A Presidential Regulation has been issued which aims to accelerate the use of renewable energy sources for electricity and signals the end of coal-fired power plants.
Last year, Indonesia set a goal of net-zero emissions by 2060 and pledged to phase down coal use, to contribute to international efforts to limit global warming.
The key effect of this month's Presidential Regulation Number 112/2022 re Acceleration of Renewable Energy Development for the Provision of Electricity is that no new coal-fired power plants are to be built, although those already in the pipeline and those that are integrated with the natural resources processing industry may still go ahead as planned. A plan for early retirement of certain plants is to be prepared, with the Government potentially absorbing losses. The target date for the end of coal-fired electricity generation is 2050.
The <>Presidential Regulation provides for a new mechanism allowing negotiation of price within a benchmark, together with certain fiscal and non-fiscal incentives, with the aim of encouraging investment in renewable energy projects.
Indonesia's State-owned electricity company PT PLN (Persero) ("PLN") must now prioritize the purchase of electricity from power plants using renewable energy, operation of power plants that consistently use only renewable energy and development of new power plants that focus on use of renewable energy
End of Coal-Fired Power Plants Era
The Presidential Regulation mandates the Ministry of Energy and Mineral Resources ("MEMR") to prepare a roadmap which will form the national basis to accelerate the retirement of coal-fired power plants.
Green energy regulations have previously been issued, and PLN's policy to date has been not to plan further coal-fired power plants, following the end of the Government's 35,000 MW new energy acceleration mega project. Now, the Presidential Regulation takes this one step further and prohibits the development of new coal-fired power plants.
There are some exemptions:
- Coal-fired power plants already planned before the Presidential Regulation and set out in PLN's National Electricity Supply Business Plan (Rencana Usaha Penyediaan Tenaga Listrik)("RUPTL"); and
- Coal -fired power plants that meet all of the following
- Integration with the national resources processing industry or are classified as National Strategic Projects, contributing significantly to employment and/or national economic development;
- A commitment to reduce greenhouse gas emissions by 35% within 10 years from operation commencement, compared to Indonesia's average coal-fired power plant emissions in 2021, through technology development, carbon offsets, and/or renewable energy mix; and
- A life-span not beyond 2050.
Early Retirement of Coal-Fired Power Plants
PLN may now implement an early retirement program for coal-fired power plants, or replacement of existing coal-fired plants with renewable energy power plants. The program must take into consideration the supply and demand for electricity.
MEMR will determine which coal-fired power plants are to be retired, or replaced with clean energy power, with prior approval from the Minister of State-Owned Enterprise and the Minister of Finance. These will be set out in PLN's RUPTL.
The Government will provide financial support for plant retirement, including through blended finance sourced from the State Budget or other sources.
The Presidential Regulation sets out the basic framework and, as is often the case, legal and practical certainty with respect to the plan is likely to evolve during the implementation process.
Procurement Methods for Renewable Energy
The Presidential Regulation largely continues the existing regime for electricity purchase, now adding more details for specific forms of renewable energy sources, by either:
- Direct Appointment, involving the appointment of one specific Independent Power Producer ("IPP"). The direct appointment of an IPP must be concluded within 90 days of document submission, similar to the existing regime; or
- Direct Selection, involving a selection from invited IPPs. The appointment of the IPP must be concluded within 180 days, again similar to the existing regime.
Specifically for geothermal, previously PLN could purchase geothermal energy only from IPPs holding a geothermal Working Area with proven reserves after exploration. The Presidential Regulation now allows electricity purchase from the holders of Electricity Business Licence (Izin Usaha Penyediaan Tenaga Listrik)("IUPTL") with a commitment for geothermal steam supply during the Power Purchase Agreement period.
Again, as is often the case in Indonesia, further provisions with respect to PLN's purchase of electric from renewable energy sources will be set out in a further MEMR regulation, to be issued in the future.
Purchase price for electricity sourced from Renewable Energy
The Presidential Regulation makes some changes to the pricing mechanism for purchase of electricity derived from renewable energy sources, with a wider scope for negotiation.
In general, the electricity price for renewable projects will now be based on negotiation between the IPP and PLN, subject to certain ceiling prices according to the type of power plant, as listed in the Attachment to the Presidential Regulation.
No approval is required from MEMR for negotiated electricity purchase prices below the ceiling price.
The ceiling price is not applicable for purchase of electricity from hydro peaker, biofuel and tidal projects. For these, the electricity purchase price will be based on agreement between the parties and must be approved by MEMR.
While the ceiling prices set out in the Presidential Regulation are quoted in USD, similar to the current regime, the currency for purchase of electricity generated from renewable energy must be IDR. The Presidential Regulation requires that the applicable USD:Rupiah exchange rate be based on the Jakarta Interbank Spot Dollar Rate ("JISDOR"), for conversion to IDR.
Under the Presidential Regulation, the Government will now provide both fiscal and non-fiscal incentives for businesses using renewable energy to generate electricity, which were previously limited to "National Strategic Projects" only.
Fiscal incentives include:
- Income tax facilities;
- Import tax exemptions/relief;
- Land and building tax facilities;
- Geothermal development support; and
- Financing and guarantee support through the Indonesian Infrastructure Guarantee Fund ("IIGF").
While the Presidential Regulation contemplates non-fiscal incentives, these are not detailed. However, we presume that these would cover matters such as accelerated licensing.
In addition, the Presidential Regulation requires relevant Ministries to support the development of new and renewable power plants, which potentially includes assistance in licensing and land acquisition.
Originally Published 23 September 2022
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