Electricity regulations incentivise private investment in Indonesian energy

Seeking to support private investment for Indonesia’s 35-GW national power development initiative, regulators rolled out two new regulations in January 2017 intended to encourage efficient, fair and transparent development of the electricity supply. These regulations, which focus specifically on the power purchase agreement (PPA) between Perusahaan Listrik Negara (PLN), the state-owned power producer and transmission system operator, and independent power producers (IPPs), come at a time when the majority of new power generation in the 35-GW plan is expected to be derived from independent sources.

NOTABLE CHANGES: While the new rules largely reinforce the terms and principles which have typically been reflected in past PPAs, they also introduce a number of changes to important principles governing the risk allocation, contract and tariff structures between PLN and IPPs, some of which may hamper the bankability of future projects.

The first of these is Government Regulation No. 10 of 2017 on power purchase agreement principles (GR 10/2017), which applies to all power projects to be developed by IPPs with the exception of “intermittent” projects such as wind and solar, as well as mini-hydro (up to 10 MW), biogas and waste-to-energy projects. GR 10/2017 covers a number of provisions of the PPA including risk-sharing and allocation, the type of contract and contract period, penalties for failure to meet obligations and other provisions.

Unlike previous contracts, the new regime covers commercial aspects of the sale and purchase of electricity, whereas in the past these were always subject to negotiation between PLN, the IPP and the commercial lenders. Another significant change for IPPs is the 30-year limit placed on all build-own-operate-transfer contracts now applied in the sector, implying that extensions beyond this period will not be possible. A stricter penalty system is also in place for IPPs which fail to deliver according to the terms of their PPAs, with a pay-or-deliver scheme replacing the previous revenue deduction penalty, which was paid in proportion to the costs PLN incurred due to the failure. In addition, GR 10/2017 also originally included a provision related to force majeure, which was later rescinded under an amendment instated by Government Regulation No. 49 of 2017.

NEW RENEWABLE INCENTIVES: The second major change, Government Regulation No. 12, applies to the renewable energy sector not covered by Government Regulation No. 10 and replaces previous renewable incentive schemes. The new system establishes a tariff system for renewable projects based on the average cost of production in each region, with different technologies receiving tariff rates equal or less than the average costs of production in their particular region (see analysis).

Although the new system is likely to lower the costs of supplying energy for PLN, some renewable projects could become unviable under the new tariff system in spite of declining production costs and increasing technological efficiency. One factor producers will need to consider is the addition of new, inexpensive coal-fired power plants, which will make up half of the additional 35-GW capacity. With these new power plants, some with very low tariffs at between $0.04 and $0.07, depending on coal technology and size, it is expected that the average cost of generation (known by its Indonesian acronym, BPP) will continue to decline. Audited figures on the average cost of generation in 2015 place the national BPP at $0.075 per KWh, dipping to $0.0739 per KWh in 2016. This could pose a challenge for many renewable producers which may find it difficult to produce at this price level. Solar producers located in Lampung, for example, are now in line for a tariff of $0.06 per KWh (85% of the regional BPP of $0.077 per KWh) whereas under the previous feed-in tariff system utilised in 2016, producers would have received a rate of $0.15 per KWh.