Client briefing: Solar power projects in Indonesia

A national fuel subsidy cut announced by President Joko Widodo at the end of 2014 brought optimism and high expectations for the growth of Indonesia’s renewable energy sector, including solar energy.

PT Perusahaan Listrik Negara (Persero) (PLN), the state-owned utility company and primary off-taker of electricity in Indonesia, revealed in its Electricity Business Plan 2017–2026 (known as the RUPTL) that Indonesia plans to implement a program of “solar power plants for 1,000 islands/ locations”. This program aims to develop solar photovoltaic (PV) power plants in remote islands and other locations facing transmission line expansion or access issues or lacking transportation.

Under the RUPTL, the plan is to develop up to 5,000MW of solar power plants by 2025. Several regulations have been issued on renewable energy for power plants, including solar energy, to help accelerate private sector development of solar power plants. These regulations include Minister of Energy and Mineral Resources (MEMR) Regulation No. 19 of 2016 on Purchase of Electricity from Solar PV Power Plants by PLN (Regulation 19/2016) and MEMR Regulation No. 50 of 2017 on the Use of Renewable Energy for Electricity Generation (Regulation 50/2017). The main changes introduced under Regulation 50/2017 are covered in our August 2017 Indonesian energy regulation update.

PLN can procure electricity projects in Indonesia in one of three ways: a competitive/public tender, direct selection, or direct appointment.

Under Regulation 19/2016, PLN may select solar power project developers by direct appointment and then purchase the electricity they generate. A business entity interested in developing a solar power plant must first be designated as a “solar PV developer” by registering with the MEMR and undergoing the pre-qualification process. The feed-in tariff payable will depend on the purchase price determined within a certain period for the maximum capacity of power plants offered to business entities (capacity quota) specified for the particular region.

Following the issuance of Regulation 50/2017, if PLN wishes to purchase electricity generated by solar PV plants, it is now required to:

• go through direct selection based on capacity quota, under a Built, Own, Operate and Transfer (BOOT) basis;
• apply the tariff framework set out in Regulation 50/2017, which is intended to lower the local “BPP Pembangkitan” – ie the prime costs incurred by PLN in providing electricity, excluding the cost of electricity distribution). The tariff is determined as follows:
  1. if the local BPP Pembangkitan is higher than the national average, the tariff may reach up to 85 percent of the local BPP Pembangkitan; and
  2. if the local BPP Pembangkitan is less than or equal to the national average, the tariff will be determined by agreement between the project owner and PLN (ie B2B basis).

Local and national average BPP Pembangkitan are the parameters, by reference to the previous year’s BPP Pembangkitan, which was set by the MEMR based on a proposal from PLN.

• ensure the locations of the power plants are scattered.

The BPP Pembangkitan varies with the regional location. Some members of the Indonesian business community feel that the tariff framework under Regulation 50/2017 may trigger a surge in solar PV projects in eastern Indonesia, where the local BPP is relatively high.

In March 2017, French energy group ENGIE and PT Arya Watala Capital entered into a partnership to invest US$15m over three years to develop power generation capacity of up to 10 megawatt peak (MWp) in East Nusa Tenggara, which is the southern most province of Indonesia. The projects will be located in ten different areas of the province, on major islands including West Timor, Flores and Sumba.

On 2 June 2017, The Jakarta Post reported that ENGIE had also signed an agreement with Indonesian private energy company Electric Vine Industries to develop and operate solar photovoltaic smart microgrids in Papua over the next five years, with a total investment value of US$240m.

And on 20 July 2017, Sindonews.com reported that PLN – through subsidiary PT Pembangkitan Jawa Bali (PJB) – and Masdar, a United Arab Emirates electricity company, plan to construct the first floating solar power plant in Indonesia. The plant is to be located at Waduk Cirata, with total capacity of 200MW and a projected investment value of US$300m.

A project company being used to develop solar PV power plants, and which will then become an independent power producer, must be a limited liability company (PT) established under Indonesian law and domiciled in Indonesia. As a general rule, a PT must have at least two shareholders.

A project company with foreign investment must establish a Penanaman Modal Asing Company (PT PMA), which falls under the auspices of Indonesia’s Investment Coordinating Board (BKPM) and is subject to the following foreign shareholding restrictions under Indonesia’s so-called Negative Investment List (see box):

• <1MW: closed to foreign ownership
• 1–10MW: up to 49 percent foreign ownership
• >10MW: up to 95 percent foreign ownership or 100 percent foreign-owned under a Public Private Partnership (PPP) scheme.

In order to establish a PT PMA project company, the founders (and prospective shareholders) of the PT PMA will need to:

1. apply for and obtain an In-Principle License from BKPM (see box), and
2. execute a Deed of Establishment (setting out the articles of association of the PT PMA) before a notary.

Approval from the Minister of Law and Human Rights for the Deed of Establishment must be obtained before the project company can be legally established.

• The project company must meet a minimum investment threshold (see box), and satisfy the debt-to-equity ratio, which is set by BKPM on a case-by-case basis.
• Prior to engaging in business as an independent power producer, the project company will need to obtain various licenses and permits, including an Electricity Business License (Izin Usaha Penyediaan Tenaga Listrik or IUPTL), which is the main business license for an IPP company.

This client briefing is intended to provide a general understanding on the development of solar PV generated electricity in Indonesia. For advice on specific matters and transactions, please contact Nadia Soraya.