Indonesia: Key Considerations For Foreign Investors In The Indonesian Power Sector

Last Updated: 9 February 2018
Article by Justin Tan

Indonesia is currently undergoing massive growth and transformation in its power sector following a string of reforms to facilitate the five-year 35 GW program promulgated by President Joko Widodo in 2014. The projected USD 93 billion expansion has attracted both local and foreign investors to invest in both traditional as well as renewable energy production. In this article, we explore four areas that foreign investors should consider, before deciding whether to make a move into the Indonesian power industry.

Criteria for developer

On 28 June 2016, the Ministry of Energy and Mineral Resources (MEMR) issued Regulation No. 19 of 2016, which revokes the former Regulation No. 17 of 2013. Foreign investors should take note of this new regulation as MEMR will now determine whether a foreign investor qualifies as a developer on a first-come-first-serve basis in accordance with the following procedures:

  • A foreign investor registers itself as a developer candidate through an online system to be launched by MEMR;
  • MEMR will verify documentation submitted by such candidate;
  • MEMR will then inform such candidate on the eligibility to apply for quota capacity;
  • Such candidate then submits an application to have quota capacity to MEMR;
  • MEMR will verify the documentation submitted by such candidate; and
  • MEMR will then declare such candidate a developer of specific quota capacity.

To be registered as a developer candidate, a foreign investor needs to establish a foreign investment limited liability company under Indonesian law (PMA Company). The establishment of the PMA Company is subject to certain investment regulations and restrictions including, among others, Presidential Regulation No. 44 of 2016 (Negative List). Pursuant to the Negative List, maximum foreign ownership in a PMA Company which operates on a small scale (1 – 10 MW) is 49% and large scale (capacity >10MW) is 95%. This local partner requirement should be considered by foreign investors when planning their project.


Land acquisition is the biggest challenge for foreign investors looking to invest in the power sector. The process may take years, and could cause substantial delay and uncertainty.

To counter the land acquisition issue, the Indonesian Government has promulgated Law No. 2/2012 on Land Procurement for Public Interest Development (Land Acquisition Law), together with accompanying regulations. These regulations are intended to speed up the current lengthy land acquisition process. The maximum time period is in theory 583 working days from the date of submission of the land acquisition plan to issue of the certificate of registration.

However, foreign investors should not be overly buoyed by the reforms introduced by the Land Acquisition Law, as there have been many cases where local residents, supported by environmental activists, refuse to release their land due to what they perceive as an unfair compensation process. For example, the USD 4 billion Batang plant, a 2 GW coal-fired power plant in Central Java, originally scheduled ground-breaking for 2012, but was delayed until August 2015, due to problems caused by land acquisition.

When selecting a site for the power plant, it will be better for foreign investors if the chosen site is on state land. The acquisition process will likely be smoother, if the livelihoods of the local people are not affected. In addition, the taking over of state land, if previously not a greenfield site, requires merely undertaking a coordination process between institutions, avoiding the need to go through a convoluted restitution process with local residents and businesses.


Another key concern for foreign investors is financing. Indonesian power projects have largely been financed by international lenders and export credit agencies, such as the Japan Bank for International Cooperation and the Korea Export Import Bank.

An important issue for the choice of lenders is the availability of a government guarantee. Presidential Regulation No 4/2016 on Acceleration of Power Infrastructure Development, issued on 8 January 2016, introduces a new government guarantee for development of power projects, which covers both projects developed by the state-owned electricity company, PT Perusahaan Listrik Negara (PLN), and those projects developed by PLN in cooperation with independent power producers (IPP) or their subsidiaries.

However, the euphoria brought about by the new PR No 4/2016 appears to be premature, as MEMR subsequently issued Regulation No. 10/2017 on Principles of Power Purchase Agreements on 19 January 2017 which, for the first time in any material way, seeks to impose certain requirements as to what provisions must be built into Power Purchase Agreements (PPA) in the power sector.

Some of the changes raise major bankability concerns. For example, where PLN is unable to evacuate the power from the power plant due to force majeure, PLN is relieved of its payment obligations.

Regulation 10/2017 seems to have removed the discretion of PLN to negotiate PPA terms with the developers, and is a move away from the fairly standardised forms of PPA that PLN has developed over time. In light of these changes, foreign investors are advised to seek specialist legal advice, prior to entering any negotiation with PLN or the banks.

Further, foreign investors should take note of the regulations issued by the Central Bank of Indonesia as they impose, amongst others, reporting obligations on companies with transactions made with overseas banks or companies domiciled outside Indonesia, and a mandatory requirement to use Indonesian Rupiah in power project transactions, including the payment of power purchase.

Captive power

In addition to traditional power project models, foreign investors could also consider venturing into the captive power sector, which has been given a boost by the Indonesian Government, which plans to set up 11 special economic zones and 15 industrial estates throughout the nation. Unlike a power project under the PPP framework, a captive power project does not go through the tender process and, depending on the offtake options and procurement process, could be developed to financial close within just 2 years.

We outline briefly the main issues that foreign investors should take note of in relation to captive power project development.

Site selection

Key decisions for a developer when targeting sites would include whether to focus on greenfield or brownfield, electrified or remote regions, and tenant type and power requirements.

Investor and development

Having identified a site, a developer would need to decide if it plans to develop the site independently or in partnership. The requirements listed under the above section "Criteria for developer" would apply.

Licensing and consent

A developer would need to obtain the following from the government:

  • a supporting letter from the head of the local government;
  • national permits, including an electricity supply business permit, an operational license (izin operasi) and a designated operating area (wilayah usaha);
  • consent from PLN – if excess power is wheeled via the transmission and distribution networks of PLN or if other arrangements have been made with PLN.


A key downside of a captive power project is that, as most industrial estate tenants use short-term contracts to purchase power, such contracts may be inadequate for banks to lend money on a non-recourse basis. Funding directly from the parent, or financing with recourse to the parent, is often the more feasible option. Hence, a sponsor with a strong balance sheet may need to guarantee the debt, in order for its subsidiary to raise financing, or else raise such debt directly itself.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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