PwC Indonesia Publication
I. INTRODUCTION
1. Indonesia’s demand for electricity
Indonesia’s economy has emerged from the global financial crisis in a strong position having achieved a GDP growth rate of 4.5% in 2009 and with growth for 2010 projected to be 5.6%. Indonesia grew at 6.3% in 2007 and 6.0% in 2008.This robust growth is spurred by a population of 235 million (including an emerging middle class of 28 million) which is undergoing an unprecedented degree of urbanization and industrialization.
This growth should see Indonesia’s demand for electricity increase at 7% to 9% p.a. for the foreseeable future. This should translate into growth in electricity demand from an estimated 135 terawatt hours (“TWh”) in 2010 to 167TWh by 2014
Indonesia’s economy has emerged from the global financial crisis in a strong position having achieved a GDP growth rate of 4.5% in 2009 and with growth for 2010 projected to be 5.6%. Indonesia grew at 6.3% in 2007 and 6.0% in 2008.This robust growth is spurred by a population of 235 million (including an emerging middle class of 28 million) which is undergoing an unprecedented degree of urbanization and industrialization.
This growth should see Indonesia’s demand for electricity increase at 7% to 9% p.a. for the foreseeable future. This should translate into growth in electricity demand from an estimated 135 terawatt hours (“TWh”) in 2010 to 167TWh by 2014
Indonesia’s generating capacity is in turn forecast to increase from 152TWh in 2010 (from an installed capacity of around 30GW) to 194TWh by 2014 (while still accounting for only approximately 2% of power generation in the Asia region).
These projections indicate a surplus in generating capacity of up to 27TWh by 2014. However, delays in capacity development (including with Independent Power Producer (“IPP”) projects-discussed further below) have meant that Indonesia is actually struggling to provide electricity for its current needs. This under supply, compounded by Indonesia’s geographic complexity, means that Indonesia has, at about 66% in 2009, one of the lowest electrification ratios in the region. There are around 20 million households, or 80 million people, who currently have no access to public electricity.
Indonesia is also one of the few countries regionally that effectively demarcates electricity pricing according to the user. In this regard, commercial and industrial electricity users pay an average 11-12US cents per KwH while retail customers pay approximately 6US cents per kwh (achieved largely through a Government subsidy currently running at US$5.5 billion p.a). The supply of electricity is therefore emerging as a potential constraint on Indonesia’s long-term growth and development ambitions. With growth in power demand of 7% - 9% p.a. the situation is also likely to only become more critical.
The historical reasons for this relative underdevelopment include :
a) The low take up in the use of primary energy sources especially for natural gas, geothermal and renewables. This low take up has been primarily due to the lack of development of distribution and transmission infrastructure (e.g. gas pipelines, coal transportation routes, distribution networks, etc.) which are necessary to bring the feed stock together with the generating assets, and onwards to the consumer.
This is especially the case for the areas outside of the islands of Sumatra, Java and Bali; the historical difficulties in obtaining land for electricity assets including
b) The necessary land use rights and achieving the associated land clearing;
c) the lack of a robust regulatory framework especially to allow access to project - based financing in the international market place. On this point, a particular concern has been the absence of sovereign or similar guarantees over the key revenue streams; and the lack of market pressures yielding profitable prices due to subsidies
d) That cause power to be sold at prices less than the fuel cost of power generation
2. Development chronology
The modern era for the electricity sector in Indonesia commenced with the 1985 Electricity Law. Under this law, limited private participation in electricity generation was permitted. Essentially, the model involved allowing for private investment in power generating assets as Independent Power Producers (“IPPs”). These IPPs were licensed to sell their electricity solely to the state-owned electricity company PLN pursuant to Power Purchase Agreements (“PPAs”). PLN, as the sole-purchaser of the electricity output, also therefore became the key driver of the commerciality of the entire value chain.
The first major PPA under this era was signed with Paiton Energy (to develop the coal fired Paiton power station) in 1991. Several other significant IPPs followed including a number in relation to geothermal power generation (under a slightly different investment framework).Many other IPP projects made it through various stages of licensing and commercial approval. This IPP program however was effectively frozen in the late 1990s when the Asian financial crisis hit. Indonesia was badly effected with GDP contracting by up to 13.5% and the Rupiah falling from circa 2,500 to the USD, to as low as 18,000.
PLN in turn suffered financially especially from the devaluation of the Rupiah. A large portion of PLN’s costs were denominated in US dollars including its PPA offtake prices. However, PLN’s revenue base, being largely from sales to the Indonesian consumer, was Rupiah denominated. With the IPP sector set up for a USD denominated value chain the Investment economics of the entire sector deteriorated markedly with the circa 75% fall in the value of the ultimate funding currency. Many of the IPPs that were yet to produce at that time were Simply abandoned. Others could only continue with their PPAs renegotiated down to a much lower offtake price. Overall a significant degree of investor confidence in the sector was lost.
PLN was also left in the position that it could not independently fund investment for the country’s much-needed additional capacity.Two years on from this, the Government introduced reforms largely through the enactment of the 2002 Electricity Law. Under this law, electricity business areas were divided into competitive and non-competitive areas; the former allowing for private participation in the generation and retailing areas of the electricity value chain
The 2002 Electricity Law also allowed for electricity tariffs to be determined by the market and for independent regulation through the establishment of the Electricity Market Supervisory Agency
However in 2004, the Constitutional Court ruled the 2002 Electricity Law to be unconstitutional largely in light of electricity’s status as a social necessity and the constitutional requirement for its delivery to remain exclusively with a State owned agency. As a result the Court effectively re-installed the previous 1985 Law and from 1999 – 2004 there was very little investment of any sort in new power projects.
In 2005, the Government began new efforts to attract private Investment back into the sector. New “public private partnership” legislation was enacted through Presidential Regulation (“Perpres”) No. 67/2005.
A list of IPP projects open for private tender was also made available.
In 2006, the Government announced stage 1 of a “fast track” program followed by a 2nd
program at the start of 2010. Each program aimed to accelerate the development of 10 GW of generating capacity with program 2 geared towards IPPs and renewable energy. Further details of the first and second fast track programs are provided at Appendix D.
In 2009 the Government passed a new Electricity Law to strengthen the regulatory framework and provide a greater role for regional Governments in terms of licensing and in determining electricity tariffs. The 2009 Electricity Law also promoted the role of private investors by allowing private participation in the electricity supply business in conjunction with support provided from within a PPP framework. Thirteen implementing regulations for the 2009 Electricity Law are due to issue by the end of 2010.
Perpres No.13/2010 makes provision for Government support for public private participation by establishing PT Sarana Multi Infrastruktur (“PT. SMI”) and its subsidiary PT Infrastruktur Financing (“PT IIF”) to act as an Infrastructure Fund to support infrastructure financing, and establishing PT Penjaminan Infrastruktur Indonesia (PT PII) to provide guarantees for infrastructure projects including electricity generation.
3. Government support for infrastructure
Separate to the initiatives around electricity the Government has recently sought to encourage the development of infrastructure more generally.President Yudhoyono for instance has made infrastructure Development a top Presidential priority by including it as a key element in Indonesia’s medium term (2010 - 2014) development plan (or “RJPM”) as prepared by the National Development Planning Board (or Bappenas).
The Government’s working plan (“RKP”) for 2010, as part of the RJPM, outlines 45 key infrastructure programs (source Bappenas) including :
a) the development of facilities needed for energy processing (e.g. oil refineries, power generation), energy transmission and distribution (e.g. pipelines for gas and oil fuels) and energy storage (e.g. depots);
b) the utilization of alternative energy including renewables (e.geothermal, solar, water, wind and biomass); and
c) the completion of implementing regulations to Law No. 30 of 2007 on energy.
The Government has also sought to clarify “public private partnership” regulations with the passing of Perpres No.13/2010.
4. Attractive opportunities for IPPs
Overall Indonesia’s economic fundamentals and its emerging regulatory framework are coming together to allow for renewed optimism within the electricity investment sector. The targeted GDP growth rates of 6.2% p.a.and an electrification ratio of 91% by 2019 (RUPTL 2010 – 2019) should see electricity demand growing by 7% to 9% p.a. (and even 9.2% p.a. through to 2019) and take installed capacity to 81.6GW by 2019. Accounting for retired capacity, this should equate to 54GW of new generating capacity or about 5GW per year (RUPTL 2010-2019)
Massive capital investment will be required if these targets are to be met with the funding needs for the period 2010 to 2019 estimated at around US$66billion or US$6.6billion p.a. For the next five years the Investment required is estimated at US$31.4 billion for 22GW of generating capacity, US$7.3 billion for some 17,000 km of transmission networks and US$5.3 billion for distribution, totaling around US$44 billion.
IPPs and other private investment in associated areas will be needed to help meet these capital demands. Whilst IPPs currently account for only 14% of generating capacity, the role of private investment in new capacity will surely grow. The second fast track program alone will require an estimated US$16.4 billion in investment with approximately US$11.1 billion of this earmarked for the private sector. Overall, investors are potentially at the dawn of the most exciting electricity investment opportunities for at least a generation.
II. Legal and regulatory framework
1. Introduction
The electricity sector is regulated by the Ministry of Energy and Mineral Resources (“MoEMR”) and its sub – agencies. These include the Directorate General of Electricity and Energy Utilization and the (newly created) Directorate General of Renewable Energy and Energy Conservation. The current regulatory framework is provided by Electricity Law No.30/2009 (the “2009 Electricity Law”).
The MoEMR is responsible for developing the electricity master plan (“RUKN”) which sets out, amongst other things, a ten year estimate of power demand and supply, the investment and funding policy, and the approach to the utilization of new and renewable energy resources. The RUKN also provides guidance to the central and regional Governments, and to potential investors, on energy contribution levels for renewable sources (to increase from 5% to 17% of Indonesia’s total energy consumption by 2025). The RUKN is reviewed annually.
The Electrification Development Program 2010 – 2019 (“RUPTL”) is based on the RUKN and constitutes an official ten year power development plan. The RUPTL is prepared by PLN, approved by the MoEMR, and mandated by the current law and regulations. The RUPTL contains demand forecasts, future expansion plans, kWh production, fuel requirements and indicates which projects will be developed by PLN and IPP investors. The RUPTL is also reviewed annually. The 2009 Electricity Law provides that regional Governments should also prepare a Regional General Plan of Electricity (“RUKD”) based on the RUKN.
2. The 2009 Electricity Law
The 2009 Electricity Law divides the electricity business into two broad categories as follows:
a) those activities involved in supplying electrical power such as:
i) electrical power generation (bothfor self-use and for sale to an off-grid captive consumer);
ii) electrical power transmission;
iii) electrical power distribution; and
iv) the sale of electrical power; and
b) those activities involved in electrical power support such as:
i) consulting activities;
ii) the construction and installation of electrical power equipment;
iii) the operations and maintenance of electrical power equipment; and
iv) the development of electrical supporting equipment technology.
Generation
The power generation sector is dominated by PLN which controls around 86% (or 26.609GW) of generation assets in Indonesia including through subsidiaries such as PT Indonesia Power, PT Pembangkit Jawa Bali, and PT PLN Batam.
Private sector partnership is allowed through Independent Power Producer (“IPP”) arrangements (which continued to be sanctioned by the 2009 Electricity Law). IPP appointment is usually through competitive bidding except in certain circumstances (e.g. for renewable energy, mine-mouth, crisis, marginal gas, or expansion projects) in which case appointment can be direct. The structure involves the IPP signing an Energy Sales Agreements or Power Purchase Agreement with PLN to produce electric power and supply PLN electricity at an agreed price for an agreed period.
Of Indonesia’s current installed capacity of 30.941GW, IPPs account for 4.269GW, or approx.14%. Electricity generation licences or “IUPTLs” can be offered to private entities (with up to 95% foreign shareholding) with PLN acting as the single buyer
Transmission, Distribution and Retailing
The 2009 Electricity Law provides PLN with priority rights to conduct these businesses throughout Indonesia. PLN, as the sole owner of transmission and distribution assets, also remains the only business entity in charge of transmitting and distributing electric power. Further, whilst the 2009 Electricity Law allows private participation in the supply of electricity for public use (which includes transmission and distribution), current private sector participation is still limited to the power generation sector.
Operations and Maintenance (“O & M”)
O & M services for conventional electrical power can take the form of the following activities:
a) consulting services for the installation of electricity power supply;
b) construction and placement of electrical power supply installations;
c) inspection and testing of electrical power installations;
d) operation of electrical power installations; and
e) maintenance of electrical power installations.
The provision of O&M services for geothermal activities is separately licensed under MoEMR Regulation No.5/2010.
2.1. Regulatory History of Electricity
History of Reforms
Early electricity arrangements in Indonesia were probably carried out pursuant to the 1890 Dutch Ordinance entitled the “Installation and Utilisation of the Conductors for Electrical Lighting and Transferring Power via Electricity in Indonesia”.
This ordinance was annulled in 1985 with the introduction of Electricity Law No.15/1985 (the “1985 Electricity Law”). The 1985 Electricity Law essentially commenced the modern era of electricity regulation in Indonesia.
The 1985 Electricity Law provided for a centralized system with a state-owned electricity company, being PLN, holding exclusive powers over the transmission, distribution and sale of electricity. Private companies were however allowed to generate electricity.
In 2002, the Government enacted Electricity Law No.20/2002 (the “2002 Electricity Law”) which was aimed at liberalizing the electricity sector by allowing private investors to produce and sell power directly to customers in those areas designated as “competitive” areas.
However, in December 2004, Indonesia’s Constitutional Court annulled the 2002 Electricity Law and re-enacted the 1985 Electricity Law. This was on the basis that the 2002 Electricity Law contravened Article 33 of the Indonesian Constitution. According to the Constitutional Court, electricity is a strategic commodity and its generation and distribution should remain under the exclusive control of the Government.
The 1985 Electricity Law was implemented through Government Regulation (“GR”) No.10/1989 on the “provision and utilization of electricity” as amended by GR No.3/2005 and GR No.26/2006. Based on these regulations, IPPs were permitted to develop and supply power to “Electric Power Business Licence” holders (“PKUK” and “PIUKs”) which was essentially limited to PLN. This was also with the approval of the MoEMR, Governors and heads of the regions/districts. Electricity development by IPPs was also required to be in-line with the prevailing RUPTL and RUKN. Other important legislation includes:
a) Perpres No.67/2005 (since amended by Perpres No.13/2010) and MoF Regulation No.38/2006 which set rules and procedures for “public/ private participation” arrangements;
b) Perpres No.42/2005 which outlined the inter-ministerial Committee for the Acceleration Program (KKPPI) responsible for coordinating policy related to the private provision of infrastructure; MoEMR Reg No.44/2006 which allowed direct tender for the first
c) fast track programs (of coal-fired plants); Perpres No.71/2006 which launched the first fast track program; Perpres No.4/2010 which launched the second fast track program; and
d) MoEMR Reg No. 1/2006 (and its revisions via MoEMR Reg.No. 4/2007) on “electric power purchasing or rental transmission lines” which covered the appointment of IPPs.
2.2. Differences between the 2009 and 1985 Laws
As indicated, the 2009 Electricity Law replaced the 1985 Electricity Law (with effect from 23 September 2009). However, unlike the (intervening) 2002 Electricity Law, the 2009 Electricity Law does not eliminate the main role of PLN in the electricity supply business (as PLN is given “priority” rights to conduct this business throughout Indonesia). The 2009 Electricity Law also provides a greater role to the regional authorities in terms of licensing and in determining electricity tariffs.
For instance, under the 1985 Electricity Law, the electricity supply business in Indonesia was conducted by PLN as the holder of the Electricity Business Power licence (or “PKUK”). Under the 2009 Electricity Law, electricity supply is still controlled by the State, but is conducted by the central and regional Governments through PLN and regionally owned entities.
To highlight the State’s control in the sector, the 2009 Electricity Law also provides a first right of refusal to PLN to conduct an electricity supply business in an area before the Central or Regional Government can offer the supply opportunity to regionally owned entities, private entities or cooperatives.
The 2009 Electricity Law also offers an improvement in the regulatory framework by providing a greater role for regional Governments and other entities to participate in this business. However, many of the finer points of the 2009 Electricity Law are to be stipulated in the 13 implementing regulations which, at the time of writing, were yet to issue (initially due within 1 year the effective date i.e. 23 September 2010).
3. Other Relevant Laws
3.1. The Geothermal Law
Geothermal energy utilization is conducted under a regime regulated by the following :
a) Presidential Decree No.76/2000;
b) Geothermal Law No.27/2003 (the “2003 Geothermal Law”);
c) Government Regulation No.59/2007;
d) MoEMR Regulation No.11/2009 (along with the 2009 Electricity Law for power generation activities); and
e) MoEMR Regulation No.32/2009 which sets purchasing price arrangements for PLN.
The 2003 Geothermal Law only covers geothermal activities (i.e. the production of steam) while power generation actually falls under the 2009 Electricity Law. In other words, the new arrangements differentiate between geothermal activities and the actual power generation. This means there are two different regulatory and licensing requirements. An integrated Geothermal business therefore now requires an “IUP”(geothermal business licence) and an IUPTL (electricity supply business licence). Notwithstanding the requirement for two licences, the geothermal and power operations can be carried out through a single Indonesian company.
This regime takes over from the (integrated) geothermal and power arrangements covered under the former Joint Operation Contract arrangements.
3.2. The Investment Law
Investment Law No.25/2007 (the “2007 Investment Law”) is aimed at providing a one-stop investment framework for investors. This includes key investor guarantees such as the right to freely repatriate foreign currency, and key incentives such as exemptions from Import Duties and VAT otherwise due on the import of capital goods, machines or equipment for production needs.
Obligations for power plant investors under the 2007 Investment Law include:
a) prioritizing the use of Indonesian manpower;
b) ensuring a safe and healthy working environment;
c) implementing a corporate social responsibility program; and
d) certain environmental conservation obligations.
Power plants must also fulfill a “local component level’ which includes local services and goods under MoEMR Regulation No. 48/2010.
The Capital Investment Coordination Board (“BKPM”) is given the power to coordinate implementation of investment policy including that pursuant to the 2007 Investment Law. Foreign investors wishing to participate in the electricity sector must first obtain a foreign investment licence from BKPM pursuant to the 2007 Investment Law. To do this an Indonesian incorporated entity must be established and licenced as a PT PMA company (under the Investment Law No. 25/2007 and Company Law No.40/2007 - see below). A PT PMA can be licenced for both the geothermal and electricity sectors. Once the PT PMA company is established, the company must apply through the MoEMR for an IUPTL licence and other licences such as the permanent business license and principal license for investment facility through BKPM according to the prevailing regulations.
The Negative List
The “negative list”, as set out in Perpres Nos.77/2007, 11/2007, and 36/2010 prescribe a set of business activities which are closed for investment or which have limitations on foreign participation.
The negative list generally limits foreign ownership to 95% for investments in the production, transmission and distribution of electricity (including for O&M of electrical power/geothermal installations). In recent changes, Presidential Regulation No.36/2010 extended foreign ownership as follows:
a) small scale power plants (1-10MW) are now open to partnerships with small-medium businesses and cooperatives (“UMKK”); and
b) geothermal support services such as O&M services may have a maximum foreign ownership of 90% and for drilling services a maximum of 95%.
As a result, foreign investors are generally limited to a 95% equity interest in companies producing electricity (conventional or geothermal based) and to 90% of an entity performing operations and maintenance service for geothermal energy.
3.3. Environment Issues
In October 2009, the Indonesian Parliament passed Environment Law No.32/2009 (“the 2009 Environment Law”). The 2009 Environment Law requires investors to comply with specific environmental practices and secure environmental permits before they begin operations. An environmental impact planning document (“AMDAL”) is required for projects greater than 10MW capacity and an environmental management effort document (“UKL” or “UPL”) is required for those less than 10MW.
These documents are a prerequisite to obtaining a business licence. Investors are also exposed to special environmental taxes. Sanctions for non-compliance can include fines, revocation of operating permits and/or imprisonment. The 2007 Company Law also imposes environmental obligations on companies undertaking business activities in the natural resources sector. The cost of these obligations is to be borne by the company. As this publication went to print, a Government Regulation providing details of these environmental responsibilities had not been issued. Whilst the obligations would seem to apply to geothermal and hydropower producers, they may ironically exclude IPPs using non renewable feed stocks.
3.4. The 1999 Forestry Law and 2007 Spatial Zoning Law
Forestry Law No.41/1999 (the “1999 Forestry Law” including the 1/2004 and 19/2004 amendments) operates to prevent specified activities from being carried out in protected forest areas except where a Government permit is obtained. A 1 February 2010 Presidential Decree allowed specified projects, including for power generation, to take place in protected forests where they are deemed to be “strategically important”.
Under Government Regulation No.24 of 2010, the utilization of Forestry Areas for non-forestry activities is permitted in both “Production forest areas” and “Protected forest areas” subject to obtaining a “borrow-and-use” permit (otherwise known as the Forestry Lend Use Permit “IPKH”) from the Ministry of Forestry. The borrow-and-use permit holder will be required to pay various non-tax State Revenues pursuant to these activities and will need to undertake reforestation activities upon ceasing its use of the land. The issuance and validity of the “borrow-and-use” permit depends entirely on the spatial zoning of the relevant forest area.
Another permit is required for the use of space (izin permanfaatan ruang) which must be in accordance with the spatial zoning plan. Power plants are only allowed to be built in the National Energy Network and the National Strategic Area. Permits for the use of space are valid for 20 years but are reviewed every five years. Use of a forestry area will often also require the making of land compensation transfers or compensation payments to local land owners.
The Director General of Forest Protection and Nature Conservation (within he Ministry of Forestry) has announced that geothermal businesses no,longer need to obtain land permits in order to operate in Protected Forest Areas. Instead they must enter into a profit sharing arrangement with specified conservation funds to be paid to the Ministry of Forestry.
Moratorium on Forest and Peatland Clearing
Draft Presidential Decrees are expected to implement a two-year moratorium on permits for forest and peatland clearing from early 2011. One of the draft Presidential Decrees notes that projects of national significance “such as those for geothermal, oil and natural gas” will be exempt from the moratorium.
3.5. Carbon Tax
In 2009 the Ministry of Finance, Fiscal Policy Office released a green paper which considered the potential introduction of a carbon tax at IDR80,000 per tonne of Co2 emissions where traditional fossil fuels comprised the feed stock of an electricity project. The option of an emissions trading regime was also considered and has also not been ruled out. Long term investors in the electricity sector should keep abreast of developments in this area.
3.6 Land Acquisition
The current regulations on land acquisition (principally Perpres No.36/2005 as amended by Perpres No.65/2006 and No.3/2007) aim to accelerate land acquisition for public purposes. Limitations however continue to exist including in applying for land expropriation (which requires the involvement of the President) and negotiating compensation which requires the involvement of an independent land acquisition committee, a land appraiser, and representatives of the Government. Government Regulation No.11/2010 regarding the Enforcement and Empowerment of Abandoned Land stipulates that State Land which originated from abandoned land will be allocated to society through agrarian reform, strategic state programs and national reserves.
The National Land Agency has also drafted a bill on Land Acquisition (to be finalised late 2010), which will specify time limits on the land acquisition process and support a more legally certain process.
4. Stakeholders
PT Perusahaan Listrik Negara (Persero) (“PLN”)
PLN is responsible for the majority of Indonesia’s electricity generation and has exclusive powers in relation to the transmission, distribution and supply of electricity to the public. PLN is regulated and supervised by the Ministry of Energy and Mineral Resources (“MoEMR”), the Ministry of State Owned Enterprises (“MoSOE”), and the Ministry of Finance (“MoF”).
In 2004, PLN was transformed from a public utility into a state-owned limited liability company (or Persero).
The 2009 Electricity Law removed PLN’s role as the “PKUK” or Authorised Holder of Electricity Business Licence. PLN is now simply the holder of an Electricity Business Supply Licence for Public Use (“IUTPL”) (Article 56 of the 2009 Electric Law) The 2009 Electricity Law also provides a first right of refusal to PLN for conducting electricity supply in an area before the Central or Regional Governments can offer the opportunity to regional-owned entities, private entities or cooperatives. PLN’s revenue hinges on a tariff structure with tariffs required to be determined by the central or regional Governments and ultimately approved by the Parliament. Under the 2009 Electricity Law, the tariff need no longer be uniform throughout Indonesia and so may differ according to the business area.
The 2009 Electricity Law also requires that the interests of relevant electricity business owners be considered in the tariff pricing and not just the interests of the public. Since tariff increases require approval from Parliament, PLN’s financial position is directly subject to the political process. Should the regulated price for electricity fall below the cost of production (which has generally been the case), the Ministry of Finance is required to compensate PLN via a subsidy. The pro-household tariff is punitive for PLN but for the first time, PLN started booking a profit in 2009 thanks largely to the Government’s decision to set for the first time a 5% margin – to be continued at a minimum 5% level in 2010.
The Ministry of Energy and Mineral Resources (MoEMR)
The MoEMR is charged with creating and implementing Indonesia’s energy policy, issuing certain business licences for facilities and licences (Goverment Regulation No. 5/2010 delegated this authority to BKPM for facility & operational permits for captive power) in the electricity sector and regulating the electricity sector through the Directorate General of Electricity and Energy Utilisation and the (newly created) Directorate General of Renewable Energy and Energy Conservation. The MoEMR is also responsible for the National Electricity Plan (“RUKN”), for preparing laws and regulations related to electricity, and for the national tariff and subsidy policies. An organisation chart and summary of the roles and responsibilities of the relevant Directorates within the MoEMR is provided at Appendix A.
The House of Representatives (DPR)
Commission VII of the House of Representatives (“DPR”) is charged with the regulatory development of energy and mineral related matters. This includes electricity activities. Commission VII is responsible for the drafting of related legislation as well as the implementation and control of related Government policy. A chart outlining Committee VII’s function and role within Government is provided at Appendix B.
The National Development Planning Board (BAPPENAS)
Bappenas is responsible for carrying out governmental duties in the field of national development planning in accordance with prevailing laws and regulations. Within Bappenas is the Project Development Facility that funds designated PPP transactions. Bappenas also includes the Private Sector Cooperation Centre (“PKPS”) which facilitates cooperation on infrastructure projects between the Government and private investors and which houses the PPP Central Unit (“P3CU”).
P3CU has a number of functions including:
a) providing support to KKPPI (see below) for policy formulation and
assessment of requests for contingent Government support;
b) the preparation of the Government’s PPP “blue book” which lists project
opportunities for private investors;
c) support to Government Contracting Agencies for the preparation of
projects; and
d) the development of capacity within government agencies for PPP
implementation.
Bappenas has organised for the Central Java Coal-Fired Power Plant (“CJCPP”) to be the model for PPP projects in the power sector. An organisational chart of Bappenas is provided at Appendix C.
The Investment Coordinating Board (“BKPM”)
BKPM acts as a “one-stop” integrated service for the licensing of all electricity projects. Its role includes to centralize the processing of projects that require private participation (at present some processing is done by the National Development Planning Board (Bappenas)). Indonesia’s PPP programs are initially discussed at Bappenas and include related ministries and institutions before being forwarded to the “back office” role of BKPM.
The Policy Committee for the Acceleration of Infrastructure Provision (KKPPI)
KKPPI is an inter-ministerial committee chaired by the Coordinating Minister of Economic Affairs. KKPPI is responsible for policy coordination related to the private provision of infrastructure. KKPPI is required to endorse requests for contingent Government support (i.e. guarantees) as a basis for Risk Management Unit (“RMU”) consideration and approval.
The Ministry of Finance
The Ministry of Finance approves tax incentives that may be offered by the Government for an electricity project as well as any Government guarantees. The RMU within the MoF is responsible for reviewing requests. Any approved guarantees are administered by PT PII (which operates the IIGF – see below). The Ministry of Finance also determines the electricity subsidy to PLN and loan arrangements for PLN.
The Ministry of State-Owned Enterprises (“MoSOE”)
The MoSOE supervises PLN’s management, sets its corporate performance targets and approves its annual budget.
The National Energy Council (DEN)
DEN was formed in June 2009 to formulate a National Energy Policy, determine the National Energy General Plan, and plan steps to provide for any future energy crisis. The DEN is chaired by the President and Vice-President with the Energy Minister as Executive Chairman. DEN has 15 members which include the Minister and Government officials responsible for the transportation, distribution and utilization of energy, and other stakeholders.
PT Penjaminan Infrastruktur Indonesia (PT PII) or Guarantee Fund
PT PII was established on 30 December 2009 to provide guarantees for infrastructure projects. It also acts as a strategic advisor to the Government and a transaction manager/lead arranger for infrastructure projects. PT PII is wholly owned by the Government with IDR 1 trillion in initial capital and plans to receive an additional IDR 1 trillion minimum per year until 2014 when it will reach IDR 6.5 trillion. For further details please see Section 3.3 below.
PT Sarana Multi Infrastruktur (PT SMI) and PT Indonesia Infrastruktur Financing (PT IIF) or Infrastructure Fund
PT SMI is a special fund set up to support infrastructure financing in Indonesia. PT SMI was established on 26 February, 2009 with IDR 1 trillion in start up capital. Its subsidiary, PT IIF is a commercially oriented non-bank financial intermediary with an infrastructure project finance focus. For further details please see Section 3.3 below.
The Indonesian Electric Power Society (MKI)
The Indonesian Electric Power Society (Masyarakat Ketenagalistrikan Indonesia or “MKI”) was established on 3 September 1998. It currently has about 200 members from various stakeholders within the electricity industry. The main objective of MKI is to provide a forum to discuss matters relating to the industry and put forward member’s views to the Government on topics such as technology, manpower, the environment and business regulation.
The Independent Power Producers Association (APLSI)
The Independent Power Producers Association (Asosiasi Produsen Listrik Swasta Indonesia or APLSI) serves as a forum for Indonesian IPPs to dialogue with the Government.
The Indonesian Geothermal Association (“INAGA”)
The Indonesian Geothermal Association is an organization for professionals involved in geothermal businesses in Indonesia. The organization currently has about 400 members from various disciplines.
III. History of IPPs in Indonesia and the PPP framework
Unlike the oil and gas and mining sectors, electricity investment has generally not (with the exception of pre 2003 geothermal electricity) operated pursuant to a stand-alone investment framework. Instead, IPP investment has generally been categorized according to the nature of the relevant offtake arrangements most particularly the power purchase agreements (“PPAs”).
IPPs have existed in Indonesia pursuant to PPAs since the early 1990s and are classified into three broad generations (as outlined below). IPPs currently account for approx 14% of Indonesia’s total generating capacity. Most IPPs, particularly in recent times, have also operated pursuant to a more general set of Public Private Partnership (“PPP”) arrangements. A PPP scheme is, in a general sense, a collaboration between the private and public sectors which utilizes the efficiencies from the private sector to reap better value for the public. The primary tool to do this is by allocating “risk to the party with the best risk controlling capacity (Article 16 on Risk Management of Presreg 67/2005)
The key regulation governing Indonesian PPPs is Perpres No.67/2005 as amended by Perpres No.13/2010. These stipulate that PPPs can be formed for “electricity infrastructure consisting of electricity generation, transmission or distribution (Article 4 Presreg 67/2005). Most IPPs have also involved a Build-Own-Operate (“BOO”) or Build-Operate-Transfer (“BOT”) arrangement.
IPP generations
First Generation (1992 until the Asian Financial Crisis)
Private participation in Indonesia’s electricity sector probably started in1992. Relatively high forecast returns (IRRs often between 20% - 25%) together with the provision of a Government guarantee (via a support letter to cover PLN’s obligations under the PPA) meant that there was initially a high investor uptake during IPP tendering.However, when the Asian financial crisis struck in late 1997, PLN became financially troubled particularly as a result of the fall in the value of the Rupiah. PLN had to put many of its IPP projects on hold. Ultimately six projects were terminated, six were acquired by the Government, one project ended up in a protected legal dispute, and 14 projects continued under renegotiated terms. When renegotiations were completed in 2003 most continuing IPP investors agreed to new PPAs which generally included lower tariffs than were initially contemplated.
Nevertheless, this first generation saw generating capacity lifted to 4,262 MW. Landmark projects included the Salak Geothermal Power Plant, the Cikarang Combined Cycle Power Plant and the coal fired Paiton Power Plant (Paiton I). Paiton I was the largest IPP project in Indonesia with installed capacity of 2 x 615MW. A second expansion occurred under the same First generation framework. During 1999 – 2004 there were no new power projects tendered.
Second Generation(post Asian Financial Crisis to 2008)
The second generation of IPPs commenced during the period 2005 – 2008.This generation was however not viewed as particularly attractive to investors as:
a) no Government guarantees were provided;
b) the risk allocation was not viewed as favourable to investors; and
c) the forecast returns were lower (with forecast IRRs often between 12% -14%).
Of 126 project proposals only 18 were awarded. These IPPs included those announced as part of Indonesia’s Infrastructure Summit in 2005 and 2006 under the PPP scheme as stipulated under Perpres No.67/2005. The IPPs were also appointed through competitive tender (except as permitted by GR No.3/2005 and GR No.26/2006 for capacity expansion to existing projects or renewable energy sourced projects). These projects (listed in Appendix D “IPP Tender Program”) mostly operated under a Build-Own-Operate (“BOO”) scheme. All projects have since been signed, financed, and had construction begun. These projects should bring on-line 4,480 MW of PLTUs (coal powered), 560 MW of PLTGs (gas powered) and 440 MW of PLTPs (geothermal powered).
Third Generation (2010 onwards)
The third generation of IPPs will operate under the recent revisions to thePPP framework developed by the Policy Committee for the Acceleration of Infrastructure Provision (KKPPI). Third generation IPPs will differ from second generation IPPs in that the PPP risk allocation mechanism will be clearer and more supportive of the investor and more government support will be provided. Perpres No.13/2010 (issued January 2010) which amends Perpres No.67/2005 on PPP Infrastructure Projects, attempts to streamline the PPP process by offering:
a) revised bidding arrangements including extensive bidder/tender consultations;
b) better-defined risk allocations to help with the bankability of projects;
c) Government support and guarantees (such as in relation to land acquisition); and
d) financial facilities (such as PT PII (Article 17C of Presreg 13/2010) and the Infrastructure Financing Fund
These projections indicate a surplus in generating capacity of up to 27TWh by 2014. However, delays in capacity development (including with Independent Power Producer (“IPP”) projects-discussed further below) have meant that Indonesia is actually struggling to provide electricity for its current needs. This under supply, compounded by Indonesia’s geographic complexity, means that Indonesia has, at about 66% in 2009, one of the lowest electrification ratios in the region. There are around 20 million households, or 80 million people, who currently have no access to public electricity.
Indonesia is also one of the few countries regionally that effectively demarcates electricity pricing according to the user. In this regard, commercial and industrial electricity users pay an average 11-12US cents per KwH while retail customers pay approximately 6US cents per kwh (achieved largely through a Government subsidy currently running at US$5.5 billion p.a). The supply of electricity is therefore emerging as a potential constraint on Indonesia’s long-term growth and development ambitions. With growth in power demand of 7% - 9% p.a. the situation is also likely to only become more critical.
The historical reasons for this relative underdevelopment include :
a) The low take up in the use of primary energy sources especially for natural gas, geothermal and renewables. This low take up has been primarily due to the lack of development of distribution and transmission infrastructure (e.g. gas pipelines, coal transportation routes, distribution networks, etc.) which are necessary to bring the feed stock together with the generating assets, and onwards to the consumer.
This is especially the case for the areas outside of the islands of Sumatra, Java and Bali; the historical difficulties in obtaining land for electricity assets including
b) The necessary land use rights and achieving the associated land clearing;
c) the lack of a robust regulatory framework especially to allow access to project - based financing in the international market place. On this point, a particular concern has been the absence of sovereign or similar guarantees over the key revenue streams; and the lack of market pressures yielding profitable prices due to subsidies
d) That cause power to be sold at prices less than the fuel cost of power generation
2. Development chronology
The modern era for the electricity sector in Indonesia commenced with the 1985 Electricity Law. Under this law, limited private participation in electricity generation was permitted. Essentially, the model involved allowing for private investment in power generating assets as Independent Power Producers (“IPPs”). These IPPs were licensed to sell their electricity solely to the state-owned electricity company PLN pursuant to Power Purchase Agreements (“PPAs”). PLN, as the sole-purchaser of the electricity output, also therefore became the key driver of the commerciality of the entire value chain.
The first major PPA under this era was signed with Paiton Energy (to develop the coal fired Paiton power station) in 1991. Several other significant IPPs followed including a number in relation to geothermal power generation (under a slightly different investment framework).Many other IPP projects made it through various stages of licensing and commercial approval. This IPP program however was effectively frozen in the late 1990s when the Asian financial crisis hit. Indonesia was badly effected with GDP contracting by up to 13.5% and the Rupiah falling from circa 2,500 to the USD, to as low as 18,000.
PLN in turn suffered financially especially from the devaluation of the Rupiah. A large portion of PLN’s costs were denominated in US dollars including its PPA offtake prices. However, PLN’s revenue base, being largely from sales to the Indonesian consumer, was Rupiah denominated. With the IPP sector set up for a USD denominated value chain the Investment economics of the entire sector deteriorated markedly with the circa 75% fall in the value of the ultimate funding currency. Many of the IPPs that were yet to produce at that time were Simply abandoned. Others could only continue with their PPAs renegotiated down to a much lower offtake price. Overall a significant degree of investor confidence in the sector was lost.
PLN was also left in the position that it could not independently fund investment for the country’s much-needed additional capacity.Two years on from this, the Government introduced reforms largely through the enactment of the 2002 Electricity Law. Under this law, electricity business areas were divided into competitive and non-competitive areas; the former allowing for private participation in the generation and retailing areas of the electricity value chain
The 2002 Electricity Law also allowed for electricity tariffs to be determined by the market and for independent regulation through the establishment of the Electricity Market Supervisory Agency
However in 2004, the Constitutional Court ruled the 2002 Electricity Law to be unconstitutional largely in light of electricity’s status as a social necessity and the constitutional requirement for its delivery to remain exclusively with a State owned agency. As a result the Court effectively re-installed the previous 1985 Law and from 1999 – 2004 there was very little investment of any sort in new power projects.
In 2005, the Government began new efforts to attract private Investment back into the sector. New “public private partnership” legislation was enacted through Presidential Regulation (“Perpres”) No. 67/2005.
A list of IPP projects open for private tender was also made available.
In 2006, the Government announced stage 1 of a “fast track” program followed by a 2nd
program at the start of 2010. Each program aimed to accelerate the development of 10 GW of generating capacity with program 2 geared towards IPPs and renewable energy. Further details of the first and second fast track programs are provided at Appendix D.
In 2009 the Government passed a new Electricity Law to strengthen the regulatory framework and provide a greater role for regional Governments in terms of licensing and in determining electricity tariffs. The 2009 Electricity Law also promoted the role of private investors by allowing private participation in the electricity supply business in conjunction with support provided from within a PPP framework. Thirteen implementing regulations for the 2009 Electricity Law are due to issue by the end of 2010.
Perpres No.13/2010 makes provision for Government support for public private participation by establishing PT Sarana Multi Infrastruktur (“PT. SMI”) and its subsidiary PT Infrastruktur Financing (“PT IIF”) to act as an Infrastructure Fund to support infrastructure financing, and establishing PT Penjaminan Infrastruktur Indonesia (PT PII) to provide guarantees for infrastructure projects including electricity generation.
3. Government support for infrastructure
Separate to the initiatives around electricity the Government has recently sought to encourage the development of infrastructure more generally.President Yudhoyono for instance has made infrastructure Development a top Presidential priority by including it as a key element in Indonesia’s medium term (2010 - 2014) development plan (or “RJPM”) as prepared by the National Development Planning Board (or Bappenas).
The Government’s working plan (“RKP”) for 2010, as part of the RJPM, outlines 45 key infrastructure programs (source Bappenas) including :
a) the development of facilities needed for energy processing (e.g. oil refineries, power generation), energy transmission and distribution (e.g. pipelines for gas and oil fuels) and energy storage (e.g. depots);
b) the utilization of alternative energy including renewables (e.geothermal, solar, water, wind and biomass); and
c) the completion of implementing regulations to Law No. 30 of 2007 on energy.
The Government has also sought to clarify “public private partnership” regulations with the passing of Perpres No.13/2010.
4. Attractive opportunities for IPPs
Overall Indonesia’s economic fundamentals and its emerging regulatory framework are coming together to allow for renewed optimism within the electricity investment sector. The targeted GDP growth rates of 6.2% p.a.and an electrification ratio of 91% by 2019 (RUPTL 2010 – 2019) should see electricity demand growing by 7% to 9% p.a. (and even 9.2% p.a. through to 2019) and take installed capacity to 81.6GW by 2019. Accounting for retired capacity, this should equate to 54GW of new generating capacity or about 5GW per year (RUPTL 2010-2019)
Massive capital investment will be required if these targets are to be met with the funding needs for the period 2010 to 2019 estimated at around US$66billion or US$6.6billion p.a. For the next five years the Investment required is estimated at US$31.4 billion for 22GW of generating capacity, US$7.3 billion for some 17,000 km of transmission networks and US$5.3 billion for distribution, totaling around US$44 billion.
IPPs and other private investment in associated areas will be needed to help meet these capital demands. Whilst IPPs currently account for only 14% of generating capacity, the role of private investment in new capacity will surely grow. The second fast track program alone will require an estimated US$16.4 billion in investment with approximately US$11.1 billion of this earmarked for the private sector. Overall, investors are potentially at the dawn of the most exciting electricity investment opportunities for at least a generation.
II. Legal and regulatory framework
1. Introduction
The electricity sector is regulated by the Ministry of Energy and Mineral Resources (“MoEMR”) and its sub – agencies. These include the Directorate General of Electricity and Energy Utilization and the (newly created) Directorate General of Renewable Energy and Energy Conservation. The current regulatory framework is provided by Electricity Law No.30/2009 (the “2009 Electricity Law”).
The MoEMR is responsible for developing the electricity master plan (“RUKN”) which sets out, amongst other things, a ten year estimate of power demand and supply, the investment and funding policy, and the approach to the utilization of new and renewable energy resources. The RUKN also provides guidance to the central and regional Governments, and to potential investors, on energy contribution levels for renewable sources (to increase from 5% to 17% of Indonesia’s total energy consumption by 2025). The RUKN is reviewed annually.
The Electrification Development Program 2010 – 2019 (“RUPTL”) is based on the RUKN and constitutes an official ten year power development plan. The RUPTL is prepared by PLN, approved by the MoEMR, and mandated by the current law and regulations. The RUPTL contains demand forecasts, future expansion plans, kWh production, fuel requirements and indicates which projects will be developed by PLN and IPP investors. The RUPTL is also reviewed annually. The 2009 Electricity Law provides that regional Governments should also prepare a Regional General Plan of Electricity (“RUKD”) based on the RUKN.
2. The 2009 Electricity Law
The 2009 Electricity Law divides the electricity business into two broad categories as follows:
a) those activities involved in supplying electrical power such as:
i) electrical power generation (bothfor self-use and for sale to an off-grid captive consumer);
ii) electrical power transmission;
iii) electrical power distribution; and
iv) the sale of electrical power; and
b) those activities involved in electrical power support such as:
i) consulting activities;
ii) the construction and installation of electrical power equipment;
iii) the operations and maintenance of electrical power equipment; and
iv) the development of electrical supporting equipment technology.
Generation
The power generation sector is dominated by PLN which controls around 86% (or 26.609GW) of generation assets in Indonesia including through subsidiaries such as PT Indonesia Power, PT Pembangkit Jawa Bali, and PT PLN Batam.
Private sector partnership is allowed through Independent Power Producer (“IPP”) arrangements (which continued to be sanctioned by the 2009 Electricity Law). IPP appointment is usually through competitive bidding except in certain circumstances (e.g. for renewable energy, mine-mouth, crisis, marginal gas, or expansion projects) in which case appointment can be direct. The structure involves the IPP signing an Energy Sales Agreements or Power Purchase Agreement with PLN to produce electric power and supply PLN electricity at an agreed price for an agreed period.
Of Indonesia’s current installed capacity of 30.941GW, IPPs account for 4.269GW, or approx.14%. Electricity generation licences or “IUPTLs” can be offered to private entities (with up to 95% foreign shareholding) with PLN acting as the single buyer
Transmission, Distribution and Retailing
The 2009 Electricity Law provides PLN with priority rights to conduct these businesses throughout Indonesia. PLN, as the sole owner of transmission and distribution assets, also remains the only business entity in charge of transmitting and distributing electric power. Further, whilst the 2009 Electricity Law allows private participation in the supply of electricity for public use (which includes transmission and distribution), current private sector participation is still limited to the power generation sector.
Operations and Maintenance (“O & M”)
O & M services for conventional electrical power can take the form of the following activities:
a) consulting services for the installation of electricity power supply;
b) construction and placement of electrical power supply installations;
c) inspection and testing of electrical power installations;
d) operation of electrical power installations; and
e) maintenance of electrical power installations.
The provision of O&M services for geothermal activities is separately licensed under MoEMR Regulation No.5/2010.
2.1. Regulatory History of Electricity
History of Reforms
Early electricity arrangements in Indonesia were probably carried out pursuant to the 1890 Dutch Ordinance entitled the “Installation and Utilisation of the Conductors for Electrical Lighting and Transferring Power via Electricity in Indonesia”.
This ordinance was annulled in 1985 with the introduction of Electricity Law No.15/1985 (the “1985 Electricity Law”). The 1985 Electricity Law essentially commenced the modern era of electricity regulation in Indonesia.
The 1985 Electricity Law provided for a centralized system with a state-owned electricity company, being PLN, holding exclusive powers over the transmission, distribution and sale of electricity. Private companies were however allowed to generate electricity.
In 2002, the Government enacted Electricity Law No.20/2002 (the “2002 Electricity Law”) which was aimed at liberalizing the electricity sector by allowing private investors to produce and sell power directly to customers in those areas designated as “competitive” areas.
However, in December 2004, Indonesia’s Constitutional Court annulled the 2002 Electricity Law and re-enacted the 1985 Electricity Law. This was on the basis that the 2002 Electricity Law contravened Article 33 of the Indonesian Constitution. According to the Constitutional Court, electricity is a strategic commodity and its generation and distribution should remain under the exclusive control of the Government.
The 1985 Electricity Law was implemented through Government Regulation (“GR”) No.10/1989 on the “provision and utilization of electricity” as amended by GR No.3/2005 and GR No.26/2006. Based on these regulations, IPPs were permitted to develop and supply power to “Electric Power Business Licence” holders (“PKUK” and “PIUKs”) which was essentially limited to PLN. This was also with the approval of the MoEMR, Governors and heads of the regions/districts. Electricity development by IPPs was also required to be in-line with the prevailing RUPTL and RUKN. Other important legislation includes:
a) Perpres No.67/2005 (since amended by Perpres No.13/2010) and MoF Regulation No.38/2006 which set rules and procedures for “public/ private participation” arrangements;
b) Perpres No.42/2005 which outlined the inter-ministerial Committee for the Acceleration Program (KKPPI) responsible for coordinating policy related to the private provision of infrastructure; MoEMR Reg No.44/2006 which allowed direct tender for the first
c) fast track programs (of coal-fired plants); Perpres No.71/2006 which launched the first fast track program; Perpres No.4/2010 which launched the second fast track program; and
d) MoEMR Reg No. 1/2006 (and its revisions via MoEMR Reg.No. 4/2007) on “electric power purchasing or rental transmission lines” which covered the appointment of IPPs.
2.2. Differences between the 2009 and 1985 Laws
As indicated, the 2009 Electricity Law replaced the 1985 Electricity Law (with effect from 23 September 2009). However, unlike the (intervening) 2002 Electricity Law, the 2009 Electricity Law does not eliminate the main role of PLN in the electricity supply business (as PLN is given “priority” rights to conduct this business throughout Indonesia). The 2009 Electricity Law also provides a greater role to the regional authorities in terms of licensing and in determining electricity tariffs.
For instance, under the 1985 Electricity Law, the electricity supply business in Indonesia was conducted by PLN as the holder of the Electricity Business Power licence (or “PKUK”). Under the 2009 Electricity Law, electricity supply is still controlled by the State, but is conducted by the central and regional Governments through PLN and regionally owned entities.
To highlight the State’s control in the sector, the 2009 Electricity Law also provides a first right of refusal to PLN to conduct an electricity supply business in an area before the Central or Regional Government can offer the supply opportunity to regionally owned entities, private entities or cooperatives.
The 2009 Electricity Law also offers an improvement in the regulatory framework by providing a greater role for regional Governments and other entities to participate in this business. However, many of the finer points of the 2009 Electricity Law are to be stipulated in the 13 implementing regulations which, at the time of writing, were yet to issue (initially due within 1 year the effective date i.e. 23 September 2010).
3. Other Relevant Laws
3.1. The Geothermal Law
Geothermal energy utilization is conducted under a regime regulated by the following :
a) Presidential Decree No.76/2000;
b) Geothermal Law No.27/2003 (the “2003 Geothermal Law”);
c) Government Regulation No.59/2007;
d) MoEMR Regulation No.11/2009 (along with the 2009 Electricity Law for power generation activities); and
e) MoEMR Regulation No.32/2009 which sets purchasing price arrangements for PLN.
The 2003 Geothermal Law only covers geothermal activities (i.e. the production of steam) while power generation actually falls under the 2009 Electricity Law. In other words, the new arrangements differentiate between geothermal activities and the actual power generation. This means there are two different regulatory and licensing requirements. An integrated Geothermal business therefore now requires an “IUP”(geothermal business licence) and an IUPTL (electricity supply business licence). Notwithstanding the requirement for two licences, the geothermal and power operations can be carried out through a single Indonesian company.
This regime takes over from the (integrated) geothermal and power arrangements covered under the former Joint Operation Contract arrangements.
3.2. The Investment Law
Investment Law No.25/2007 (the “2007 Investment Law”) is aimed at providing a one-stop investment framework for investors. This includes key investor guarantees such as the right to freely repatriate foreign currency, and key incentives such as exemptions from Import Duties and VAT otherwise due on the import of capital goods, machines or equipment for production needs.
Obligations for power plant investors under the 2007 Investment Law include:
a) prioritizing the use of Indonesian manpower;
b) ensuring a safe and healthy working environment;
c) implementing a corporate social responsibility program; and
d) certain environmental conservation obligations.
Power plants must also fulfill a “local component level’ which includes local services and goods under MoEMR Regulation No. 48/2010.
The Capital Investment Coordination Board (“BKPM”) is given the power to coordinate implementation of investment policy including that pursuant to the 2007 Investment Law. Foreign investors wishing to participate in the electricity sector must first obtain a foreign investment licence from BKPM pursuant to the 2007 Investment Law. To do this an Indonesian incorporated entity must be established and licenced as a PT PMA company (under the Investment Law No. 25/2007 and Company Law No.40/2007 - see below). A PT PMA can be licenced for both the geothermal and electricity sectors. Once the PT PMA company is established, the company must apply through the MoEMR for an IUPTL licence and other licences such as the permanent business license and principal license for investment facility through BKPM according to the prevailing regulations.
The Negative List
The “negative list”, as set out in Perpres Nos.77/2007, 11/2007, and 36/2010 prescribe a set of business activities which are closed for investment or which have limitations on foreign participation.
The negative list generally limits foreign ownership to 95% for investments in the production, transmission and distribution of electricity (including for O&M of electrical power/geothermal installations). In recent changes, Presidential Regulation No.36/2010 extended foreign ownership as follows:
a) small scale power plants (1-10MW) are now open to partnerships with small-medium businesses and cooperatives (“UMKK”); and
b) geothermal support services such as O&M services may have a maximum foreign ownership of 90% and for drilling services a maximum of 95%.
As a result, foreign investors are generally limited to a 95% equity interest in companies producing electricity (conventional or geothermal based) and to 90% of an entity performing operations and maintenance service for geothermal energy.
3.3. Environment Issues
In October 2009, the Indonesian Parliament passed Environment Law No.32/2009 (“the 2009 Environment Law”). The 2009 Environment Law requires investors to comply with specific environmental practices and secure environmental permits before they begin operations. An environmental impact planning document (“AMDAL”) is required for projects greater than 10MW capacity and an environmental management effort document (“UKL” or “UPL”) is required for those less than 10MW.
These documents are a prerequisite to obtaining a business licence. Investors are also exposed to special environmental taxes. Sanctions for non-compliance can include fines, revocation of operating permits and/or imprisonment. The 2007 Company Law also imposes environmental obligations on companies undertaking business activities in the natural resources sector. The cost of these obligations is to be borne by the company. As this publication went to print, a Government Regulation providing details of these environmental responsibilities had not been issued. Whilst the obligations would seem to apply to geothermal and hydropower producers, they may ironically exclude IPPs using non renewable feed stocks.
3.4. The 1999 Forestry Law and 2007 Spatial Zoning Law
Forestry Law No.41/1999 (the “1999 Forestry Law” including the 1/2004 and 19/2004 amendments) operates to prevent specified activities from being carried out in protected forest areas except where a Government permit is obtained. A 1 February 2010 Presidential Decree allowed specified projects, including for power generation, to take place in protected forests where they are deemed to be “strategically important”.
Under Government Regulation No.24 of 2010, the utilization of Forestry Areas for non-forestry activities is permitted in both “Production forest areas” and “Protected forest areas” subject to obtaining a “borrow-and-use” permit (otherwise known as the Forestry Lend Use Permit “IPKH”) from the Ministry of Forestry. The borrow-and-use permit holder will be required to pay various non-tax State Revenues pursuant to these activities and will need to undertake reforestation activities upon ceasing its use of the land. The issuance and validity of the “borrow-and-use” permit depends entirely on the spatial zoning of the relevant forest area.
Another permit is required for the use of space (izin permanfaatan ruang) which must be in accordance with the spatial zoning plan. Power plants are only allowed to be built in the National Energy Network and the National Strategic Area. Permits for the use of space are valid for 20 years but are reviewed every five years. Use of a forestry area will often also require the making of land compensation transfers or compensation payments to local land owners.
The Director General of Forest Protection and Nature Conservation (within he Ministry of Forestry) has announced that geothermal businesses no,longer need to obtain land permits in order to operate in Protected Forest Areas. Instead they must enter into a profit sharing arrangement with specified conservation funds to be paid to the Ministry of Forestry.
Moratorium on Forest and Peatland Clearing
Draft Presidential Decrees are expected to implement a two-year moratorium on permits for forest and peatland clearing from early 2011. One of the draft Presidential Decrees notes that projects of national significance “such as those for geothermal, oil and natural gas” will be exempt from the moratorium.
3.5. Carbon Tax
In 2009 the Ministry of Finance, Fiscal Policy Office released a green paper which considered the potential introduction of a carbon tax at IDR80,000 per tonne of Co2 emissions where traditional fossil fuels comprised the feed stock of an electricity project. The option of an emissions trading regime was also considered and has also not been ruled out. Long term investors in the electricity sector should keep abreast of developments in this area.
3.6 Land Acquisition
The current regulations on land acquisition (principally Perpres No.36/2005 as amended by Perpres No.65/2006 and No.3/2007) aim to accelerate land acquisition for public purposes. Limitations however continue to exist including in applying for land expropriation (which requires the involvement of the President) and negotiating compensation which requires the involvement of an independent land acquisition committee, a land appraiser, and representatives of the Government. Government Regulation No.11/2010 regarding the Enforcement and Empowerment of Abandoned Land stipulates that State Land which originated from abandoned land will be allocated to society through agrarian reform, strategic state programs and national reserves.
The National Land Agency has also drafted a bill on Land Acquisition (to be finalised late 2010), which will specify time limits on the land acquisition process and support a more legally certain process.
4. Stakeholders
PT Perusahaan Listrik Negara (Persero) (“PLN”)
PLN is responsible for the majority of Indonesia’s electricity generation and has exclusive powers in relation to the transmission, distribution and supply of electricity to the public. PLN is regulated and supervised by the Ministry of Energy and Mineral Resources (“MoEMR”), the Ministry of State Owned Enterprises (“MoSOE”), and the Ministry of Finance (“MoF”).
In 2004, PLN was transformed from a public utility into a state-owned limited liability company (or Persero).
The 2009 Electricity Law removed PLN’s role as the “PKUK” or Authorised Holder of Electricity Business Licence. PLN is now simply the holder of an Electricity Business Supply Licence for Public Use (“IUTPL”) (Article 56 of the 2009 Electric Law) The 2009 Electricity Law also provides a first right of refusal to PLN for conducting electricity supply in an area before the Central or Regional Governments can offer the opportunity to regional-owned entities, private entities or cooperatives. PLN’s revenue hinges on a tariff structure with tariffs required to be determined by the central or regional Governments and ultimately approved by the Parliament. Under the 2009 Electricity Law, the tariff need no longer be uniform throughout Indonesia and so may differ according to the business area.
The 2009 Electricity Law also requires that the interests of relevant electricity business owners be considered in the tariff pricing and not just the interests of the public. Since tariff increases require approval from Parliament, PLN’s financial position is directly subject to the political process. Should the regulated price for electricity fall below the cost of production (which has generally been the case), the Ministry of Finance is required to compensate PLN via a subsidy. The pro-household tariff is punitive for PLN but for the first time, PLN started booking a profit in 2009 thanks largely to the Government’s decision to set for the first time a 5% margin – to be continued at a minimum 5% level in 2010.
The Ministry of Energy and Mineral Resources (MoEMR)
The MoEMR is charged with creating and implementing Indonesia’s energy policy, issuing certain business licences for facilities and licences (Goverment Regulation No. 5/2010 delegated this authority to BKPM for facility & operational permits for captive power) in the electricity sector and regulating the electricity sector through the Directorate General of Electricity and Energy Utilisation and the (newly created) Directorate General of Renewable Energy and Energy Conservation. The MoEMR is also responsible for the National Electricity Plan (“RUKN”), for preparing laws and regulations related to electricity, and for the national tariff and subsidy policies. An organisation chart and summary of the roles and responsibilities of the relevant Directorates within the MoEMR is provided at Appendix A.
The House of Representatives (DPR)
Commission VII of the House of Representatives (“DPR”) is charged with the regulatory development of energy and mineral related matters. This includes electricity activities. Commission VII is responsible for the drafting of related legislation as well as the implementation and control of related Government policy. A chart outlining Committee VII’s function and role within Government is provided at Appendix B.
The National Development Planning Board (BAPPENAS)
Bappenas is responsible for carrying out governmental duties in the field of national development planning in accordance with prevailing laws and regulations. Within Bappenas is the Project Development Facility that funds designated PPP transactions. Bappenas also includes the Private Sector Cooperation Centre (“PKPS”) which facilitates cooperation on infrastructure projects between the Government and private investors and which houses the PPP Central Unit (“P3CU”).
P3CU has a number of functions including:
a) providing support to KKPPI (see below) for policy formulation and
assessment of requests for contingent Government support;
b) the preparation of the Government’s PPP “blue book” which lists project
opportunities for private investors;
c) support to Government Contracting Agencies for the preparation of
projects; and
d) the development of capacity within government agencies for PPP
implementation.
Bappenas has organised for the Central Java Coal-Fired Power Plant (“CJCPP”) to be the model for PPP projects in the power sector. An organisational chart of Bappenas is provided at Appendix C.
The Investment Coordinating Board (“BKPM”)
BKPM acts as a “one-stop” integrated service for the licensing of all electricity projects. Its role includes to centralize the processing of projects that require private participation (at present some processing is done by the National Development Planning Board (Bappenas)). Indonesia’s PPP programs are initially discussed at Bappenas and include related ministries and institutions before being forwarded to the “back office” role of BKPM.
The Policy Committee for the Acceleration of Infrastructure Provision (KKPPI)
KKPPI is an inter-ministerial committee chaired by the Coordinating Minister of Economic Affairs. KKPPI is responsible for policy coordination related to the private provision of infrastructure. KKPPI is required to endorse requests for contingent Government support (i.e. guarantees) as a basis for Risk Management Unit (“RMU”) consideration and approval.
The Ministry of Finance
The Ministry of Finance approves tax incentives that may be offered by the Government for an electricity project as well as any Government guarantees. The RMU within the MoF is responsible for reviewing requests. Any approved guarantees are administered by PT PII (which operates the IIGF – see below). The Ministry of Finance also determines the electricity subsidy to PLN and loan arrangements for PLN.
The Ministry of State-Owned Enterprises (“MoSOE”)
The MoSOE supervises PLN’s management, sets its corporate performance targets and approves its annual budget.
The National Energy Council (DEN)
DEN was formed in June 2009 to formulate a National Energy Policy, determine the National Energy General Plan, and plan steps to provide for any future energy crisis. The DEN is chaired by the President and Vice-President with the Energy Minister as Executive Chairman. DEN has 15 members which include the Minister and Government officials responsible for the transportation, distribution and utilization of energy, and other stakeholders.
PT Penjaminan Infrastruktur Indonesia (PT PII) or Guarantee Fund
PT PII was established on 30 December 2009 to provide guarantees for infrastructure projects. It also acts as a strategic advisor to the Government and a transaction manager/lead arranger for infrastructure projects. PT PII is wholly owned by the Government with IDR 1 trillion in initial capital and plans to receive an additional IDR 1 trillion minimum per year until 2014 when it will reach IDR 6.5 trillion. For further details please see Section 3.3 below.
PT Sarana Multi Infrastruktur (PT SMI) and PT Indonesia Infrastruktur Financing (PT IIF) or Infrastructure Fund
PT SMI is a special fund set up to support infrastructure financing in Indonesia. PT SMI was established on 26 February, 2009 with IDR 1 trillion in start up capital. Its subsidiary, PT IIF is a commercially oriented non-bank financial intermediary with an infrastructure project finance focus. For further details please see Section 3.3 below.
The Indonesian Electric Power Society (MKI)
The Indonesian Electric Power Society (Masyarakat Ketenagalistrikan Indonesia or “MKI”) was established on 3 September 1998. It currently has about 200 members from various stakeholders within the electricity industry. The main objective of MKI is to provide a forum to discuss matters relating to the industry and put forward member’s views to the Government on topics such as technology, manpower, the environment and business regulation.
The Independent Power Producers Association (APLSI)
The Independent Power Producers Association (Asosiasi Produsen Listrik Swasta Indonesia or APLSI) serves as a forum for Indonesian IPPs to dialogue with the Government.
The Indonesian Geothermal Association (“INAGA”)
The Indonesian Geothermal Association is an organization for professionals involved in geothermal businesses in Indonesia. The organization currently has about 400 members from various disciplines.
III. History of IPPs in Indonesia and the PPP framework
Unlike the oil and gas and mining sectors, electricity investment has generally not (with the exception of pre 2003 geothermal electricity) operated pursuant to a stand-alone investment framework. Instead, IPP investment has generally been categorized according to the nature of the relevant offtake arrangements most particularly the power purchase agreements (“PPAs”).
IPPs have existed in Indonesia pursuant to PPAs since the early 1990s and are classified into three broad generations (as outlined below). IPPs currently account for approx 14% of Indonesia’s total generating capacity. Most IPPs, particularly in recent times, have also operated pursuant to a more general set of Public Private Partnership (“PPP”) arrangements. A PPP scheme is, in a general sense, a collaboration between the private and public sectors which utilizes the efficiencies from the private sector to reap better value for the public. The primary tool to do this is by allocating “risk to the party with the best risk controlling capacity (Article 16 on Risk Management of Presreg 67/2005)
The key regulation governing Indonesian PPPs is Perpres No.67/2005 as amended by Perpres No.13/2010. These stipulate that PPPs can be formed for “electricity infrastructure consisting of electricity generation, transmission or distribution (Article 4 Presreg 67/2005). Most IPPs have also involved a Build-Own-Operate (“BOO”) or Build-Operate-Transfer (“BOT”) arrangement.
IPP generations
First Generation (1992 until the Asian Financial Crisis)
Private participation in Indonesia’s electricity sector probably started in1992. Relatively high forecast returns (IRRs often between 20% - 25%) together with the provision of a Government guarantee (via a support letter to cover PLN’s obligations under the PPA) meant that there was initially a high investor uptake during IPP tendering.However, when the Asian financial crisis struck in late 1997, PLN became financially troubled particularly as a result of the fall in the value of the Rupiah. PLN had to put many of its IPP projects on hold. Ultimately six projects were terminated, six were acquired by the Government, one project ended up in a protected legal dispute, and 14 projects continued under renegotiated terms. When renegotiations were completed in 2003 most continuing IPP investors agreed to new PPAs which generally included lower tariffs than were initially contemplated.
Nevertheless, this first generation saw generating capacity lifted to 4,262 MW. Landmark projects included the Salak Geothermal Power Plant, the Cikarang Combined Cycle Power Plant and the coal fired Paiton Power Plant (Paiton I). Paiton I was the largest IPP project in Indonesia with installed capacity of 2 x 615MW. A second expansion occurred under the same First generation framework. During 1999 – 2004 there were no new power projects tendered.
Second Generation(post Asian Financial Crisis to 2008)
The second generation of IPPs commenced during the period 2005 – 2008.This generation was however not viewed as particularly attractive to investors as:
a) no Government guarantees were provided;
b) the risk allocation was not viewed as favourable to investors; and
c) the forecast returns were lower (with forecast IRRs often between 12% -14%).
Of 126 project proposals only 18 were awarded. These IPPs included those announced as part of Indonesia’s Infrastructure Summit in 2005 and 2006 under the PPP scheme as stipulated under Perpres No.67/2005. The IPPs were also appointed through competitive tender (except as permitted by GR No.3/2005 and GR No.26/2006 for capacity expansion to existing projects or renewable energy sourced projects). These projects (listed in Appendix D “IPP Tender Program”) mostly operated under a Build-Own-Operate (“BOO”) scheme. All projects have since been signed, financed, and had construction begun. These projects should bring on-line 4,480 MW of PLTUs (coal powered), 560 MW of PLTGs (gas powered) and 440 MW of PLTPs (geothermal powered).
Third Generation (2010 onwards)
The third generation of IPPs will operate under the recent revisions to thePPP framework developed by the Policy Committee for the Acceleration of Infrastructure Provision (KKPPI). Third generation IPPs will differ from second generation IPPs in that the PPP risk allocation mechanism will be clearer and more supportive of the investor and more government support will be provided. Perpres No.13/2010 (issued January 2010) which amends Perpres No.67/2005 on PPP Infrastructure Projects, attempts to streamline the PPP process by offering:
a) revised bidding arrangements including extensive bidder/tender consultations;
b) better-defined risk allocations to help with the bankability of projects;
c) Government support and guarantees (such as in relation to land acquisition); and
d) financial facilities (such as PT PII (Article 17C of Presreg 13/2010) and the Infrastructure Financing Fund
Future improvements could also include:
a) the synchronisation of Government support with the project preparation transaction cycle;
b) capacity building for Government contracting agencies;
c) the mobilization of domestic capital markets; and
d) the linking of PPP policy with related polices such as in response to climate change.
Serving as a template for third generation IPPs – such as the 5,035 MW of IPP development available under the “second fast track program” will be the flagship CJCPP with a proposed capacity of 2 x 1000 MW and an estimated cost US$3 billion. The CJCPP will operate under a “BOOT” structure and will be the largest IPP in Indonesia. Seven bidders have pre-qualified and are expected to bid in late 2010. PLN has appointed the International Finance Corporation and the World Bank Group as transaction advisors. This project also provides the first opportunity to utilize the Indonesia Infrastructure Guarantee Fund (“IIGF”) structure
IV. IPP opportunities and challenges
Of the 54GW of new generating capacity required to reach the Government’s 2019 electrification goal about 30GW (or 55%) is earmarked for the development by IPP projects at an estimated cost of around US$33 billion.
Current Opportunities
As part of the 3rd generation of IPPs, the Government has initiated a 2nd phase of its electricity “fast track” with the goal of creating around 10GW of additional generating capacity. This program, launched in January 2010 under Perpres No.4/2010, focuses on the use of IPPs and the use of eco-friendly, non-carbon (renewable) sources of energy such as geothermal.
A summary of the 2nd phase “fast track” power projects is as follows:
Total capital required for the 93 power plants forming the 2nd phase,including 3,490km of power transmission lines, is approx US$16.4 billion. Of this, some US$5.3 billion is to be met by PLN and US$11.1billion from IPPs. The projects are expected to finish in 2014.
Although targeted to produce almost equal amounts of capacity, the power plants to be built by the IPPs will require double the investment of PLN’s plants. This is primarily because the IPP plants will focus on geothermal energy which are more costly than PLN’s coal-fired plants. Of the total 3.977GW to be generated from geothermal energy, IPPs are expected to contribute 3.097GW.
The biggest hydroelectric plant will be the 4 x 250MW Upper Cisokan plant in West Java. The biggest gas combine-cycle plant will be the expanded Muara Tawar plant, also in West Java, with total capacity of 1.2GW. The biggest geothermal plant will be the Sarulla 1 plant in North Sumatra with expected total capacity of 3 x 110MW. The largest coal-fired project is the 1000MW Indramayu power plant in West Java.
Bidding Arrangements
The IPPs under the second “fast track” program will utilize the Perpres No.13/2010 PPP regulations for bidding etc. and will have access to new Government support around guarantees and financing. Some projects from the second phase have already completed their tenders. However, the awarding of PPAs is more or less on hold until the flagship CJCPP is awarded. The Government has also highlighted five “P-P P” style power projects, valued at around US$4 billion, available for IPP investment. According to the Bappenas “P-P P Infrastructure Projects in Indonesia 2010-2014” report, they are:
a) the Jambi Coal Fired Steam Power Plant (2 x 400MW estimated cost of US$1.04 billion, expected to tender in 2012 and be operating by 2018);
b) the South Sumatera Mine Mouth Coal Fired Steam Power Plant (2 x 600MW estimated cost of US$1.56 billion, expected to tender in 2011 and be operating by 2016);
c) the East Kalimantan Coal Fired Steam Power Plant (2 x 100 MW estimated cost of US$280 million, expected to tender in 2012 and be operating by 2017);
d) the North Sulawesi Coal Fired Steam Power Plant (2 x 55 MW estimated cost of US$165 million, expected to tender in 2013 and be operating by 2018);
e) the Karama Hydro Power Plant, West Sulawesi (3 dams with total capacity of 4,400MW, estimated cost of US$1 billion, expected to tender in 2012 and be operational by 2019).
V. Opportunities in renewable electricity generation
The utilization of renewable energy can be broken into three stages:
1) those already in commercial operation (i.e. geothermal, biomass and hydro energy);
2) those developed but with limited commerciality (solar, wind); and
3) those at the research stage (ocean energy).
1). Geothermal
Geothermal is a “clean” energy emitting up to 1800 times less carbon dioxide than coal-fired plants and 1600 times less than oil-fired plants. Being a renewable source, geothermal energy is also unaffected by changes in oil prices. It is also the only renewable source with capacity factors close to 100%.
Indonesia’s geothermal reserves have the potential to generate approx 27.710 GW of power (around 40% of the world’s total) across more than 250 locations.
Of this total, 14.707GW are estimated reserves, 2.288 GW are proven, 11.369 GW are probable, and 1.050 GW are possible resources. The remaining 13.003 GW is still speculative or hypothetical. However, the sector in Indonesia remains underdeveloped with only around 1.2GW of capacity installed (or around 4.3 percent of its potential and only 3% of Indonesia’s current energy mix). This is compared to a target of 9.5GW or 5% of the energy mix set for 2025
The main deterrents for investors have been in the mix of high development risk and the large upfront capital outlays. In this regard, it can take 10 years to develop a geothermal plant to the level of commercial operation with project financing usually only available for the last few years of this process. This means that a typical geothermal project will require significant investor contributions in up-front equity.
Regulations for Geothermal Electricity Generation
To encourage private sector involvement in geothermal power generation the Government passed Geothermal Law No.27/2003 (“the 2003 Geothermal Law”) in 2003. The 2003 Geothernal Law allows private sector control over geothermal resources and the sale of base load electricity to PLN.
The 2003 Geothermal Law passes the authority to grant geothermal permits, as an Izin Usaha Pertambangan Panas Bumi (“IUP”), to regional Governments with input from the MoEMR. The permits are granted through competitive tendering. To assist with provincial capacity building the central Government has undertaken to help improve training and capacity for local Governments.
There can also be a disconnect between the tendering process at the local level and the subsequent price negotiations in the PPA with PLN given that PLN is centrally controlled while the IUP is granted by local Governments. This means that investors have less certainty since they are effectively negotiating with two parties. To help with the negotiation of tariffs, in 2009 the MoEMR released Reg No.32/2009 which caps the price that PLN can pay for geothermal energy at US9.7 cents per kWh. The Government has stated that this will have retrospective effect.
2nd Phase Fast Track Program
There are 33 geothermal power projects allocated for IPPs in the 2nd phase of the fast track program, and another 11 allocated for PLN. These are as follows:
Geothermal energy is also a special focus of Indonesia’s US$400 million Clean Technology Fund co-financed by the World Bank and the Asian Development Bank for which a significant scale-up of large geothermal power development has been identified as a priority.
2). Biomass
Biomass is organic matter used to provide heat, make fuel and generate electricity. Biomass can be converted directly into liquid fuels called bio-fuels. Biomass energy has been utilized in Indonesia for many years and plays an important role in rural areas where it is commonly used by households and small industries (and is in fact estimated to account for 35% of energy consumption). The potential in Indonesia is estimated to be equal to 50,000 MW. Current production of biofuels is around 4.2m Kilo litres (“kL”) per year of which bioethanol (based on carbohydrates such as corn) is estimated to reach 120,000 kL in 2010 and biodiesel (based on vegetable oils and animal fats) is estimated to reach 4.1m kL in 2010. The source of most biofuels in Indonesia is crude palm oil of which production is expected to reach 21.5m tons for 2010. Consumption of biofuel for 2010 is expected to reach around 770,000 kL. Indonesia is taking steps to become a significant player in biofuel development with a target of 5% representation of total energy sources by 2025. The Government has also announced plans to designate up to 6.5 million hectares of uncultivated land for the development of biofuel feedstock plantations and has set aside funds to support agricultural development related to biofuel. PLN has also recently contracted two IPPs using biomass. The first was for a 6MW plant on Bangka Island using palm plantation waste and a second was for a 2 x 7MW plant which is under construction in Bitung.
3). Hydro power
In 2009, Indonesia generated an estimated 12.5TWh of electricity from around 4.2GW of installed hydro-electric capacity, representing about 7.9% of the country’s total generation . Industry reports suggest that Indonesia holds hydro-power potential of up to 76GW across 1300 locations of which 8.7GW could be developed with plants of 100MW or more (most of the potential in Java has been developed). However, Indonesia is yet to embark on the large hydroelectric programmes seen elsewhere in the Asia Pacific region. Challenges include land acquisition and the need to invest in transmission lines given that most sites are located far from high consumption areas. There are also challenges (discussed elsewhere) associated with the significant upfront capital commitments.
Indonesia in fact increased its consumption of hydroelectricity in 2009 by 4.8% to 2.7 million tonnes of oil equivalent which was the third biggest increase across the AsiaPacific region, after New Zealand and China Hong Kong SAR.
Small Hydro Opportunities (<10MW)
The potential for mini/micro hydro power of around 460MW exists although only around 64 MW has been developed. Small/micro hydro (generally <1MW) and mini hydro (generally 1-10MW) mostly targets rural electrification with the largest potential in Papua and Sumatra. The MoEMR plans to construct 570 mini hydro-power plants with a total capacity of 45.6MW. The MoEMR’s Mini Hydro Clearing House provides information and networking support. Challenges again include the need to invest in transmission lines, access to finance and the quality of geological and hydrological data.
4). Solar Energy
There are two types of solar technology being:-
a) thermal technology and
b) photovoltaic (“PV”) technology.
The potential of solar energy averages at approx. 4.8kWh/m2 solar radiation per day. Current installed capacity is however only about 14MW, mostly as solar home systems and utility-scale solar photovoltaic (PV) plants. PV solar energy is used to meet rural electricity requirements and is cost competitive in areas with low population density. The MoEMR plans to build solar power plants with a peak capacity of 2,234kW with the aim of improving electricity provision in remote areas. The challenges are the intermittency of sunlight, the lack of regulatory support, and high upfront costs.
5). Wind
The estimated potential of wind energy is relatively small at about 450MW. This is primarily because wind velocity in Indonesia is (in general) relatively low except for the Eastern islands where wind velocity can reach levels sufficient to power small to medium scale wind turbines. Current installed wind power capacity is estimated at only about 1.4MW and mainly for rural electricity. The MoEMR plans to construct 270 wind power generators with 21.67MW capacity. The challenges are that accurate and reliable wind mapping needs to be done nationally, the lack of any tariff incentives to make wind competitive, and the general intermittency of the wind.
Other Challenges for Renewable Energy Projects
Weaker fossil fuel prices of late have undermined the attractiveness of investments in renewable energy technology. Many renewable-electricity generated projects tend to be small scale and typically have high unit capital costs. This means that they often rely on price protection especially with regard to their tariff.
They may also face grid connection and land acquisition/use problems. Finally, financing can be an issue as there is little early stage risk equity available in Indonesia with investors typically looking for more mature projects driven off conventional power sources. However, the cost of renewables should fall with technology improvements and as carbon is priced into the generation value chain. Greater use should also ultimately add scale and drive the associated economic advantages. For Indonesia, there is also an opportunity to improve the security of its energy supply and to address climate change, albeit with a continuously supportive policy framework.
VI. Taxation issues for geothermal electricity generation
1. State Revenues and Taxes – New Regime
Geothermal activity under the former Joint Operating Contract (“JoC”) framework (please see our separate Oil and Gas in Indonesia Investment and Taxation Guide for details -www.pwc.com/id/en/publications/energy-utilities-miningpublications.jhtml) included a relatively straight for ward 34% “all inclusive” tax regime. Other tax relevant features were included within the JoC itself and applied for the life of the project. Geothermal Law No.27/2003 (the 2003 Geothermal Law) however removed the all-inclusive fixed tax rate of 34%. Under the new regime there are no (at least as yet) specific tax regulations for geothermal activities meaning that the prevailing tax laws and regulations should apply. This also means that most of the Income Tax issues outlined above will also apply for geothermal projects.On this basis profits from both the geothermal/steam and electricity generation activities (noting that geothermal projects are now licensed on a dis-aggregated basis) are taxable at the standard rate of 25%. Presumably also if both activities are within a single entity there should be no need for the internal ring fencing of the associated costs.
2. VAT ( value added tax ) on Geothermal Projects
Steam generated from geothermal activity is considered to be a product of mining, excavating and drilling which is taken from source. Under the prevailing VAT rules the supply of steam is therefore VAT exempt. On thisbasis, any Input VAT paid in relation to geothermal activities would not be creditable (but should be deductible).
This means that, under the post-2003 arrangements supplies of both steam and electricity are exempt, and so input VAT would not be creditable irrespective of whether connected to the steam or electricity generation activities. (Note - under the “old JoC regime” this VAT was reimbursable).
3. Draft GR on Income Tax for Geothermal Activities
In late December 2009, the Directorate General of Tax (DGT) circulated a draft GR on proposed Income Tax arrangements for the geothermal sector. Some key points outlined in the draft GR are:
a) that the tax calculation will generally follow the prevailing Income Tax Law. An exception could be an extension of the tax loss carry forward (to seven years). Fixed retributions, production retributions and bonuses should be deductible; and
b) that all geothermal contracts signed prior to PD No.76 (i.e. under the old JoC regime) should be amended within three years to comply with provisions of the GR.
As this publication went to print, there had been no developments and the GR remained in draft.
There has been little (advanced) geothermal activity under the new regime. Therefore, the relevant investment and tax frameworks have not been tested at a practical level.
VII. Incentives for power projects
1. General Incentives
a) Investment Law incentives: Chapter X of the 2007 Investment Law contains a separate category of “investment facilities” for (BKPM licensed) investors. Concessions potentially include: Income Tax rate reductions and other “relief”, for a finite period,
i) According to the scale of the investment;
ii) Import Duty exemptions, or other “relief”, on imported capital goods/equipment which are yet to be produced locally;
iii) Import Duty exemptions, or other “relief”, on raw materials, components etc., for a finite period;
iv) VAT exemptions or deferments on the import of capital goods/equipment which have not been produced locally;
v) Accelerated rates of depreciation/amortization;
vi) Land and Building Tax exemptions for certain sectors; and
vii) Assistance in obtaining rights over land, immigration and imports.
The qualifying criteria as set out in the Investment Law is not detailed, and implementing regulations have not yet been issued. However, qualifying criteria may include :
i) the level of employment; or
ii) that the investment satisfies some national priority; or
iii) that the investment constitutes infrastructure; or
iv) that the investment involves the transfer of technology; or
v) that the investment constitutes a pioneer industry; or
vi) that the investment will be located in a remote area; or
vii) that the investment will be environmentally sustainable; or
viii) that the investment will involve a local partnership (especially with a small to medium sized investor);
b) Kapet Incentives:- the Income Tax Law (and VAT Law) provide that businesses located in a “special development area” (known as a Kapet) may be entitled to the following incentives (which are similar to those under GR No.1/2007 (as amended by GR 62/2008)):
i) an investment allowance of 30% (taken over 6 years);
ii) accelerated depreciation and amortization rates;
iii) an extended 10 year tax loss carried forward entitlement;
iv) a maximum dividend WHT rate of 10% (generally 20%); and
v) an exemption from the “collection” of VAT otherwise due on certain
capital imports.
2. Incentives for Renewable Energy Generation
There are a number of tax incentives which may be applicable for renewable energy projects, particularly geothermal powered projects. These include:
a) Income Tax incentives under GR No.1 (as lastly amended by GR No. 62/2008) which currently applies to the “conversion” of geothermal energy into electric power. GR No.1 concessions include:
i) an “investment credit” @30% of the qualifying capital investment (i.e. as an uplift in deductions at five percent p.a. each year from commercial production);
ii) an extended tax loss carry forward period of up to 10 years;
iii) accelerated depreciation rates (essentially at double the general rates);
iv) a maximum dividend Withholding Tax (“WHT”) of 10%.
Implementing regulations to GR No.1 indicate that:
i) BKPM is to recommend the granting of any tax incentives to the MoF (i.e. the initial application will be through BKPM). The DGT will issue a decision on behalf of the MoF;
ii) the tax incentives are to take effect from the beginning of commercial production;
iii) the tax loss carry forward period is extended incrementally to a maximum of 10 years (i.e. an extension to between 5 and 10 years is a possible outcome);
iv) the DGT determines the beginning of the commercial production and the tax loss carry forward period (separately) and after tax audit (i.e. entitlement to these concessions may not be known in advance).
b) for electricity generation driven by renewable energy, MoF regulation No. 21/PMK. 011/2010 may also provide tax and customs incentives similar to those available under GR No.1.
c) Minister of Finance (“MoF”) Regulation No.177/2007 (for geothermal operations) and MoF Regulations No.154/2008 and No.176/2009 (for power operations) may provide a separate Import Duty exemption;
d) an Import Duty exemption (specifically for projects under the 2nd fast track program) may alternatively be available under Presidential Regulation No.4/2010 (to be further regulated under MoF Decree yet to issue);
e) an Import VAT “borne by the Government” facility is available under MoF Regulation No.24/2010 (for geothermal projects in exploration phase). This facility is subject to annual renewal; and
f) For imports of capital goods during the development/construction phase, import VAT may be exempted under MoF Regulation No.31/2008.
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