Summary: Indonesia’s new solar photovoltaic (“PV”) regulation introduces a first-come, first-served (“FCFS”) process for allocating capacity quotas to verified solar developers and investors (“SDIs”). At least 5000 MW of solar capacity will be allocated at feed-in tariffs (“FiTs”) determined by ESDM. FiTs for the first tranche of 250 MWp range from US$ 0.145 per kWh (DKI Jakarta) to US$ 0.23 per kWh (Papua and West Papua).
Indonesia’s solar photovoltaic (“PV”) industry has welcomed the long-awaited Ministry of Energy and Mineral Resources (“ESDM”) Regulation No. 19 of 2016 (the “Regulation”), which introduces a new FCFS capacity quota offering process following the revocation of ESDM Regulation No. 17 of 2013 (the “Original Regulation”) by the Supreme Court.
Under the Regulation, PLN must deliver a revised model PPA to ESDM through EBTKE (defined below) by 24 August 2016, which will comprise an extendable 20-year term from the commercial operation date. FiTs, including power transmission line connections fees, will be established under the FCFS process and paid in Indonesian Rupiah using JISDOR.
Whilst not entirely clear cut, local content requirements appear to be defined by reference to existing Ministry of Industry regulations for electricity infrastructure. This is in contrast to the Original Regulation, which contemplated that SDIs do not necessarily need to comply. For communal or centralised solar power plants (which is undefined), the existing regulations require 43.85% local content for combined goods and services. Failure to meet these requirements may result in FiT reductions or other penalties.
Capacity Quota Allocations
In a process akin to an empanelment, SDIs will pre-qualify as “PLTS Photovoltaic Developers” (“VSDIs”). To register as a VSDI, interested SDIs must provide a business profile (including investment licence) and satisfactory evidence of financial capability to ESDM.
VSDIs will participate in offers for capacity quotas relating to particular geographical regions. Multiple offers may be held if capacity quotas are not fully allocated in the initial offering stage. VSDIs may be restricted from applying for additional capacity, depending on the overall amount of capacity on offer. In order to participate, VSDIs must submit a feasibility study and an interconnection study, amongst other things, for verification by an integrated team comprising the Director-General of New Energy, Renewable Energy and Energy Conservation (“EBTKE”), the Director-General of Electric Power, and PLN. The verification will be conducted using the FCFS process, so that the earliest successful application will win.
FCFS has the potential to be faster and more streamlined than the previous competitive tender and auction process, and will be conducted online (see http://lelang.ebtke.esdm.go.id/ which administered the previous process). However, mandatory timescales for each step in the process are ambitious. For example, once an application for capacity is successfully verified, the VSDI and PLN must execute the PPA within one month after the award.
Winning SDIs under the previous regime must sign PPAs no later than 12 October 2016, so as to avoid having their winning stipulations revoked. It is unclear whether these PPAs must comply with the new Regulation. Whilst not entirely clear, it appears that the Regulation permits SDIs in the process of procuring a PPA with PLN on a business-to-business basis to continue to do so outside of the FCFS process.
Issues and Analysis
The Regulation does not address long-standing challenges such as a lack of site details and solar resources availability data, grid interconnection, and land availability. As such, there is a risk that the FCFS process may be undermined if projects are delayed, resulting in a loss of investor confidence. If land acquisition could be achieved prior to the capacity allocation process, this would go a long way to reduce delays. Furthermore, it may be open to ESDM and PLN to establish an informal process to provide VSDIs with a dossier of site details and other relevant solar data for specific projects, thereby helping VSDIs to prepare more effectively.
The preparation of a new model PPA represents an important opportunity to improve the existing form, which currently requires negotiation with PLN to achieve bankability. In order to address financing concerns, many of the issues highlighted in the preceding paragraph will need to be tackled in the context of the PPA. Another challenge will be reflecting the different nature, type, size and location of potential projects using a single form, including potential hybrid diesel-solar projects, as referred to below. The PPA will likely reflect a traditional IPP development structure, as contemplated under the Regulation. However, this may be a missed opportunity to endorse alternative structures such as the solar leasing model, which has been successful (especially for small-scale projects) in other jurisdictions.
Initial feedback from SDIs is that the FiTs for the first offering of solar capacity appear to be attractive, even though there is limited visibility as to FiTs for subsequent tranches. Media reports suggest that this view is shared by Mr. Abdul Kholik, the Chairman of Indonesia’s Association of Solar Module Manufacturing (Asosiasi Pabrikan Modul Surya Indonesia) (“APMSI”), which successfully challenged the Original Regulation in the Supreme Court. Whilst there is a risk that APMSI may launch further challenges in the future, Mr. Kholik’s initial comments to the media suggest that APMSI is relatively comfortable with the new Regulation, provided that there is sufficient local participation in capacity allocations.
High FiTs – even without long-term adjustments for inflation as per the Regulation - will continue to put pressure on PLN, which has been reluctant to pursue renewables projects due to the relatively high cost, despite political pressure to move such projects forward. EBTKE budget cuts, announced on 8 August 2016, will do little to counter the view of some investors that the Indonesian government’s position on renewable energy is not wholly aligned.
The use of renewable energy continues to grow globally. Indonesia, however, lags behind some of its ASEAN peers, despite its enormous potential. There are a variety of niche roles for solar power in Indonesia’s energy mix, and new power storage and hybrid diesel solutions (amongst others) have the potential to overcome shortcomings. Accordingly, the Regulation provides an opportunity to re-engage with SDIs on important issues, and continue the dialogue on innovative development models that may help to light up Indonesia’s solar power industry.
Finally, it will be important for the Indonesian government to support and incentivise the domestic solar manufacturing industry, whilst ensuring fruitful co-operation in a financially viable manner between both the local manufacturers of solar PV panels, on the one hand, and local and foreign SDIs on the other.