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In 2013, the Indonesian government first introduced a solar power regulatory regime, which required the government to publish solar power quota allocations for various parts of Indonesia, with interested developers then submitting competing bids to supply the solar power to the state-owned power utility firm, PLN, at the lowest tariff (with the maximum tariff which could be bid being subject to a cap of $0.25 USD per kWh (where no locally sourced equipment was used) and $0.30 USD per kWh (where a prescribed minimum amount of local content was used). However as referenced in a previous article, the Indonesian Supreme Court struck down this 2013 framework as being inconsistent with prevailing regulations, primarily on the basis that any regulatory framework put forward by the government should oblige the interested developers to use a certain amount of local content for their projects (and not give the developers the option to opt-out of local content requirements).
The Indonesian government has now filled the regulatory void left by that Supreme Court decision through the issuance of Minister of Energy and Mineral Resources Regulation No. 19 of 2016 on Purchase of Power by PLN from Solar Photovoltaic ("Reg 19").
The major changes introduced under Reg 19 which differ from its 2013 predecessor are:
Reg 19 provides a two-stage process for the appointment of a developer to construct and operate solar photovoltaic (PV) power plants:
Following the designation as a "solar PV developer", that developer will then proceed to execute a Power Purchase Agreement ("PPA") with PLN, and thereafter finance, construct and operate the solar PV project.
Where the government intends to commence a process of seeking developers for solar PV projects, the government, through the Directorate General of New and Renewable Energy and Energy Conservation ("EBTKE") of the MEMR, will call for interested developers to apply for registration. The call for registrations will be made one month prior to the registration window being opened.
Once the registration window is opened, interested developers will have seven days to lodge the required documents, and EBTKE will take a further 6 days to determine whether the interested developer fulfils the administrative and financial requirements.
The documents required to be submitted by an interested developer during this period are in the nature of pre-qualification documents, and are not project or site-specific. The information to be submitted includes the corporate profile, financial capability, corporate establishment documents, Indonesian tax registration number and any foreign investment principle permits.
As and when EBTKE is ready to offer solar projects in certain regions of the country, the following process is as follows:
An aggressive development timetable takes effect upon being designated as a Solar PV Developer in respect of a specific quota allocation. The successful developer must:
The timeline for an interested developer becoming an Approved Developer Candidate is set out in Appendix A.
Appendix B sets out the timeline for (i) an Approved Developer Candidate being designated a Solar PV Developer, and (ii) the development timetable for a Solar PV Developer.
To register as an Approved Developer Candidate, Reg 19 requires applicants to submit among other things, its Indonesian taxpayer registration number (known by its Indonesian acronym NPWP) and the principle investment license.
Similarly, the Reg 19 process provides that upon an Approved Developer Candidate becoming designated as a Solar PV Developer, then that same entity must sign a PPA with PLN (i.e. there is no provision made for a new project company to be formed at that time to sign the PPA). Under the applicable regulations, the only entities entitled to sign PPAs with PLN are Indonesian-established entities (whether domestic or foreign-owned).
All of these requirements suggest that only Indonesian-established legal entities (which includes foreign-owned Indonesian companies) can register as an Approved Developer Candidate. EBTKE officials have confirmed to us this fact. That said, there have been similar regulations in other renewables sectors (e.g. geothermal) which have suggested (by the nature of the documents required to be lodged as part of the application process) that only Indonesian-established entities are able to participate, yet when the detailed application/bid documentation has been subsequently issued, that documentation has allowed foreign companies to participate in consortium with an Indonesian-established entity.
Under the applicable Negative Investment List, maximum foreign ownership in power projects with a capacity of more than 10 MW is 95% (unless the project is formally designated a PPP project (which is unlikely, due to the relatively small scale of solar projects) where 100% foreign ownership is permitted). For projects with a capacity of 10 MW or less, foreign ownership is limited to 49%.
The previous 2013 regime provided for qualified developers to vie for the capacity quotas on offer through a competitive tender process, with the lowest electricity tariff offered winning the quota allocation.
However under Reg 19, capacity quota is not tendered out to developers. Instead, the MEMR will offer the capacity quota to the qualified developers (i.e. the Approved Developer Candidates), and these developers will then submit an application on the size of capacity quota they are willing to develop to the MEMR, and the MEMR will then verify the capacity quota application — on a first-come, first-served basis. Based on this verification, the MEMR will later decide whether or not it approves the capacity quota size as proposed by the developer.
To avoid a monopoly situation where a single developer applies for all the capacity on offer, there are limits imposed on how much of the capacity quota on offer can be granted to a particular Solar PV Developer:
Reg 19 however also provides that if after the capacity quota has been offered for one month there is still available capacity quota, the Approved Developer Candidates that have obtained three capacity quota approvals may apply for another capacity quota for the remaining available capacity quota. But it is not clear whether the limitation on maximum capacity as stipulated in point (i) above will still be applicable for this additional capacity quota application.
Reg 19 defines capacity quota as the total maximum capacity of solar PV power plants offered to developers within a period with a determined feed-in-tariff.
The capacity quota per region will be determined by the MEMR based on PLN's power network system with a minimum capacity quota of 5,000 MW, which will be offered in stages. EBTKE has indicated in the media that the government's target is to offer this minimum 5,000 MW capacity quota by 2018.
The first of the capacity quota offers is laid out in Reg 19 itself. Attachment I of Reg 19 sets out a total capacity quota for each relevant region, including the applicable feed-in-tariffs for the capacity quota offering in the first stage. In this first stage offering, the government has offered 250MW to interested developers. Please see Appendix C for this first stage capacity quota offering for each region in Indonesia.
The capacity quota will be offered online for a maximum of 2 months for each offering — preceded by an announcement of the offering plan at the latest 4 months before the capacity quota offering. The next capacity quota offering can only be done after the lapse of this 2-month period, or after 80% of the offered capacity quota is taken up.
Applications for capacity quota must be submitted online and must be supplemented with the following documents:
Reg 19 provides the forms for the reports of the feasibility study and interconnection study. The feasibility study reports will need to include among other things benefits of the projects, description of the technology used, installed capacity, ownership, local content requirements, location, preliminary geotechnical analysis, environmental analysis, costs, risk mitigation, and warranty service. The interconnection study report will need to cover among other things, initial identification of voltage limit violations, analysis of distribution system, and interconnection facilities between the connecting point and the solar power plant.
There is no express requirement under Reg 19 for PLN to support and provide assistance to the candidate developers to prepare the interconnection study report, although from coverage of the interconnection reports we suspect data and information from PLN, in particular PLN relevant regional office where the proposed power plant is located, will be required. Accordingly, this requirement for an interconnection study may in fact become a de-facto method for PLN to pre-approve solar projects before the EBTKE quota allocation process even begins.
Reg 19 provides that for projects which have been negotiated with PLN on a business-to-business basis and for which the developers and PLN have not signed the PPA, Reg 19 states that the procurement process can be continued and the developers can sign the PPA with PLN (without having to follow the new rules under Reg 19). There are no details of how this business-to-business relationship has to be evidenced, but we expect that parties that have, prior to 12th July 2016, signed a Memorandum of Understanding, or letters of intent or the like with PLN will be able to use this exception.
The position for new projects is less clear — i.e. is there a way for developers to develop new solar PV projects with PLN on a business-to-business basis. The fact that Reg 19 contains a specific exemption for pre-existing business-to-business relationships does suggest that any new projects must follow the Reg 19 system (i.e. if the intent was to allow both pre-existing and future business-to-business developments to proceed outside the Reg 19 regime, then the relevant exception written into Reg 19 would not have been expressly limited to pre-existing business-to-business relationships with PLN).
However, from our discussion with the officials at the EBTKE, we understand that PLN may still appoint a solar PV developer outside the capacity quota offered under Reg 19 on a business-to-business basis. The procedures for the appointment of the developer will refer to PLN's procurement guidelines.
Reg 19 stipulates fixed feed-in-tariffs for each region within each capacity offering tranche, where the tariffs can differ from time to time for each capacity quota offering based on the discretion of the MEMR.
For this first stage capacity quota offering, the tariff ranges from $0.145 USD/kWh (for the Java area) to $0.252 USD/kWh (for the Papua area). Please see Appendix C for the feed-in-tariffs for the first capacity quota offering stipulated in Reg 19.
Further, Reg 19 also provides that the tariffs:
Reg 19 requires solar power plant developers to fully comply with the local content requirement for solar power plants as set out in the regulation issued by the Ministry of Industry ("MOI"). The prevailing MOI regulation on the local content level requirement for the development of power plants is MOI Regulation No. 54/M-IND/PER/3/2012 of 2012 ("Reg 54").
The local content level requirement for solar power plants under Reg 54 is as follows:
For communal power plants:
Reg 54 does not provide a definition on what constitutes a "communal power plant". However, we believe that "communal power plants" should refer to any solar power plants which sell the power produced to PLN or directly to end-customers.
Solar power plant developers must verify their self-assessment of local content level requirement by appointing an official verifier approved by the MOI. The verification results must be submitted to the EBTKE at the latest 30 days before the commercial operation date. If the verification results do not meet the requirements set out under Reg 54, the developers must replace the goods/services to meet the minimum percentage requirement within 60 days. However, Reg 19 further states that if a developer fails to submit verification results, a sanction will be imposed in the form of a decrease of power purchase tariff in the amount of the percentage difference between the verified local content level and the required local content level under Reg 54. That is, if the total local content of the project is only 40% instead of the required 43.85%, there will be a 3.85% decrease in the tariff. The decrease will be stated in the PPA.
Although Reg. 19 states that the sanction will be applied for failure to submit local content verification results, we would expect that EBTKE will also apply it where the verification results have been submitted, but the required level of local content has not been achieved.
Reg 19 sets out the following mandatory milestones with regard to the execution of PPA:
Please see Appendix B for more details on the above timeline.
Reg 19 requires the winning bidders of the capacity quota of solar photovoltaic power plants under the now-revoked 2013 regime to sign a PPA within 3 months after the promulgation of Reg 19 (i.e., at the latest on 12th October 2016). If they do not do so, their winning bidder determinations will be revoked.
Reg 19 — which removes tender requirements and sets the feed-in-tariffs — is another positive signal to the market on the seriousness of the government to accelerate development of the power sector to achieve the aggressive 5-year 35 GW programme and the aggressive renewable energy targets through to 2025.
However, to complete the picture on solar project reforms, the focus will now shift to:
If the new model PPA does represent a bankable document, there are high expectations that we will see significant levels of new investment in solar photovoltaic projects in Indonesia.
Hadiputranto, Hadinoto & Partners, Member of Baker & McKenzie International - 3rd August 2016
Capital: Jakarta
Population: 259 million (2016)
Currency: Indonesian Rupiah
Nominal GDP: $936 billion USD (IMF, 2016)
GDP Per Capita: $3,620 USD at Current Prices (IMF, 2016)
GDP Growth: 5.0% (2016)
External Debt: 36.80% of GDP (BI, Q2 2016)
Ease of Doing Business: 91/190 (WB, 2017)
Corruption Index: 90/176 (TI, 2016)
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