Indonesia Renewable Energy Laws and Regulations 2022
24 September 2021
24 September 2021
In this piece, our Jakarta-based projects and renewables team provides a compact overview of the regulatory environment & policy landscape for renewables in Indonesia, how different energy sources are placed in the market, the barriers and challenges to deployment, as well as an update on recent developments relevant to the industry. Indonesia's race to renewable energy is clearly heating up!
The article was first published on ICLG.com available here. ICLG.com is a leading global platform for legal reference, analysis and news covering law in more than 192 jurisdictions across 59 practice areas.
There are several key regulations governing renewable energy policy in Indonesia:
(a) The main regulations on energy in general:
(i) Law No. 30 of 2007 on Energy (Energy Law); and
(ii) Government Regulation No. 79 of 2014 on National Energy Policy.
(b) Regulations which are specific to a certain type of renew-able energy such as:
(i) Law No. 17 of 2019 on Water Resources; and
(ii) Law No. 21 of 2014 on Geothermal Energy.
Pursuant to the Energy Law, renewable energy is defined as the energy that comes from renewable energy sources. Renewable energy sources are subsequently defined as sources of energy produced from sustainable energy resources, if managed properly, including geothermal, wind, bioenergy, solar, hydropower, tidal and ocean thermal.
The main participants in Indonesia's renewable energy sector include:
(a) Government institutions and National Utility
(b) Private parties
Based on the Indonesian constitution, natural resources (including renewable energy) are controlled by the state and shall be utilised for the optimal welfare of the people. Therefore, the Government of Indonesia (GoI) has the full power and authority to govern the development of renewable energy in Indonesia.
One of the main policies of the NEP is the utilisation of renewable energy sources for national electricity purposes. The GoI has set targets for renewable energy to represent at least 23% of the energy mix by 2025, and at least 31% by 2050.
PLN has the priority to provide electricity for public interests. Private electricity generation by IPPs is permitted; however, PLN is the sole offtaker and party that has the right to sell electricity to end consumers with the exception of limited "Business Areas" (Wilayah Usaha), where private participants can sell electricity (see question 3.1).
Based on PLN's latest Electricity Supply Business Plan (RUPTL) issued in 2019, as of October 2018, PLN owned and operated 5,921 power plants (including 371 renewable plants) and purchased electricity from 313 IPPs (including 191 renew-able plants).
The main types of renewable energy deployed for power generation in Indonesia are (in a decreasing order of installed capacity) hydropower, geothermal, biomass and biogas, solar and wind.
There have been recent trends towards an increase of the deployment of solar and wind; however, the size of these projects and total installed capacity remains modest compared to other similar economies in the region and globally.
The current global energy transition, which involves moving away from the use of depletable sources of energy to renewable energy and a reduction of carbon emissions, is clearly also having an impact on policy in Indonesia.
Indonesia's commitments to energy transition are embodied through its ratification of the Paris Agreement under the United Nations Framework Convention on Climate Change through Law No. 16 of 2016. In its First Nationally Determined Contribution, in an effort to reduce its carbon footprint, Indonesia has set an unconditional reduction target of 29% and, with international assistance, a conditional reduction target of up to 41% against the business-as-usual scenario by 2030. Consequently, the development and utilisation of renewable energy is essential to fulfil these commitments and will undoubtedly gain momentum over the next few years.
For the past decade, a number of environmental groups and civil societal groups, such as the Indonesian Renewable Energy Society and the Institute for Essential Services Reform, have advocated for the promotion of renewable energy in Indonesia, but with a relatively limited success given the current modest share of renewables in the national energy mix.
More recently, there has been an uptick in public awareness and pressure, largely driven by the deterioration of air quality in urban centres such as Jakarta. As an example of the mounting pressure to address these issues, in June 2021, 32 plaintiffs (grouped under the Clean Air Initiative Coalition) filed a citizen lawsuit against the GoI on the grounds of failure to fulfil the Indonesian peoples' right to clean air. Pursuant to IQAir's 2019 world air quality report, Jakarta ranked as the fifth most polluted city out of 85 contenders worldwide, with an average PM2.5 concentration of 49.4 µg/m3, which is almost five times above the World Health Organization's exposure recommendation with daytime concentrations regularly above 130 µg/m3.
The main legal basis for the utilisation of renewable energy for electricity production are:
(a) Law No. 30 of 2009 on Electricity (Electricity Law) and some of its implementing regulations such as Government Regulation No. 14 of 2012 on Electricity Supply Business Activities; and
(b) MEMR Regulation No. 50 of 2017 on the Utilisation of Renewable Energy Resources for the Production of Electricity (MEMR 50/2017), as lastly amended by MEMR Regulation No. 4 of 2020 (MEMR 4/2020). Additionally, two main master plans are regularly issued to detail national objectives in terms of development of generation, transmission and distribution infrastructure:
(c) The National Electricity General Plan, as lastly issued through MEMR Decree No. 143K/20/MEM/2019 on the National General Plan of Electricity from 2019 until 2038; and
(d) The RUPTL, which is PLN's 10-year development plan of electricity generation, transmission and distribution assets nationwide. It is an essential guide for business participants (including developers and contractors) to understand the current situation of the national electricity network as well as future prospects and trends for new projects including IPPs and PLN's own infrastructure development plans.
The main challenges to investments in, and development of, renewable projects in Indonesia currently lie in:
(a) The lack of clarity and stability of the regulatory framework
The regulatory regime applicable to renewable energy projects has been marred by frequent changes over the past five years with key regulations (such as MEMR 50/2017) being perceived by private investors and financiers as lacking clarity and attractiveness, especially in terms of the applicable tariffs for renewables IPPs (which use the national and regional average cost of generation as reference points) and the tendering regime to award such projects. A new overarching Presidential regulation on renewable energy supposed to bring renewed clarity on these issues, and potentially reintroducing a feed-in-tariff (FIT) regime, has been in the works for the past two years but is yet to be issued. In the meantime, a bill on renew-able energy is also going through Parliament but without much clarity as to the timeline and its coordination with lower-rank regulations.
(b) Difficulties faced by PLN
In its capacity of state utility companies, PLN has public service obligations across Indonesia's vast and complex national territory. A substantial part of the electricity sold to end consumers is subsidised and, as a result, PLN is structurally in a loss-making position and relies on government subsidies. This arguably places it in a difficult situation to engage in substantial new investments or take on liabilities in support of renewable projects, either by way of incurring the necessary capital expenditures to develop the infrastructure required for such new projects (especially intermittent projects), or through FITs payable to renewable IPPs.
(c) Uncertainties in relation to available projects and general project size
The two factors above have in turn an impact on the level of support and ambition of the transition to renewables which has been observed over the recent past in Indonesia comparatively to other countries in the Asia-Pacific region. For an economy of its size, the project/ deal flow of the past three to five years has been relatively modest and slow, as well as involving projects of a limited size (generally below the 50-75 MW mark depending on the technology). COVID-19 has also presented a major challenge as the attention of the authorities has had to partly shift to managing the economic and societal effects of the pandemic, and that electricity demand has also been impacted as a result.
Recent statements from the GoI and PLN, as well as the impending issuance of a new RUPTL, do, however, seem to indicate a (potential) shift of direction and focus towards more action and support for the energy transition across the archipelago.
Pursuant to MEMR 50/2017, the default procurement method for most types of renewable energy projects (i.e. solar photovoltaic, wind, hydropower, biomass, biogas, wave and tidal, biofuel but not waste-to-energy (WTE) and geothermal) is the "direct selection". This typically involves a tender process in which only limited (pre-selected) developers can participate. In practice, PLN has established a number of lists of providers depending on the type of renewable technology which are updated from time to time and contain a large number of selected suppliers/ developers which have fulfilled certain pre-qualification criteria and permits them to participate in relevant renewable IPP tenders across the country.
MEMR 4/2020 has also reintroduced the "direct appointment" method in the following limited circumstances:
(a) where there is a shortage of electricity in the local system, excess power, plant expansions, or if there is only one suit-able provider;
(b) where there is an assignment by MEMR for: (i) hydro-power projects (built by the selected business entity using state-owned water resources); (ii) other renewable projects (whether partly or fully developed by the GoI, including those funded with a grant); and (iii) WTE projects; and
(c) for hydropower projects with an existing location permit from the regional government, agencies or institutions prior to the entry into force of MEMR 4/2020.
Finally, it should also be noted that in recent renewable IPP tenders, PLN has imposed the "mandatory partnership" with one of its subsidiaries (generally Pembangkitan Jawa Bali or Indonesia Power) to hold 51% of the shares in the relevant IPP company to be established by the winning bidder. In spite of the 51:49 shareholding, the practical arrangements under this scheme generally involve the private IPP partner having joint control over the IPP company and project as well as being responsible for financing the project.
As of April 2021, the share of renewable energy in Indonesia's energy mix is 13.83%, with hydropower contributing to 7.9%, geothermal 5.6%, and other forms of renewable energy 0.33% of the energy mix (source: DGE).
Besides utility-scale projects which may be developed directly by PLN and injecting into the national grid, there are two basic schemes through which utility-scale renewable energy can be sold:
The most common scheme involves IPPs selling power to PLN as sole offtaker from such projects. PLN will then sell the electricity to end consumers through its national grid.
(b) Business Areas
An alternative scheme involves privately owned Business Areas which are carved out from PLN's national Business Area and in which the licensed holder is permitted to generate and sell electricity to end consumers within its boundaries. There are currently approximately 40 Business Areas across Indonesia and these generally consist of inte-grated industrial estates and large industrial plants (such as smelters, processing plants, etc.) and PLN has a de facto right of first refusal for such rights to be awarded, which has its challenges and limits the expansion of the scheme.
Yes. The GoI enacted Presidential Regulation No. 10 of 2021 on Investment Business Activities on 4 March 2021 (the Positive List) to complement the recent changes to Law No. 25 of 2007 on Investment (the Investment Law). The Positive List intro-duces a list of prioritised lines of businesses that are entitled to certain fiscal incentives. This includes renewable energy electricity generation which is eligible for corporate income tax reduction facility.
Further, pursuant to Presidential Regulation No. 4 of 2016, renewable power projects may obtain incentives from the central and/or regional government in the form of, among others: (i) fiscal incentives; (ii) facilities for licensing and non-licensing; and (iii) subsidies. As at the time of writing, the following main financial or regulatory incentives are available:
(a) Income tax facility in the form of a 30% deduction of net income of investment value, accelerated depreciation of tangible assets and accelerated amortisation of intangible assets, a 10% dividend withholding tax concession, and compensation for losses (for micro and mini power plants with an investment value of less than IDR 100 billion).
(b) Exemption of import duties for geothermal activities.
(c) Facilities for income tax, VAT and import duty.
This depends on the type of projects:
(a) Projects developed directly by the GoI or PLN
The main source of financing for such projects is the government's development budget. Besides that, grants, technical assistance and soft loans from bilateral and multilateral agencies are also used as well as other commercial sources which PLN relies on (such as loans from relationship banks and bond issuances).
(b) Projects developed by IPPs
The main sources of financing are (i) capital contributions by the sponsors, and (ii) loan facilities with banks or other financial institutions (such as development finance institutions and ECAs).
There is no specific regulatory framework applicable to distributed/C&I renewable energy. The Electricity Law enables the integration of electricity generation, transmission, distribution and sales activities into one business carried out by a business entity. This is the case of PLN and certain holders of Business Areas which can develop distributed/C&I assets and networks within their respective Business Areas.
Due to the restrictions on the granting of private Business Areas and the restrictions on the sale of electricity to end consumers, alternative business models and structures are implemented in practice for the development of renewable C&I assets and solutions, such as long-term leases and operation and maintenance arrangements.
Please refer to question 3.2 as these incentives are also applicable to distributed/C&I renewable energy facilities.
In addition, the government can also directly fund the development of microgrids through the line ministry and regional infrastructure budgets. For example, a direct fund may be granted for the development of off-grid renewable energy projects (Ministry of Villages, Disadvantaged Regions, and Transmigration Regulation No. 11 of 2019).
Please refer to question 3.3.
There is currently no specific legal and regulatory framework that applies for clean energy certificates from renewable energy projects in Indonesia. However, in November 2020, PLN launched renewable energy certificates in order to promote the use of electricity from renewable energy sources.
Hence, private consumers or companies wanting to demonstrate their commitment to use renewable energy can participate directly in the purchase of renewable energy through these certificates.
In addition, a draft Presidential regulation on greenhouse gas (GHG) obligations is currently under preparation and will provide for GHG emissions reporting obligations and the imple-mentation of a carbon economic value mechanism (including carbon trading) in order to achieve Indonesia's objectives under the Paris Agreement.
There are currently no financial or regulatory incentives or mechanisms in place to promote the purchase of renewable energy by the private sector.
Business entities supplying electricity for public use, which covers the generation, transmission, distribution and/or sale of electricity, are required to hold an Electricity Supply Business Licence which is granted for up to 30 years (extendable).
Upon the completion of construction of the facilities, owners must obtain an Operation Worthiness Certificate (Sertifikat Laik Operasi) as proof that the electricity facilities have passed the required commissioning tests in order to ensure compliance with the applicable technical requirements.
In addition, there may also be other permits required in relation to specific types of renewable energy projects (such as for geothermal or hydropower projects). Please also refer to question 4.6.
Please refer to question 4.1.
Please refer to question 4.1.
In addition, upon connecting to and accessing the grid, the facilities must comply with the requirements under the applicable grid code.
There are several grid codes in Indonesia based on the location of the relevant grids in light of the scattered and archipelagic nature of Indonesia's geography.
Please refer to question 4.3.
Yes. However, there are certain requirements that need to be fulfilled in order to operate microgrids.
The main applicable legal basis is MEMR Regulation No. 38 of 2016, which strives to provide electricity access to rural or remote areas by permitting entities to operate small-scale electricity businesses of up to 50 MW. However, the relevant business entities must obtain a stipulation of Business Area in order to be able to supply electricity to end consumers. Please refer to question 3.1 and the related challenges.
The implementation of small-scale electricity business is categorised based on the source of fund (i.e. with or without subsidy). If with subsidy, MEMR will stipulate the Business Area to be tendered with a selection process by the governor of the relevant area. The winner of the selection process must then optimise the utilisation of renewable energy sources and may be granted certain fiscal incentives as mentioned in question 3.2. Where a subsidy is not called for, the relevant business entity shall apply for the Business Area in accordance with relevant regulations.
Please also refer to question 3.5 on the direct funding available from the government.
Health and Safety
Generally, health and safety requirements apply to all types of renewable energy projects. These are mainly regulated under the Minister of Manpower (MOM) Regulation No. 12 of 2015.
Environmental matters are regulated under Law No. 32 of 2009 on Environmental Protection and Management and Government Regulation No. 22 of 2021 on the Implementation of Environmental Protection and Management. Based on the foregoing, business entities are required to prepare a certain environmental commitment document depending on the impact their activities will have on the environment. In the renewable energy sector, the type of document is determined under MEF Regulation No. 4 of 2021 and different requirements may apply depending on the type and capacity of the renewable energy project.
To utilise certain types of renewable energy for electricity generation, there are also certain specific permits of environ-mental nature that need to be obtained. These include: (i) the Water Resource Utilisation Permit for hydropower projects; (ii) the Geothermal Permit for geothermal power projects; and (iii) the Waste Management Permit for WTE projects. Where the project is fully or partly located in a forestry area, a Forestry Use Approval must also be obtained.
There are currently no specific regulations in Indonesia that apply to the storage of renewable energy.
There are currently no specific financial or regulatory incentives available in Indonesia to promote the storage of renewable energy
Yes, please see below.
Minimum Capital requirement
Pursuant to the Head of Ministry of Investment (Badan Koordinasi Penanaman Modal, BKPM) Regulation No. 4 of 2021, foreign investment companies in Indonesia are subject to a minimum capital requirement of at least IDR 10 billion in paid-up capital.
Foreign ownership requirement
Pursuant to the recent Positive List, foreign investment limitations no longer apply for electricity generation activities of a capacity of 1 MW and above; however, generation below 1 MW remains reserved for domestic cooperatives and micro-, small-and medium-scale businesses.
Pursuant to Law No. 24 of 1999 on the Flow of Foreign Exchange and Exchange Rate System, the transfer of foreign exchange from Indonesia to overseas (and vice versa) is subject to reporting obligations to Bank Indonesia.
Further, Law No. 7 of 2011 on Currency provides that, among others, payment transactions, settlement obligations which use money and other transactions that take place within Indonesia, are required to use IDR subject to certain exemptions which include, amongst others, international commercial transactions and international financing transactions.
In this respect, the Investment Law provides that investors may transfer and repatriate in foreign exchange for, among others, capital, profits, bank interest, dividends, other income or funds required to purchase raw and auxiliary materials or replacing capital goods in order to protect the viability of the investment.
Yes. Law No. 13 of 2003 on Manpower (as amended by Law No. 11 of 2020 — the Job Creation Law) suggests that the employment expatriates need to be based on an expatriate utilisation plan (Rencana Penggunaan Tenaga Keya Asing) which is approved by MOM.
Further, some areas of work, such as positions relating to personnel hire and human resources, are closed for expatriates, and employers are required to appoint Indonesian citizens as the expatriates' understudy for the purpose of transfer of technology and expertise, as well as the conduct of education and job training in accordance with the qualifications of the position occupied by the expatriate.
Yes, there are certain local content requirements that must be complied with in relation to the equipment and materials used in renewable energy projects. These are mainly regulated in Ministry of Industry Regulation No. 54/M-IND/PER/03/2012 on the Guidelines for the Utilisation of Local Products for the Development of Electricity Infrastructure.
Pursuant to Law No. 5 of 1999 on the Prohibition of Monopolies and Unfair Business Competition Practices (Competition Law), the Indonesian Competition Commission (Komisi Pengawas Persaingan Usaha, KPPU) is the governmental authority and regulator that is responsible for all competition and antitrust matters in Indonesia (including for the renewable energy sector).
The KPPU acts as regulator, investigator and decision maker, with the authority to:
(a) launch investigations on its own initiative or following complaints by consumers, companies or government agencies (however, this does not extend to search-and-seizure dawn raids or other commanding investigative powers);
(b) issue internal guidelines, summon and subpoena witnesses and experts, request information from parties and the GoI; and
(c) impose penalties and sanctions to business actors who conduct anti-competitive practices.
The Competition Law applies a number of criteria to determine whether a practice is anti-competitive, namely:
(a) Monopoly: business actors may be reasonably suspected or deemed to control the production or marketing of certain goods and/or services.
(b) Monopsony: business actors may be reasonably suspected or deemed to control the acquisition of supplies or to act as a sole buyer where one business actor or a group of business actors controls more than 50% of the market of a certain type of goods or services.
(c) Dominant position: (i) where a business actor or group of business actors controls ≥ 50% of the market share; or (ii) where two or three business actors or groups hold ≥ 75%. Other relevant factors include financial capacity, access to supplies or sales, and capability to adjust supply or demand.
The Competition Law also provides additional prohibitions on anti-competitive practices, namely price-fixing, market allocation, trusts, oligopoly, oligopsony and bid or tender rigging.
As a general proposition, Indonesian law recognises the settlement of disputes by way of litigation, arbitration and alternative dispute resolution (which includes consultation, negotiation, mediation, conciliation and expert evaluation).
Typically, the choice of dispute resolution method in the renewable energy sector in Indonesia will depend on the nature of the parties involved. If the relevant relationship and/or contract involves private parties (especially foreign parties), the preferred and most common type of dispute resolution framework will involve international arbitration seated outside Indonesia (with Singapore having become the most popular seat for arbitrations involving Indonesian renewable energy projects). This is, for example, the case under PPAs with PLN for any type of IPP project (other than mini or micro projects) and large-scale EPC projects for its own developments and needs.
If the relationship or contract only involves domestic parties and public sector participants, the parties may have a tendency to opt for domestic arbitration or even litigation.
Yes. As an example, MEMR Regulation No. 10 of 2017 provides that PPAs between PLN and IPPs must include tiered dispute resolution provisions.
In a court proceeding, parties can request provisional measures to be issued for the purpose of preserving the status quo or preventing the disappearance of assets, the taking of evidence of witnesses or the preservation of property or evidence. These are granted to protect the claimant's interest and may include measures pertaining to the jurisdiction of the court in adjudicating the case, the intervention of third parties, or the seizure of assets as a means to ensure the payment of an award.
In general, there are strict requirements in order for the court to grant provisional measures and these are intensified even more so when the purpose of issuance is in support of an arbitral process.
Yes. Indonesia is a signatory to:
(a) the New York Convention — ratified through Presidential Decree No. 34 of 1981 with reservations on reciprocity and commerciality; and
(b) the Convention on the Settlement of Disputes between States and Nationals of Other States — ratified through Law No. 5 of 1968.
Currently, Indonesia is not a party to any international convention on the recognition and enforcement of foreign judgments. Furthermore, the Reglement op de Burgerliike rechtvordering stipulates that foreign judgments cannot be enforced in Indonesia. As a result, the Indonesian courts will not be bound to enforce foreign judgments.
In order to enforce the disputed matters in Indonesia, it will be necessary to obtain a judgment from a competent court in Indonesia. Foreign court judgments are consequently only admissible as non-conclusive evidence.
There are no difficulties as a matter of law in litigating against government authorities or the state. In practice, government authorities or state institutions rarely appear before the court and the decision will therefore be rendered in absentia (verstek). The difficulties arise on the enforcement process of such decisions as the government authorities or state institutions will typically challenge the application of such enforcement, consequently prolonging the process.
As a note, the typical litigation process before Indonesian courts lasts between two to three years until a final and binding decision is issued by the Supreme Court. Challenges also typically arise during the enforcement process, resulting in additional delays before the seizure of assets can be granted.
The general hurdle lies with the fact that arbitration awards are subject to an enforcement order to be issued by a local court (the District Court of Central Jakarta). Law No. 30 of 1999 on Arbitration and Alternative Dispute Resolution provides a public policy exception to grant an enforcement order which gives the courts a wide discretion to determine whether an arbitral award is enforceable in Indonesia.
When the state or state entities are involved, an enforcement order must be obtained through the Supreme Court. In order to preserve the state's assets, there is a likelihood that an enforcement order against such assets will be denied.
In addition, there is a tendency for lower courts in Indonesia to assume jurisdiction over the matters being disputed despite the existence of a valid arbitration clause in the underlying agreement. There are cases in point where the Supreme Court over-ruled the preceding judgments on the basis of an unfounded exercise of jurisdiction.
Yes. For example: Case No. 250 K/PDT.SUS/2009, PT Bumigas Energi v. BANI.
Job Creation Law
The long-awaited Job Creation Law (often also referred to as the Omnibus Law) — designed to promote investment and the creation of jobs through economic growth in Indonesia — came into force on 2 November 2020. It contains the most significant legislative reforms to the Indonesian investment landscape in a generation as it seeks to amend, supplement and/or revoke numerous existing laws with the aim of easing investment and licensing restrictions. In relation to the power sector (including from renewable sources), the Job Creation Law and Government Regulation No. 25 of 2021 on the Implementation of the Energy and Mineral Resources Sector have introduced a number of changes, including:
(a) Expansion of the central government's role: the central government has become the sole issuing authority for all licences and permits in the electricity sector and has been granted the authority to stipulate norms, standards, procedures and criteria to be followed by regional governments when exercising their authorities.
(b) Clarification on the location of electricity generation within a Business Area: the location of electricity generation assets to supply end consumers within Business Areas can now be located outside such Business Areas.
(c) Reserve fund for electricity in rural areas: MEMR and the relevant provincial government must allocate reserve funds for the development of electricity supply infrastructure in rural and remote areas.
The enactment of the Positive List has opened up a number of business sectors in Indonesia, including electricity generation from renewable energy sources, by lifting the maximum foreign ownership restrictions. Please refer to question 6.1.
Draft Bill and Presidential Regulation on Renewable Energy
Please refer to question 2.5.
Announcement of carbon neutrality by 2060
Recent news has seen the GoI announcing its ambitions to reach carbon neutrality by 2060.
Authors: Frédéric Draps, Elizabeth Sidabutar, and Khairunissa Yuliandhini