Indonesia: Renewable energy in the Asia Pacific: a legal overview (3rd edition) - Indonesia

Carbon Markets and Renewable Energy Update (Australia)
Last Updated: 11 September 2013
Article by Stephen Webb

INDONESIA

OVERVIEW

JURISDICTION LANGUAGE
Civil law Indonesian (Bahasa Indonesia)


BUSINESS ENVIRONMENT

  • Ease of Doing Business Report 2013: 128 out of 185 (up 2 rankings)
  • Global Competitiveness Index 2013: 50 out of 144 (down 4 rankings)
  • Index of Economic Freedom 2013: 108 out of 177 (up 7 rankings)
  • Corruption Perceptions Index 2012: 118 out of 176 (down 18 rankings)
POPULATION INCOME GNI CAPITA (PPP TERMS)
242.3 million Lower middle $4,500

PROFILE

Indonesia is an archipelagic nation located in South East Asia. It is the fourth most populous country in the world and is home to the world's largest Muslim population. Its 13,466 islands foster a diverse range of cultures, languages and ethnicities, which inspired the country's motto of "unity in diversity". Indonesia was once a Dutch colony and declared its independence shortly after Japanese occupation ended in 1945. After a long period of political instability, Indonesia held legislative elections in 1999 and is now regarded as the third-largest democracy in the world. Important issues within Indonesia include combating poverty and domestic terrorism, the implementation of reforms and the promotion of transparency in its governmental institutions.

ELECTRICITY INDUSTRY OVERVIEW

  • Total installed electricity capacity in 2011 was 28.6GW. Of this amount:
    • coal accounted for 44%;
    • oil accounted for 23%;
    • natural gas accounted for 21%;
    • hydropower accounted for 7%; and
    • geothermal accounted for 5%.
  • Despite an abundance of indigenous fossil fuel reserves and renewables capacity, Indonesia is not self-sufficient in energy supply.
  • It is estimated that just 65% of the population has access to electricity or modern forms of energy, with electrification rates lower in remote and rural areas. Despite significant growth in electricity infrastructure in the last decade, per capita capacity remains low.
  • An additional 54GW of electricity capacity will need to be developed by 2020 to meet continued growth in demand. Accordingly, the Government has sought to diversify the country's energy supplies with an increased renewable energy contribution while also attempting to foster competition in the electricity market.

Government

  • The Ministry of Energy and Mineral Resources (MEMR) is the overarching government body for the energy sector. MEMR oversees the electricity master plan, which lays out the future goals and targets for the sector
  • The Directorate General of Electricity and Energy Utilisation, which is under the Department of Energy and Mineral Resources (DEMR), is the chief regulator of the energy sector.

Generation

  • The state-owned electricity company, Perusahaan Listrik Negara (PLN), owns most of the generation assets, transmission and distribution infrastructure.
  • In 1994, PLN's status was changed from a general company to a corporation. It also became the only "authorised agency of electricity business" (PKUK)permitted to provide electricity to the public. However, in 2009 PLN's role was further reformed when it was restructured to become a state-owned enterprise (BUMN).
  • Two wholly owned subsidiaries of PLN, Pembangkit Jawa-Bali and Indonesian Power, are now the primary generators of electricity. Overall, PLN effectively controls 86% of generation assets. Independent Power Producers (IPPs) and various electricity cooperatives also generate electricity, however PLN is the sole buyer of electricity and retains the right of first refusal.

Distribution and transmission

  • The low rate of electrification in Indonesia is largely due to distribution and transmission infrastructure shortages. Experts have warned that unless Indonesia's electricity infrastructure is updated, then the country could face an energy crisis within a decade.
  • Five distribution entities now act semi-autonomously from PLN to distribute electricity to the east, west, central Java, Bali and Jakarta regions.
  • The Indonesian interconnected system encompasses Java, Bali and Madura. The islands of Java and Sumatra are connected by a 39km submarine cable.
  • Despite the increased privatisation of the electricity sector, PLN controls all transmission infrastructure.

Electricity laws

  • Electricity Law No. 15/1985 allowed limited private participation in the generation phase through IPPs who sold electricity to PLN. However, PLN was granted exclusive powers over the transmission, distribution and ultimate sale of electricity. The impact of the Asian financial crisis, however, significantly limited the IPPs operation. This law has been revoked and replaced by Electricity Law No. 30/2009.
  • Electricity Law No. 20/2002 sought to further privatise the industry by allowing market-driven tariffs and independent regulation whilst also amending Law No. 15/1985. However, Law No. 20/2002 was ruled as unconstitutional by the Constitutional Court. In its decision, the Court considered that electricity is an industry sector that the Indonesian Government must control because it is "important to the state and affects the lives of most people". As a result, Law No. 15/1985 was reinstated.
  • Electricity Law No. 30/2009 is now the key piece of legislation regulating the electricity sector. Under Law No. 30/2009, the Government (Central or Regional) has the authority to issue licenses that are needed by entities to conduct activities in the electricity sector.
    Under Law No. 30/2009, PLN is treated as a BUMN and no longer has a monopoly power in the electricity sector. Law No. 30/2009 also provides for competition in the supply and distribution of electricity to end customers and establishes the basic framework for private entities to participate in the electric power business. Unlike Law No. 20/2002, which was intended to privatise the industry by allowing market-driven tariffs and independent regulation, Law No. 30/2009 still gives authority to the Government to control the energy sector.
  • Energy Law No. 30/2007 established the National Energy Council.

RENEWABLES INDUSTRY OVERVIEW

  • Renewable energy currently plays a minor role in Indonesia's energy supply, however the Government is seeking an increase in renewable generation to 17% of the total energy consumption by 2025.
  • Current estimates place total renewable energy capacity at 2.9GW (on-grid) and 3.2GW (off-grid). Given a total renewable energy potential within the country of 163.3GW, this amounts to an undeveloped renewables potential of 96%.
  • The Government is aiming for 10.1GW of new capacity comprising of 3.9GW of geothermal and 1.2GW of hydropower by 2014.
  • Indonesia has introduced a Climate Change Trust Fund to ensure that climate change is integrated into the development planning. The Government is seeking to become a regional leader on climate change mitigation and in 2009 voluntarily committed to reduce greenhouse gas emissions by 26% by 2020.
  • The US$400 million Clean Technology Fund was created to promote renewable energy, improve electrification rates and enhance energy efficiency within Indonesia. The fund's predominant focus is on developing Indonesia's large-scaled geothermal projects.
  • The Directorate General of Renewable Energy and Energy Conservation, which sits under the MEMR, is the chief regulator in the renewable energy area.

Hydropower

  • Indonesia has a significant hydropower potential of approximately 75GW, of which about half lies in isolated Papua.
  • The current total installed capacity for hydropower is estimated by MEMR to be 4.3GW.

Wind energy

  • Wind speeds averaging between 3m and 6m/s have encouraged government investment in small and medium sized wind projects, however large-scale wind farms are not feasible with such wind speeds.
  • Much like in Mongolia and China, Indonesia's most productive wind sites are located far from population centres, thus requiring extensive transmission infrastructure.
  • Indonesia is seeking a total installed wind capacity of 970MW by 2025.

Solar energy

  • The installed capacity of solar energy in Indonesia is just 12MW.
  • In 2009, 77,433 50W solar PV home systems were distributed to Indonesian households.

Geothermal energy

  • Geothermal energy is Indonesia's most feasible renewable energy source given that it accounts for roughly 40% of known geothermal capacity worldwide. Indonesia is currently the third largest geothermal generator.
  • Climate change activists like Al Gore have proclaimed that Indonesia can become the global geothermal superpower, while other analysts have called on the country to replicate its success in thermal coal production in the geothermal field.
  • Indonesia's total geothermal potential is reportedly 28.1GW, with current capacity of 1.2GW – a figure considered quite low given the country's potential.
  • A target of 5GW production by 2014 has been announced by the Government.
  • There is a separate legal regime for geothermal energy production in Indonesia compared to other forms of electricity. It is regulated by Geothermal Law No. 27/2003. A geothermal business requires a geothermal business licence, as well as the standard electricity supply business licence to generate electricity.
  • In April 2012, Indonesia signed an extensive geothermal cooperation agreement with New Zealand.

Biomass energy

  • The installed capacity of biomass in 2010 was 5.7GW, while biomass potential is approximately 50GW.
  • Indonesia is a leading exporter of palm oil.
  • Like East Timor, remote villages in Indonesia rely heavily on traditional biomass sources for energy.

Ocean energy

  • With 54,716km of coastline, Indonesia has vast potential for ocean current, wave and tidal energy. However, at present the country has no installed ocean energy capacity and just one demonstration project has been developed.
  • The estimated potential of ocean energy in Indonesia is between 10MW and 35MW per kilometre of coastline.

CURRENT ISSUES IN THE RENEWABLES INDUSTRY

  • Around 80% of Indonesia's geothermal resources lie in conservation forests, which are protected under Indonesian law. The Government has proposed to allow drilling in these conservation forests on the condition that the processing plant is located outside the conservation forest area. Still, developments within these areas require presidential approval and in May 2011 the Indonesian Government committed to a twoyear moratorium on forestry development as part of a US$1 billion forestry agreement with Norway. It will thus be difficult for Indonesia to balance its voluntary emission reduction targets which rely on reducing deforestation whilst also reaching its geothermal potential that is crucial for the country to avoid an energy crisis.
  • Commentators suggest that the Directorate General of Electricity and Energy Utilisation, which regulates the electricity industry, has no clearly defined role or free autonomy to balance the various interests in the energy sector. Additionally, the absence of an independent regulator, as well as infrastructure shortages, had led to cautiousness from foreign investors.
  • There is a large backlog of pipeline projects, particularly for geothermal projects. For instance, the World Bank has estimated that there are 580MW of geothermal projects in the pipeline and just 5MW of total capacity that have reached financial close.
  • The cost of electricity, like in Australia, is a politically sensitive issue. In 2011, the Government gave US$8 billion in subsidies to PLN to offset the renewable energy feed-in tariff scheme (see below). An ensuing proposal to raise the cost of electricity by 20% was met with mass strikes and demonstrations, ultimately defeating the proposal. It is estimated that only an 80% increase in electricity prices would cover production costs, which brings into question the financial viability of Indonesia's state-dominated electricity system.

RENEWABLES LAWS

  • Green Energy Policy 2004 is an MEMR Decision No. 2/2004 which aims to reduce the country's reliance on oil.
  • Geothermal Law No. 27/2003 gives power to the regional governments to develop geothermal energy and establishes a separate regime for geothermal licensing.
  • Governmental Regulation No. 70/2009 on Energy Conservation forms the National Energy Conservation Plan, promotes energy efficiency and offers incentives for the importation of energy-saving devices.
  • Presidential Regulation No. 5/2006 on National Energy Policy sets out the definition of renewable energy and the target for renewable energy production.

GOVERNMENT INCENTIVE PROGRAMS

  • Indonesia currently offers tax concessions for renewable energy projects, particularly geothermal energy projects. Incentives for geothermal projects include an investment credit of 20% of the qualifying capital investment, an extended tax loss carry forward period for up to 10 years, accelerated depreciation rates and a maximum dividend withholding tax of 10%.
  • The Ministry of Finance's Regulation No. 21/PMK. 011/2010 provides similar tax and also custom incentives for other renewable energy technologies.
  • Importantly, since 2002, the MEMR has also established a feed-in tariff scheme for renewable energy. However, international developers have not been as attracted by the feed-in tariff given the fixed end-user energy prices, which are regarded by many as unsustainably low.

MAJOR PROJECTS/COMPANIES

  • Ulumbu Geothermal Power Plant, which supplies electricity to neighbouring districts, has a capacity of 5MW.
  • There are a number of other geothermal plants that have recently become operational, including a 20MW plant in Lahedong.
  • Cisokan hydropower plant has a capacity of 1GW. The project is substantially funded by the World Bank.
  • As part of Indonesia's Power Transmission Development Phase II, PLN is undertaking extensive repairs to the transmission infrastructure on grids in Java-Bali, Sulawesi and Kalimantan. This is being funded by the World Bank.
  • The Itochu Corporation of Japan has been one of the largest sponsors of renewable energy projects in Indonesia.

FOREIGN INVESTMENT/OWNERSHIP

  • Investment Law No. 25/2007 requires foreign investors in the electricity sector to obtain a foreign investment license from the Capital Investment Coordinating Board (BKPM). In order to obtain the foreign investment license, an Indonesian company must be established under the Investment Law. The Indonesian company can then apply to MEMR for a licence to engage in the energy sector.
  • BKPM provides a one-stop integrated service to handle the investment application process.
  • Like the Philippines, Indonesia has a "negative list" for foreign investment. It is set out in Presidential Regulation No. 77/2007 (Perpres), as amended by Perpres 36/2010. Generally, this list limits foreign ownership in the production, transmission and distribution of electricity up to 95%. However, since Perpres No. 36/2010, foreign ownership is allowed for small-scale power plants of 1 to 10MW throughpartnerships or cooperatives. Geothermal facility services may have foreign ownership of up to 90%. Clearly though, there are limits on foreign ownership for larger renewables projects.
  • Industry analysts have recognised an increase in foreign investment as crucial to growing renewable energy development in Indonesia.

RELEVANT INTERNATIONAL TREATIES

  • Indonesia is a signatory to the United Nations Framework Convention on Climate Change, however it has no emissions reduction targets. Like other non-annex one countries, Indonesia has voluntarily committed to reducing emissions.
  • It is a member of the Association of South East Asian Nations (ASEAN), which promotes sustainable energy through the ASEAN Centre for Energy.

© DLA Piper

This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.


DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to www.dlapiper.com

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Practice Guides
by Mondaq Advice Centres
Relevancy Powered by MondaqAI
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions