Regulation of electricity utilities – power generation

Authorisation to construct and operate generation facilities

What authorisations are required to construct and operate generation facilities?

As of the enactment of Government Regulation No. 5 of 2021, dated 2 February 2021, on the Administration of Risk-Based Business Licensing (GR 5/2021), the licences required for a business entity shall be based on the risk level of its relevant business activity. Such licences shall be processed and issued through the Online Single Submission (OSS) System operated under the supervision of the Capital Investment Coordinating Board.

Under GR 5/2021, a power generation business is considered a high-risk business that will require a Business Identification Number (NIB), Standard Certificate and a relevant business licence (in this case, the Electricity Supply Business Licence (IUPTLU)).

Further, a power purchase agreement between the IUPTLU applicant and its buyer (commonly, PT Perusahaan Listrik Negara (Persero) (PLN)) is a prerequisite to obtaining an IUPTLU.

In terms of constructing generation facilities, an IUPTLU holder may subcontract the construction to a qualified construction service provider through an engineering, procurement, and construction contract. Formerly, such construction service provider shall adhere to the laws and regulations governing construction services in general, however, as of the enactment of Law No. 2 of 2017 on Construction Services as amended by Law No. 11 of 2020 on Job Creation (the Construction Law) and its implementing regulations, Government Regulation No. 22 of 2020 as amended by Government Regulation No. 14 of 2021 (GR 22/2020), electrical installations including power generation facilities shall be subject to the electricity regulations.

Therefore, currently, construction service providers for electrical installation are considered electricity supporting services governed by Law No. 30 of 2009 on Electricity and its implementing regulations, specifically, Government Regulation No. 62 of 2012 on Electricity Supporting Services, GR 25/2021 as well as Minister of Energy and Mineral Resources (MEMR) Regulation No. 11 of 2021 on Implementation of Electricity Business (MEMR 11/2021), which require an Electricity Supporting Services Business Licence (IUJPTL).

Before the commencement of construction, an IUPTLU holder must secure various prerequisite licences from the regional or provincial government. Among others, a location permit, building approval, formerly known as a building permit, and environmental licence (now called an Environmental Feasibility Decree) or an Environmental Management Willingness Statement.

Compensation to any party whose assets (land, buildings, or plants) are directly or indirectly affected must be settled before commencing construction.

Further, under MEMR Regulation No. 38 of 2018 on Electricity Procedures and Certification (MEMR 38/2018), before the operation of generation facilities, the IUPTLU holder must obtain an operational feasibility certificate (SLO) issued by the OSS Agency on behalf of an institution accredited by the MEMR and registered with the Directorate General of Electricity (DGE), subject to a physical assessment by the technical team from the institution.

Grid connection policies

What are the policies with respect to connection of generation to the transmission grid?

Generation facilities are connected to the transmission grid subject to a power purchase agreement or a grid lease agreement under an electricity supply business plan from the transmission business entity.

Transmission grids are owned by an integrated IUPTLU, transmission IUPTLU or transmission IUPTLS holder (the transmission business entity). The transmission business entity may lease the transmission grid to an integrated IUPTLU holder having a certain business area, a holder of generation IUPTLU or a holder of IUPTLS (the transmission lessee).

The transmission lessee should submit a request for lease of grid to the transmission business entity by copying the MEMR or the Governor in accordance with their respective authority. The result of the negotiation on the price for the lease of grid between the transmission business entity and the transmission lessee shall be submitted by the transmission business entity to the MEMR or the Governor for its approval.

In terms of its technicality, MEMR 11/2021 also requires the collective use of transmission grid to consider the applicable grid capacity and grid code.

Before connecting to the grid, an electricity installation must also satisfy safety and equipment standards determined by the MEMR by securing an SLO from an institution accredited by the DGE as regulated under MEMR 38/2018 and MEMR Regulation No. 10 of 2021 on Electrical Safety.

Alternative energy sources

Does government policy or legislation encourage power generation based on alternative energy sources such as renewable energies or combined heat and power?

The use of renewable energy sources is encouraged at the policy level through the endorsement of the National Energy Policy, which aims to achieve the best possible energy mix for power production in Indonesia. The National Energy Policy provides that by 2025, energy consumption from new and renewable energy (biomass, nuclear, solar, wind, etc) should reach more than 23 per cent of total energy consumed and that the use of oil should be reduced to less than 25 per cent.

Since 2010, the PLN has been provided with a fast-track programme for the development of coal-fired power plants, as well as the use of renewable energy and gas. Under MEMR Regulation No. 40 of 2014, there are 58 power plant projects and 40 transmission projects listed as fast-track private-public partnerships involving coal, geothermal, water and gas-fired power plants.

Further, Presidential Regulation No. 4 of 2016 on Development of Electrical Infrastructure, as last amended by Presidential Regulation No. 14 of 2017, provides that for the development of generation facilities using new and renewable energy, the central or regional government may give government support in the form of fiscal incentives, feed-in tariffs and outright subsidies.

Feed-in tariffs are subject to MEMR Regulation No. 50 of 2017 as last amended by MEMR Regulation No. 4 of 2020 on the Utilisation of Renewable Energy for Electricity Supply (MEMR 50/2017), which regulates the appointment method for power purchase and purchase price by the PLN from renewable power plants.

MEMR 50/2017 provides that power purchase from power plants utilising renewable energy will be made through direct selection, whereas power purchase from renewable power plants that have high technology is variable and highly dependent on the weather, will be made through direct selection with capacity quota.

Direct appointment may only be made by the PLN in the event there is only one candidate for power producer utilising renewable energy. The regulation further provides that power purchase prices by the PLN from renewable power plants will be determined based on a tariff that does not include the electricity distribution price (BPP).

As regulated under MEMR Regulation No. 24 of 2017 on the Mechanism for Stipulation of BPP by the PLN, both the local BPP and the national BPP will be determined every year by the MEMR. The prevailing BPP is currently determined through MEMR Decree No. 55 K/20/MEM/2019 Year 2019 on the Amount of BPP by PLN for Year 2018.

For power plants utilising solar, wind, biomass, biogas and tidal or ocean thermal energy conversion, if the local BPP is higher than the national BPP, the maximum power purchase price by the PLN is 85 per cent of the local BPP. If the local BPP is equal to or less than the national BPP, the power purchase price may be determined based on the consent of the parties.

For power plants using hydro, municipal waste or geothermal, if the local BPP is higher than the national BPP, the maximum power purchase price by the PLN is equal to the local BPP. If the local BPP is equal to or less than the national BPP, the power purchase price may be determined based on the consent of the parties.

Climate change

What impact will government policy on climate change have on the types of resources that are used to meet electricity demand and on the cost and amount of power that is consumed?

As part of a commitment to reduce the CO2 emissions from deforestation and forest degradation, since 2010, the government has suspended the issuance of new mining licences in areas that are specified as primary natural forest and peatland (including conservation and protected forest areas). This reduced the potential amount of coal that can be produced for coal-fired power plants in Indonesia. However, given the abundance of cheap coal in Indonesia, it is arguable whether this policy will have a substantial impact on the construction and use of coal-fired power plants.

Storage

Does the regulatory framework support electricity storage including research and development of storage solutions?

Battery Energy Storage System (BESS) is now included as one of the sub-fields of electricity supporting services for power generation under the newly enacted GR 25/2021. GR 25/2021 acknowledge the electricity supporting services of consultation, construction or installation, examination and testing, operations, maintenance, education and training specifically for BESS under the power generation classification.

Aside from the above, there are currently no regulations on electricity storage. In general, the Energy and Mineral Resources Research and Development Body (LITBANG) under the MEMR is responsible for research and development in the fields of oil and gas, electricity, minerals and coal, new and renewable energy, energy conservation and sea geology. The authority of LITBANG includes organising technical policies and implementing research and development.

Government policy

Does government policy encourage or discourage development of new nuclear power plants? How?

Both legislation on nuclear energy and the National Energy Policy encourage and provide the opportunity to develop nuclear power plants. However, to date, Indonesia has no commercial nuclear power plants, mainly owing to public resistance to nuclear power on health, safety and liability issues and the historical recognition of nuclear waste as a hazardous material.

The development of nuclear power plants in Indonesia so far goes no further than for research under the supervision of the national nuclear agency.

Regulation of electricity utilities – transmission

Authorisations to construct and operate transmission networks

What authorisations are required to construct and operate transmission networks?

Main permit

Based on GR 14/2012 and MEMR Reg. 11/2021, an integrated IUPTLU, transmission IUPTLU or transmission IUPTLS is required to engage in the transmission business (the holders of such licence, a transmission business entity).

To obtain the abovementioned licence of a transmission business entity, the applicant is required to submit an application supported by certain administrative and technical document in accordance with the procedure set out under MEMR 11/2021 and MEMR Regulation No. 5 of 2021 on Standards of Business Activities and Products on the Administration of Risk Based Licensing on the Energy and Mineral Resources Sector (MEMR 5/2021).

 

Issuing authority

Under Government Regulation No. 5 of 2021 on the Administration of Risk-Based Business Licensing and the most recent Capital Investment Coordinating Board Regulation No. 4 of 2021 on Guidelines and Procedures for Risk-Based Licensing and Investment Facilities, the issuing authority of an IUPTLU is now the OSS agency on behalf of the relevant central or provincial government.

The OSS agency on behalf of the central government (MEMR) is authorised to issue IUPTLUs to entities whose business areas are cross-province, state-owned enterprises, those who sell electricity or lease off the electricity grid to an IUPTLU holder issued by the MEMR, and holders of business areas with an integrated power business.

The OSS agency, on behalf of the provincial government, is authorised to issue IUPTLUs to entities whose business areas are within one province, those who sell electricity or lease off the electricity grid to an IUPTLU holder issued by the governor and holders of the business area except for power generation activities.

 

Other licences

In addition to the above, after the issuance of IUPTLU, the applicant must fulfil commitments to secure a building permit (now a building approval), location permit, and an environmental licence from the OSS on behalf of the local government and must compensate any party whose assets (land, buildings, or plants) are directly or indirectly affected by the transmission network.

Before commencing operation, a transmission installation must secure an operational feasibility certificate (SLO) issued by an accredited technical inspection institution.

Private investment in power transmission and distribution in Indonesia has been very rare to date, as transmission and distribution historically have been monopolised by PT Perusahaan Listrik Negara (Persero) (PLN).

Eligibility to obtain transmission services

Who is eligible to obtain transmission services and what requirements must be met to obtain access?

A transmission business entity may lease the transmission grid to an integrated IUPTLU holder having a certain electricity business area (Wilayah Usaha), a holder of generation IUPTLU or a holder of IUPTLS (the transmission lessee).

Specifically, for IPPs (generation IUPLTU holder), access to the grid is subject to the PPA with the PLN governing the terms of the IPP’s electricity transfer to the PLN’s transmission grid.

Other than the above, access to the grid may also be obtained through a lease agreement between the transmission business entity and the transmission lessee. The fee for such lease must be approved by the MEMR or governor, according to their jurisdiction.

An IUPTLU holder who produces power and owns and operates a transmission network is also eligible to access transmission and distribution networks.

The utilisation of transmission or distribution networks for telecommunications, multimedia and information purposes is permissible, subject to a licence issued by the OSS agency on behalf of the MEMR, provided that such utilisation does not compromise power supply in the area.

Government transmission policy

Are there any government measures to encourage or otherwise require the expansion of the transmission grid?

Since 2010, the government has assigned the PLN to develop electricity infrastructures to meet the target of 35,000 megawatts of power generation and 46,000 kilometres of transmission grid across Indonesia, particularly with the issuance of MEMR Regulation No. 15 of 2010 on the List of Fast Track Projects in Renewable Energy, Coal and Gas Power Generation and the Relevant Transmissions, as amended four times, lastly by MEMR Regulation No. 40 of 2014.

Consistent with this objective, Presidential Regulation No. 4 of 2016 on the Development of Electrical Infrastructure specifically provides government financial support for the development of electrical infrastructures, including transmission grids, by the PLN through an independent management scheme.

Theoretically, based on MEMR 11/2021, a transmission business entity holding integrated IUPTLU or transmission IUPLTU will not be bound by an electricity business area (Wilayah Usaha) and is obliged to open the opportunity for the collective use of transmission grid in conducting its transmission business. In a way, the fact that such transmission business entity will not be bound to a Wilayah Usaha like other power supply businesses and the obligation for such operator to open as much opportunity as possible for the collective use of its grid is a way for the government to encourage the transmission development.

Despite the regulations allowing private-sector involvement in electricity transmission, the historical monopoly on transmission by the PLN is expected to continue for some time. The expansion of transmission networks by the private sector may likely take longer to realise, considering that the government incentives to encourage the development of transmission networks for private entities were only just introduced in early 2016. They are, among others, in the form of delegation of land acquisition to government institutions on behalf of private entities, and an increase in foreign ownership permitted in mid- to high-voltage electricity.

Rates and terms for transmission services

Who determines the rates and terms for the provision of transmission services and what legal standard does that entity apply?

The tariff for leasing transmission services is regulated by the government (ie, MEMR, governor), depending on the location of the transmission network.

Transmission services may be leased through a network lease agreement between the transmission business entity and another transmission business entity.

The parties to a network lease agreement, through the Transmission Business Entity, may propose the price of power transmission by submitting a written application to the MEMR or governor for approval under MEMR 11/2021. The approved price or fee from the relevant authority may be in the form of a benchmark price.

Entities responsible for grid reliability

Which entities are responsible for the reliability of the transmission grid and what are their powers and responsibilities?

The MEMR, through the Directorate General of Electricity, is responsible for assuring the reliability of the transmission grid. An inspector from an accredited technical inspection institution will issue an SLO in connection with the installation and operation of the transmission grid.

In the event of non-compliance, the inspector may recommend suspension of the activities of the service provider, which may result in revocation of its operational licence.