As renewables markets mature, renewables investors are looking to new markets for their next source of growth.

In this series of e-briefings, we summarise the opportunities and risks for international investors in the developing renewables markets of South East Asia. The renewables sector in South East Asia is nascent (with some notable exceptions). However, the commitments made by Asian countries at COP 21 indicate that renewables enjoys broad support throughout the region.

Together with AKHH and our other partners, we are pleased to outline for you some of the key issues involved in developing a renewables project in Indonesia.

1. Market Readiness

1.1 Statutory Framework

Indonesia does not have standalone legislation governing the renewables sector. However, there are Indonesian laws governing certain forms of renewable energy. For example, the 2014 Geothermal Law governs geothermal energy and the Ministry of Energy and Mineral Resource’s Regulation No. 19 of 2016 on Purchase of Power by PLN from Solar Photovoltaic introduces a new regime for solar power (Regulation 19). Indonesia passed an Energy Law in 2007, which governs its power sector.

1.2 Targeted Capacities

The total national installed capacity is around 53 GW. Given the economic growth projection of 6%-7% per year, this means that, within five years, Indonesia will need an additional total capacity of 35 GW or 7 GW in additional capacity per year. According to the Perusahaan Listrik Negara’s (PLN) Power Supply Business Plan 2016-2025 (RUPTL), an additional 80.5 GW of new capacity is to be added over the next 10 years. Within this total PLN have been allocated 18GW and IPPs 45.5GW, with the remainder currently unallocated.

Over 22GW of new capacity is to come from renewable energy:

Energy Source

FIT

Conditions

Relevant Regulations

Geothermal

US$0.118 – US$0.296/kWh

Depends on location, year of COD

MEMR Regulation No. 17 of 2014

Biomass & Biogas

Rp1,150 – Rp1,500/kWh

Depends on voltage power network of PLN and location of generators

MEMR Regulations No. 27 of 2014

Hydro Power (up to 10 MW)

US$0.12 – US$0.1440/kWh

Depends on location, the energy used, whether from waterfall or reservoir, and power voltage of PLN

MEMR Regulation No. 19 of 2015

Solar PV

US$0.25/kWh – US$0.30/kWh

Depends on the result of the tender price set forth in the purchase agreements. Price ceiling dependent on the use of 40% local content level

MEMR Regulation No.17 of 2013

1.3 Key Regulators

The key regulators in Indonesia’s power industry are the following:

  • Perusahaan Listrik Negara (PLN), an Indonesian government-owned corporation, which monopolises electricity distribution in Indonesia
  • Ministry of Energy and Mineral Resources (MEMR), which is responsible for providing assistance to the President and Vice President of Indonesia on all energy and mineral resource matters
  • Badan Koordinasi Penanaman Modal (BKPM), which is the investment coordinating board acting as the primary interface between businesses and the Government

1.4 Grid

The Indonesian Electricity Generality Program Unit (UP3KN) announced in September 2015 that PLN has constructed:

  • 832 km of installed transmission, which equates to 18% of the 2015 target of 4,717 km
  • 1,530 MVA at the main station which equates to 20% of the 2015 target of 7,480 MVA

Consequently:

  • the grid network covering transmission should be sufficient to support the existing electricity supply
  • the upcoming construction of the grid network should be completed simultaneously with the completion of all new power plants, including new or renewable energy based power plants, and consequently, the grid network will be sufficiently stable for the amount of all new energy sources

Under the RUPTL, national power grid management is divided into three main systems:

  • the Sumatera Grid
  • the Java-Bali Grid
  • the East Indonesia Grid

The grid network will likely be built intermittently across Indonesia. Grid connection, which includes transmission lines, is the responsibility of PLN, except for:

  • several transmission projects for power plants owned by developers, which will be built by the developers
  • other transmission projects to be performed by developers to provide and supply electricity directly to industrial zones and houses in certain business areas

Further specific provisions regarding transmission, including price, the payment system and required upgrades, will be stipulated in future PPAs. One recent power project required the payment of a transmission fee as one of the components of the power sale price calculation.

Notwithstanding the above, there are new opportunities for private parties to engage with PLN in transmission projects, including through build-lease-transfer arrangements and power wheeling.

1.5 Feed-in-Tariff

The current regulations provide for the FIT to be determined in both US Dollars and in Indonesian Rupiah, depending on the energy source and certain conditions (such as location, commercial operation date and capacity). There are no specific provisions in the regulations governing variations to the FIT to accommodate peak and low user times, nor is there any mechanism to determine the FIT on a levelised basis. The FIT can be reduced if the construction of the project is not completed by the required commercial operation date.

The table below sets out the current FITs:

Energy Source

FIT

Conditions

Relevant Regulations

Geothermal

US$0.118 – US$0.296/kWh

Depends on location, year of COD

MEMR Regulation No. 17 of 2014

Biomass & Biogas

Rp1,150 – Rp1,500 /kWh

Depends on voltage power network of PLN and location of generators

MEMR Regulations No. 27 of 2014

Hydro Power (up to 10 MW)

US$0.12 – US$0.1440/kWh

Depends on location, the energy used, whether from waterfall or reservoir, and power voltage of PLN

MEMR Regulation No. 19 of 2015

Solar PV

US$0.145/kWh (Java) – US$0.252/kWh (Papua)

For the first tranche of 250MW. Local content requirements apply.

MEMR Regulation No.19 of 2016

The Government is developing a FIT policy for the wind sector. Regulation 19 requires that all developers of solar plants are to fully comply with the local content requirement as detailed in the Ministry of Industry’s Regulation No. 54/M-IND/PER/3/2012 of 2012 on Guidelines to Utilize Domestic Products in Erecting Electricity Infrastructures.

Local content requirements for solar plants:

Local content

Minimum Percentage

Goods

25.63

Services

100

Goods and services

43.85

1.6 Power Purchase Agreements

Government guarantee industry position

During the initial development of the power industry in Indonesia and prior to the issuance of PR 4/2016 issued in February 2016, PLN’s obligations under many power projects were not supported by a Government guarantee. For those projects that were supported by a Government guarantee, two types of Government guarantee were available:

  • business viability guarantee (introduced in 2011) issued by the Minister of Finance (MOF) for IPP projects listed in the second Fast Track Programme list, which compromised an acknowledgment by MOF that it would ensure PLN would meet all its financial obligations under the PPA
  • guarantees issued by the Indonesian Infrastructure Guarantee Fund (IIGF) and MOF for projects developed by Independent Power Producers (IPPs) and which are in the PPP list

However, this position was unsatisfactory for some international investors because it meant many IPPs did not benefit from an Indonesian Government guarantee and investors were required to take PLN credit risk. Although this risk was taken in some projects, in practice, investment in the power sector was only available to a narrow set of international investors.

Government guarantee PR 4/2016

In response to investor concerns, the Indonesian Government released PR 04/2016, which:

  • shortened the time periods required to obtain necessary permits for power projects
  • introduced a new Government guarantee for both power projects developed by PLN and projects developed by PLN or its subsidiaries in cooperation with Independent Power Producers (IPPs).

Concerns have been raised regarding the process for obtaining approval for a guarantee from MOF and the basis upon which PLN will execute its discretion to request such guarantees. However, strictly speaking, all power projects listed in PLN’s RUPTL (Power Supply Business Plan) should be eligible for a MOF guarantee.

The Indonesian Government has yet to stipulate a standard form of PPA and the terms and conditions of PPAs remain subject to negotiation with PLN. Most of the executed PPAs are for a term which is concurrent with the life of the power plant. Under Regulation 19, the PLN are to provide a “model PPA” to the Ministry of Energy and Mineral Resources by 24 August 2016, which will include 20 year term (from commercial operation) that may be extended. Under most PPAs, PLN pays the developer a specific tariff on a take or pay basis for electricity produced of an amount set out in the PPA. The tariffs normally consist of four different components:

  • a capital cost recovery charge, covering the capital cost of the project and its associated cost of debt and equity
  • a fixed operation and maintenance charge, to cover the fixed operation and maintenance cost during the operation of the power plant, escalated annually based on inflationary adjustments
  • an energy/fuel charge, to cover the costs of fuel needed to generate the electricity. The fuel cost is paid by PLN and is based on a cost pass-through mechanism
  • a variable operation and maintenance charge, to cover the variable operation and maintenance cost for every unit of electricity produced, escalated annually based on inflationary adjustments
  • a take-or-pay structure, which permits the developer to cover its fixed cost with the capacity charge, fixed operating costs and provides an agreed equity return (and is generally bankable within the Indonesian power sector)

In principle, all transactions conducted within the Republic of Indonesia are obliged to utilize the Rupiah. To support this obligation, Bank Indonesia advises businesses to state the price of goods and services only in Rupiah and prohibits dual quotation in Rupiah and a foreign currency. However, exemptions are made for strategic infrastructure projects sanctioned by the relevant ministry or agency and approved by Bank Indonesia. These strategic infrastructure projects include, amongst other things, electricity infrastructure businesses, including power generation, and the transmission and distribution of electricity.

Therefore, it is our understanding that a renewables developer will likely be able to stipulate a long-term tariff in a currency other than Rupiah. However, currently, a power purchase transaction from a hydro power plant with a capacity of up to 10 MW, must be paid in Rupiah.

Other provisions

The 2009 Electricity Law does not contain any specific regulations regarding the mandatory governing law, jurisdiction or selection of an arbitration forum for any PPA in Indonesia. In addition, PLN does not usually use one standard form of PPA and, in practice, the form of the PPA differs according to the project. This is because each PPA is tailored to accommodate the legal relationships involved and modifications are made during the negotiation process. However, the key terms of the PPAs have become fairly standardised and are often non-negotiable by PLN. For example, the governing law, jurisdiction and selection of arbitration forum are among those provisions which, in practice, are non-negotiable. The governing law of any PPA will be Indonesian law. PLN does tend to be more flexible in the selection of an arbitration forum for its PPAs, and any one of the following may be chosen:

  • Singapore International Arbitration Centre
  • ICC International Court of Arbitration
  • Indonesia National Board of Arbitration (Badan Arbitrase Nasional Indonesia)

1.7 Tendering Process

The procurement process for new power projects is generally conducted on a competitive tender basis, although in certain cases, direct selection and direct appointment is permitted.

Under Regulation 19, solar capacity will be offered to approved developer candidates, who may then submit an application, detailing the capacity (subject to the prescribed limitations), to the MEMR. Applications will then be verified on a first-come, first-served basis, subject to an approved developer being limited to a maximum of three quota approvals per stage, per region.

Competitive tendering for a new non-PPP power project will be subject to the general provisions of a ruling known as “MR 1/2006” (as amended by MR 4/2007) and competitive tendering for a new PPP power project will be subject to a ruling known as “PR 38/2015”. Specific criteria of the tender (including the prequalification phase) is detailed in the tender documentation.

There are two stages involved during the evaluation of the bid documents. The first stage consists of administrative, technical and financial requirements. The technical and financial evaluation is determined by the relevant tender committee. The second stage is comprised of an evaluation on work program and the electricity price quotation and calculation. A bidder will be disqualified and ineligible to continue to the second stage if it fails to meet the requirements in the first stage. The evaluation on the electricity price quotation is determined based on the lowest electricity price. In the event the electricity price quotation is unsuitable for the work program, the tender committee is entitled to disqualify the electricity price quotation.

2. Project Considerations

2.1 Content Requirements

There are local content requirements and these are stipulated by the 1999 Construction Law, 2007 Energy Law and 2009 Electricity Law. In Indonesian power projects, the use of local content is prioritised. This prioritisation is supported by other local regulations.

2.2 Land Requirements

In practice, the land acquisition process can be very time consuming for foreign developers.

In 2012, the Indonesian Government enacted a new legal framework governing land procurement, which is considered to be in the public interest. Under Article 11 of the 2012 Land Procurement Law, land procurement is the prerogative of the Indonesian Government, and, in the future, all acquired land shall be owned by the central Government and regional Government, including enterprises owned by the state. Power plants, electricity transmission, power houses, electricity grids and any means of electricity distribution, all fall within the scope of the Land Procurement Law.

Prior to both the Land Procurement Law and the rules known as “PR 71/2012”, Indonesia did not have any established legal procedure relating to compulsory land acquisition for any infrastructure project considered to be in the public interest. The latest amendments to PR 71/2012 incorporate new provisions, including the provisions for land procurement for the public interest conducted by any private business entities as proxy for the relevant government agency/state-owned enterprise. The latest amendments regulate land procurement for the public interest initiated by business entities conducted through the processes of sale and purchase, exchange, or other methods agreed upon between the entity and the owner/possessor of the land in question. However, land procurement conducted by any private business entities is limited only for the construction of specified infrastructure under Article 10 paragraphs (b) to (r) of the Land Procurement Law. This includes any infrastructure for the energy sector, specifically power plants, electricity transmission, power houses, electricity grid and any means of electricity distribution. Therefore, power projects will be located on Government owned land even if the land acquisition process is conducted by private business entities.

In Indonesia, the basic legal provisions governing the ownership of land were established under the 1960 Agrarian Law. The strongest form of land-title in Indonesia is the Right of Ownership (Hak Milik or HM). HM is similar to an indefeasible land title. Only Indonesian nationals (and other corporate bodies designated by the Indonesian Government, such as state-established banks, associations of agricultural cooperation (perkumpulan koperasi pertanian), religious bodies that have been appointed by the Head of the National Land Agency (Badan Pertanahan Nasional or BPN) and social organisations that have been appointed by the Head of BPN), are permitted to ‘own’ land with the HM type land-title.

On 22 December 2015, the Indonesian Government enacted a new provision relating to ownership of property by foreign nationals through a rule known as “GR 103/2015”. In principle, GR 103/2015 states that foreign nationals who live, work, invest or are beneficial to Indonesia may take possession of property based on the Right to Use (Hak Pakai or HP) exercising its rights over land. With this HP type land-title, foreigners have the right to own houses and/or apartment units in Indonesia, as well as the right to collect remuneration from plots of land either owned by the Indonesian Government or Indonesian nationals possessing HM type land-title. GR 103/2015 specifically provides that this must be based on an agreement with the owner of HM type land-title made in the form of a deed by the Land Deed Office (Pejabat Pembuat Akta Tanah or PPAT). However, GR 103/2015 also provides that foreign nationals may only be granted HP type land-title if they possess a valid residential permit. The 1960 Agrarian Law also identifies several other types of land-title. However, only the following land-title may be issued to a foreign investment limited liability company:

  • Right to Cultivate (Hak Guna Usaha or HGU)
  • Right to Build (Hak Guna Bangunan or HGB)
  • HP

The following table summarises the differences between the different types of land-titles available under Indonesian law:

Name of land-title

Basis of land-title

Period

Remarks

HGU

State-owned land-title, granted based on a stipulation from the Indonesian Government

A maximum period of 95 years (extended in advance for 60 years with an option for further extension of another 35 years)

  • May only be used for cultivation
  • Could be used as financial security (mortgage)
  • Transferable to any other party

HGB

  • State-owned land-title, granted based ona stipulation from the Indonesian Government
  • HM type land-title, based on an agreement with the owner of the HM type land-title made in the form of a deed by PPAT and must be incorporated under the land documentation (land certificate and log book)

30 years, subject to a 20-year extension (for the purpose of foreign investment, it is possible to apply for the initial period and for the extension simultaneously, making the total term 50 years), subject to further re-application

  • Provides a right to erect and possess construction on the plots of land
  • Could be used as financial security (mortgage)
  • Transferable to any other party

HP

  • State-owned land-title, granted based on astipulation from the Indonesian Government
  • HM type land-title, which must be based on an agreement with the owner of HM type land-title made in the form of a deed by PPAT and must be incorporated in the land documentation (land certificate and log book)

May be granted for 70 years (extended in advance for 45 years with an option for a further extension of 25 years)

  • Provides a right to use and/or collect produce from the land
  • For HP type land-title above, any State-owned land-title may only be transferred to another party holding a permit from the Indonesian Government
  • For HP type land-title above, any HM type land-title may only be transferred to another party if permitted under the original agreement

2.3 Consents and Permits

Attachment 1 summarises the licensing requirements of the development of a power project in Indonesia (pre-construction through to operation stage).

2.4 Tax

The Minister of Finance Regulation No. 21/PMK.011/2010 on Tax Facility and Customs for Utilization of Renewable Energy Activity, provides the following deductions in income tax, VAT, import duty, and tax, which may be available for renewables developers:

  • income tax facility:
  • net income deduction of 30% of total investment, for 6 years, 5% for each year
  • accelerated amortization and depreciation
  • income Tax for dividend paid to foreign taxpayers charged at 10% or Fower tariff, based on avoidance of double tax agreement
  • financial compensation for losses incurred for more than 5 years, but not exceeding 10 years
  • exemption of income tax for import of machineries and equipment
  • VAT facility: exemption from VAT on import of taxable goods such as machineries and equipment
  • import duty facilities for import of machineries and capital goods for power plant industries

3. General Investment Considerations

3.1 Foreign Ownership

In Indonesia, direct foreign investment (the scheme of investment whereby the investor invests their capital in a newly established or existing company) is governed by the 2007 Investment Law. Based on the 2007 Investment Law, any form of direct foreign investment must be in the form of a limited liability company. Any limited liability company established with foreign investment capital is commonly known as a “PMA Company”. Generally, any limited liability company in Indonesia is subject to the 2007 Company Law. A PMA Company is subject to both the 2007 Investment Law and the 2007 Company Law.

Foreign investment conducted in Indonesia must be approved by the Indonesian Government through BKPM. BKPM is responsible for approving all foreign investment, although exceptions apply for certain sectors.

Not all business sectors are ‘open’ to foreign investment in Indonesia. The Negative List of Investment, which came into effect on 24 April 2014, regulates business sectors that are either completely ‘closed to’ investment or ‘conditionally open’ for investment in Indonesia. Specifically, for the business sectors that are ‘closed to’ investment, the Negative List of Investments prohibits any investment activities from being conducted in those fields. The business sectors that are ‘conditionally open’ are defined as:

  • closed to foreign investments
  • subject to limitations in foreign ownership
  • require special arrangements and permits

Article 3 of the Negative List of Investment clarifies that business sectors not specifically mentioned as ‘closed to’ investment or ‘conditionally open’ for investment are unconditionally open for investment activities. However, it would be advisable for a foreign developer to re-confirm with BKPM whether its proposed investment is in an industry on the Negative List.

Foreign investors should also note that there are unwritten policies in place or conditions restricting foreign investments in business sectors not listed in the Negative List of Investment.

Pursuant to the Negative List of Investment, several sub-sectors for energy and mineral resources fall under the business sectors that are ‘conditionally open’ for investment. The 2007 Energy Law governs renewable energy, including geothermal, wind, bio-energy, solar, stream (aliran), waterfall, movement (gerakan) and differences in the sea surface temperature.

The following are limitations on foreign investments relating to certain renewable energy business sectors:

Business Field

KBLI

Requirement of the Negative List of Investment

Geothermal Survey Services

71100

Maximum foreign capital ownership of 95%

Geothermal Drilling Services

09900

Maximum foreign capital ownership of 95%

Geothermal Operation and Maintenance Services

09900

Maximum foreign capital ownership of 90%

Production Industry of Biomass Pellets for Energy

16295

Partnership scheme

Based on the Negative List of Investments, the electricity industry is among the list of industries and business sectors in which foreign investment in Indonesia is prohibited, restricted or subject to the fulfilment of certain conditions stipulated by the applicable government authorities. Foreign investment in the electricity industry is subject to various limitations on foreign shareholdings, such as:

  • 100% domestic capital for electricity generation of < 1 MW
  • maximum of 49% foreign ownership for small-scale electricity generation (1 to 10 MW)
  • maximum of 95% foreign ownership for electricity generation of > 10 MW (100% for foreign ownership in government-private cooperation during a concession period)
  • maximum of 95% foreign ownership for electricity transmission (100% for foreign ownership government-private cooperation during a concession period)
  • maximum of 95% foreign ownership for electricity distribution (100% for foreign ownership government-private cooperation during a concession period)
  • maximum of 95% foreign ownership for electricity installation consultancy
  • maximum of 95% foreign ownership for electrical utility construction
  • 100% of domestic capital for electrical installation
  • maximum of 95% foreign ownership for operation and maintenance of electrical installation
  • 100% of domestic capital for testing and analysis of electrical installation

3.2 Incorporating Companies

The incorporation process involves seven governmental institutions, starting from investment application and finishing with the issuance of principal license (Izin Prinsip) for beginning an operation in Indonesia. The incorporation process historically took around 10 weeks, but currently the PT PMA process is taking about 6 weeks.

3.3 Selling or Pledging Shares

There is no specific renewable energy regulation which regulates the sale or pledge of shares. However, for PPP projects, the transfer of shares in a business entity requires approval from, and must occur in accordance with, the requirements of the Indonesian Government. In practice, detailed restrictions on share transfers or pledges are set out in the underlying PPA.

3.4 Availability of Debt Finance

The following is a summary of assistance that may be available to foreign developers:

  • Government Guarantee on the feasibility of PLN’s business activity in accordance with a rule known as “the Minister of Finance Regulation No. 139/PMK.011/2011 regarding the Procedure to Grant Guarantee on Business Feasibility of PLN projects relating to Power Plant Using Renewable Energy, Coal and Gas in the framework of cooperation with the private sector”
  • special fund allocation by the Indonesian Government
  • funds provided by Bank Indonesia
  • Government equity from state revenue and expense budget
  • State-owned enterprises providing funds for infrastructure in the energy sector, for example, the IIGF and business viability guarantee
  • loan or equity investment from international funds or equities (ADB, World Bank IFC, foreign bank)

There is no database on the liquidity of local banks. However, there are a large number of substantial national banks which are funding renewables projects. For example, Bank Mandiri recently funded a solar project in Kupang.

In general, local banks use Jakarta Interbank Offered Rate (JIBOR), London Interbank Offered Rate (LIBOR) or Singapore Interbank Offered Rate (SIBOR), as base interest rates.

The ECAs and DFIs which are actively active in Indonesia are the following:

  • Japan International Cooperation Agency (JICA)
  • Japan Bank for International Corporation (JBIC)
  • Asian Development Bank (ADB) (for the 320 megawatt Sarulla Geothermal Power Development Project in North Sumatra)
  • World Bank (for Ulubelu (Lampung) and Lahendong (Sulawesi) and hydro power projects in Upper Cisokan PS
  • Kreditanstalt für Wiederaufbau (KfW) (Germany)
  • State-owned enterprise such as PT Penjaminan Infrastruktur Indonesia The international banks which are actively involved in Indonesia include: Bank of Tokyo-Mitsubishi UFJ, ING Bank, Mizuho Bank, National Australia Bank, Société Générale, and Sumitomo Mitsui Banking Corporation.

4. Other issues for foreign developers

In order to attract investors, the Indonesian Government has undertaken various efforts, such as restoring public facility and infrastructure, providing incentives and coordinating with relevant parties and simplifying licencing procedures. However, upholding the rule of law remains a challenge in Indonesia. Government bureaucracy remains an issue for foreign investors and there may be discrepancies between regulations issued by regulators at the central Government level and those issued at the provincial/regional level.

Eversheds would like to thank AKHH, International Finance Corporation, Wind Prospect, Savills and Ernst and Young for their contribution towards the e-briefing.