Long-awaited Reform of Indonesia’s Renewable Energy Sector

After several years of discussions, the Indonesian Government has finally issued Presidential Regulation No. 112 of 2022 on Accelerating Development of Renewable Power Supply (PR 112/2022).

SUMMARY OF KEY CHANGES 

PR 112/2022 introduces three key reforms to Indonesia’s renewable energy sector:

• New Electricity Tariff Regime. Under the new regime, renewable electricity tariffs no longer have to directly compete with existing local electricity generation costs (Biaya Pokok Penyediaan Pembangkitan or BPP). Instead, the vast majority of renewable energy projects will be subject to the maximum benchmark price set out in PR 112/2022, which will be re-evaluated annually.
• Revised Power Purchase Agreement (PPA) Procurement Framework. PR 112/2022 expands the use of direct appointments (the more straightforward procurement process), particularly for hydro and geothermal power plants.
• Prohibition on New Coal-fired Power Plants. PR 112/2022 formalises the Indonesian Government’s ban on new coal-fired power plants in the country (subject to certain exceptions). It also contemplates the preparation of a roadmap to accelerate termination of existing coal-fired power plant PPAs, subject to consideration of the power supply and demand balance.

These long-overdue reforms should generally be seen as a step in the right direction for Indonesia’s renewable energy industry. However, it remains to be seen whether:

• the maximum benchmark prices and location factors are sufficient (and will remain sufficient) to encourage new investment into the sector
• PLN, given its financial and electricity supply management concerns, will be willing to embark on a comprehensive package of new bankable PPAs at or near the maximum benchmark prices
• Government policies to accelerate termination of existing coal-fired power plant PPAs will lead to new renewable energy opportunities.

NEW ELECTRICITY TARIFF REGIME 

To date, the development of renewable energy projects in Indonesia has been somewhat hampered by the electricity tariff regime, which required renewable energy projects (depending on their size, location and type) to use pricing between 85 and 100 percent of the average local BPP. This BPP regime often required renewable energy projects to compete directly with the existing lower-cost fossil fuel power plants.

Maximum Benchmark Price Regime

PR 112/2022 introduces a new electricity tariff regime whereby most new renewable energy projects will have a pre-determined maximum benchmark price. The maximum benchmark price will apply to (among others) any solar, geothermal, hydro (other than peaker plants), wind, biomass or biogas power plant that is developed entirely by an Independent Power Producer (IPP).

The applicable maximum benchmark price is set out in Appendix I of PR 112/2022, and will vary depending on:

• the type of renewable power plant (eg, hydroelectric power plants will have a higher maximum benchmark price than biogas power plants)
• the size of the power plant (with prices generally decreasing as the size of the plant increases)
• if applicable, the term of the PPA (with higher prices generally available in the first 10 years than in the last 20 years)
• if applicable, a location multiplication factor (eg, a multiplication factor of 1x applies in mainland Java, Madura and Bali while a multiplication factor of 1.5x applies in Papua and West Papua).

Tables containing the maximum benchmark prices and location factors (based on Appendices I and II of PR 112/2022) can be downloaded by clicking on the button below.

The maximum benchmark prices under PR 112/2022 do not include the power network facility price, which must be determined based on negotiations with PLN (the Indonesian state-owned electricity company) and must not exceed 30 percent of the relevant electricity tariff, except with approval from Indonesia’s Minister of Energy and Mineral Resources (the MEMR).

Unfortunately for developers, PR 112/2022 expressly states that, except for electricity generated from geothermal power plants, once the relevant electricity tariff has been agreed with PLN at an amount at or below the maximum benchmark price, the electricity tariff will apply without escalation for the duration of the PPA.

PR 112/2022 states that benchmark prices will be re-evaluated annually by the MEMR together with the Minister of Finance and Minister of State-owned Enterprises, taking into account the latest average PLN contract prices. While PR 112/2022 is not entirely clear on this issue, we expect that such re-evaluated prices will only apply to PPAs entered into by PLN after the change to the maximum benchmark prices, and would not apply to any PPAs executed previously.

It is important to note that the maximum benchmark prices set out in PR 112/2022 are not fixed prices but caps on the amounts payable by PLN. While we see the Indonesian Government’s move away from the previous BPP regime as a positive development, it remains to be seen whether PLN will be willing to enter into PPAs with electricity tariffs at (or near) the maximum benchmark prices.

Deal Price Regime

The maximum benchmark price regime will apply to all renewable energy power plants which are entirely developed by IPPs, except for:

• hydro peaker power plants;
• biofuel power plants; and
• sea-wave power plants,

which are instead subject to a “deal price” regime. Under the deal price regime, electricity prices will be negotiated directly with PLN, and will not be subject to a maximum electricity price. Once the deal price has been agreed, it must then be approved by the MEMR.

REVISED PPA PROCUREMENT FRAMEWORK 

Like the previous regulatory framework, PR 112/2022 allows PLN to purchase electricity generated from renewable power plants by direct appointment or direct selection, depending on the type of power plant developed by an IPP.

Under the previous regulatory regime, direct appointments could only be used by PLN in one of the following circumstances:

• an emergency or critical situation in the local power system;
• capacity expansion;
• excess power; or
• where only one IPP is available to supply the electricity.

The direct appointment and direct selection processes under PR 112/2022 are summarised in the accompanying table.

PROHIBITION ON NEW COAL-FIRED POWER PLANTS 

As has been widely reported, PR 112/2022 prohibits the development of new coal-fired power plants that were not already under construction and had not reached financial close (based on the Electricity Supply Business Plan (RUPTL) in effect prior to 13 September 2022, being the effective date of PR 112/2022). However, PR 112/2022 does allow an exemption for the development of new coal-fired power plants that:

1. are integrated into natural resources processing/refining industries or part of national strategic projects;
2. commit to reduce their greenhouse gas emissions by at least 35 percent within 10 years of commencing commercial operations (compared with average coal-fired power plant emissions in 2021); and
3. will cease operations by 2050.

In addition, the MEMR will be responsible for preparing a road map to accelerate termination of existing coal-fired power plant PPAs, taking into account the power supply and demand balance.

Please reach out to the authors or your usual contact at HBT if you would like to discuss how this new regulation might affect your business.

10 October 2022

By Dhani Maulana M Pattinggi, Matthew Goerke and Paskalia Deviani Ekaputri

HBT Website Link: https://www.hbtlaw.com/latest-thinking/long-awaited-reform-indonesia%E2%80%99s-renewable-energy-sector