Alternative Energy & Power 2019 Comparisons

Last Updated July 31, 2018

Law and Practice

Authors



Ali Budiardjo, Nugroho, Reksodiputro was established in Jakarta in 1967. ABNR is one of the largest independent full-service law firms in Indonesia. ABNR’s reputation has been recognised globally by independent industry surveys and law firm guides. ABNR was selected, based on its integrity and professionalism, as the sole Indonesia member of the world’s largest law firm association Lex Mundi and the prestigious Pacific Rim Advisory Council (PRAC). ABNR has played a major role in the financing of most of the 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. ABNR also assists mining service companies with contracts and compliance with tender procedures.

The electricity industry in Indonesia is governed by Law Number 30 of 2009 concerning Electricity (the “Electricity Law”), which revokes the previous law, Law Number 15 of 1985 (“Law 15/1985”). Under Law 15/1985, 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, a party that can supply electricity for the public interest is a company that has an Electricity Supply Business Licence (Izin Usaha Penyediaan Tenaga Listrik, or “IUPTL”). Under the Electricity Law, PLN is granted "first priority position" to do business in supplying electricity for the public interest, although other companies holding an IUPTL can also supply electricity for the public interest. Further, with the issuance of 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 of 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 Reg 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 Regulation of Minister of Energy and Mineral Resources No 7 of 2016. 

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

Further, 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 2006 (“Constitutional Court Decision”), which ruled that the concept of “unbundling” is unconstitutional. We understand 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 (ie, 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 or 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-consumer (ie, bundled) (“Integrated Power Company”). Most, if not all, Integrated Power Companies in Indonesia supply electricity to industrial areas that are identified in their Business Area Directives, which are issued by the Investment Coordinating Board (Badan Koordinasi Penanaman Modal/BKPM) on behalf of MEMR (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), own and operate power generation facilities and sell the electricity produced to PLN as off-taker.

Investor-owned companies or Independent Power Producers (IPP) in Indonesia mostly engage solely in power generation activities. These IPPs by and large 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 own" (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 (MEMR Reg 49/2017) and Minister of Energy and Mineral Resources Regulation No 10 of 2018 (MEMR Reg 10/2018) (collectively “MEMR Reg. 10/2017, as amended”), which requires PPAs with PLN to be based on the BOOT scheme.

There are hundreds of (power generation) IPPs in Indonesia which cannot be named one-by-one in this article. However, we understand that currently PT Paiton Energy, PT Cirebon Electric Power, PT Jawa Power and PT Central Java Power are 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 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. 

Foreign direct investment in Indonesia is subject to Presidential Regulation No 44 of 2016 regarding Business Fields that are Closed or Conditionally Open for Investment,or what is known as the “Negative List”. Under the Negative List, certain lines of business are closed or subject to maximum foreign shareholding that must be complied with by a PMA Company in Indonesia. A power generation activity with capacity below 1 MW is closed for foreign investment. Foreign investment is allowed for a power plant with capacity above 1 MW; a small-scale power plant (1-10 MW) is open for a maximum 49% foreign shareholding, and those projects above 10 MW are open for a maximum 95% foreign shareholding (with an exemption for projects developed under Public Private Partnership (PPP) in which the maximum foreign shareholding is 100% during the concession period). The maximum 95% foreign shareholding (and the exemption for PPP projects) is also applicable for power plant transmission and distribution business activities.

Foreign investment limited liability companies in Indonesia (locally known as “PT PMA”) are generally treated equally as domestic investment or local limited liability companies. The rights and protections for PT PMA are principally regulated under Law No 25 of 2007 concerning Capital Investment (“Investment Law”). The Investment Law is silent on protection against seizure and confiscation. However, 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 nationalisation or takeover of property rights of the investor. Under the Investment Law, the Government of the Republic of Indonesia (GoI) shall not conduct nationalisation or take-over of property rights of the investor unless by law. In case the GoI does nationalise a PT PMA or acquire the property rights of the investor, the GoI must compensate the investor in an amount based on market prices. If the GoI and the investor fail to reach an agreement with respect to compensation, a settlement can be sought through arbitration.

The Investment Law provides that in the event of a dispute between the GoI and a foreign investor, 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 Center for the Settlement of Investment Disputes) Convention. 

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 value-added tax (VAT) for a defined period in relation to the importation of production capital goods/machines/equipment not yet produced domestically; and
  • accelerated depreciation or amortisation.

Generally, there are no restriction on the sale of power industry assets or businesses for purely 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, conduct amalgamations (the Company Law does not recognise the term "amalgamation" and 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 (the “Company Law”). In general any plan 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 to approve the merger/consolidation, the deed of merger/consolidation must be submitted to MOLHR to obtain the approval of MOLHR and further to obtain approval from BKPM and be notified to MEMR; additionally, the surviving or new company must 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 foregoing process normally takes around three to six months to complete. 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 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.

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 with the BOO scheme, the restrictions are normally contractual in which 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 with the BOOT scheme, the general rule is that power industry entities are not allowed to sell the power generation facilities save 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. Further, in a BOOT scheme power project with PLN, in order to ring-fence the assets before it is 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 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 to the foregoing, any transfer of shares in IPPs with the 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 Reg 48/2017”). In this regard, MEMR Reg 48/2017 differentiates between transfers of shares for non-geothermal and for geothermal IPPs.

For non-geothermal IPPs, it is necessary to obtain a written approval 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 and is an Indonesian legal entity which carries out permanent and continuous business activities in Indonesia. (In other words, transfer of shares to non-affiliated parties is not permitted even with approval from the PLN). Subsequently, after the transfer of shares, the non-geothermal IPP must notify the 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 Reg 48/2017 distinguishes between a public and private sale of the shares. MEMR Reg 48/2017 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. Our discussions with the Director General of New Renewable Energy and Energy Conservation (“EBTKE”) clarify that the Minister’s approval will be required both prior to a Geothermal IPP’s IPO, as well as before the transfer of ownership is recorded on the stock exchange for all secondary offerings and rights issuances. The MEMR will issue its approval or rejection to a Geothermal IPP for the transfer of shares through public trade within 14 business days after receiving all required documentation.

It is unclear whether the prohibition of transfer of shares during the exploration phase applies to private sale. However we understand the current applicable view from EBTKE is that a geothermal IPP can privately transfer its shares during the exploration phase and exploitation phase. Geothermal IPPs must notify the MEMR of the transfer within five business days from the date 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.

PLN is responsible for preparing the long-term power supply business plan (Rencana Usaha Penyediaan Tenaga Listrik, or RUPTL) that includes generation and transmission planning and development within Indonesian territory to make sure there is an adequate supply of electricity for public interest. The RUPTL is periodically updated by PLN and such RUPTL (including the updates) has to be approved by MEMR. The business of providing electricity for public interest is carried out in accordance with the RUPTL as approved by MEMR and also the National General Plan of Electricity (Rencana Umum Ketenagalistrikan Nasional, or “RUKN”) prepared by MEMR and approved by the House of Representative. 

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

The most significant changes to the laws and regulations over the past year are the issuance of (i) MEMR Reg 10/2017, as amended, and (ii) MEMR Reg 48/2017.

MEMR Regulation 10/2017, as Amended

Before the issuance of MEMR Reg 10/2017, a PPA with PLN was mostly negotiated business-to-business. MEMR Reg 10/2017 imposes certain requirements that must be included in the Power Purchase Agreement (PPA) and to some extent limits the negotiation of commercial provisions or terms of PPAs between PLN and IPP. Some of the provisions are quite burdensome and affect the bankability of the PPAs. When MEMR Reg 10/2017 was first issued (without its amendment), it regulated the allocation of risks in a manner that was not in line with the general principles of allocation of risks, where risks are allocated to and borne by the party that has the best ability to manage and mitigate them so that the PPA is bankable. For example, it was previously provided that the risks of change of policy and change of regulations (“Government Force Majeure”) were to be borne by both PLN and the IPP and, as a result, in the event of Government Force Majeure the IPP was not entitled to deemed dispatch from PLN and as a balance the IPP was not obligated to deliver the electricity energy to PLN. Subsequent amendments to MEMR Reg 10/2017 (under MEMR Reg 49/2017 and MEMR Reg 10/2018) were enacted to address this issue by way of revoking the relevant provision which prohibits the IPPs from receiving deemed dispatch in the event of Government Force Majeure. However, how PLN perceives or implements the amendments of MEMR Reg 10/2017 in practice still need to be monitored in future PPAs.

MEMR Regulation 48/2017

MEMR Reg 48/2017 imposes certain restrictions on the transfer of shares prior to COD to non-geothermal IPPs and restrictions on the transfer of shares during exploration for geothermal IPPs, as described previously in 1.4 Principal Law Governing the Sale of Power Industry Assets. In addition to transfers of shares, MEMR Reg 48/2017 also requires an IPP to notify the MEMR of any changes to the membership of the Board of Directors and/or Board of Commissioners within five business days from the date of providing notice of the change to the MOLHR. Further, it is also to be noted that due to the lack of an explicit exemption, it is unclear under MEMR Reg 48/2017 whether the pre-COD prohibition on share transfers/requirement to notify the MEMR of a transfer also apply in the context of enforcing a pledge of shares in the IPP. Based on our latest discussions with its representatives, the MEMR understands that the lack of an explicit exemption creates uncertainty as to whether lenders can enforce a pledge of shares in an IPP prior to COD. MEMR’s current suggestion is that PLN should take a view on how it would interpret the lack of explicit exemption from the above restrictions under Regulation 48 for enforcement of a pledge of shares. However, it is likely that with no explicit exemption, PLN may be reluctant to take a view and provide the approval for transfer of shares to a third party in the framework of enforcing a pledge of shares. If that is the case, an Indonesian pledge of shares would practically be enforceable and would have no value (other than, perhaps, as “defensive” security). If it is to be enforced, the transfer of the shares to the affiliated parties must be made after the lenders have taken over the shares of the direct shareholders of the IPP or enforced any offshore pledge of shares, which may be of limited usefulness. In light of this, we understand from our discussions with them that MEMR is considering whether Regulation 48 should be further amended to expressly accommodate share transfers resulting from share pledge enforcement, although we are not sure when and whether the amendment will be made by MEMR – we note that this transfer restriction should only be applicable in the enforcement of the pledge, rather than the entry into the share pledge (by the direct shareholder of the IPP) – which we do not think would, in and of itself, breach MEMR Reg 48/2017. 

Other Regulations

In addition to the above, MEMR has revoked several regulations in the electricity and new and renewable energy sectors. Among the MEMR regulations revoked, the following three are of particular importance to IPPs in the new and renewable power sector:  

  • MEMR Regulation No 19 of 2015 on the Purchase of Electricity by PT PLN from Hydro Power Plants with a Capacity of Up To 10 MW;
  • MEMR Regulation No 19 of 2016 on the Purchase of Electricity by PT PLN from Photovoltaic Solar Power Plants; and
  • MEMR Regulation No 21 of 2016 on the Purchase of Electricity by PT PLN from Biomass and Biogas Power Plants.

The revocation of the above regulations will simplify the licensing process and eliminate certain obligations placed on IPPs operating in the new and renewable energy sub-sector, especially for hydropower, solar (photovoltaic) and biogas/biomass IPP, for example:

  • the requirement for hydropower IPP to register with the MEMR to obtain the designation of Water Manager for Power Plant Purposes (pengelola tenaga air untuk pembangkit listrik) and to post a performance bond amounting to 5% of the total investment value;
  • the requirement of solar IPP to register with the MEMR as the Developer of Solar for Photovoltaic Solar Power Plant; and
  • the requirement for a biomass/biogas IPP to register with the MEMR as the Developer of a Biogas or Biomass for Biogas or Biomass Power Plant and the requirement to achieve financial closure within 12 months subsequent to the signing of the PPA.

There are no new policies that are especially significant to the power industry in Indonesia.

The power industry in Indonesia is heavily regulated by the GoI, including as regard 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 to be 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 to 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. The wholesale price of electricity in Indonesia is set by price regulation and subject to obtaining initial approval from the MEMR if sold to PLN or by the Governor/Regent (according to its authority) if the electricity produced is sold to another IUPTL holder which licence is issued by the Governor/Regent. 

The power industry in Indonesia is based on a capacity market with almost all electricity produced by power generation companies being sold to PLN, which has the obligation to provide electricity for 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. Thus, we are not sure whether it can be considered as an energy market, considering also that the electricity price to the end-consumer in such an arrangement is subject to price regulation in that it must be approved by the Governor/Regent (according to its authority). 

In respect of the electricity purchase price for IPP projects with PLN, the GoI does not determine the exact electricity purchase price and instead it provides benchmarks for electricity purchase prices based on the primary cost of power generation by PLN (Biaya Pokok Penyediaan Pembangkitan PLN, or “PLN BPP”) in 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 that 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:

  • Minister of Energy and Mineral Resources Regulation No 50 of 2017 concerning Utilisation of Renewable Energy for the Supply of Electricity Power (“MEMR Reg 50/2017”) for electricity produced by new and renewable power plants;
  • Minister of Energy and Mineral Resources Regulation No 19 of 2017 concerning Utilisation of Coal for Power Plant and Purchase of Excess Power (“MEMR Reg 19/2017”) or 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 (“MEMR Reg 45/2017”) 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 condition that (i) the need for electricity in the local and the surrounding areas has been met, (ii) the selling price of electricity does not contain any subsidy, and (iii) it will not disturb the quality and reliability of local electricity supply.

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

In respect of the import or purchase of electricity from other jurisdictions or countries, this may be conducted on the condition that:

  • 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 fulfillment 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 the supply of electricity from abroad is cut off then the local power system can still be functionalised to provide the necessary domestic electricity.

As far as we know there have been no IPPs that engage in import of electricity given the conditions above that must be met cumulatively.If the business of 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 the RUKN draft of 2015-2034, to support the plan to increase the portion of new and renewable energy, the expected composition of fuel mix for power generation in Indonesia is 50% from coal, 24% from gas, 25% from renewable energy and 1% from diesel fuel.

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.

Although the Electricity Law provides the opportunity for the private sector to participate in the power supply business in Indonesia, the market itself is heavily regulated for the reason mentioned in 1.8 Unique Aspects of the Power Industry, above. The Constitution does not allow GoI to create a fully competitive market in the energy sector, including electricity.

Currently, there are no specific laws or policies which regulate climate change in relation to the power industry. Prior to Law No 16 of 2016 regarding the Ratification of Paris Agreement to the United Nations Framework Convention on Climate Change, the Government of Indonesia attempted to raise awareness of climate change by issuing Minister of Environmental and Forestry Affairs Regulation No P.39/Menlhk-Setjen/2015 on the environmental programme for 2015-2019, including but not limited to (i) a programme to reduce the area of forest fires which occurred during 2015, and (ii) the “Kampung Iklim”, as further described below.

Although to the best of our knowledge the GoI has not yet enacted the carbon tax or a cap-and-trade system, Indonesia has taken several steps to cut carbon emissions, including (i) the establishment of the Peatland Special Taskforce to reduce and mitigate peatland fires and restore the function of peatland, (ii) energy conservation in the industrial sector, and (iii) the “Kampung Iklim” programme, which was initiated in 2012 in order to recognise the active participation of local communities in implementing climate change mitigation and adaptation.

Despite the GoI’s effort to increase the use of alternative energies, fossil fuels – in particular coal – still play a major role in energy production. Based on the 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 in the case of 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 for renewable energy of 25% of the total capacity to be developed in the ambitious 35,000 MW programme. 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 encourages the utilisation of renewable energy resources as an alternative to coal by means of MEMR Reg 50/2017, which set clearer grounds for renewable energy resources utilisation for power supply; this regulation contains provisions relating to, among other things, procurement and pricing formulas. By issuing this regulation, the GoI hopes that renewable energy may attract more interest from potential power developers, rather than coal. The types of energy governed under MEMR Reg 50/2017 are solar, wind, biomass, biogas, waste, geothermal and seawater (which utilises movements and difference in the temperature of sea layers).

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.

Further, 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 Government may provide support by providing fiscal incentives, easier processing of licences and permits, subsidies and prioritisation of land procurement.

Under Ministry of Finance Regulation No 130/PMK.08/2016 (“MoF Regulation 130/2016”) the 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 the 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.

The fiscal facilities provided by the 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 holidays (eg, exemption from tax from five to ten years as of the commercial production and a 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:

  • The Electricity Law, GR 14/2012, as amended, and MEMR Reg 35/2013, as amended; and
  • Law No 32 of 2009 on Environmental Protection and Management (“Environmental Law”) and Government Regulation No 27 of 2012 concerning Environmental Licence (“GR 27/2012”).

To avoid confusion, in Indonesia construction and operations in the civil works field are regulated by the Minister of Public Works and Housing, 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 construction and operation of power generation works, such company only needs to obtain the major licences for electricity works. Please note that in the case of an owner of power generation facilities, it is necessary to obtain an Environmental Permit and Building Construction Permit before construction of the power generation facilities can commence.

An EPC Contractor in the power industry is subject to Law No 2 of 2017 concerning Construction and its implementing regulations, as well as additional requirements under the foregoing electricity regulations (including local content requirements 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). 

For civil works, the major licences are:

  • Certification of Business Entity (Sertifikasi Badan Usaha – “SBU”) issued by LPJK in co-ordination with the registered construction company association;
  • Construction Business Licences (Izin Usaha Jasa Konstruksi – “IUJK”) issued by BKPM for a foreign investment company and by MoPWH (or its relevant agency) for a local construction company; and
  • Permit for Representative of Foreign Construction Business Entity (Izin Perwakilan Badan Usaha Jasa Konstruksi Asing – “IPBUJKA”).

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.

For electricity works, the major licences are SBU issued by the Directorate General of Electricity of the MEMR or the registered certification institution and the Supporting Electricity Business License (Izin Usaha Jasa Penunjang Tenaga Listrik – IUJPTL).

It is common practice in Indonesia for the construction and operation of power generation to be conducted by separate companies that are appointed by the project company. In the event that the project company does not independently construct and operate the power generation facility, the project company is not required to obtain the above licences. The major licences for a project company are Electricity Supply Business Licences (Izin Usaha Penyediaan Tenaga Listrik – IUPTL).

Generally, to determine whether or not a project may be approved, the usage of the project location must be in line with its designated intended purpose under the regional and national spatial planning. Apart from this, we have previously obtained verbal confirmation from the MEMR that other than the completeness and correctness of the administrative and technical requirements, the financial capability (capitalisation structure, source of funding, etc) and profile of the IPP will also play a part in determining whether or not such a project will be awarded to the IPP. 

IPP’s Major Licences

Location Permit

In order to obtain land title for a power project, the relevant project company must firstly obtain a permit for land acquisition – the so-called Location Permit (Izin Lokasi). Based on the Regulation of the Minister of Agrarian and Spatial Planning/Head of National Land Office No 5 of 2015 regarding Location Permit, a Location Permit is granted to a company for the purpose of land procurement and acquisition in the framework of investment and also to utilise the required land for its investment purposes as stated in the permit.

A Location Permit is not evidence of 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 in the following manner: (i) if the plots of land are owned by existing third parties, on the basis of agreement with the owners of the land by way of a selling-buying transaction, or (ii) if the plots of land are owned by the State, on the basis of a submission of 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 land-owner still has the freedom to sell his/her land to any other interested party.

Prior to the issuance of a Location Permit, there is a co-ordination meeting between all related stakeholders to determine the area which will be covered under the Location Permit. The Location Permit applicant is required to submit information, such as the location of the land, a sketch or map of the land, the status of the land and its current usage.

AMDAL

Any business/activity with substantial environmental hazard must prepare an AMDAL document, which consists of (i) terms of reference for environmental impact assessment (Kerangka Acuan Analisis Dampak Lingkungan – “Ka-ANDAL”), (ii) an environmental impact assessment report (Analisis Dampak Lingkungan – “ANDAL”), and (iii) an environmental management plan (Rencana Pengelolaan Lingkungan – “RKL”) and an environmental monitoring plan (Rencana Pemantauan Lingkungan – “RPL”).

The Ka-ANDAL must be assessed by the AMDAL Assessment Commission for its approval. If approved, the Ka-ANDAL will be the basis of the preparation of ANDAL, RKL and RPL. However, the AMDAL Assessment Commission must reject the Ka-ANDAL if the proposed location where the business/activity is to be carried out is not in line with the prevailing spatial plan. The Ka-ANDAL may be rejected in the event the proposed area on which the power plant is to be built has been initially determined or planned for other purposes – eg, to be used as a forestry area or residential area. Therefore, checking of the spatial plan (the plan prepared by the local/regional government on the zoning or diversification of purposes of land upon its territory) at the regional government offices must be conducted prior to commencing the project. Additional steps may be also required to obtain necessary licences related to the utilisation of the land for a power project, such as obtaining recommendation from the head of local government or obtaining approval from the Regional House of Representative (DPRD) to alter or change the initial purpose of the land.

The AMDAL process evaluates the environmental feasibility of a project or activity and is used by Indonesian national and regional environmental regulatory authorities. This process results in the grant of a Decree of Environmental Feasibility as the basis for granting the permits for the business or activity. The AMDAL Assessment Commission can determine and issue a recommendation as to whether the business/activity is environmentally worthy or not. Following the AMDAL approval, the project company can then obtain the Environmental Permit. A public consultation will be held until the issuance of such approval and permit.

If there is any change in the location or the activity of the project or in the design, process, capacity and/or the use of raw and support materials, and/or if there is any substantial change to the environment due to the forces of nature or other causes prior to or during the course of the project, the company will have to undertake a new assessment of the environmental impact and apply for approval for a new AMDAL – in which case, the previous AMDAL approval will become null and void upon the issuance of the approval.

IUPTLS

Prior to obtaining the IUPTL, an IPP is required to obtain Temporary IUPTL or IUPTLS. The procedure and requirements for obtaining IUPTL and IUPTLS are regulated under MEMR Reg 35/2013. For a foreign investment company, the IUPTL and IUPTLS are issued by the BKPM on behalf of MEMR. To obtain IUPTLS and IUPTL, the applicant must fulfil certain administrative and technical requirements under MEMR Reg 35/2013. For a foreign investment company, an IUPTL will be issued by BKPM on behalf of MEMR.        

Based on the regulation, the process of obtaining IUPTLS shall take up to 20 business days after all completed documents have been submitted and accepted.

IMB

Any company or person that constructs buildings must obtain approval in the form of a Building Construction Permit or IMB. The general procedures for obtaining an IMB are based on the Regulation of Minister of Home Affairs No 32 of 2010 regarding the Guidance of Building Permit Grant. However, please note that the procedures for obtaining an IMB might be slightly different from one local jurisdiction to another, as in Indonesia each regional government has the authority to issue specific regional government regulations, including any IMB requirements which are applicable in the relevant region. It is also advisable to check with the relevant regency to confirm the exact practice in the area relating to issuance of an IMB.

Contractor’s Major Licences

SBU

According to LPJK Regulation No 1/2015 concerning Registration of Foreign Construction Service Business Entity, a BUJKA can only be given with a SBU under a “large” qualification, specifically "large 2 (B2)" for the implementation and integration of construction work and "large (B)" for the planning and supervision of construction.

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

IUJPTL

Pursuant to Government Regulation No 62 of 2012 regarding Supporting Businesses in the Electricity Sector, in conjunction with MEMR Regulation No 35 of 2013, a company that conducts electricity supporting business services, including construction of the power plant, is required to obtain an IUJPTL. To obtain an IUJPTL, an application must be submitted to BKPM, accompanied with the administrative and technical requirements as stipulated in the regulation. As with IUPTLS and IUPTL, IUJPTL will be issued by BKPM on behalf of MEMR.

Based on the regulation, the application process shall take at least 30 days after all completed documents have been submitted and accepted.

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

It is difficult to generalise the terms and conditions imposed in all approvals, since the coverage and purpose of issuance of each approval are different, thus creating different obligations. However, usually each approval will require the holder to (i) submit periodic reports on its activity to the issuing authority, (ii) seek approval and/or report to the issuing authority in the event that there are changes in the project or the project company, (iii) conduct its activity only within the approved area, (iv) utilise domestic goods in accordance with the applicable regulations.

Acquisition of land for public interest is regulated under Law No 2 of 2012 (“Law 2/2012”) and its implementing regulations, namely Presidential Regulation No 71 of 2012 on the Implementation of Acquisition of Land for Development for Public Interest, as amended by Presidential Regulations No 40 of 2014, No 99 of 2014, No 30 of 2015 and No 148/2015 (“Regulation 71/2012, as amended”). Electricity infrastructure falls under the category of development of public interest-related matters as described under this law.

To implement the acquisition, the GoI – or appointed state-owned entities (in the case of the power sector, PLN) – shall provide compensation to the land-owner 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”). In accordance with Regulation No 5/2012, as amended, depending on who is acquiring the land, the entity which acquires such land can be granted a right to manage (Hak Pengelolaan), a right to build on (Hak Guna Bangunan – HGB), or a right to use (Hak Pakai – HP) the land. We believe PLN can obtain either HPL, HGB or HP.

In general, the procedure of 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, through its preparation team must conduct public consultation with the land-owners 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 development plan, minutes of agreement will be made. PLN will then apply for location stipulation to the Governor, who will issue a decision letter on this matter (“Location Stipulation”).

In the event there is an objection or disagreement from the land-owners or the community, a second public consultation must be held. In the event 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 appeal assessment team's recommendation, 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.

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

Most power projects are established based on the BOOT scheme. Therefore, 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. Further, there is no specific regulation with respect to decommissioning of a generation facility, although any activities (including decommissioning) which 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 thereof, the construction and operation of transmission lines are also subject to technical regulations issued by the MEMR.

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

See above 4.3 Terms and Conditions Imposed in Approvals to Construct and Operate for the obligations that apply to a IUJPTL holder. 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 we are aware, no IUPTL Transmission is ever issued to private power entities. 

See 4.4 Proponent's Domain, Condemnation or Expropriation Rights, above. Specifically, for compensation on land, buildings and plants under the free area of 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, buildings and/or plants. The calculation for the compensation cover shall take into account the total land area under the transmission lines, 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 the compensation is 15% of the total land area multiplied by the market value, where the market value is determined by independent public appraisal.

The prevailing regulations are silent on whether the provider of the transmission service has the monopoly rights of certain territory. In general, private sector involvement in the electricity sector in Indonesia has in the main been limited to power generation, where an independent power producer (IPP) enters into a power purchase agreement 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 that of: (i) 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 completion of construction, and (ii) construction and maintenance of the transmission lines/network in an industrial area in which power generation and 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 as granted under the Stipulation of Business Area.

MEMR Regulation No 01 of 2015 regarding Joint Co-operation in the Provision of Electricity and Joint Utilisation of Electricity Network (“MEMR Regulation 1/2015”). MEMR Regulation No 1/2015 allows IPPs and PPUs to use other PPUs, the holder of a power transmission business licence or PLN’s existing transmission and distribution network by entering into a power wheeling agreement with a 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 governor (as relevant). The MEMR or governor will issue approval of the lease price at the latest 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, in general the decision of the authority can be challenged or appealed to the Administrative Court. Further, MEMR Regulation 1/2015 stipulates that in the event the MEMR or governor rejects the agreed price, the relevant parties are allowed to conduct re-negotiation.

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, with a carbon copy sent to the MEMR. The owner of a transmission network must approve or reject such an application at the latest five business days after the submission has been completely received by the transmission entity.

In the event the transmission entity approves the application, it can enter into negotiation with the applicant; this shall be completed at the latest 30 business days after the approval date. If the transmission entity rejects the application, it must furnish a written explanation.

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

See 4.2 Regulatory Process for Obtaining All Approvals to Construct and Operate, above.

See above 4.3 Terms and Conditions Imposed in Approvals to Construct and Operate for the obligations that apply to a IUJPTL holder. 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 we are aware, no IUPTL Distribution is ever issued to private power entities. 

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

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

See 4.1 Principal Laws Governing the Construction and Operation of Generation Facilities, above. GR 14/2012, as amended, and MEMR Regulation 1/2015 provides for IPPs and PPUs to use other PPUs, the holder of an electricity distribution business licence (IUPTL Distribution) or PLN’s existing transmission and distribution network by entering into a power wheeling agreement with a PPU/IUPTL Distribution holder or PLN. The terms of service shall be based on the agreement between the parties. The system charge or lease/wheeling price must be approved by MEMR.

Terms of service shall be based on the agreement between the parties. The system charge/price must be approved by the MEMR or governor (in accordance with its authority). The regulation does not provide any guidelines in determining the system charge submitted to the MEMR/governor to be approved. Principally, 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 rates of service. However, in general the decision of the authority can be challenged or appealed to the Administrative Court.   

Ali Budiardjo, Nugroho, Reksodiputro

Graha CIMB Niaga 24th Floor
Jl. Jenderal Sudirman Kav.58
Jakarta 12190
Indonesia

+62 21 250 5125

+62 21 250 5001

info@abnrlaw.com www.abnrlaw.com
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Ali Budiardjo, Nugroho, Reksodiputro was established in Jakarta in 1967. ABNR is one of the largest independent full-service law firms in Indonesia. ABNR’s reputation has been recognised globally by independent industry surveys and law firm guides. ABNR was selected, based on its integrity and professionalism, as the sole Indonesia member of the world’s largest law firm association Lex Mundi and the prestigious Pacific Rim Advisory Council (PRAC). ABNR has played a major role in the financing of most of the 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. ABNR also assists mining service companies with contracts and compliance with tender procedures.

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