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