-fired power plants which will regulate, among other things, technical specifications for biomass fuel, the biomass fuel price, reporting obligations and incentives such as construction of facilities to produce biomass fuel from waste. This Ministerial Regulation will hopefully provide legal certainty in biomass co-firing and encourage independent power producers to take part in the conversion of existing coal-fired power plants to biomass co-firing.

If all coal-fired power plants in Indonesia were to convert 5% of their fuel to biomass co-firing, the MEMR claims that this would reduce coal utilisation by 4 million tonnes per year and increase NRE contribution by 0.9%. The number of NRE contribution would jump to 1.79% if biomass fuel were to be used for 10% of overall fuel. The MEMR states that the BPP will also decrease, and this is already proven to be the case in several co-firing biomass power plants where the reduction ranges from 5,09 IDR/kWh to 21,26 IDR/kWh.

III – Carbon tax

There has been talk within the Indonesian government on imposing a carbon tax on certain objects and activities. The government is considering two alternatives:

  • imposing carbon tax through current economic instruments such as customs, tax income, VAT, sales tax on luxury goods (PPnBM), or non-tax state revenue (PNBP) at the national level and vehicle tax and vehicle fuel tax at the regional level; or
  • imposing a carbon tax through a new economic instrument.

The estimated amount of carbon tax to be imposed is IDR75,000 (approximately USD5) per tonne of CO2. Carbon tax will be levied on emissions from economic activities such as pulp and paper, cement, power plants, and petrochemical industries or emission sources. One of the potential objects for carbon tax is fossil fuel and emissions emitted by industries or vehicles, such as coal, diesel, and gasoline. The revenues generated from the carbon tax will be used for development, green investment, and welfare enhancement for poor and vulnerable groups.

IV – Development of integrated transmission and the smart grid

Integrated transmission and development of a smart grid are also one of the priorities of the Indonesian government. The PLN intends to partner up with the private sector to build integrated transmission throughout Indonesia up to 2030, which will require investment of more than USD10.8 billion. Given that Indonesia is an archipelago country, an integrated transmission system is critical to ensure every area in Indonesia, including rural areas, can enjoy electricity. This may help reduce the BPP in certain areas with a high BPP and tackle oversupply issues in the Java-Bali grid because the excess electricity can be transmitted to other areas outside Java-Bali easily.

It was reported that the MEMR has been developing a smart grid since 2020 with an ambition to develop at least five smart grids each year until 2024. Smart grid refers to an electricity grid equipped with advanced information and communication technology that can enable efficient electricity management. The first development phase of the smart grid will focus on reliability, efficiency, customer experience and grid productivity and the second phase will focus more on customer resilience, customer engagement, sustainability, and self-healing.

Conclusion

A variety of legal and non-legal plans to accelerate NRE development are in the pipeline which shows that Indonesia is striving to transition to green energy development and realise its NRE commitments. Strong investment, close collaboration between a variety of stakeholders and a robust legal framework are vital to ensure the smooth implementation of those plans.

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Law and Practice

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ABNR Counsellors at Law was established in Jakarta in 1967 and is one of the largest independent full-service law firms in Indonesia, and the sole Indonesian member of the world’s largest law firm association, Lex Mundi. ABNR has played a major role in the financing of most significant Indonesian power projects. It has advised on project finance aspects, including financing structures involving BOT and BOO, and issues relating to government guarantees. ABNR has also advised on gold, copper and coal mining projects, including the regulatory and licensing framework of these industries. It also assists mining service companies with contracts and compliance with tender procedures.

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UMBRA – Strategic Legal Solutions is an independent law firm established by lawyers from one of the leading law firms in Indonesia. Since its introduction in 2017, UMBRA has demonstrated an unprecedented growth in the Indonesian legal industry, becoming the fastest growing law firm in Indonesia. The firm comprises 58 talented lawyers who are frequently recognised in prominent international legal directories. Power has always been at the core of the firm’s practice. It embraces the dynamic and multifaceted nature of the industry by growing its expertise to encompass all kinds of power projects. UMBRA has extensive experience in the Indonesian power sector, having represented over 12,500 MW combined capacity from a wide variety of power, energy, natural resources, and infrastructure projects.

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