Finance & Projects Jakarta | Singapore Client Alert September 2015 Indonesian Supreme Court Revokes Solar Power Regulation On 30 June 2014, the Supreme Court issued a decision which requires the Minister of Energy and Mineral Resources ("MEMR") to revoke MEMR Regulation No. 17 of 2013 on Purchase of Power by PLN from Solar Photovoltaic Power Plants ("Reg 17"). Please click here for our previous Client Alert on Reg 17. Although the decision was issued more than a year ago, it only became available to the public recently. Reg 17 stipulates, among other things: procedures for purchase of power from solar photovoltaic power projects by PLN through capacity allocation tenders held by the Directorate General of Renewable Energy and Energy Conservation ("EBTKE"); and feed-in-tariffs for solar photovoltaic power projects with a cap of US$0.25/kWh, or US$0.30/kWh if the photovoltaic module contains 40% or more local components ("TKDN"). Background and Court Ruling The petition to revoke Reg 17 was submitted by Asosiasi Pabrikan Modul Surya Indonesia ("APAMSI"), an association of local manufacturers of solar panels. The main motivation for APAMSI lodging the petition was APAMSI's objection to Reg 17 allowing PLN to purchase power from IPP developers that use photovoltaic modules without any local components. So although Reg 17 gave a competitive advantage to IPP developers who were bidding for solar projects using locally sourced panels over IPP developers who were relying solely on imported panels, APAMSI was of the view that the ability of IPP developers to bid using imported panels should be removed completely from Reg 17. The ceiling tariffs under Reg 17 are as follows: Photovoltaic Modules Ceiling Tariff US$0.25/kWh US$0.30/kWh TKDN ≥ 40% - V TKDN < 40% V - TKDN = 0% (import) V - Finance & Projects 2 Indonesian Supreme Court Revokes Solar Power Regulation September 2015 APAMSI argued that allowing IPP developers to bid for solar projects using solely imported equipment was not in line with Law No. 30 of 2007 on Energy ("Energy Law"), Law No. 30 of 2009 on Electricity ("Electricity Law") and Law No. 5 of 1984 on Industry ("Industrial Law") (which has now been replaced by Law No. 3 of 2014 on Industry), all of which mandate the maximization of use of local products. In its decision, the Supreme Court ruled that Reg 17 is not in line with all of the abovementioned laws and therefore it is not valid, citing the following specific articles of those laws: 1. Article 9 of the Energy Law: local components of goods and services must be maximized in the energy sector. 2. Article 2 of the Electricity Law: electricity development upholds several principles, among others, self-reliant principles and sound business principles. 3. Article 17 (3) of the Electricity Law: state owned-enterprises (BUMN), regional-owned enterprises (BUMD), private business entities and cooperatives doing electricity supporting business must prioritize local products and potential. 4. Article 28(d) of the Electricity Law: holders of electricity supply business licenses ("IUPTL"), being the type of business license that the IPP developer that wins the solar tender must obtain, must prioritize local products and potential. 5. Articles 2 and 3 of the Industrial Law: the use of local products must be prioritized so that Indonesian industries can be developed and to reduce dependency on other countries. In its consideration, the panel of judges also mentioned that PLN is more likely to purchase power from IPP developers using imported photovoltaic modules, as they have a lower ceiling price. Reg. 17 actually does not provide details of how to determine the lower tariff where a bidder who meets the minimum 40% local content requirement bids a higher tariff compared to bid tariff than another bidder who does not fulfill the minimum 40% local content requirement. From our discussion with officials at EBTKE, in determining which bid tariff is lower, EBTKE will deduct US$0.05/kWh from the tariff submitted by the bidder who meets the minimum local content requirement. For example, if Bidder 1 who uses more than 40% TKDN bids a price of US$0.28/kWh, and Bidder 2 using solely imported equipment bids a price of US$0.24/kWh, then Bidder 1's price will in fact be read as US$0.23/kWh, and accordingly Bidder 1 will be declared the winner of the bid. Implications Although the MEMR has not formally revoked Reg 17 as required under the Supreme Court decision, from our discussion with officials at the EBTKE, they take the view that following the issuance of the Supreme Court decision, EBTKE no longer has a regulatory base on which to conduct tenders for awarding new solar power projects. Under Government Regulation No. 14 of 2012 on Electricity Supply Business Activities as amended by Regulation No. 23 of 2014 ("GR 14"), PLN as an IUPTL holder is allowed to conduct tenders to purchase power. GR 14 also allows the purchase of power to be done through direct selection or direct appointment under certain conditions. A direct appointment, for example, can be done for purchase of power from power plants using renewable energy. Thus, despite the Supreme Court's Finance & Projects 3 Indonesian Supreme Court Revokes Solar Power Regulation September 2015 direction to revoke Reg 17, PLN does itself have a regulatory basis to sign up new solar IPP developers. However a second aspect of the revocation of Reg 17 is that the tariff regime that was put in place by the Government for solar is no longer applicable. Accordingly, there is no feed in tariff or similar regulated tariff regime currently in place for solar. Despite the absence of a formalized tariff regime, PLN has shown its willingness in other renewable energy sectors (namely wind power) to proceed to sign Power Purchase Agreements ("PPAs") with developers without any formalized tariff regime, instead relying on the MEMR giving caseby-case approval to the tariff negotiated between PLN and the IPP developer. However, in view of the MEMR having already indicated that it will be issuing a replacement regulation for Reg 17, it is likely that all future solar PPAs will be delayed until the new regulation is issued. In terms of pre-existing solar project, we were informed by officials from the MEMR that PPAs signed based on Reg 17 before the issuance of the Supreme Court decision will continue to be valid and binding. For tenders that have been concluded before the issuance of the Supreme Court decision, where the PPAs have not been executed, the execution of the PPAs will be suspended until the new regulation is issued. However, it is still not clear which tariff will be implemented in these PPAs. Despite this issue, we note that PLN signed two power purchase agreements for solar power plants (i.e. Gorontalo Solar Power Plant and Sumba Timur Solar Power Plant) on 19 August 2015. Concluding remarks The issuance of this Supreme Court decision has again highlighted how sensitive Indonesian laws and regulations are to adverse interpretations by the Indonesian courts. Although the effects of such court decisions are often not catastrophic (largely because the Government has the ability to bring in new laws and regulations taking into account the constraints highlighted by the court decisions), in view of the time involved in getting new laws and regulations issued by Indonesian Government instrumentalities, these court decisions do have the effect of stopping development for periods of time. That said, in the case of Reg 17 and it setting a framework for solar developments, two of the major criticisms of Reg 17 were that it was not set up to promote utility-scale solar projects in Indonesia (as the largest capacity of a single solar project under the Government quotas issued pursuant to Reg 17 was 5MWe), and it took away the ability of PLN to carry out its own tender processes (or enter into direct appointment negotiations) with IPP developers. In this respect, the Supreme Court's decision has given the Government an opportunity to reflect on some of this industry feedback, and it is hoped that the Government will take on board some of this feedback when issuing a replacement to Reg 17. www.bakermckenzie.com For further information please contact Luke Devine Foreign Legal Consultant +62 21 2960 8600 firstname.lastname@example.org Kirana D. 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