Contributed By ABNR Counsellors at Law
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:
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.
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:
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:
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:
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.
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.
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:
Furthermore, GR 25/2021 also stipulates that the changes of business area can be carried out in the form of:
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:
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:
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:
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:
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:
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.
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:
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 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.
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:
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:
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.
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.
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
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:
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:
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:
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.