Indonesia’s geothermal resources are among the largest in the world, with 299 geothermal locations and a total potential of 28,807 MW, or around 40 percent of the total geothermal resources worldwide, according to a September 2014 press release from Indonesia’s Directorate General of Geothermal. In order to utilize this enormous energy potential, the Government of Indonesia (the “GOI”) has intensified its efforts to encourage geothermal power development. Some background to the regulatory climate will put these developments in perspective.
Prior and Existing Laws
- Law No. 27 of 2003 on Geothermal (the “2003 Geothermal Law”): The GOI enacted the 2003 Geothermal Law, making geothermal the only renewable energy resources governed by its own law. In 2004, the Ministry of Energy and Mineral Resources (the “MEMR”) issued the “Blueprint for Geothermal Development in Indonesia,” a roadmap to develop 6,000 MW of geothermal power capacity by 2020. In 2005, the Directorate General of Geothermal Enterprise Supervision and Groundwater Management was established by the MEMR to strengthen management and support in this sector.
In 2006, the MEMR initiated the Master Plan Study for Geothermal Power Development in Indonesia, funded by the Japan International Cooperation Agency, to further solidify knowledge and understanding about developing Indonesia’s geothermal resources. In 2012, the MEMR, with the issuance of MEMR Regulation No. 22 of 2012, set out a feed-in-tariff (“FIT”) policy for geothermal electricity. That same year the Ministry of Finance established a geothermal fund in the amount of more than US$200 million of initial capitalization to mitigate resource risks related to geothermal development, as reported in a 2015 Asian Development Bank publication titled “Unlocking Indonesia’s Geothermal Potential.” And in 2014, the MEMR, through the issuance of MEMR Regulation No. 17 of 2014, set out a new FIT policy based on commercial operation dates and regions.
- Law No. 21 of 2014 on Geothermal (the “2014 Geothermal Law”): The 2014 Geothermal Law, which replaced the 2003 Geothermal Law, was a major policy change to boost geothermal exploration activity by separating the geothermal sector from mining activity. This was necessary because the restrictions on mining within protected and conservation forests also prohibited geothermal development in those areas, as most geothermal resources are located there.
- MEMR Regulation No. 14 of 2015 regarding Procedures for the Imposition, Collection and Remittance of Non-Tax State Revenues Derived from Geothermal Activity at the Directorate General of New Energy, Renewable and Energy Conservation (“MEMR Reg. 14/2015”): Since the 2014 Geothermal Law, the GOI has not adopted further regulations to encourage geothermal power development, with the exception of MEMR Reg. 14/2015. This is an implementing regulation of Government Regulation No. 9 of 2012 regarding Types and Fees over the Types of Non-Tax State Revenues Applicable at the Ministry of Energy and Mineral Resources.
Under MEMR Reg. 14/2015, the types of Non-Tax State Revenues derived from geothermal activity are as follows:
- Fixed fees that consist of (a) fixed fees on geothermal exploration and (b) fixed fees on geothermal operation production, both of which are imposed annually on the geothermal working area after the issuance of the geothermal business license until the commercial operation date. The formula for the calculation of fixed fees is based on the size of the geothermal working area (in hectares) times the applicable fee.
The fixed fee payment obligation on geothermal exploration for the first year is calculated based on the number of months from the date of the issuance of the geothermal business license until December 31 of the current year. The fee must be remitted to the state treasury account not later than one month after the issuance of the geothermal business license. In the following years, the fee is calculated from January 1 until December 31 and must be remitted to the state treasury account not later than January 15 of the following year.
The fixed fee payment obligation on geothermal operation production for the first year is calculated on the same basis as the fixed fee on exploration but must be remitted to the state treasury account not later than one month after the commercial operation date of the first production unit. In the following years, the method of calculation is again the same as the fixed fee for exploration and must be calculated as of January 1 until December 31 and be remitted to the state treasury account not later than January 15 of each year. In the final year, the fee is calculated on the number of months from January 1 until the end of the geothermal business license and must be remitted to the state treasury account at the latest on January 15 of the following year.
There is a late payment penalty of the foregoing fees of 2 percent per month.
- A production fee is imposed on the electricity power that is generated from the geothermal steam upon the commercial operation date. The calculation of the production fee is based on the total production of electricity sold (in kilowatts per hour) at the delivery point of electricity from the holder of the geothermal business license to the holder of the electric power supply business license, times the applicable fee multiplied by the sale prices of the electricity.
The production fee is calculated as of the commercial operation date of the first production unit each month not later than the 15th day of the following month for the supply of electricity of the previous month in accordance with the relevant power purchase agreement.
Any late payment of the production fee is subject to a 2 percent penalty per month of the outstanding production fee.
- A fee for information map printing services on geothermal areas.
- A fee for data on geothermal working areas collected from preliminary surveys and/or exploration activities.
The transitional provisions of MEMR Reg. 14/2015 stipulate the payment obligation of fixed fees and production fees for the holder of a geothermal mining business license issued before the enactment of MEMR Reg. 14/2015.
There are several draft regulations in process concerning geothermal production bonuses, direct utilization of geothermal resources and indirect utilization of geothermal resources. However, no details have been released about these drafts, except one publication by the Directorate General of New Energy, Renewable and Energy Conservation that mentioned the draft regulation on geothermal production bonuses would provide that people living in the neighborhood closest to the geothermal activity would be given priority access to the geothermal production bonus. The GOI has talked about allowing 100 percent foreign share ownership for investments in geothermal power plants with a capacity of 10 MW or more and 67 percent foreign share ownership for plants with a capacity of less than 10 MW. However, in the recently released 2016 Negative Investment List (the “2016 DNI”), foreign share ownership is capped at 95 percent and 67 percent, respectively, for the above megawatt capacities.
Despite the efforts by the Indonesian government to date, the geothermal sector in Indonesia is still underdeveloped. This is primarily the result of a number of outstanding challenges that have not yet been resolved by the GOI, particularly with respect to the feed-in tariff of geothermal electricity, which many investors consider unattractive in view of the high capital requirements needed to develop a geothermal working area in Indonesia. This factor alone may hinder the GOI’s efforts to add 35,000 MW of electricity throughout Indonesia by 2019, 4,815 MW of which is intended to come from geothermal resources, according to the Power Supply Provision Business Plan 2015-2019, as ratified by the Minister of Energy and Mineral Resources.