MEMR Regulation 4/2020: Changes to the tendering regime for Indonesian Renewables IPPs

Overview

Late February 2020 and just before the surge of the Covid-19 pandemic and the issuance of containment measures across the Indonesian archipelago, the Minister of Energy and Mineral Resources ("MEMR") enacted Regulation No. 4 of 2020 on the Second Amendment to MEMR Regulation No. 50 of 2017 on the Utilisation of Renewable Energy Resources for Electricity Procurement ("MEMR 4/2020"). This latest amendment to MEMR Regulation 50/2017 (as previously amended by MEMR Regulation 53/2018 – "MEMR 50/2017") brings three notable changes to the procurement of renewable energy projects developed under the independent power producer (IPP) scheme ("renewables IPPs"): (i) the renewed possibility for PLN to use the direct appointment mechanism, (ii) the removal of the requirement that such projects be developed exclusively under the build, own, operate and transfer (BOOT) scheme and (iii) the fact that PLN must prioritize the purchase of electricity from renewables IPPs (based on the must-run regime) and this without any restrictions on the generation capacity of these plants. However, MEMR 4/2020 does not change the pricing regime which has been applicable since the issuance of MEMR 50/2017 and falls short of the larger regulatory overhaul which has been long awaited to boost the sluggish pace of development in the Indonesian renewables IPP sector.

Refresher on the scope of MEMR 50/2017

MEMR 50/2017 was enacted for the purpose of accelerating the development of IPP projects from renewable sources of energy in Indonesia. Under MEMR 50/2017, PLN is required to purchase electricity from renewables IPP projects in accordance with the tendering and pricing principles provided therein. MEMR 50/2017 categorises the following energy sources as "renewables": solar, wind, hydropower, biomass, biogas, municipal waste, geothermal, tidal and ocean thermal, and liquid biofuel.

MEMR 50/2017 regulates the basic principles for PLN's procurement of power from renewables IPPs under a power purchase agreement ("PPA"). The key terms of the PPA are regulated separately under MEMR Regulation No. 10 of 2017 on Main Provisions of Power Purchase Agreements ("MEMR 10/2017"). 

Following a deluge of criticism since the issuance of MEMR 10/2017 and MEMR 50/2017 and the general stall of the renewables IPP developments in Indonesia ever since, MEMR initiated discussions with relevant stakeholders (including business associations, sponsors, lenders and PLN) mid-2019 in order to come up with a revised scheme for the development of renewables IPPs, including changes to applicable tariff principles. The main points under discussion, and which have now been partially addressed by MEMR 4/2020, included: 

• the tendering scheme (applicability of direct appointment for certain types of projects);
• modality of the projects (build own operate and transfer or BOOT vs build own operate or BOO);
• tariff levels (including the (re-)introduction of feed-in-tariffs ("FITs")); and
• the key principles applicable under PPAs for renewables IPP projects.

The issuance of MEMR 4/2020 came somewhat as a surprise to the key stakeholders and observers who had been following the regulatory overhaul process which was led by MEMR and which was meant to lead to the issuance of a Presidential Regulation to replace MEMR 50/2017, instead of a second amendment of the same regulation. It remains to be seen whether a separate regulation will indeed still be issued to address the remaining concerns with respect to the bankability and financial feasibility of renewables IPPs in Indonesia, including a commercially sound tariff and a fair and workable risk allocation under the PPAs.

Key changes introduced by MEMR 4/2020

PLN is allowed to carry out direct appointment

Prior to the issuance of MEMR 50/2017, direct appointment was one of the three tendering schemes available to PLN under Government Regulation No. 14 of 2012 on Electricity Supply Business Activities and, later, the short-lived MEMR Regulation No. 12 of 2017 on the Utilisation of Renewable Energy Resources for Electricity Procurement. 

This tendering scheme which was widely used by PLN for the award of renewables IPP projects (such as hydro-electric, geothermal, wind and even solar projects) was then overturned by Article 4 of MEMR 50/2017 which provided that all such projects (except geothermal and waste-to-energy – "WTE") must be procured on the basis of the direct selection process (pemilihan langsung). Direct selection typically involves a tender process in which only limited (pre-selected) developers can participate. In practice, since the issuance of MEMR 50/2017, PLN has implemented the direct selection scheme for renewables IPPs through the establishment of the DPT list (daftar penyedia terseleksi or selected provider list) which is updated from time to time and contains a large number of selected suppliers/developers which have fulfilled certain pre-qualification criterion and allows them to participate in relevant renewables IPP tenders across the country. 

The removal of the possibility for PLN to award projects through direct appointment was heavily criticized by industry participants on the basis that the direct selection scheme is not suitable for the tendering of certain types of renewables projects, in particular hydro and geothermal, which are location and resource specific.

MEMR 4/2020 has now amended Article 4 of MEMR 50/2017 and provides PLN with the option to carry out a direct appointment (penunjukan langsung) in the following limited circumstances:

• if the local electricity system suffers a crisis or emergency situations;
• for the purchase of excess electricity, including purchasing electricity through cooperation with the holder of an electricity supply business area (wilayah usaha);
• for the increased generation capacity at the location of an operating power plant (i.e., expansion projects); or
• for the purchase of electricity from renewable power plant in the event there is only one candidate IPP [for the relevant area].

Article 4 of MEMR 4/2020 also requires that all procurement steps comprising (i) qualification, (ii) proposal submission and evaluation, and (iii) execution of the PPA be completed within 90 calendar days for direct appointment and 180 days for direct selection, and introduces a maximum PPA term of 30 years (which is the maximum allowable PPA terms under the Electricity Law).

Other specific tendering schemes

Besides the renewed allowance to use direct appointment, MEMR 4/2020 also provides for other tendering principles to apply in certain specific circumstances: 

• Intermittent plants using high technology
  
  Article 4(2) of MEMR 4/2020 provides for the continuation of direct selection based on "Capacity Quota" (i.e. the maximum capacity that PLN will buy within a certain area for a specific type of renewables project , for a certain period of time and at a certain pre-determined price) for intermittent plants utilising high technology (which should be assumed to refer to solar, wind, and tidal).

• Hydro
  
  MEMR 4/2020 allows for direct appointment to be used in two specific circumstances involving hydro IPP projects:
  
  • Article 26B of MEMR 4/2020 allows PLN to carry out direct appointment for hydroelectric IPP projects that have already obtained their relevant site permit at the time of enactment of MEMR 4/2020 (i.e., 26 February 2020); and
  • Article 7A allows direct appointment for hydroelectric plants developed by an awardee of a multi-function dam or irrigation channel utilisation project, which is carried out through a separate procurement regime under the purview of the Ministry of Public Works and Public Housing.

• Waste-to-Energy
  
  Article 10 (3a) confirms that, for WTE projects, PLN will not need to carry out a separate IPP appointment and, instead, will purchase the electricity directly from the awardee of the WTE project procured by the applicable regional government. 

Removal of the requirement to use the BOOT scheme

MEMR 50/2017 introduced the requirement for all renewables IPP projects to be carried out under the BOOT scheme. This requirement was also the object of intense criticism from market participants in that it de facto compelled developers to purchase full ownership rights over the project site for the same to be transferred to PLN at the end of the term of the PPA. The cost and (in certain cases) added complexity to procure such ownership rights (instead of securing long term leasehold rights) had a corresponding impact on the tariff level which can be offered by developers, particularly in regions where land costs are high (such as most of Java and Bali).

MEMR 4/2020 now removes such requirement to deliver renewables projects as BOOT, enabling the adoption of the BOO scheme which is common and important for the commerciality of projects that are not site-specific such as solar PV and biomass/biogas projects.

It is worth noting that the possibility to implement renewable projects under the BOO structure has also been extended to "pre-existing projects", being projects which have been procured under MEMR 50/2017 and whose PPAs have been executed. Pursuant to Article 26A MEMR 4/2020, such PPAs may also be adjusted to the BOO scheme, subject to any applicable agrarian and civil legal requirements. It is difficult to see how PLN would want to change such fundamental aspect of projects which have already been awarded given that this would ultimately play out in its disfavour in relinquishing its ownership rights at the end of the term of the PPA, and even if it were to contemplate doing so, this would be subject to intense scrutiny by the relevant regulators including the State Auditor (BPK).

Extended "must-run" regime

Another positive development from MEMR 4/2020 is the expansion of the obligations for PLN to prioritize the purchase electricity generated from renewables IPPs on a "must-run" basis, which means that PLN must prioritize the dispatch of such plants against available capacity from conventional/thermal plants. This is a change from the regime which prevailed under MEMR 50/2017 and which limited the must-run regime to renewables plants with a capacity up to 10 MW.

No changes to the tariff regime

In terms of the purchase price paid by PLN under PPAs with renewables IPPs, MEMR 4/2020 does not change and affirms the tariff regime under MEMR 50/2017 that relies on benchmarking based on the local BPP (biaya pokok penyediaan pembangkitan, PLN's average electricity generation cost as determined annually by MEMR based on PLN's own calculation) against the national average BPP. Under the BPP regime: (i) in case the local BPP is higher than the national average BPP, a maximum purchase price is set (typically 85% of the local BPP, except for hydro, WTE and geothermal plants that allow the maximum tariff to be set up to the level of the local BPP), and (ii) in case the local BPP is equal to or lower than the national BPP, PLN and the IPP are allowed to agree on the applicable tariff on a B2B basis although in practice, PLN generally seeks to impose a tariff through its owner's estimate (HPS) which is no higher than the local BPP.

Certain exemptions from the BPP scheme are however available. For liquid biofuel projects, PLN and the IPP may agree on the applicable PPA tariff, so long as the latter can guarantee availability of feedstock during the term of the PPA. In certain WTE projects delivered under Presidential Regulation No. 35 of 2018 on the Acceleration of Development of Environmentally-Friendly Waste-to Energy Installations, a fixed feed-in-tariff is available (with a maximum of US$13.35 cent/kWh for projects under 20MW). 

Tariff setting has been a key issue in the ongoing discussions on the replacement of MEMR 50/2017 as the market perception has been that the BPP is not a relevant benchmark to be used for the offtake from renewables projects, particularly in areas where the local BPP is at a level which does not allow for most renewables projects to be commercially viable. Without any changes to the PPA tariff setting, MEMR 4/2020 leaves the commerciality and attractiveness of renewable projects dependent on the specific location of the relevant projects being tendered and falls short of the comprehensive regulatory overhaul required to reignite traction from market participants and investors required to boost Indonesia's renewables share in the generation mix.

Conclusion

MEMR has sought to partially address the intense criticism surrounding the regulatory framework applicable to the development of renewables IPPs since the issuance of MEMR 50/2017 by reinstating direct appointment as a way to procure renewables IPP projects and removing the requirement that such projects be developed as a BOO. This shift in policy appears intended to create a more conducive investment climate for the development of renewables IPP projects but falls short of the discussions that were taking place between the Government and industry participants and which were targeting a much wider overhaul given the sluggish pace of development of renewables generation in the archipelago for the past 3 years. 

Without tackling the issue of tariff setting in vast areas of the country (especially the population and consumption centres of Java-Bali and certain areas of Sumatra), and providing assurance of a stable and balanced PPA framework, it is likely that these latest changes brought by MEMR 4/2020 will not (yet) allow for a much-needed uptick in the development of renewables IPPs which should otherwise have materialized in the largest economy of the ASEAN community given the surge of activity encountered in other regional markets such as Vietnam and the Philippines.

Authors: Frédéric Draps, foreign legal consultant; Suci Modjo, senior associate, Khairunissa Yuliandhini, junior associate