Indonesia power sector: New regulation on tariff and tendering for renewable energy projects

The Ministry of Energy and Mineral Resources of the Republic of Indonesia (MEMR) recently issued regulation No. 12 of 2017 on the utilization of renewable energy sources for electricity supply (Regulation 12/2017).

Key points:

  • This regulation supplements recent regulations issued by MEMR for specific types of renewable energies (minihydro, solar, biomass and biogas).

The new rules focus on two main issues: (i) the applicable tariff for the purchase by PLN of electricity from renewable generators and (ii) the tendering schemes to be used for awarding renewable projects to independent power producers (IPPs).

  • Some industry participants have voiced concern at the way Regulation 12/2017 sets ceiling prices for the purchase of renewable energy by reference to the “average cost of generation” which, in some regions, is substantially lower than the typical generation cost of most types of renewable energy plants. This may result in renewable power projects being uneconomical in a number of Indonesian regions (such as Java, Bali and most of Sumatra).

  • The new rules also raise questions about the integration between Regulation 12/2017 and prior regulations covering the tendering process for awarding renewable energy projects.

1. Scope of regulation 12/2017

Regulation 12/2017 is applicable to the following types of renewable energy projects: (i) solar PV, (ii) wind, (iii) hydropower, (iv) biomass, (v) biogas, (vi) city waste-toenergy and (vii) geothermal. The new pricing regime enacted by Regulation 12/2017 will apply to all projects which do not yet have a PPA signed at the date of issuance of the regulation (i.e. 27 January 2017), except for geothermal projects which have been granted a concession but where no PPA has been signed yet.

An important principle set out in the closing provisions of Regulation 12/2017 is that pre-existing regulations governing the tendering, development and tariffs applicable to certain specific types of renewable energy projects remain in force “so long as they do not contradict” the terms and principles of Regulation 12/2017. As we note below, the practical outcome of this principle is unclear, particularly with regards to the details of the tendering schemes which PLN will have to implement to procure renewable energy projects. For example, Regulation 12/2017 provides that solar PV projects will be procured through an auction process based on capacity quotas with minimum packages of 15MW, whereas MEMR Regulation 19 of 2016 on solar PV (Solar PV Regulation) provides for a detailed tendering regime consisting of a (i) pre-qualification stage to become an “eligible PV candidate”, and (ii) an online auction system where certain regional capacity quota allocations (which can be lower than 15MW) are to be awarded on a first come, first served basis. It is now unclear whether the tendering regime set out in the Solar PV Regulation remains applicable as well as how quotas will be set and allocated. For example, will these still be set on a regional basis as in the Solar PV Regulation? The same issues of coordination and integration of the principles set out in Regulation 12/2017 with tendering regimes for other renewable energy projects also arise and it is unclear how and when the details of the respective tendering regimes for each type of renewable energy projects will be settled.

2. Tariff framework

The pricing regime for the purchase of electricity by PLN from renewable energy projects enacted by Regulation 12/2017 revolves around the Biaya Pokok Penyediaan Pembangkitan (BPP) or “average cost of generation” which is issued by MEMR based on a recommendation from PLN. We set out in a table appended to this alert an overview of the pricing regimes for each type of renewable energy covered by the regulation. Regulation 12/2017 essentially sets three types of pricing regimes:

2.1. For solar PV, wind, hydro, biomass and biogas (except in case of direct selection for hydro, biomass and biogas)

If the local BPP in the region where a project is proposed to be developed is higher than the national BPP, then the applicable tariff will be maximum 85% of the local BPP and, depending on the tendering scheme applicable to the project, interested developers may be required to bid a price on a competitive basis which is no more than 85% of the local BPP; if on the other hand the BPP in the relevant region is lower than the national BPP, the tariff will be 100% of the local BPP.

2.2. For city waste-to-energy and geothermal

Where the local BPP is higher than the national BPP, interested developers will be required to bid a price which shall be no higher than 100% of the local BPP; if on the other hand the local BPP is lower than the national BPP and for all projects to be developed on Java, Bali and Sumatra, the price is to be agreed between PLN and the developer.

2.3. For hydro, biomass and biogas projects procured on the basis of a direct selection process

The price will be set based on the results of the direct selection process.

The pricing regimes above raise a number of key issues: 

  • The BPP in some cases is too low for renewable energy projects

The national and regional BPPs are calculated based on the average cost of generation on the relevant grid/ network and therefore may include large scale coal or gas-fired power plants as well as less efficient and more costly sources of power generation. In 2015, the national BPP (which is the average of all local BPPs) published by PLN was USD cents 7.5 /kWh and the local BPPs on Java, Bali and large parts of Sumatra was below that figure. If such tariffs are used as ceiling prices for renewable energy projects to be developed in these regions, we understand from feedback from the industry that it may render most renewable energy projects uneconomical in these regions where the majority of the Indonesian population resides.

  • How will developers be selected if the price has to be 100% of the local BPP?

Regulation 12/2017 somewhat strangely provides that in some cases, the price for the purchase of electricity from renewable energy projects will be 100% of the local BPP. In such cases where the price appears to be fixed, it is unclear how developers are then supposed to compete such as, for example, in the case of solar and wind projects which are supposed to be procured by way of auctions.

  • How and when is the BPP set?

It is yet unclear if the BPP will be denominated in USD or in IDR. Most of the recent renewables feed-in-tariffs (FITs) were denominated in USD but Bank Indonesia Regulation 17/3/PBI/2015 provides that prices and payments in Indonesia need to be set and made in Rupiah. Further, Regulation 12/2017 does not set out when and how the BPP will be calculated, but only provides that the BPP to be used as pricing reference for the procurement of a project will be the BPP of the previous year.

  • Are tariffs for renewable energy projects subject to escalation?

Regulation 12/2017 does not address the question whether the tariff agreed for a project between PLN and the relevant IPPs will be subject to escalation or not.

Tariffs in most PPAs for conventional projects are subject to escalation while the most recent FITs (for solar, biomass and biogas, mini-hydro and city waste-toenergy projects) were to be fixed throughout the term of the PPA.

3. Tendering schemes to award renewable energy projects

Regulation 12/2017 refers to three types of tendering schemes without, however, defining them nor providing any details as to how these are supposed to be implemented:

3.1 Auction process (solar PV and wind)

The only feature of the auction process to be followed for solar PV and wind projects set out in the regulation, is that such auction must be based on capacity quota packages of at least 15MW. The Solar PV Regulation also contemplated an auction based tender system involving (i) an online capacity quota application and (ii) an appointment on a first come, first served basis. It will have to be seen whether the regime under the Solar PV Regulation is maintained in essence or whether MEMR and/or PLN will come up with details for a new type of auction process which would also apply to wind projects which have so far been awarded on a direct appointment basis.

3.2 Reference price (hydro, biomass, biogas, city waste-to-energy and geothermal)

Regulation 12/2017 refers to “reference price” as a type of tendering scheme without providing any detail let alone guidance on what such scheme involves and how projects are to be awarded (i.e. Direct appointment? Competitive tender? A bespoke type of process?). The reference price itself for a project is to be set based on the local and national BPP as explained above.

3.3 Direct selection (hydro, biomass and biogas)

Regulation 12/2017 also contemplates the use of direct selection as a way to procure hydro, biomass and biogas projects. However, it does not set out the circumstances under which such projects have to or can be procured through direct selection rather than through the reference price mechanism which is also available for these projects. Further, the traditional concept of direct selection implemented by PLN in procuring power projects involves a competitive bidding process which is extended to a limited number of bidders. It is unclear how such limited bidders would be selected and how such competitive process can be used for hydro projects which are eminently site specific and where, unless a given site is allocated by PLN, it is difficult if not impossible to benchmark different bidders proposing different sites.

Finally, another point worth noting is that Regulation 12/2017 provides that PLN will have to issue standardised forms of PPAs for each type of renewable energy projects. A similar requirement was included in the recent solar PV and biomass-biogas regulations but we understand that these have not to date been fully implemented yet.

Commentary

The main aim of Regulation 12/2017, as openly communicated by officials of MEMR at various socialisation events, is to ensure that PLN’s procurement of electricity from renewable energy sources is made at the lowest price possible. This follows concerns that have been voiced by several institutions within the central and local governments (such as the lower house of the national parliament – the DPR) as well as PLN, that the feed-in tariffs which had been enacted so far (such as for mini-hydro, solar, biomass and biogas) were too high and cannot be funded based on the current budget and allocations of PLN. We also understand that in practice, PLN has been reluctant to implement these feed-in tariffs which has resulted in the stalled implementation of the mini-hydro, solar, biomass and biogas regulations.

While the aim pursued by the Government of Indonesia (GOI) to procure electricity at the best price possible for the State coffers is commendable, the pricing mechanism prescribed by Regulation 12/2017 based on the BPP sets a ceiling price at a level which renders most renewable energy projects uneconomical in vast areas of the archipelago where the bulk of the population resides. Such a pricing regime might render all forms of renewable energy projects in such areas practically unfeasible and, as a consequence, might seriously jeopardise the achievement of the ambitious target set by the GOI to have 25% of the electricity generation mix coming from renewable sources by 2025. This would potentially also nip in the bud the potential for an Indonesian domestic renewables sector made up of small and large scale domestic players contributing to the local economy and employment market as has been seen in numerous countries around the world following the surge in renewable energy projects over the past 10 to 20 years.

Hopefully, MEMR and/or PLN will without delay provide further guidance on the practical implementation of Regulation 12/2017 and details on the tendering framework and pricing regime which will apply in practice for each type of renewable energy projects in order to address some of the concerns reflected above and restore confidence of developers and other key market players.