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Legal Updates | Indonesia New Coal Pricing Regulation


Against a backdrop of rising coal prices, election-driven utility-price freezes, and a lower than expected uptick in electricity demand, the Government has introduced a new decree designed to cap coal prices for public interest electricity supply. MEMR Decree No. 1395/K/30/MEM/2018, which was issued on 9th March 2018, does three things:

  1. It limits coal prices for public interest electricity supply at USD 70 per tonne for FOB coal. This price is applicable for relatively high quality 6322 kcal/kg GAR coal with a maximum moisture content of 8%, a total sulphur content of 0.8, and ash at 15%.

    For coal with different specifications, where the coal reference price (harga batubara acuan) is greater than or equal to USD 70 per tonne, the coal price will be adjusted by a formula (for differing specifications of coal) having regard to the benchmark price of USD 70.

    Where the coal reference price is less than USD 70 per tonne, then the applicable price for sales to public interest electricity producers will be determined on the basis of the coal reference price.

    In other words, the coal sales price for public interest electricity supply is capped at USD 70.

    The price cap will apply for the remainder of 2018 and 2019 for total sales of 100 million metric tonnes of coal per year.

    Decree 1395 did attempt to make this price cap retrospective, but this was quickly revoked by Decree 1410K/30/MEM 2018, issued a few days later.

  2. Notwithstanding what Directorate General of Mineral and Coal (DGMC) Decree No. 953.K/32/DJB/2015 on Production Cost to Determine Base Price of Coal says, royalties will be determined based on the actual sales price, rather than the reference price (unless the reference price is less than USD 70 per tonne, in which case that will be the price used to determine royalty).

  3. As a sop to coal producers, companies satisfying the DMO requirement at these capped prices may have their permitted production volumes increased by 10%.

The Decree applies to both coal IUP holders, and holders of CCOWs, even though the latter permit sales at market price, regardless of any DMO requirements.


As a general reminder, Indonesia's domestic market obligation requires coal producers to sell up to 25% of their coal domestically. If they fail to do so, then they may be prevented from exporting coal. So far, there has not been sufficient demand within Indonesia for this to be an issue. However, as Indonesia continues to rely on domestic coal in the future, this may pose more of a problem for its biggest suppliers and coal exporters.

Aside from the longer-term market impact and questions surrounding the effectiveness of non-market price controls, the Decree raises a number of issues. Chief among these is, what is public interest electricity supply? The term is not defined in the decree. However, having regard to the Electricity Law, the decree should be applicable for all coal sales to IUPTL holders, as an IUPTL is granted to entities to "carry out electricity supply activities for the public interest". On this basis, the decree will cover: (i) PLN; (ii) IPPs that sell power to PLN; and (iii) IPPs that have their own business area (wilayah usaha) and supply electricity directly to end users.

We assume, in this context, FOB refers to sales FOB mother ship (this is the basis of the FOB price under the benchmark price regulations – DGMC Regulation No. 999.K/30/DJB/2011 on Procedure to Determine Cost to Adjust the Benchmark Price of Coal, as amended by DGMC Regulation No.
644.K/30/DJB/2013). What benchmark price should be used where coal is not sold FOB? In practice, we assume that most sales to PLN, or to IPPs, will be made FOB.

The reference to sales of coal for the first 100 million tonnes applies to total sales of coal used for power generation; these are currently running at approximately 97 - 100 million tonnes per year. Given Indonesia's increasing reliance on coal power generation, what happens if this figure is reached? Will coal producers be allowed to sell coal to PLN/IPPs at a higher price? We presume that the cap of 100 million tonnes will be increased at that point. In the interim, as total coal sales for power hover at the 100 million tonne mark, it would seem to make sense for coal companies to delay rushing to agree sales agreements.

As set out above, mine-mouth coal power prices should not be impacted by the new regulation, as coal prices for these projects will continue to be regulated by MEMR Regulation No. 09 of 2016 on Procedure of Supply and Determination of Coal Price of Mine-Mouth Power Plants, as amended by Regulation No. 24 of 2016. The MEMR has confirmed this position. From PLN’s perspective, however, the cap on FOB coal sales prices may result in mine-mouth power projects becoming increasingly unattractive.

What should coal companies do?

There is no transition provision in Decree 1395. Accordingly, the capped price of USD 70 is effective straight away. It is not clear whether PLN or IPPs will seek to apply the regulation to existing contracts, although we imagine they will. Coal companies with existing supply contracts with PLN should review the regulation to determine what price they will get for their sales. They should also review their service agreements with service providers, to understand to what degree they face not only a price freeze, but a cost squeeze.

Notwithstanding the terms of their service contracts, service providers should expect a further continuation of the squeeze on their costs. Accordingly, they should review the terms of their service contracts, and in particular the force majeure provisions, to see how robustly these might be used by the coal companies.

This being said, the overall impacts of the new regulation are likely to be muted, at first. According to Fitch Ratings, most of Indonesia's big coal producers' sales are export driven. The impact is likely to be greater over the next few years, as Indonesian domestic coal usage increases. While PLN is not the only domestic consumer in Indonesia, removing the price pressure generated by PLN demand will, presumably, result in a general softening of prices across the domestic market.

Hadiputranto, Hadinoto & Partners, Member of Baker & McKenzie International - 19th March 2018

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Indonesia Snapshot

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)