Renewable energy policy and regulation in Indonesia

All questions

The policy and regulatory framework

i The policy background

To balance the government's ambition to achieve a 35,000MW electricity capacity while increasing the proportion of renewable sources in the energy mix, the government has introduced several incentives to IPPs that develop renewable energy sources, namely:

1. a possible exemption by the Bank of Indonesia on the mandatory use of the rupiah for power plant projects as strategic infrastructure projects;
2. tax incentives provided for renewable energy power generation projects, including solar, wind, ocean and hydropower, and covering:
   • income tax deductions in an amount of 5 per cent per year for six years;
   • lower tariffs for income tax on dividends paid to non-resident taxpayers;
   • an extended tax loss carry-forward period of up to 10 years;
   • accelerated depreciation on tangible assets; and
   • accelerated amortisation of intangible assets;
3. IPPs may be granted a 2.5 per cent customs duty exemption for the import of capital goods used in energy development projects;
4. the possibility to acquire government guarantees for power plant projects, which is discussed further in Section IV; and
5. the OSS system, which allows IPPs applying for an electricity supply business licence (IUPTL) to automatically obtain a conditional IUPTL after stating their commitment to fulfilling all the requirements set by the government (see Section III.ii).

ii The regulatory framework

Electricity generation from renewable sources is mainly governed by the Energy Law, the Electricity Law, the Investment Law, and other sectoral and implementing regulations in the areas of geothermal, water, environment and forestry. In addition, IPPs and lenders must also comply with the applicable laws in relation to offshore loans and the mandatory use of the rupiah.

Electricity supply business licences

For IPPs to generate electricity and deliver it to PLN, they are required to obtain an IUPTL issued by the government to control the IPP's technical and financial capability, and fulfil environmental protection requirements. To simplify bureaucracy, IUPTL applications are pooled by and submitted to BKPM, which is currently operating the OSS system. The OSS system is an integrated licensing system for the processing of business licences for and on behalf of ministries, heads of agencies, governors, regents and mayors. MEMR 39/2018 reclassifies business licensing within the electricity sector into business licences, and commercial and operational licences. An IUPTL is considered a business licence and a certificate of operational worthiness constitutes a commercial and operational licence. To obtain an IUPTL and a certificate of operational worthiness, an IPP is only required to secure a Business Identity Number (NIB) through the OSS system. After securing the NIB, the IPP must submit its applications for licences through the OSS system. Licences will then be issued subject to the IPP meeting certain obligations. For an IUPTL, an IPP is required to submit documents proving it has met these obligations within 25 days of the issuance of the IUPTL. The documentary requirements include an electricity generation feasibility study, details of the project's proposed location, construction and operation schedules, and a PPA with PLN demonstrating the IPP's technical, financial and environmental protection capabilities.

Geothermal licences

The regulatory regime with respect to geothermal business activity is divided into two regulatory regimes: the old regulatory regime applicable prior to 2003 and the new regulatory regime applicable after 2003.

Prior to the issuance of the geothermal law in 2003, Pertamina was appointed by the government as the sole geothermal mining authority in Indonesia. Pertamina has the exclusive right to undertake geothermal business activities in work areas stipulated by the government by implementing its own operations or appointing a contractor pursuant to a joint operation contract (JOC). The JOC sits back-to-back with an energy sales contract (ESC) between the contractor as the deliverer of the geothermal energy or electricity produced, Pertamina as the seller and PLN as the buyer.

Following the enactment of the geothermal law in 2003, geothermal business activity is implemented by virtue of a geothermal licence issued by the government following tenders for work areas. Notwithstanding the foregoing, all JOCs and ESCs entered into prior to the enactment of the geothermal laws in 2003 remain valid until the end of their terms. In 2014, the government introduced a new law to better manage geothermal energy. The 2014 Geothermal Law established the distinction that geothermal activities are not part of mining activities. Consequently, geothermal activities in production forests and protected forest areas, which is where most of Indonesia's geothermal resources are concentrated, are permitted by obtaining a 'borrow-and-use' permit for forest areas (see Section III.ii, 'Forestry issues', below).

To undertake geothermal activities, the IPP must participate in a public bid process to obtain the rights to manage and operate a geothermal working area. Pursuant to MEMR 37/2018, geothermal working areas are required to be publicly offered through the implementation of a two-tiered tender mechanism: (1) determination of qualified tender participants according to various administrative, technical and financial criteria, and (2) appointment of the winning bidder, who will be granted the rights to manage and operate a geothermal working area and geothermal licence by the MEMR.

Procurement process for renewable energy PPAs

PLN in general is required to purchase electricity produced from renewable energy if the following requirements are met:

1. the electricity generation is in line with PLN's local grid supply–demand balance;
2. a feasibility and connectivity study has been conducted and verified by PLN;
3. funding is available; and
4. the pricing of the electricity is consistent with MEMR 50/2017 (see 'Electricity tariff for renewable power generation projects', below).

For renewable energy projects, PLN may appoint an IPP by way of direct selection or direct appointment, depending on the type of renewable energy in question, as follows.

Power source	Procurement process
Solar PV	Direct selection based on a quota of capacity
Wind	Direct selection based on a quota of capacity
Hydro	Direct selection
Biomass	Direct selection
Biogas	Direct selection
Municipal waste	Direct appointment
Geothermal	Direct appointment
Ocean tidal or thermal	Direct selection

The direct appointment process involves the appointment of one specific IPP, whereas direct selection involves the selection of more than one potential IPP. The MEMR's approval is required to initiate the direct appointment and direct selection processes.

Terms and conditions for PPAs

Until recently, the provision of PPAs was mostly based on business-to-business negotiations between an IPP and PLN. In 2017, however, the government issued MEMR 10/2017 to 'lock down' certain provisions of PPAs. This regulation may reduce the time required to negotiate the terms of a PPA, but at the same time may prejudice the general bankability of a PPA (i.e., through provisions regarding risk allocation, deemed capacity payment and GFM events).

MEMR 10/2017 is widely applicable to most types of power plant with the exception of intermittent power plants and certain renewable energy power plants, namely biogas, mini hydropower plants below 10MW and municipal waste-based power plants. Other renewable energy plants, such as geothermal, hydropower and biomass plants, remain subject to this regulation.

The key provisions regarding PPAs based on MEMR 10/2017 (including its subsequent amendments) and recent PPA precedent in the areas of renewable energy are as follows.

Key terms	Remarks
Term	Maximum of 30 years as of the commercial operation date (COD)
Scheme	Build, own, operate and transfer (BOOT)
Deemed dispatch	Limited only if PLN's grid is interrupted or unable to take the net electrical output because of PLN's default or negligence
GFM	References to GFM are omitted from the most recent regulation (i.e., MEMR 10/2018)
Price review	Limited to changes of cost structures or changes to the technical details of a project. A change in cost structure is defined as a change in laws in the following areas: regulations related to electricity prices; taxation; environment; and regulations related to energy cost
PLN take-or-pay	Limited to a certain period agreed by the parties and in consideration of the repayment term to an IPP's lenders
Penalty payable to PLN	Penalty for failure to meet the COD schedule Penalty in respect of availability factor or capacity factor, and outage factor Penalty in respect of IPP's failure to cope with PLN's megavolt ampere reactive interconnection system, except if the failure is due to a PLN request Penalty for failure to maintain frequency required by the electrical grid system (grid code) Penalty for failure to meet the required ramp rate
Remedy for PLN default or GFM	PLN is required to purchase the project with consideration of the equity injected, the equity return rate, and senior debt and interest

Electricity tariff for renewable power generation projects

The general pricing guidelines under MEMR 50/2017 for renewable power generation projects are benchmarked against PLN's average electricity generation basic cost for the preceding year in the area where that project is to be located (the generating BPP). The electricity tariffs for renewable power generation projects are as follows.

Power sources	Calculating the electricity tariff
Solar PV	If the generating BPP is higher than the national average, then the tariff may not exceed 85 per cent of the generating BPP If the generating BPP is lower or the same as the national average, then the electricity purchase price will be determined by mutual agreement between the IPP and PLN on a business-to-business basis
Wind farm
Biomass
Biogas
Ocean tidal or thermal
Hydro	If the generating BPP is higher than the national average, then the tariff under the PPA may not exceed the generating BPP If the BPP of the Sumatra, Java and Bali areas or the relevant generating BPP is lower than or the same as the national average, then the electricity purchase price will be determined by mutual agreement between the IPP and PLN on a business-to-business basis
Biofuel	The electricity tariff must be based on agreements made between the relevant parties

The national average generating BPP for the period from 1 April 2019 to 31 March 2020 is US$7.86 cent/kWh.

For obvious commercial reasons, PLN intends to lower or at least maintain the generating BPP. Benchmarking the electricity tariffs to the generating BPPs will affect investors' appetite to develop renewable power generation projects, because the low generating BPPs in most of the relevant areas are the result of Indonesia's principal reliance on coal-fired power plants, which are not comparable for the calculation of renewable power generation prices.

Supervision by the MEMR

Under MEMR 48/2017, the MEMR exercises supervisory authority over IPPs in several areas, including regarding share transfer restrictions, and notification requirements for changes in shareholdings and in the composition of the board of directors and board of commissioners of an IPP. The share transfer restrictions have created some concerns over the bankability IPP projects.

Environmental matters

Pursuant to the Environmental Law, business entities carrying out operational activities with significant impact on the environment are required to prepare an environmental impact assessment (AMDAL) that has to be approved as a prerequisite to secure an environmental permit. Where an AMDAL is not required, companies shall annually submit environmental management and environmental control effort reports to be approved by the authorised government institution.

Forestry issues

Indonesia's forests are arranged in three different classifications depending on their nature and functionality: production forests, protected forests and conservation forests. To use production and protected forests for commercial activities, including for the development of power plants, and the transmission and distribution of power supplies, a borrow-and-use permit must be obtained from the Minister of Environment and Forestry (MOEF) through the OSS system. The Forestry Law in general prohibits commercial activities within conservation forest areas to protect their pristine nature. However, geothermal activities may be implemented within nature-reserve forest areas after securing a geothermal environmental services utilisation permit issued by MOEF. There is currently no legal framework available to secure access to conservation forests and hunting parks.

Land matters

Under the Agrarian Law, the state holds ultimate title to all land in Indonesia. To construct a power plant (except in a forestry area), IPPs must first secure a land title in the form of a building right. Prior to acquiring any land title with a total area of more than 10,000 square metres, IPPs must obtain a location permit, as well as a permit to conduct land acquisition within the framework of investment and to use the land for operational activities, from the relevant authority, which depends on the location of the land.

To mitigate project risks due to land acquisition, the government provides a legal framework for the mandatory acquisition of land, including for electricity infrastructure development, if this is in the public interest. Such land acquisition is undertaken through the state budget. Accordingly, any land title subject to such acquisition must be transferred from the relevant landowner to the government, in this case to the National Land Agency (BPN). IPPs may be required to assist in the land acquisition process, and may have a use right over the land, but will not be entitled to register the land under their name.

In addition to land for power plants, IPPs may also be required to acquire a right of way for a transmission line to traverse the conductors from power plants to PLN interconnection points (where power plants and PLN's grid system are connected). Transmission lines and interconnection points are commonly referred to as 'special facilities'. Based on PPA precedents, IPPs are required to construct these special facilities and transfer their title to PLN on or before the COD. Thus, IPPs may not place any encumbrances over special facilities.