As the world battles with the issue of climate change, India has decided to slowly migrate from conventional forms to clean renewable sources of electricity generation. In 2008, the federal and state governments started a major initiative called the National Solar Mission while launching India’s National Action Plan on Climate Change. With its objective to migrate to clean renewable energy, the country has set a target to achieve a capacity of 450GW by 2030. India presently has more than 100GW of installed capacity at renewable energy plants, with about 80GW comprising solar and wind facilities.
India has both federal and unitary structures of governance. Thus, the constitution specifies the distribution of executive and legislative powers between the union and the states. In this separation of powers, electricity features in the concurrent list of the constitution of India. Hence, both the national parliament and the state legislatures have the right to formulate laws on the subject. However, in case of any conflict, the provisions of the central laws shall override the state laws.
The principal legislation that governs the electricity sector in India is the Electricity Act, 2003 (Electricity Act). At present, there is no specific legislation governing renewable energy in India. Since renewable energy is part of the electricity sector, it is governed under the provisions of the Electricity Act, which provides a framework for the generation, transmission, distribution, trading and use of electricity.
The Ministry of Power administers the implementation of the Electricity Act and primarily plays a supervisory role in overseeing the development of the electricity sector in the country. However, the development and growth of renewable energy in India are administered by the Ministry of New and Renewable Energy, which functions as the nodal agency of the government for all matters relating to renewable energy developments.
India is blessed with various sources of renewable energy, among which solar and wind are the most prevalent. Since 2015, the federal government and most of the state governments have issued favourable policies supporting private sector investment (including foreign investment) in the renewable energy sector. The Electricity Act requires the federal government to issue a National Electricity Policy in consultation with the state governments, which lays down the guidelines for the accelerated development of the electricity sector in the country, with the optimal utilisation of resources such as coal, natural gas, nuclear materials, hydro and renewable sources of energy. The last National Electricity Policy was issued in 2005.
The government also notifies a National Electricity Plan once every five years, which lays down a short-term framework for the electricity sector. In May, the government issued a draft National Electricity Policy 2021, which is yet to be notified. The Electricity Act also requires the government to publish a National Tariff Policy, which was first issued in 2006 and was revised in 2016. It is noteworthy that the National Tariff Policy 2016 emphasised the promotion of electricity generation through renewable energy sources, and encouraged private sector participation in setting up renewable energy plants.
In the past, to encourage wind and solar project development, the government had announced a generation-based incentive scheme that entitles generators to monetary incentives for each unit of electricity fed into the grid during the first 10 years of operations. Generators are also entitled to an accelerated depreciation benefit, which allows the commercial and industrial users of solar power in India to depreciate their investment in wind and solar at a much higher rate than general fixed assets. Regulatory commissions set up under the Electricty Act have issued regulations that mandate a minimum level of renewable energy to be purchased by distribution licensees as part of their total demand, to ensure the wider adoption of electricity generated from renewable sources.
Most state governments with the rich potential of renewable energy sources have issued specific policies to attract private investment in wind and solar. These policies provide benefits such as easier access to land acquisition for setting up of projects, faster conversion of land use to suit the development of renewable energy projects, preferential procurement of renewable power by state distribution licensees, preferential allotment of evacuation capacities, and hassle-free transmission infrastructure.
One of the prime incentives that has enabled large-scale growth of solar power in India is the grant of “must-run” status to wind and solar power plants. Unlike the two-part tariff of conventional power plants, both wind and solar power plants have a single-part tariff. Hence, their revenue is linked to generation and onward transmission. The must-run status ensures that the wind and solar plants are not subjected to unwarranted backdown or curtailment due to congestion in grid infrastructure. The Ministry of Power, from time to time by notification, has waived the interstate transmission system charges, through the central grid, of electricity generated from solar and wind sources of energy.
In India, electricity is a highly regulated sector. The Electricity Act sets the framework for setting up electricity regulatory commissions at the central and state levels, i.e. the Central Electricity Regulatory Commission and the State Electricity Regulatory Commissions. The commissions enjoy legislative and judicial powers, issue regulations and subordinate legislation, and have judicial powers to preside over disputes between generators and distribution licensees, or distributions licensees and consumers. Central or state commission orders can be appealed before the Appellate Tribunal for Electricity (APTEL), a specialised body to review disputes pertaining to electricity. The decisions of the APTEL may be challenged before the Supreme Court of India.
The central and state commissions discharge various functions including regulating tariffs for sale of electricity (at central and state levels), regulating the nature of procurement of electricity generated from various sources (including renewable sources), adjudicating disputes, regulating electricity transmission and issuing licences. The Electricity Act provides for two methods of tariff discovery – the first is a tariff determined by the central and state commissions under various tariff regulations issued by them, and the second is a tariff discovered through competitive bidding. The competitive bids are conducted under standard bidding guidelines and standard bidding documents issued by the federal government.
The central commission presently fixes generic tariffs for renewable plants based on parameters fixed under the Central Electricity Regulatory Commission (Terms and Conditions for Tariff Determination from Renewable Energy Sources) Regulations, 2017. This regulation defines “renewable energy” as grid quality electricity generated from renewable energy sources. The term “renewable energy sources” has been further defined in the regulation to include small hydro, wind, solar including its integration with combined cycle, biomass, biofuel cogeneration, urban or municipal waste and other sources as approved by the Ministry of New and Renewable Energy.
Similarly, the state commissions, based on fixed generic parameters or cost components set out under tariff determination regulations, arrive at a generic tariff determined through a public hearing process. The generators are free to adopt such tariffs and agree to sell power to a distribution licensee. The power purchase agreements for such projects are further filed before the state commission for consenting and approval. Once approved, a generator is entitled to supply power to the distribution licensee at the tariff agreed under the agreement. In case of a tariff discovered through the competitive bidding route, the act provides that the same shall be adopted by the central or state commission, and the agreement executed between generator and licensee be approved. These power purchase agreements have a very robust payment mechanism secured through a letter of credit issued by the procurer (distribution licensee) in favour of generation.
The federal government introduced the Electricity (Amendment) Bill, 2020, to propose amendments that are focused on growth of renewable energy sector. For instance, the constitution of the Electricity Contract Enforcement Authority that shall have the sole authority to adjudicate disputes emerging from power purchase agreements, make establishment of payment security mechanism under power purchase contracts mandatory, levy of penalty on distribution licensees for not adhering to renewable purchase obligations, and empowering the federal government to notify a National Renewable Energy Policy and prescribe a minimum renewable purchase obligation.
This bill, the draft National Electricity Policy 2021, and other policies are expected to bring about the much needed change to enhance energy efficiency to meet technological advancements and climate change goals.
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The government of Indonesia has shown a serious commitment to achieve its 23% renewable energy utilisation target in 2025 by giving more relaxed rules and opportunities to investors. The Directorate General of New, Renewable Energy and Energy Conservation (Direktorat Jenderal Energi Baru Terbarukan dan Konservasi Energi, or DJEBTKE) recently announced that Indonesia managed to generate 217MW in the first semester of 2021 from hydro, solar, geothermal and bioenergy-based power plants. The DJEBTKE also states that it is now focusing on promoting a greater use of solar power. Despite its huge solar power potential (up to 207.8GW of potential capacity), the country still shows very low utilisation of solar energy (only 0.1 %).
From a regulatory perspective, the government has set a positive momentum for investments in Indonesian renewable energy-based power generation. For example, the Minister of Energy and Mineral Resources (MEMR) has issued a regulation on rooftop solar power plants connected to the electricity grid of holders of an electricity supply business licence for public interest in August. The MEMR and the State Power Company (Perusahaan Listrik Negara, or PLN) has also stipulated its long-awaited electricity supply business plan for 2021-2030. The government strongly anticipates that the above-mentioned new regulatory framework will effectively stimulate the increased use of clean energy, and eventually investment in the renewable energy sector.
Investing in renewable energy
Investments in the renewable energy sector are supervised by the MEMR (together with its Directorate General of Electricity and the DJEBTKE) and the Investment Co-ordinating Board, and regulated under the following:
- Law No. 25 of 2007 on investments;
- Presidential Regulation No. 10 of 2021 on investment business activities (as amended);
- Law No. 30 of 2007 on energy (as amended);
- Law No. 30 of 2009 on electricity (as amended) (Electricity Law); and
- MEMR Regulation No. 50 of 2017 on the utilisation of renewable energy sources for electricity supply (as amended).
The regulatory framework for the renewable energy sector typically includes the following key elements:
(1) Foreign ownership limitation. The government has relaxed certain foreign ownership restrictions. The following power sectors are now open to 100% foreign ownership: (i) power generation with a capacity of more than 1MW for all types of energy (those with a capacity of less than 1MW remain closed to foreign investors); (ii) power transmission; and (iii) power distribution.
(2) The PLN and independent power producers (IPPs). As a general rule, the government does not allow an IPP to sell electricity to end customers directly. Instead, the government gives priority and privilege to the PLN to supply electricity to end customers. The most common business structure in the power sector is that an IPP enters into a power purchase agreement with the PLN to develop, construct and operate a power plant and supply electricity to the PLN. After the PLN receives the electricity from the IPP, it will further distribute and sell it to the public.
(3) Procurement. Except for certain specific circumstances set by the regulation for direct selection or appointment, procurement for public infrastructure must be carried out through public tender. The procedures, requirements and technical procurement documents are specified in the regulation of the board of directors of the PLN on the purchase of electricity from new and renewable energy-based power plants, dated 28 August 2020. An IPP in the renewable energy sector needs to be registered in the selected provider list, a list issued and maintained by the PLN containing preselected goods and service providers. This list helps the PLN to speed up the process of selecting fit and qualified providers, allowing it to shortlist prequalified providers for a limited tender or directly appoint a qualified provider for PLN projects.
(4) Purchase price of renewable energy-based power. The purchase price proposed by an IPP to the PLN is subject to the MEMR’s approval. The purchase price is set based on negotiation between the IPP and PLN, or the maximum benchmark price fixed by the government, which is much dependent on the renewable energy type and the PLN’s generation cost as approved by the MEMR (excluding power distribution costs) at the national and local or regional levels. The government recently set a new benchmark price for power generation cost, which is lower in some regions than the previous benchmark. This could be challenging for investors in the renewable energy-based power generation industry.
(5) Purchasing scheme. The government applies different structures or schemes when purchasing power supplies from IPPs. Unlike the purchase of non-renewable energy-based power, which must be made through the “build, own, operate and transfer” scheme, renewable energy-based power offers a more attractive scheme by allowing “build, own and operate” subject to negotiation with the PLN. The main difference between the two is that in the latter scheme, the IPP is not obligated to transfer the project to the PLN upon the expiry of the power purchase agreement.
With the purchasing scheme for renewable energy-based power generation, investors seem to be adopting a new calculation on the internal rate of return by no longer taking into account the cost component of asset transfers, which may increase project bankability.
For rooftop solar power plants, the most popular business scheme in Indonesia is to adopt an operating lease arrangement. A rooftop solar power plant developer leases its rooftop solar power plant equipment to a consumer, with the rental fee as the underlying tariff payment, on a contractual basis. The MEMR regulation provides further relaxation.
Customers can now receive a 100% credit (previously limited to only 65%) on the excess electricity exported through their installed rooftop solar power plants to the PLN grid, or grid belonging to the holder of power supply for the public interest business licence (izin usaha penyediaan tenaga listrik untuk kepentingan umum, or IUPTLU), leading to a greater reduction in their electricity bills.
Shares transfer restriction. The MEMR regulation prohibits sponsors (other than geothermal-based IPPs) from transferring their shares before the IPP reaches the commercial operation date, except for transfer to an affiliated party in which such sponsors or shareholders hold more than 90% of the shares, subject to PLN approval.
Local content requirement. The Electricity Law requires the prioritisation of domestic products and services (local content). Therefore, foreign products and potential resources are only allowed if domestic products or resources are not available. Regarding renewable energy-based power generation, the Minister of Industry sets the minimum percentage of local content to be used, depending on the type of renewable energy.
In practice, renewable energy investors often encounter difficulty complying with the prescribed local content policy due to the unavailability of the domestic industry supplying the necessary components. To date, there has been no update on whether the government will loosen the relevant policy anytime soon.
Currently, there are two new regulations for the renewable energy sector pending finalisation by the government, namely a presidential regulation on the purchase of renewable energy-based power by the PLN, and a bill on new energy and renewable energy. Some of the significant points proposed for the new regulations include a change of the purchase price scheme (i.e. from power generation cost-benchmark price to the feed-in tariff), and a better method to calculate the renewable energy generation costs.
Many stakeholders hope that these regulations will directly stimulate renewable energy investment in Indonesia by providing more attractive and bankable power pricing schemes, and promoting a more rapid transition from conventional energy to renewable energy, leading to favourable business opportunities for investors.
The government is also planning to apply carbon pricing instruments (i.e. carbon emissions trading and carbon taxes) to encourage business players to control carbon emissions from their business activities and follow the applicable emission standards. This should be something keenly awaited by businesses in the energy sector.
Walalangi & Partners
(in association with Nishimura & Asahi)
19/F, Pacific Century Place
Jalan Jenderal Sudirman Kav. 52-53, SCBD Lot. 10
Jakarta – 12190, Indonesia
Tel: +62 21 5080 8600
The adoption of renewable energy has been on the uptick in Japan, especially after the feed-in tariff (FIT) system was introduced in 2012, based on the Act on Special Measures Concerning Procurement of Renewable Energy Electricity by Electric Utilities. In June 2020, the act was amended and renamed the Act on Special Measures Concerning the Promotion of the Use of Renewable Energy Electricity, which will come into effect with some exceptions on 1 April 2022. The feed-in premium (FIP) system was added under the amended law.
This article focuses on the treatment of solar power generation. The amended law will be referred to as the “new renewable energy act”, while both laws before and after the amendment will be referred to as the “renewable energy act”.
FIT and FIP systems
FIT is a system where the government guarantees that electricity utilities will purchase power generated by renewable energy sources at a certain fixed price (procurement price) for a certain fixed period. A business operator who obtains certification under the renewable energy act is entitled to conclude a power purchase agreement (specified agreement) with an electricity utility. Based on this specified agreement, the purchase by the electric utility is guaranteed over the procurement period at the procurement price.
Both the procurement price and period are determined each fiscal year by the Minister of Economy, Trade and Industry for each category of renewable energy power generation facilities. The procurement price is determined based on the cost that would normally be required if the project were carried out efficiently, considering price targets, appropriate profit margins, etc. The procurement price for solar power facilities above a certain scale is subject to a bidding system, and determined based on the bidding results.
FIP is a system in which the difference between the standard price (as defined under the new renewable energy act) and the reference price is granted to a business operator as a premium over a certain fixed period (grant period). Under the FIP system, business operators sell electricity in the wholesale power market or through negotiated transactions. The purchase price is also determined in the wholesale power market, or through negotiated transactions. Business operators receive a supply promotion subsidy defined under the renewable energy act, paid monthly by Japan’s Organisation for Cross-regional Co-ordination of Transmission Operators (OCCTO).
As with the procurement price, the “standard price” in the FIP system is determined based on the cost that would normally be required if the project were carried out efficiently, considering price targets and appropriate profit margins, etc. The “reference price” is determined based on the average price in the wholesale electricity trading market. With the FIP system, the price of electricity sold is linked to the market price. A supply promotion subsidy is paid in addition to the price, so there is an incentive to increase supply during peak electricity demand periods when the market price is high. The FIP system is intended to upgrade the renewable energy electricity business and promote its integration into the general electricity market. The FIT and FIP systems will coexist under the new renewable energy act.
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