Indonesia has set an ambitious national target to reduce emissions by either 31.89% on its own or 43.2% with international support, by 2030, and then to achieve net-zero emissions by 2060. In order to achieve this target, the Indonesian government has launched numerous initiatives, including:
According to the Directorate General of New, Renewable Energy and Energy Conservation (the DGNRE), the total share of all renewable energy sources in Indonesia as of December 2023 was 13.29%. Although Indonesia has made progress in its energy transition, there remain a number of key challenges in Indonesia’s energy transition and Indonesia still remains heavily reliant on fossil fuels for its energy production.
Indonesia has significant potential renewable resources, including (among others) over 550 GW of potential solar power, 450 GW of potential wind power, 100 GW of potential hydropower, 10 GW of potential geothermal power (as the world’s largest source of geothermal power) and 20 GW of potential power generated from biomass.
Hydropower still makes the most significant renewable energy contribution in Indonesia, representing 8% of the total Indonesian energy mix. The other main type of renewable energy in Indonesia is geothermal, which produced an estimated 16,935 GWh in 2023, compared to 24,589 GWh produced by hydropower in 2023. Notably, hydropower energy technology has been developed in Indonesia and is widely available locally.
There has been rapid growth in the development of solar power projects in Indonesia, including investment in floating solar projects, solar power export projects and rooftop solar projects. While Indonesia has started to see an increase in the investment in onshore solar power manufacturing plants and facilities, for now, solar PV equipment is still largely imported.
With 2024 being an election year, the last 12 months have been a period of transition for the Indonesian government. Nonetheless, the Indonesian government and relevant stakeholders have sought to continue to accelerate development of renewable energy projects. Highlights of the development of renewable energy in Indonesia during the last 12 months include:
There is no one single law regarding the utilisation of renewable energy in Indonesia. Rather, the production, transmission and sale of renewable energy is governed under several different laws and regulations. Further, currently, there is no specific regulatory framework for the production, utilisation and/or development of certain renewable energy, including hydrogen and biomass – instead, these industries are governed by general sectoral laws and regulations.
The utilisation and development of renewable energy is mainly regulated under Indonesian Law No 30 of 2007 on Energy (the “Energy Law”) as well as Indonesian Law No 30 of 2009 on Electricity (as amended) (the “Electricity Law”). The Energy Law requires the Indonesian central and local governments to (i) increase the utilisation of renewable energy and (ii) provide incentives for developers of clean energy. Further, Government Regulation No 79 of 2014 on National Energy Policy sets out the Indonesian government’s national renewable energy sources targets as part of its national energy mix.
The Indonesian government is reportedly still formulating a new draft law specifically related to the development of new and renewable energy in Indonesia (the “Draft New Renewable Energy Law”). The key provisions of the Draft New Renewable Energy Law are expected to relate to, among other things, a roadmap for Indonesia’s energy transition, an updated business licensing regulatory framework, revised local content obligations for renewable energy plants and equipment, and a pricing model for new and renewable energy. The Ministry of Energy and Mineral Resources (the MEMR) is also reportedly drafting a new regulation to provide a specific regulatory framework for green hydrogen production. This new regulation is expected to be finalised by 2025, signalling a potential shift towards recognising and promoting green hydrogen as a distinctly recognised and important component of Indonesia’s clean energy future. However, the enactment of the Draft New Renewable Energy Law has suffered several delays due to prolonged political discussions on the scope of Indonesia’s new and renewable energy ambitions and is expected to re-tabled once the new Prabowo government comes into power in late 2024.
In Indonesia, the key regulators responsible for the new and renewable energy sectors are as follows.
In addition to the above, the Directorate General of Electricity (the DGE, also part of the MEMR) has the authority to issue business licences in relation to power generation, transmission, distribution and sale business activities (including for the generation of power from new and renewable energy sources) while the Ministry of Industry (the MOI) is generally responsible for industrial business activities (such as green hydrogen production) and for setting local content requirements.
The authors set out below a high-level summary of the regulatory framework for the generation of renewable energy under the Indonesian regulatory regime:
The transmission and sale of electricity is also heavily regulated in Indonesia. To supply electricity to a third party, the relevant electricity supply business will need to obtain a business area stipulation issued by the MEMR (a “Wilus Stipulation”). In principle, a Wilus Stipulation is issued by the MEMR to determine the area to be utilised by a business entity to carry out its electricity supply business (including the distribution and/or sale of electricity to third parties). However, the industry of electricity transmission and distribution is largely monopolised by a state-owned enterprise, namely PT Perusahaan Listrik Negara (Persero) (PLN). Accordingly, PLN essentially holds the Wilus Stipulation with an area which covers the entire area of Indonesia, except for certain areas of Indonesia which have been specifically relinquished by PLN in circumstances where PLN is not able to supply electricity or to meet quality and reliability levels (including, for example, in several industrial estate areas in Indonesia).
Pursuant to the Indonesian Constitution, all natural resources in Indonesia (including renewable energy resources) are controlled by the state and must be used for the greatest welfare of the people of Indonesia. As a result, the ownership of geothermal resources in Indonesia resides with the state. As the owner of all renewable energy resources in Indonesia, only the state may grant access to renewable energy resources. However, private parties may utilise renewable energy resources by obtaining an appropriate licence.
Further, in the utilisation of state-owned assets (including, for example, dams) certain utilisation arrangements (including lease or borrow and use arrangements) would require a utilisation permit to be issued by the relevant government authorities. The utilisation of water resources in Indonesia is mainly regulated under Indonesian Law No 17 of 2019 on Water Resources (as amended) and implementing regulations issued by the Minister of Public Works and Social Housing (the MPWH). In order to be legally entitled to commercially utilise water for power generation activities, Indonesian business entities must obtain a water resources commercialisation business licence from the MPWH, governor or regent/mayor (as relevant). The development of hydro-power facilities will also typically require obtaining the following dam-related licences from the MPWH, governor or regent/mayor (as relevant):
In general, the Indonesian laws and regulations prohibit the transfer of any business licence (including any licence for the utilisation of renewable energy). However, in certain circumstances, the transfer of such business licence is allowed, subject to prior approval from the MEMR. There are also restrictions on the transfer of shares in companies holding an IUPTL. Under MEMR Regulation No 48 of 2017 (as amended) there is a prohibition on the transfer of shares in an independent power producer company holding an IUPTL (which sells its electricity to PLN) prior to such company achieving its commercial operation date (subject to limited exceptions for transfers to affiliates).
Under the Indonesian investment law (and subject to limited exceptions), foreign companies and individuals looking to do business in Indonesia are not permitted to set up branches or otherwise operate directly in Indonesia. Instead, they must establish an Indonesian foreign-owned (PMA) limited liability company to operate a business in Indonesia and obtain the requisite business licences.
The foreign ownership of a PMA company in various sectors in Indonesia is subject to (and must comply with) the Indonesian Investment List. The Investment List identifies specific business sectors that are:
The Investment List generally does not provide any foreign ownership restrictions for the utilisation or generation of renewable energy, except for electricity generation (for commercial sale) with a capacity of less than 1 MW, which is reserved for CMSMEs. No such foreign ownership restriction applies to the generation or utilisation of energy for a business entity’s own use.
The electricity sector in Indonesia is mainly regulated under the Electricity Law, under which electricity supply is controlled by the Republic of Indonesia and handled by the central and regional governments (through state-owned enterprises and regional-owned enterprises). Private business entities are permitted by the Electricity Law to engage in the electricity supply business. However, the Electricity Law does not separately regulate the utilisation of renewable energy for the generation of electricity. Instead, all business activities in respect of power generation, transmission, distribution and sale (irrespective of the sources of the power generation) are subject to the same provisions within the Electricity Law.
The structure of the Indonesian power market involves the following key participants:
The Indonesian government has established a general business licensing framework for the production of biogas and green gas. However, there are currently no underlying implementing regulations which provide specific details on the procedures and requirements for the production of biogas and green gas.
Within the Indonesian regulatory framework, the raw materials for the production of biogas and green gas comprise of palm oil industrial waste, agriculture/farm waste and urban waste.
The key parties involved in the production of biogas and green gas are:
Under the Geothermal Law, the exploitation and utilisation of geothermal resources in Indonesia is subject to a licensing regime, namely: (i) a licence for the direct utilisation of geothermal resources for non-electricity purposes, such as tourism and agribusiness, and (ii) a Geothermal Licence for electricity purposes (for extracting the relevant geothermal resources) and an IUPTL (for producing and selling the electricity generated). Under previous regulatory regimes, pursuant to which several large-scale geothermal projects in Indonesia still operate, the Indonesian government (typically through its state-owned enterprises) has also entered into various concession agreements directly with private parties to permit the exploitation of geothermal resources for electricity generation purposes.
The Indonesian geothermal market involves the following key participants:
Hydrogen
Currently, there is no clear regulatory framework regarding the utilisation and development of hydrogen (including green hydrogen) in Indonesia. Under the current licensing regime, the production of hydrogen is classified as an industrial business activity and would require an industrial standard certificate from the Minister of Industry. The licensing regime applicable to the production of hydrogen is generic in the sense that the licence covers various industrial gas production activities and therefore, such licence does not differentiate between hydrogen produced from renewable sources (green hydrogen) and that produced from fossil fuels (gray or blue hydrogen). As a result, businesses producing hydrogen from renewable sources are subject to the same regulatory standards as those using fossil fuels, which is not ideal given the environmental and technical differences between these processes.
Given the current nascent regulatory framework for hydrogen in Indonesia, the MEMR is reportedly drafting a new regulation to provide a specific regulatory framework for green hydrogen production. This new regulation is expected to be finalised by 2025, signalling a potential shift towards recognising and promoting green hydrogen as a distinctly recognised and important component of Indonesia’s clean energy future.
The structure of the Indonesian geothermal market involves the following key participants:
Waste to Energy
Indonesia has developed a specific regulatory regime for the development of waste-to-energy projects through Presidential Regulation No 35 of 2018. This regulation was issued to promote the development of waste-to-energy projects to manage and reduce the level of domestic waste in Indonesia (in particular in Jakarta, Tangerang, South Tangerang, Bekasi, Bandung, Semarang, Surakarta, Surabaya, Makassar, Denpasar, Palembang and Manado). Waste-to-energy projects developed under this regulatory framework are currently the only renewable energy projects in Indonesia with a fixed feed-in tariff (whereas all other Indonesian renewable energy projects are subject to a prescribed ceiling price which is determined based on the type, size and location of the relevant project).
Captive Power Plants
Pursuant to the elucidation of the Electricity Law, captive power supply is divided into the following activities:
In order to construct and operate a captive power plant, a business entity will need to apply for and obtain an Electricity Supply Business Licence for Private Use (IUPTLS) for power generation with capacity exceeding 500 kW (in one integrated electricity installation system). The regulatory framework for the production and generation of renewable energy for own use is relatively liberalised in Indonesia, subject to compliance with the relevant environmental, health and safety standards.
Rooftop Solar Sector
The rooftop solar PV sector has seen notable growth in recent years. The sector is primarily structured through an operating lease model whereby electricity consumers lease rooftop solar PV installations from third-party providers (which also service and maintain the relevant installation). Under this model, electricity consumers are considered to be generating electricity for their own use and are therefore subject to the more relaxed IUPTLS regulatory regime (and are not deemed to be “selling” electricity to a third party, which is otherwise prohibited without specific licences). Electricity consumers with rooftop solar PV installations (whose electrical power network is also connected to the electrical power network of an IUPTL holder) must obtain a prior approval from the relevant IUPTL holder (for example, PLN) for the purpose of the installation and sale to the relevant IUPTL holder of the electricity generated from the rooftop solar PV installation.
Under the Electricity Law, the transmission and distribution of power requires an IUPTL from the MEMR. Further, the activity of power sale/distribution requires a Wilus Stipulation, also issued by the MEMR.
As the state-owned enterprise having the authority for power supply in Indonesia, PLN essentially holds the business area stipulation with an area covering the entire territory of Indonesia (except for certain business areas which have been relinquished to the holders of Integrated IUPTLs). As a result, PLN essentially owns and operates all electricity grids in Indonesia except for transmission networks owned and operated by IPPs and/or Power Developers. PLN has been taking a number of important steps to seek to upgrade Indonesia’s electricity, including to seek to better manage intermittent power supply and to accommodate battery storage solutions.
Private parties (being IPPs and/or Power Developers) may also own and operate their own transmission networks in Indonesia. In particular, IPPs may enter into arrangements with PLN to construct their own transmission networks under a build operate transfer (BOT) or build lease transfer (BLT) scheme. Under the BOT scheme, the operation and maintenance of the transmission network will be conducted by the IPP in accordance with a dispatch order from PLN, while under the BLT scheme, the operation and maintenance of the transmission network will be conducted by PLN. The transmission assets will typically be transferred to PLN at the end of the concession period.
Under the relevant electricity regulations, there is also a clear regulatory basis for the joint-utilisation of a transmission line through the lease of capacity (ie, power wheeling), which is subject to a wheeling price approval from the MEMR.
The current electricity regulatory framework does not provide clear regulatory guidance for managing the intermittent nature of renewable power plants and grid congestion. The relevant regulations currently provide that provisions for the terms of power purchase agreements (PPA) for new and renewable energy power plants of an intermittent nature will be regulated in a separate regulation to be issued by the MEMR. However, the MEMR is still formulating this regulation, which is expected to be issued shortly to provide greater clarity on the regulatory framework for addressing intermittent power supply.
However, the standard PPA template of PLN already includes provisions regarding forced curtailment, whereby the curtailment may occur as a result of (among other things) (i) a system emergency affecting PLN, including operating conditions on its system or its inability to accept deliveries of energy, and/or (ii) non-compliance of the IPP with the prescribed grid code (which seeks to manage grid congestion). PLN has also introduced take-and-pay PPA arrangements which provide PLN with greater financial flexibility for supply-side management.
Transporting biogas, hydrogen and green gas can be carried out by way of (i) pipeline infrastructure, or (ii) bottled plant (compressed or liquefied) biogas, hydrogen and green gas to be further transported by trucks or vessels.
There is currently no specific regulatory framework for the transportation and storage of gas from renewable energy – accordingly, these business activities are governed by general sectoral laws and regulations. In practice, producers of biogas, hydrogen and green gas may elect one of the following.
In principle, the transportation and storage of heat from geothermal sources is included under the Geothermal Licence issued by the DGNRE. In practice, Indonesian geothermal power plants will typically be located close to the specific geothermal working area for the ease of supply of heat energy to the power plant. As a result, a Geothermal Licence holder would typically supply the relevant heat energy to the power plant through the construction and maintenance of certain infrastructure (including pipelines). There is not otherwise a well-developed market for the transportation and storage of heat from renewable sources in Indonesia.
See 4.3 Gas.
Under the Electricity Law, a business entity is required to obtain an integrated IUPTL for the purpose of the distribution and sale of electricity. Prior to applying for and obtaining an integrated IUPTL, the relevant business entity would need to obtain a Wilus Stipulation from the MEMR. In principle, a Wilus Stipulation is issued by the MEMR to determine the area to be utilised by a business entity to carry out its electricity supply business (including the distribution and sale of electricity).
Regulatory Framework
The general terms and conditions of PPAs are regulated under regulations issued by the MEMR. In general, each PPA must at least contain terms and conditions relating to the following:
Presidential and MEMR regulations explicitly mandate PLN to purchase electricity from IPPs that utilise renewable energy sources. PLN may purchase electricity sourced from renewable energy by way of direct selection or direct appointment (as applicable). During the tender award process, PLN will typically prepare a PPA which is prepared based on the relevant regulatory guidance and precedent agreed-form PPAs. While PLN will typically prepare PPA terms which are as favourable as possible to PLN, PLN is also concerned to ensure that the PPA terms are consistent with market conditions and bankable.
PPA Provisions
There are a number of important commercial provisions included in PLN’s standard-form PPA, including:
The tariff payable under PPAs with PLN typically includes a number of different components including, among others:
Currently, there is no specific regulatory framework (or well-developed market) for the trading and supply of biogas, green gas, hydrogen or other renewable fuels. From a regulatory perspective, such activities would require:
The sale and purchase transaction for such energy would typically be carried out on a business-to-business basis, by taking into account the absence of prescribed terms and conditions of the contract under the laws and regulations.
There is not a well-developed market for the trade and supply of heat from renewable sources in Indonesia. Accordingly, the trade and supply of heat is typically conducted through captive projects whereby the holder of a Geothermal Licence may either directly (i) sell the electricity produced from the geothermal power plant (typically to PLN); or (ii) sell the heat energy from the geothermal fluid to the relevant captive power generation company.
See 5.3 Heat.
Renewable Energy Certificates
MEMR Regulation 11/2021 stipulates that a holder of a Wilus Stipulation must have a valid Electricity Supply Business Plan (RUPTL), which shall include the details of the energy mix target for the relevant supply area. In practice, such energy mix target can be achieved through:
An REC generally certifies the amount of electricity produced by a renewable-energy-sourced power plant. However, Indonesia has not yet issued any implementing regulations which set out the procedures and requirements for the registration and trading of RECs.
PLN has an internal system for creating RECs from its projects and has established a service portal which enables an individual or business entity to purchase RECs as proof of the utilisation of renewable energy for its projects. There is also regulatory scope for a third-party independent institution, being REC Indonesia, to issue RECs for projects in circumstances where the relevant project will be implemented without any involvement of PLN.
Indonesia has also created a legal framework for carbon credit trading (and launched, through the Indonesian Stock Exchange, Indonesia’s first carbon exchange). Carbon trading can be conducted either domestically or in the international market, subject to the fulfilment of the following:
Further implementing regulations are expected to be issued to clarify the processes and procedures for the international trading of carbon credits.
Corporate PPAs
Long-term corporate PPAs are available in Indonesia (from PLN and Power Developers holding a Wilus Stipulation to be able to sell electricity to end customers) in respect of large-scale energy consumption projects. These corporate PPAs (particularly between Power Developers) can vary significant in their structure and complexity. However, PLN has developed a relatively standard form corporate PPA which typically provides corporate customers with certainty in respect of the term of the PPA and the availability of power supply.
In principle, the development of an onshore renewable energy project would vary depending on the type of renewable energy involved. For example, in order to apply for and obtain a Geothermal Licence, a business entity must participate in a tender to obtain a geothermal working area (and be determined as the tender winner). In addition, an onshore renewable energy project would require an IUPTL for power generation (as discussed previously).
Environmental Approvals
Prior to conducting any business activities in Indonesia (such as commencing development, construction or operation), companies are required to assess the environmental impact of their business activities and prepare the relevant environmental documents by:
The construction and operation of any power plant with a capacity >50MW is required to have an AMDAL. For the business activity of electricity transmission, the requirement for the environmental document would depend on the particular unit being constructed, ie, airways (direct current), airways (alternating current), cable line, sea cable line, high voltage substation, gas insulated switchgear substation, or HVDC transmission converter substation. If those units each have a capacity of >230kV, then the transmission facilities will also be required to have an AMDAL. Smaller scale projects will generally be required to obtain a UKL/UPL or SPPL.
The AMDAL approval process includes significant scope for engagement with (and participation by) relevant government stakeholders and the surrounding community. The typical time required for completion of the AMDAL preparation process is approximately six to eight months.
Forestry Approvals
If the relevant renewable energy project is built or developed within a forestry area, the relevant business entity would need to apply for and obtain a Forest Area Utilisation Approval covering the intended business activity area as issued by the MOEF. Certain renewable energy projects can only be developed (with a licence) within certain forestry areas.
Building Approvals
For the construction of any electricity generation facilities, the relevant electricity generation company will need to obtain a building approval (“Building Approval”) from the Ministry of Public Works and Public Housing (MPWH) through the Building Management Information System managed by the MPWH. A Building Approval must be obtained prior to the commencement of any construction activities.
Prior to the commercial operation of any renewable energy installations, the relevant business entity will be required to apply for and obtain an operational worthiness certificate (SLO), issued by the DGE or an accredited technical inspection institution registered under the DGE (as applicable). The regulatory purpose of an SLO is to ensure that the renewable energy installation has been constructed in accordance with all relevant zoning, health, safety and environmental requirements.
Spatial Utilisation
A Conformity to Spatial Utilisation Activities (KKPR) is also required for the development of renewable energy projects to ensure the conformity of spatial utilisation plans with the spatial layout (ie, zoning) plan determined by the central or local government. A KKPR is a pre-requisite document for a company to obtain its relevant main business licence.
In general, there are three types of KKPR.
Accordingly, the development of renewable projects must take into account the relevant spatial utilisation (ie, zoning requirements) for the relevant project location, specifically including whether the designated area has been approved by the government for industrial activities.
Construction Contracts
Further, the relevant project company would typically enter into an EPC contract with an Indonesian construction company holding the relevant construction licences for the construction of the project. Onshore Indonesian construction projects (including renewable energy projects) are closely regulated under the Indonesian construction services law. Notably, all onshore Indonesian construction services contracts must:
Local Content
Indonesia requires renewable energy project developers for public use (including developers of electricity infrastructure for cross-border electricity sales) to:
Under current regulations, compliance with the TKDN requirements (for the combination of goods and services) must be verified by an independent entity. The result of the verification process must be further submitted to the DGNRE (with a copy to the DGE for certain renewable projects). Failure to comply with the local content requirement may lead to administrative sanctions.
The most recently issued regulations take an overall approach to local content requirements, such that there is no longer any specific TKDN requirement for individual goods and services. Instead, there is now only one TKDN level for each type of power plant, which will be assessed on a combination of goods and services. This updated approach reflects the reality that domestic production can be very limited (or non-existent) for certain projects and instead allows projects to satisfy the TKDN requirement through a holistic assessment of the project.
Land
Land access is one of the key project risks for renewable energy projects in Indonesia. Indonesian business entities should ensure that they have a clear and achievable land access strategy (whether through acquisition, forestry licences or land lease arrangements) to ensure the viability of the project. Indonesia also has a specific regulatory framework (including a restitution and compensation regime) for the construction and operation of electricity transmission infrastructure over third-party land. Under this regulatory regime, the amount of compensation provided to the relevant landowners or occupiers must be determined by an independent valuer appointed and approved by the MEMR.
Offshore Renewable Energy Projects
The Indonesian government is starting to explore the potential of offshore renewable energy, particularly offshore wind and ocean energy. While the market is still in its early stages, promising areas identified for offshore wind farms include Aceh, Java and Papua. The Indonesian government is also looking into wave and tidal energy as part of its broader renewable energy strategy. However, the authors note that currently there is no operating power plant in Indonesia utilising offshore wind or wave and tidal energy resources.
There is also no specific or different regulatory regime for the development of offshore renewable energy projects (as compared to onshore renewable energy projects). Accordingly, the authors’ response in 6.1 Onshore Project Development will also generally apply to offshore projects.
Electricity Export Projects
Following the execution of a Memorandum of Understanding between the Indonesian and Singapore governments for the proposed export of 3.2 GW of clean energy from Indonesia to Singapore, there has been renewed interest and investment in Indonesian renewable energy export projects. The development of cross-border transmission infrastructure is strongly supported by the Association of Southeast Asian Nations Power Grid initiative.
In addition to the usual licensing requirements (including an IUPTL and Wilus Stipulation), the export of renewable energy from Indonesia also requires (i) a cross-border electricity sale licence, and (ii) a cross-border electricity network interconnection licence, each of which are currently only available for a period of up to five years (but can be extended). In general, in order to obtain such licences for the export of renewable energy from Indonesia, the relevant project developer will need to be able to demonstrate that:
Currently, there is a lack of clear regulatory framework for the procedures and requirements for the construction and development of the cross-border transmission infrastructure. At this stage, there is no specific prohibition on the construction and development of the relevant cross-border transmission infrastructure. The MEMR is reportedly currently drafting the relevant implementing regulations for the construction and development of the relevant cross-border transmission infrastructure.
In general, financing for development of electricity supply sourced from renewable energy projects in Indonesia is carried out by way of equity or loan financing (or a combination of both). However, investment loans (typically on a limited-recourse project finance basis) remain the main source of funds for the financing of renewable power projects.
The granting of project financing will ultimately depend on the bankability of the relevant project. The bankability of renewable energy projects would depend on the following, among others:
PPA Terms
From a bankability perspective (and in addition to the payment regime, ie, take-and-pay or take-or-pay, and step-in rights of financiers of the project if there is any default of the project company under the relevant PPA), there will typically be particular focus on the termination (and termination payment) regime for the relevant PPA. In general, financiers will want to ensure that sufficient protections are included in the PPA for the pay-out of the senior debt in the event of such termination events, including through a combination of available insurance (particularly for natural disaster force majeure events affecting the plant) and termination payments payable by PLN (particularly for non-performance events, government force majeure events and natural disaster force majeure events affecting the grid facilities).
Security
As part of the financing of the project, relevant lenders would typically require the granting of security from the relevant project company (as applicable) to secure the repayment obligations of the project company under the relevant loan agreement.
The typical security package for Indonesian renewable energy projects would include:
Depending on the overall bankability of the project, financiers may also require project sponsors to provide completion guarantees or other forms of equity support.
A direct agreement between the lenders and PLN is typically also a major bankability requirement. PLN typically attaches a template PLN consent letter to the PPA (which is currently the accepted market standard direct agreement between lenders and PLN for IPP projects).
World Bank Negative Pledge
Pursuant to the obligations of the Republic of Indonesia to the World Bank, Indonesian state-owned enterprises are subject to the World Bank negative pledge which, in respect of foreign currency loans or offshore loans only, restricts the ability to grant security over any “public assets” which are owned or controlled by the government of the Republic of Indonesia without also granting similar security to the World Bank. The World Bank negative pledge can have an impact on the financing arrangements for renewable energy projects in circumstances where an Indonesian state-owned enterprise is a project sponsor. Addressing the requirements and restrictions involving the World Bank negative pledge often involves complex debt structuring arrangements and specialist legal advice should be sought.
There are several incentives offered by the Indonesian government for businesses engaged in the renewable energy sector, including:
There is no clear regulatory guidance on the decommissioning of renewable energy installations in Indonesia. However, the authors note that under the relevant environmental regulations, business entities must conduct environmental management in respect of their post-operation stage, which includes conducting an environmental audit to ensure all obligations related to the termination of environmental management and monitoring have been fulfilled.
In practice, IPP projects in Indonesia are generally developed under a “Build, Own, Operate, Transfer” (BOOT) scheme whereby, following the termination of the PPA, which is for a maximum period of 30 years from the date of commercial operation, the project will then be transferred to PLN. This transfer obligation requires the IPP to transfer the renewable energy project to PLN in a useable and properly maintained state. As a result, following the transfer, PLN will be primarily responsible for managing the end-of-life and decommissioning requirements for the project.
Enhancing Indonesia’s Regulatory Framework
The Indonesian government and parliament are currently contemplating the Draft New Renewable Energy Law, which will include provisions on, among other things, licensing and concessions, research and development, and renewable energy pricing, and will create a new and specific regulatory framework for Indonesian renewable energy projects.
Additionally, the Indonesian government is working on enhancing Indonesia’s regulatory framework through the issuance of new implementing regulations for:
Future Renewable Energy Projects
Points of interest in the future development of Indonesian renewable energy projects include the following.
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hbtlaw@hbtlaw.com www.hbtlaw.comA Greener Future for Indonesia
Background
Across Indonesia’s sprawling archipelago, the government of Indonesia (GOI) has exhibited its unwavering commitment to renewable energy for many years. In the regulatory scrutiny, such commitment has been materialised through the enactment of Law No 30 of 2007 on Energy (“Energy Law”) which, among other things, necessitates local and central government, as well as incentivises business entities to utilise renewable energy. Following issuance of the Energy Law, a national energy policy (kebijakan energi nasional – KEN) was issued in 2014 through Presidential Regulation No 79 of 2014. The regulation outlines the target of achieving at least 23% of a new and renewable energy mix in the scheme of the optimal primary energy mix by 2025 (and at least 31% of a new and renewable energy mix in the optimal primary energy mix in 2050, so long as its economic viability is fulfilled).
To achieve this target, the GOI has enacted Presidential Regulation No 22 of 2017 on the general national energy plan (rencana umum energi nasional – RUEN) to further the agenda of the national energy policy. The general national energy plan emphasises the need to consider energy–economic balance, security of energy supply, and preservation of environmental functions in developing renewable energy.
Ever since the optimal primary energy mix target was introduced, the efficacy of mixed renewable energy has demonstrated a consistent annual upward trajectory. Statistically, the new and renewable energy mix in 2023 peaked at 13.09%, marking a notable 6.39% increase from 2015 (MEMR, 2017 & 2024). Despite being 11.91% behind the minimum 23% of the new and renewable energy mix target for 2025, several expansive developments on renewable energy in Indonesia are underway.
Government prioritisation on renewable energy
The government is preparing an umbrella law focused on new and renewable energy. The law aims to facilitate the energy transition and encourage non-renewable power plant developers to develop renewable power plants. It will likely require those developers to meet certain renewable portfolio standards or purchase renewable energy certificates. Additionally, the law will establish a new and renewable energy fund, designed to finance and incentivise renewable energy development. The fund will be managed by the Minister of Energy and Mineral Resources and Minister of Finance. Its sources of funding may include state and regional budget, non-tax state revenues from non-renewable energy exports, carbon trading, and a renewable energy certificate fund.
The National Energy Policy is currently undergoing a revision process with the aim to incorporate the recent developments in the energy sector. The updates will likely address critical issues such as the energy transition, ensuring energy security during this transition, reducing greenhouse gas emissions in the energy sector, as well as exploring energy decarbonisation pathways and related financing opportunities (CNBC, 2024). In addition, the Ministry of Energy and Mineral Resources is working on several minister regulations designed to boost renewable energy development. For instance, a minister regulation on key provisions of power purchase agreements specifically for renewable power plants.
PLN’s greener ten-year electricity plan
PLN, as the sole electricity offtaker in Indonesia, outlines its strategic plans in the ten-year electricity generation business plan known as RUPTL (rencana usaha peneyediaan tenaga listrik). The current RUPTL is RUPTL 2021–2030. PLN claims that RUPTL 2021–2030 is their greenest RUPTL thus far, with a significant focus on new and renewable power plants that are expected to contribute 20.9 GW or 51.6% of the total development plan. To accelerate this, PLN intends to foster private-sector participation by co-operating with them in developing 56.3% of the 20.9 GW renewable energy projects outlined in the RUPTL.
According to recent updates, PLN is currently advancing its commitment by proposing to GOI that the renewable energy mix must reach 75% in Indonesia (CNBC, 2024). PLN has planned on the Accelerated Renewable Energy Development (ARED) scenario that is expected to be incorporated in the upcoming 2024–2033 RUPTL as part of the journey to net-zero emissions (NZE) by 2060, where PLN plans, among other things:
(a) Renewable Energy Development – increase the capacity of renewable energy power plants by 75% and gas power plants by 25% by 2040.
(b) Green Supergrid – develop transmission network designed to facilitate the energy transition by integrating advanced technologies such as smart grids and flexible generation systems to overcome the geographical mismatch between the renewable energy sources and epicentres of energy demand.
(c) Flexible generation & smart grid – build an end-to-end smart grid infrastructure and flexible generation to enable large-scale solar and wind penetration.
(d) Green emerging technologies – explores the use of storage, CCS/CCUS, co-firing hydrogen, ammonia, and new energy such as nuclear.
New procurement models for renewable power plant projects
Indonesia’s procurement mechanisms for renewable power plants have undergone multiple changes over the years, which often perceive as reducing the attractiveness of the Indonesian renewable market to investors due to the regulatory uncertainties. Indonesia initially used a direct appointment method to select renewable energy developers. However, in 2017, a shift was made to direct selection as the primary procurement mechanism for renewable power plants, with direct appointment reserved for specific conditions. Direct selection involves competitively selecting an electricity developer by comparing at least two offers/bids and direct appointment involves directly appointing one developer. As for the electricity purchase by PLN, several mechanisms were used prior to 2017, such as ceiling price, PLN’s estimated price, and a feed-in tariff until PLN’s electricity generation cost (Biaya Pokok Penyediaan – BPP) was used between 2017–2022.
In 2022, GOI issued Presidential Regulation No 112 of 2022 on the Acceleration of Renewable Energy Development for Electricity Generation (PR 112/2022) which now acts as the cornerstone regulation for the electricity purchase by PLN from renewable power plants in Indonesia. PR 112/2022 continues to apply direct selection and direct appointment. PR 112/2022 applies direct selection and direct appointment based on the type of renewable power plants. Under this regulation, essentially most renewable power plants are procured through direct selection, with direct appointment reserved for specific categories such as hydro power plants utilising state-owned reservoirs, dams, or irrigation channels, geothermal power plants, as well as expansion and excess power of certain types of power plants. Specifically for hydro, solar, wind, peaker hydro, biofuels, and tidal power plants, the procurement is conducted based on a capacity quota determined by the Ministry of Energy and Mineral Resources. The capacity quota is the maximum amount of a plant’s capacity offered to business entities within a certain period at a determined electricity purchase price.
PR 112/2022 also reformed the mechanisms for determining electricity purchase price. It replaced the BPP-referenced system with a ceiling price mechanism, except for certain power plants (eg, biofuel and tidal power plants) where prices are based on an agreement. The ceiling prices are categorised by types and capacities of renewable power plants and are divided into two stages, namely year 1–10 and year 11–20/25/30. Notably, the ceiling price for the first ten years considers factor location, where more densely populated areas (such as Java and Bali) would have a lower ceiling price compared to rural areas (such as Papua and Maluku). Furthermore, the regulation establishes a separate ceiling price for solar power plants where the government provides the land – a positive development considering the complexity and time-consuming nature of the land acquisition process that usually occurs for solar projects.
These reforms aim to create a more structured and transparent procurement environment, potentially making the Indonesian renewable energy market more appealing to investors. However, ongoing regulatory changes continue to play a critical role in shaping the market’s attractiveness and stability.
Increased participation of private sectors and PLN Group in renewable power plant projects
PLN administers the procurement and electricity purchase price mechanisms outlined in PR 112/2022. To facilitate this, PLN carries out direct selection or direct appointment processes to select an independent power producer (IPP) that will develop the renewable power plants and sell the generated electricity to PLN through a power purchase agreement.
Traditionally, IPPs were purely private companies, either standalone or in consortiums. However, in recent years, PLN has started involving its subsidiaries as mandatory partners or strategic partners in developing renewable power plants.
Under the mandatory partner arrangement, the selected private developer forms a special purpose vehicle (SPV) with PLN’s subsidiary as the mandatory partner, where the private developer holds the majority of shares and PLN’s subsidiary holds minority shares in the SPV. The mandatory partner approach aims to enhance the capabilities of PLN’s group in developing renewable power plants, which is targeted to be the future main energy source, while maintaining PLN’s oversight and control as a state-owned electricity enterprise in these project developments.
In addition to the mandatory partner concept, PLN has the option to involve its subsidiaries as majority shareholders in SPVs formed with private developers. This is regulated by Presidential Regulation No 4/2016 that aims to achieve the government’s targets under the Acceleration of Electricity Infrastructure (program infrastruktur ketenagalistrikan – PIK) programme as outlined in the regulation. The implementation of this programme includes co-operation in electricity supply through joint ventures, where PLN (through its subsidiaries) holds at least 51% of the SPV’s shares in the project, with the remaining shares held by the private developers. This structure facilitates strategic partnerships aimed at enhancing Indonesia’s power infrastructure by leveraging the expertise and resources of both the public and private sectors.
Project developments & financing trends in renewable energy
Since the introduction of a new renewable energy power procurement model in 2017 by the Minister of Energy and Mineral Resources, Indonesia has witnessed a surge in the signing of major renewable energy Power Purchase Agreements (PPAs) that have reached financial close. Among these notable projects are the Cirata Floating Solar Project, boasting a capacity of 145 MW. In 2022, the PPAs of Bali 2x25 MW solar power plants were signed, marking the success of the first-ever direct selection process under the new procurement method outlined in Minister of Energy and Mineral Resources (MEMR) Regulation 50/2017. This milestone paved the way for further advancements in the renewable energy sector. In 2023, there was the PPA of 70 MW Tanah Laut Wind Power Plant with 10 MW/10 MWh Battery Energy Storage System (BESS) between PLN, Total Eren, PT Adaro Energy Indonesia Tbk, and PT PJB Investasi, with a mandatory partner scheme. Most recently, in 2024, the PPA for the 35 MWac Tembesi Batam Floating Solar Photovoltaic Power Plant Development was signed, reinforcing the government of Indonesia’s concrete commitment to achieve the NZE target by 2060. Additionally, to meet the need for green energy in the new capital city (IKN) Nusantara, PLN commenced construction of a 50 MW solar power plant and a 14 MWh BESS.
The momentum in renewable energy developments has been accompanied by a notable increase in funding from local banks. A prominent example is the financing of Small Hydro Power Plants (PLTM) by PT Sarana Multi Infrastruktur (SMI), a leading infrastructure financing company in Indonesia. Moreover, several of SMI’s PLTM projects have been successfully published, including the notable PLTP Ijen financing underscoring the vital role of local financial institutions in supporting the country’s renewable energy ambitions.
Expansion beyond PLN: emerging trends
Private-sector involvement in Indonesia’s renewable energy market is not limited to collaborations with PLN. Private companies are increasingly participating through various other channels. In the Indonesian electricity market, PLN owns the business for the entire Indonesian area other than those parts specifically granted to an entity as may be approved by the Ministry of Energy and Mineral Resources. This business area allows PLN exclusive rights to sell electricity to end customers located in its business area. However, to date, there are 62 private companies who have been granted business areas, enabling them to sell electricity directly to end customers without PLN’s involvement.
These companies are actively engaging in renewable energy development. For example, SESNA, a prominent solar power plant developer, has committed to constructing a 255 MWp solar power plant with an 80 MWh BESS in an industrial park designated for nickel ore processing (Antara News, 2024). This project aims to reduce CO2 emissions and promote the extensive use of clean energy.
Private stakeholders in Indonesia are also exploring the development of low-carbon technologies and new energy sources, such as carbon capture and storage, hydrogen production and utilisation, and biomass co-firing of coal-fired power plants.
Indonesia is also pursuing electricity export opportunities by leveraging its solar power potential. The country officially established an electricity sale and purchase co-operation with Singapore through a memorandum of understanding as signed on 8 September 2023. This co-operation focuses on low-carbon energy co-operation and cross-border electricity interconnection. Following this, Singapore’s Energy Market Authority gives its conditional approval to five entities to import a total of 2 GW of low-carbon electricity to Singapore. Notably, two of these entities involve Indonesian private companies, highlighting the private sector’s role in expanding Indonesia’s renewable energy footprint.
Reforms of local content governance for Indonesia’s renewable energy power projects
For years, reports have indicated that financing for renewable energy projects has faced inhibition due to issues related to the local content threshold, as the domestic market is sceptical about meeting these requirements (CNBC Indonesia, 2024). In response, the government of Indonesia has recently issued a series of regulations related to local content, which reform the governance of local content requirements for power project development in Indonesia.
Authority to govern local content for power projects has moved to MEMR
The regulation of the local content threshold for power projects was initially under the authority of the Ministry of Industry (MoI) through MoI Regulation 54/2012. However, the involvement of MoI in regulating local content for power projects led to confusion as the authority for regulating and issuing permits for power projects generally falls under the MEMR. On 30 July 2024, MEMR issued MEMR Regulation No 11 of 2024 on the Use of Domestic Products in the Development of Electrical Infrastructure (MEMR Regulation 11/2024) which shifts the authority and responsibility for setting and enforcing the local content requirements of combined goods and services for power projects from MoI to MEMR.
Exemption of local content threshold for solar projects
Given the current conditions in the market, fulfilling local content requirements, particularly for solar projects, presents significant challenges. One major issue is that local manufacturers often struggle to produce solar modules that meet the required quality standards (Bisnis Indonesia, 2024). This has led many market participants to frequently seek exemptions from these local content thresholds. The difficulty in meeting the stringent local content criteria has led to an increasing number of requests for leniency or exceptions.
For example:
MEMR Regulation 11/2024 continues to provide relaxation of the local content threshold for solar projects. This relaxation of the local content threshold can be granted until 30 June 2025 for solar projects if (i) the power purchase agreement is signed no later than 31 December 2024, and (ii) the commercial operation date is planned to occur by no later than 30 June 2026, and subject to certain conditions.
Significant reduction of local content for solar projects
Previously, in 2023, MoI Regulation 5/2017 stated that the minimum local content requirements of combined goods and services for solar projects were set at over 40% (depending on the type), where:
As one of the implementing regulations to MEMR 11/2024, on 6 August 2024, MEMR issued MEMR Decree 191/2024 which, among others, reduced the minimum local content requirements for solar projects to a minimum of just 20% of combined goods and services.
New local content for other types of renewable projects
MEMR Regulation 11/2024 and MEMR Decree 191/2024 broaden the scope of local content requirements to larger types of power plants that were previously unaddressed by stipulating express local content thresholds for gas engine power plants, wind power plants, biomass power plants, biogas power plants, and waste-to-energy power plants. For instance, the local content threshold for wind power plants is now set at 15% which was not previously regulated under MoI Regulation 54/2012.
Local content exemption for projects funded by government offshore loans/grants
The local content requirements have also posed significant challenges in securing international funding for renewable power projects, particularly those developed by State-Owned Enterprises (SOEs) through sovereign-direct or government two-step loans or grants. International financial institutions like the Asian Development Bank (ADB), World Bank, and Japan International Cooperation Agency (JICA) have expressed concerns about these requirements. For example, the development of the Hululais geothermal power plant was delayed when JICA decided not to proceed with funding due to misalignment between local content requirements and the agency’s procurement guidelines.
MEMR Regulation 11/2024 seeks to mitigate this issue by permitting projects funded by foreign loans or grants to adhere to the local content requirements outlined in the relevant loan or grant agreements, rather than those imposed by MEMR. This flexibility is conditional on the project being intended to meet domestic electricity needs, with at least 50% of the loan or grant value coming from multilateral or bilateral creditors (development banks or financial institutions).
This relaxation of local content requirements under MEMR Regulation 11/2024 is anticipated to significantly boost the development of renewable energy projects, particularly solar power plants (PLTS). Notably, following the announcement of the issuance of MEMR Regulation 11/2024, the PPA for the development of the 60 MWac Floating Solar Power Plant at Saguling Reservoir, West Java, Indonesia was signed. The authors hope that this regulatory change can further accelerate the growth of renewable energy in Indonesia and contribute to the country’s sustainable energy goals.
The way forward
The current Indonesian regulatory framework and PLN’s RUPTL 2021–2030 have demonstrated a strong commitment from the GOI to accelerate renewable energy development in Indonesia. However, those regulations require rigorous implementation, particularly among relevant ministries, to ensure the seamless progression of renewable energy.
Despite the positive progress, there remains a need to expedite renewable energy procurement to ensure that the 23% new and renewable energy target is achieved by 2025.
Several regulatory developments are still in the pipeline, including the new and renewable energy bill, revision to the national energy policy, and a minister regulation on power purchase agreements for renewable power plants. Additionally, several implementing regulations are anticipated to support renewable energy, such as implementing regulations on energy efficiency and international carbon-trading.
The Indonesian market is also experiencing significant development in technologies relating to new and renewable energy. These developments include hydrogen, battery energy storage systems, and hybrid power plants. Unfortunately, these developments are not yet matched by a comprehensive regulatory framework. Establishing a robust regulatory framework regarding these developments, particularly in terms of licensing, incentives, procedures, and requirements, would be instrumental in attracting investors to these emerging developments.
Moreover, it is crucial to encourage greater participation from local governments in renewable energy development. Currently, renewable energy policies are relatively centralised, limiting the scope for regional engagement. The existing regulations primarily grant authority to regional governments for a select few renewable energy developments, such as geothermal, biomass, biogas, and energy conservation. Enhancing regional participation could significantly accelerate the deployment of renewable energy projects across the country.
By addressing these challenges, Indonesia can better position itself to meet its ambitious renewable energy goals in order to ensure a sustainable and secure energy future.
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