Examining the draft pricing strategy for renewables in Indonesia

By Bill Sullivan, Christian Teo & Partners and Wang Jihong, Zhong Lun Law Firm
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Indonesia’s renewable energy resources comprise solar, wind, hydro, biomass, biogas, city waste, geothermal, tidal and liquid biofuel energy. Potential investors have long hoped for a new regulatory framework that includes feed-in tariff arrangements for renewable energy resources. They believe that such arrangements will bring better financial stability and benefits.

Bill Sullivan, Partner, Christian Teo & Partners
Bill Sullivan
Partner
Christian Teo & Partners

With such high expectations, Indonesia’s Presidential Regulation on the Purchase of Renewable Energy Electricity by the State Electricity Company (PLN) (the draft regulation) now appears to be very close to finally being issued after many delays. This article presents an overview of the pricing structures proposed in the draft regulation, and offers an initial assessment of relevant impacts.

The applicable purchase price payable by the PLN for electricity from renewable energy power plants differs, depending upon whether the particular renewable energy power plant has been:

(1) wholly built by private sector business entities (Pengembang Pembangkit Listrik, or PPL, meaning power plant developer); or

(2) wholly or partially built by the central government, or a regional government, including with or without the benefit of grants. For the purposes of what follows, we focus exclusively on the electricity purchase price payable by the PLN for electricity from renewable energy power plants wholly built by a PPL.

Pricing structure

The draft regulation on renewable energy electricity purchase provides for three different pricing structures in determining the electricity purchase price, depending on:

(1) the type of renewable energy resource used to power a particular renewable energy plant; and

(2) the capacity of the particular plant. The three pricing structures are feed-in tariff price, highest benchmark price, and strike price (article 4(1) of the draft regulation).

Each of the three pricing structures is in US cents per kilowatt-hour (kWh), and may be subject to adjustment, depending upon just where that renewable energy plant is located, utilising a so-called location factor, or “F”. “F” varies between 1.00 and 1.70.

In the case of most but not all renewable energy resources, the applicable pricing structure also differs depending upon whether the particular renewable energy power plant is small scale (i.e., with a capacity ≤ 5MW) or medium/large scale (i.e., with a capacity >5 MW). Somewhat curiously, however, the magnitude of “F” is differentiated depending upon whether the relevant renewable energy plant has a capacity of ≤10MW or >10MW.

王霁虹, Wang Jihong, Partner, Zhonglun Law Firm
Wang Jihong
Partner
Zhong Lun Law Firm

Structure summary

(1) Feed-in tariff price. The feed-in tariff price: (i) is specified in annex I of the draft regulation on renewable energy electricity purchase multiplied by the location factor, F, where applicable; (ii) is not subject to negotiation between PPL and PLN; (iii) will not be subject to escalation during the power purchase agreement (PPA) term; and (iv) no separate Minister of Energy and Mineral Resources (MoEMR) approval needs to be obtained.

(2) Highest benchmark price. There are three alternative versions of the highest benchmark price, and for all of them no separate approval is required from the MoEMR. The first alternative is subject to negotiation between the PPL and PLN, with a ceiling being the highest benchmark price specified in annexure I of the draft regulation multiplied by the location factor, F, where applicable.

The second alternative is specified in annexure I of the draft regulation multiplied by the location factor, F, where applicable, and is not subject to negotiation between the PPL and PLN. The third alternative is negotiated and agreed between the PPL and PLN, with a ceiling being the highest benchmark price (as specified in annexure I of the draft regulation) and multiplied by the location factor, F, where applicable, and operates as a base price. In terms of escalation possibility, while the first two alternatives will not be subject to escalation during the PPA term, the third alternative will be subject to escalation.

(3) Strike price. The strike price: (i) is ne- gotiated and agreed between the PPL and PLN, and then multiplied by the location factor, F, where applicable; (ii) is based on a reference price set by the MoEMR; and (iii) separate MoEMR approval is required).

Impact of regulation

The draft regulation seeks to continue the process of encouraging the development and utilisation of Indonesia’s renewable energy resources by, among other things, reforming the pricing arrangements for the purchase of electricity generated from renewable energy power plants, so as to include a feed-in tariff component. Compared with the high expectations of potential investors, the draft regulation very arguably “comes up short”, because the feed-in tariff price structure:

(1) is confined to the purchase of electricity from small-scale renewable energy power plants (≤ 5MW) utilising certain renewable energy resources only; and

(2) does not apply at all to the purchase of electricity from renewable energy power plants utilising geothermal, tidal or liquid biofuel.

While the feed-in tariff price structure may well encourage the development of more small-scale renewable energy power plants utilising solar, wind, hydro and hydropower from dams/reservoirs, biomass and biogas, it will clearly do nothing to encourage the development of large-scale renewable energy power plants (> 5MW) or renewable energy power plants of any size utilising geothermal, tidal or liquid biofuel.

Without much expanded development of large-scale renewable energy power plants, the overall impact on Indonesia’s development and utilisation of renewable energy resources is likely to be very modest, at best. The authors of this article will continue monitoring the policy changes in the renewable energy sector in Indonesia.

Bill Sullivan is a partner at Christian Teo & Partners, and Wang Jihong is a partner at Zhong Lun Law Firm

Zhong Lun Law Firm

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bsullivan@cteolaw.com

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