Indonesian Energy Transition – A Snapshot

White & Case LLP

White & Case LLP

Justin Nurdiansyah (Associate, Jakarta, Witara Cakra Advocates), Theresia Carolina (Associate, Jakarta, Witara Cakra Advocates) and Alvansa Vickya (Associate, Jakarta, Witara Cakra Advocates) are also contributing authors to this publication. 

In line with government objectives globally, Indonesia is working towards reshaping its energy policy.

In 2014, the Indonesian government took significant steps to establish the groundwork for Indonesia's new energy policy. This was achieved by issuing Government Regulation No. 79 of 2014 on National Energy Policy (which replaced the previous framework outlined in Presidential Regulation No. 5 of 2006 on the same subject). Amongst other things, this policy aims to achieve a national primary energy mix with minimum contribution of 23% from new and renewable energy sources by 2025, with a subsequent increase to 31% by 2050. 

In 2016, the Indonesian government affirmed its commitment to the Paris Agreement by enacting  Law No. 16 of 2016 on the Ratification of the Paris Agreement to the United Nations Framework Convention on Climate Change. This law formalizes Indonesia's commitment to reduce greenhouse gases ("GHG") emissions by 29% (in a business-as-usual scenario) or 41% (with international assistance) by 2030. In 2022, Indonesia enhanced this commitment through the Indonesian Enhanced Nationally Determined Contribution and is now targeting a reduction of GHG emissions by 31.89% (in a business-as-usual scenario) or 43.2% (with international assistance) by 2030.

Since 2022, the Indonesian government has continued to pass regulations and endorse policy papers that establish the legal and institutional framework for energy transition in the country. The implementation of these regulations and policies, however, lies in the hand of: (i) the new administration that will be installed at the end of 2024, and (ii) of course, PLN – Indonesia's state electricity company ("PLN"). 

This article highlights the Indonesian government's energy priorities that are reflected across the key regulatory and policy package that has been issued since 2022. This package is comprised of:

  • Presidential Regulation No. 112 of 2022 on Acceleration of Development of Renewable Energy for Electricity Provision ("PR 112") issued in September 2022.
  • Ministry of Finance Regulation No. 103 of 2023 on Granting of Fiscal Support through Funding and Financing Framework for Acceleration of Energy Transition in Electricity Sector ("PM 103") issued in October 2023 to implement PR 112 in relation to the financing support for energy transition.
  • Comprehensive Investment and Policy Plan under Just Energy Transition Plan (JETP) launched in November 2023.

It should also be noted that, in addition to the regulations and policies above, a bill on renewable energy is waiting to be passed by the legislative body.

Renewable Energy

PLN carries the institutional mandate to 'prioritize' renewable energy in the electricity procurement for the nation. At present, this mandate is not to fully eliminate coal (as discussed in further detail below). PR 112 provides detailed guidance on pricing and procurement methods for renewable power projects. While procurement methods have remained largely unchanged, PR 112 enacts significant changes with respect to pricing and tariff by replacing the previously unbankable BPP (Electricity Generation Cost) benchmarking with a ‘highest ceiling price' (as prescribed in the PR 112). This ‘highest ceiling price' is subject to a step down after 10 years or a negotiated price (to be agreed with PLN).

The other mandate pursuant to PR 112 is that PLN must use local content. Local content is regulated by the Ministry of Industry using a threshold approach – for example, solar panels have a 40% minimum local content requirement (this threshold will increase over time, as specified in Minister of Industry Regulation No. 54/M-IND/PER/3/2012 on Guidelines for Use of Domestic Products for Development of Electricity Infrastructure, as lastly amended by Minister of Industry Regulation No. 23 of 2023). This threshold approach presents a significant challenge on the supply side – to prepare for future demand the government is working on initiatives and packages to spur investment in manufacturing industries (e.g., solar panel manufacturing). Current market expectation is that these thresholds will be amendable, from time to time, to reflect the manufacturing industries' readiness to meet the demand.

Despite the Indonesian government's efforts, 2023 saw the lowest investment in renewable energy in the last six years (source: Kontan, MEMR). Multiple touch points have been identified which must be addressed to turn this around. This includes tariff, local content, electricity over supply (in some areas), transmission infrastructure and coal fired power plant replacement.

Coal Fired Power Plants ("CFPPs")

The road map

The government is preparing the road map that will guide national efforts to achieve CFPP emission reduction, including early retirement of CFPPs. The road map is being prepared by three ministries, namely the Ministry of Energy and Mineral Resources ("MEMR"), the Ministry of Finance ("MOF") and the Ministry of State-Owned Enterprises ("MSOE"). This road map will address various topics, including the reduction in GHG emissions from CFPPs, strategies for the early retirement of CFPP operational periods and enhanced alignment with other related policies.

New CFPPs still permitted under certain circumstances

Development of new CFPPs is no longer allowed, however, there are exemptions, namely (1) where a CFPP is already planned for in the Electricity Supply Business Plan ("RUPTL") issued prior to PR 112, or (2) where the new CFPP satisfies each of the following criteria:

  • it is built to support an industrial estate that is listed as a national strategic project or an industrial estate that is dedicated to enhance the value add of natural resources (e.g., nickel smelter, in reality, most of the nickel smelters industrial estate are still heavily relying on CFPPs); 
  • it is committed to reduce GHG emission by at least 35% (as compared to the average GHG emission of CFPP in Indonesia in 2021) within 10 years from commencement of operation, which could be by way of carbon offset, new technology, or increasing the number of renewable power projects; and
  • its operation does not go beyond the year of 2050. 

PLN's CFPP early retirement program

PR 112 provides for an umbrella legal basis for PLN to early retire PLN's own CFPPs or early retire private sector CFPPs under power purchase agreements ("PPAs"). The retired CFPPs may then be replaced with renewable power projects (if there is demand). However, PR 112 is not prescriptive as to mechanisms and timeline for PLN to achieve this. 

CFPPs that will be subject to early retirement must be incorporated into the PLN's RUPTL. A new RUPTL for 2024-2033 is anticipated to be issued soon and expectations are building that the new RUPTL will be greener than its predecessors. MEMR is tasked with the responsibility to determine projects which will be subject to an early retirement program (subject to obtaining approval of MOF and MSOE, and based upon a number of criteria such as the capacity, age of the plant, utilization, GHG emission level, economic value add, availability of funding and availability of technology).

Financing Support

PR 112 indicates that the government may offer fiscal assistance for the termination of PLN's own CFPP operations or PPAs, regardless of whether these terminations require replacements with renewable power projects. This assistance will be extended through a funding and financing framework with the goal of expediting Indonesia's continuous energy transition.

Through PM 103, the government has established a legal framework to provide blended financing (from the State Budget and other sources) for early retirement program of CFPPs as well as a legal framework for the institutional set up of the Energy Transition Platform ("ETP"). The ETP is a special purpose platform tasked with the role of procuring the financing for eligible projects.

Platform Manager

PT Sarana Multi Infrastruktur (Persero) (which is an MOF wholly-owned company) is tasked as the Platform Manager to operate the ETP, including to distribute the funding to eligible projects and source financing outside the state budget. PT Sarana Multi Infrastruktur (Persero) has previously been appointed as Country Platform Manager of Energy Transition Mechanism based on MOF Decree No. 275/KMK.010/2022. 

Guidance Committee

The ETP also has a Guidance Committee whose members comprise officials from the MOF. The role of the Guidance Committee is to determine eligible projects, provide a recommendation in respect of ETP financing and undertake any debottlenecking and cross-ministerial coordination to support the projects. 

Eligible projects

Energy transition projects that qualify for the financing support under the ETP are projects undertaken to early retire existing CFPPs and develop new renewable power projects to replace the retired CFPPs. A replacement renewable power project must satisfy the following criteria:

  • it is already identified in the RUPTL of PLN (whether located within or outside PLN's business area);
  • it has proven technology domestically and internationally;
  • it is classified as green project or yellow project in the Indonesian Green Taxonomy issued by the OJK (the Indonesian Financial Services Authority); 
  • it is committed to implement the ESG principles; and
  • other criteria as MOF or MEMR may require.

Note that the carbon units produced by the projects mentioned above must be utilized in accordance with the provisions of laws and regulations on the implementation of the carbon economic value.

Eligible parties

ETP financing may be accessed by PLN (or its subsidiaries) or the private sector provided that the early retirement plan is already incorporated in the RUPTL. To be eligible to submit an application to access an ETP facility private sector actors (either directly or via its shareholders, sponsors, investors or other prospective recipients) must hold  an electricity business license ("IUPTL").

ETP facilities

The type of facilities that will be available under the ETP are loan facilities, government investments, sovereign guarantees, public private partnerships and any other type of facilities. At this stage, additional detail has not been provided. It is expected that the Platform Manager will further develop the scheme to implement these broad range of facilities.

ETP source of fund

The ETP's funds may be sourced from the state budget or from international/governmental/multilateral institutions, local institutions, foreign commercial or non-commercial institutions, philanthropical agencies or climate and infrastructure funds. Funding support may be in the form of technical assistance or in-kind support (e.g., capacity building). The Platform Manager is authorized to enter into funding cooperation agreements with the aforesaid institutions.

Just Energy Transition Partnership (JETP)

Arguably the most awaited financing opportunity is the USD 20 billion commitment for Indonesia decarbonization that has been pledged by the International Partners Group (led by USA and Japan) and GFANZ Working Group under the JETP. As outlined in the joint statement issued in November 2022, this financing commitment is to be mobilized over the next three to five years. Subsequent to the joint statement, in November 2023, JETP launched a blueprint called the Comprehensive Investment and Policy Plan ("CIPP") that laid out the decarbonization pathway and priority actions that will tap the financing commitment. CIPP identified five investment focus areas: (1) expansion and modernization of transmission network and infrastructure, (2) early retirement and managed phase out (e.g., repurposing) of CFPPs, (3) acceleration of dispatchable renewable (e.g., bioenergy, geothermal and hydro), (4) acceleration of non-dispatchable renewable (e.g., wind, solar), and (5) enhancing renewable energy supply chain (e.g., solar PV manufacturing) – with a sixth investment focus area of 'energy efficiency and electrification' planned to be added in the subsequent 2024 version of the CIPP. The CIPP included recommendations for policy reforms across each focus area.

The heart of the JETP lies in the concentrated effort to mobilize financing from private and public sectors towards the identified focus areas and the ability to blend financing sources to take on higher risk projects which private finance would otherwise not be able to do. The form of financing under the JETP may be debt, equity, grants, concessional loan, capital market instruments, carbon finance, etc. 

There are currently two pilot projects for CFPP early retirement in JETP priority list, namely the Cirebon-1 660MW CFPP and the 1050 MW Pelabuhan Ratu CFPP.

Below is a figure from CIPP on the JETP prioritization of capital deployment.

Indonesian Energy Transition – A Snapshot

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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