Indonesia: Presidential Regulation 112: Indonesia's Commitment To Renewable Energy

Under PR 112, the government formally bans the development of new coal-fired power plants, with certain exceptions (including coal-fired plants that are already included in PLN's electricity development plan (RUPTL)) and require the Ministry to come up with a roadmap for the early termination of existing coal-fired power plants operated by PLN and IPPs.

Pursuant to the terms of power purchase agreements between PLN and IPPs that are typically and generally applied in Indonesia, early termination due to government's policy would be considered as "Government Force Majeure" that would require PLN to pay a termination fee to the respective IPP.

Now, under PR 112, the government can issue fiscal contribution in the form of blended financing from the State Budget or other source of financing to the IPP, to support the accelerated termination. For now, we have no clarity as to whether this fiscal contribution will be used to pay the termination fee or for other purposes. Instead, PR 112 mandates the Ministry of Finance to issue an implementing regulation to further detail the form of this fiscal contribution.

Under the 2021 RUPTL, the government is planning to construct around 13,819 MW capacity of coal-fired power plants between 2021 and 2030. Due to this inclusion in the RUPTL, these new plants will be exempted from the ban. With the ban on new power plants (subject to limited exceptions), it is interesting to see how the government plans to replace the load peaker role that has been traditionally placed on coal-fired power plant. In addition, one wonders whether the ban will affect Indonesia's coal mining production and causes volatility to the commodity price that we have seen in other countries that introduced the same ban or whether there will be an increase in the electricity price paid by end consumers.

Despite the push to have feed-in tariff (FIT) for renewable energy power plant from industry players and investors, the government has decided to introduce new ceiling tariff that varies depending on the types of renewable energy power plants and its location.

The concept of ceiling tariff is not much different from what is applied under PLN's Generating BPP scheme. Under the ceiling tariff scheme, the tariff offered and negotiated between an IPP and PLN must not be higher than the ceiling tariff for that particular type of renewable energy power plant, which is derived from the tariff set out in the appendices of PR 112 multiplied by the relevant location tariff. The difference with the Generating BPP's scheme is that the ceiling tariff for renewable energy power plant is no longer benchmarked against the Generating BPP for non-renewable energy such as coal, which is cheaper.

The basis for the tariffs set out under PR 112 is unclear, however, in our view, it does not deviate from the tariffs that were applied to successful renewable energy projects in Indonesia in general.

Under PR 112, the principles for the new renewable energy tariff are as follows:

1. The tariff and formula allow for tariff increment depending on the location of the plant, by applying a location factor ("F" factor) to the base tariff. Essentially, the government is providing incentive for the development of renewable power plants in frontier Indonesia.
2. The electricity transmission tariff (i.e., component E), which is the tariff to transmit the electricity downstream from the power plant's busbar to PLN's grid is capped at 30% of the base tariff. Exception to this cap is possible by obtaining the Ministry's approval.
3. Battery storage charges (if applicable) is capped at 60% of the base tariff. Exception to this cap is possible by obtaining the Ministry approval.
4. Payment of the tariff must be made in Rupiah but may be indexed against the fluctuation of exchange rates based on rates issued by Bank Indonesia (JISDOR).
5. The base tariff is not subject to escalation (except for geothermal power plant).
6. The ceiling tariffs are subject to annual review by the Ministry.

For the following renewable energy power plants, exception to the ceiling tariff may be applied if the parties (i.e., PLN and IPP), subject to the Ministry's approval, has commercially agreed on a tariff in excess of the ceiling tariff:

1. hydroelectric power plant – designated as load peaker;
2. tidal power plant; and
3. biofuel power plant.

3. Tender Process

PR 112 allows PLN to implement direct appointment or direct selection to streamline the purchase of electricity generated from renewable energy. The following table summarises the applicable tender process.

1. Fiscal incentives in the form of income tax facility, import duty, land and building tax facilities, geothermal development support, financing or project guarantees by Indonesian state-owned companies.
2. Non-fiscal incentives from the central and regional governments. The form of this incentives is unclear at this moment, and we expect further clarity after the enactment of the implementing regulations.

Surrounded by ring of active volcanos, Indonesia is estimated to have more than 29,544 MW of undeveloped geothermal resources. Hence, it is only fitting that under PR 112, the government provides support and incentives that are specific to the development of geothermal energy:

1. appointment of a public service agency (badan layanan umum) or a state-owned company to acquire additional geothermal data;
2. appointment of a developer to conduct preliminary survey and exploration in return for a right to match in the geothermal working area tender;
3. sharing exploration risk (known as 'derisking' scheme), pursuant to which the developer and the government will share the exploration risk and cost;
4. financing facility;
5. possible escalation of the electricity or geothermal energy tariffs (note that escalation is not permitted for other types of renewable energy);
6. the ceiling tariff set out under PR 112 to be referenced in any tender of a geothermal working area; and
7. PLN is tasked by the government to purchase the electricity or geothermal energy produced by way of direct appointment.

In consideration of PLN being the only offtaker, the tariffs determination will be the most crucial part of the geothermal energy development under PR 112. The above approach is intended to ascertain PLN's role as standby buyer and remove uncertainty on the tariff that will be applied to a specific working area.

Notwithstanding the foregoing, the Ministry or the Ministry of Finance is expected to issue further implementing regulation on certain incentives and support that will be provided for the development of geothermal energy.

All power purchase agreements signed prior to the issuance of PR 112 remains valid until the expiry of its term. On the other hand, all power purchase agreements that have not been signed must comply with PR 112 (irrespective of whether the Ministry have approved the tariff or not). If the agreed tariff exceeds the tariff under PR 112, then the Ministry's approval will be required.

Specific to geothermal power plants that are in the process of renegotiation:

1. the renegotiation must be concluded within six months after the issuance of PR 112;
2. if the renegotiated tariff is equal to or less than the ceiling price under PR 112, then the parties may sign the power purchase agreement without the Ministry's approval; and
3. if the renegotiated tariff exceeds the ceiling price under PR 112, then the parties must first obtain the Ministry's approval.