Have Indonesian Government Regulation Friendly Enough for Renewable Energy’s Investor?

Photo by IIGCE

JAKARTA (TheInsiderStories) – Indonesia is expected to face an energy crisis by 2020-2030 due to its inability to generate enough clean energy to meet the electricity needs of its growing urban population and industries. That’s why government has set ambitious target for renewable energy production to reach 8,050 megawatt (MW) by 2025.

Investment certainly become main story in upcoming Indonesian renewable energy development. Typically, renewable energy (geothermal, solar, wind, hydro, biomass, etc) plant need bigger capital than the capital needed for the construction of fossil fuel power plants.
It is estimated for 1 Geothermal Working Area need investment at least US$25 million. The question is, have Indonesian government regulation, procedures, permit friendly enough for investor? As we know Ministry of Energy and Mineral Resources (MEMR) has issued the Ministerial Regulation No. 12/2017 on the utilization of renewable energy sources for the provision of electricity.
It introduces new ceiling price mechanism to replace the feed-in tariff mechanism. With the ceiling price mechanism, the upper limit of tariff to be paid by PT Perusahaan Listrik Negara (PLN) has been determined. While in the fee-in-tariff mechanism, the price to be paid by PLN is the fixed price per unit produced.
Vice minister EMR, Arcandra explained, the new mechanism will reduce fiscal burden in energy subsidy. For long time, state budget allocate gap between production cost and determined tariff.
More important, the new mechanism aims lower power price on the consumer level. With ceiling price, when production cost pass average level (Rp900 per Kilowatt), the maximum price is 85 per cent of production cost. Contrary, when production cost is below average level, the maximum price is 100 percent of production cost. It will dragged power price down.
Arcandra admitted, price mechanism, together with tax tariff, land availability and banking rate affect investor in renewable energy development.
Recently, 53 independent power producer (IPP) sign power purchase agreement with state owned power company PLN with total renewable energy based power plant capacity of 350 megawatt, despite unfair price agreement. This deal is one of Indonesian government move to accelerate renewable energy mix that targeted to react 23 percent by next 2025.
The sign is initially set to be participated by 64 IPP. Yet, 11 IPP are unable to reach agreement, following unfair price scheme. Based on Ministerial Decree Number 12/ 2017, the price cover 85 percent of total local production cost use feed in tariff .
Even though, government has revised that policy to newer mechanism ceiling price that allowed IPP to get more fair price, PLN insist to use old mechanism. Moreover, the deal use Built, Own, Operate and Transfer (BOOT) schemes that won’t fit all IPP.
“CEO of PLN told me that there should be 64 IPP, instead of 53 IPP that will participate in this purchase deal. But its okay. We never push them. I think the price is interesting because we decide it based on technology development and standard from global,” Ignasius Jonan, Minister EMR said in one event.
Government want to accelerate energy mix use that only reach 8 to 9 percent at present. They want to reach 25 percent of energy mix use by next 2023. That target will normally be achieved in 11 years if government do it in “business as usual” way. Thus, government pursue PLN to boost renewable power purchase such as geothermal, wind, hydro-power solar, micro-hydro, steam, biomass, biogas, etc.
“We can understand if they can’t reach the deal. More over, this project will take very long time, about 20 until 25 years. If IPP can survive that long of course it will make both side loss,” he added.
Among IPP that sign the deal, PT Nusantara Hidro Utama agree with Arcandra. New price mechanism still allow investor to get proper profit, not too much, nor too little. The selling price is determined at 1,049  per Kwh.
“We can still gain some profit from such machinery optimization, utilities optimization etc. Moreover, we can lower funding from foreign investor with rate 4 percent. Lower than domestic banking loan rate of 10 percent,” Minadi Pujaya, its CEO added.
PLN’s planning director Nicke Widyawati implies that PPA use unfair price because previously all IPP has reach deal using old mechanism on April, when government hasn’t revise that regulation yet.
Riza Husni, Chairman of Hidro Power Plant Business Association see PPA that use old regulation will discomfort investor. “IPP will never sign PPA that will give them loss. Even IPP that can’t reach agreement, they already loss because they already invest in land acquisition etc,” he said.
Geothermal Potency
Indonesia is top three geothermal potency leader in the world, reached 28.6 gigawatt (GW), toping Philippine (4 GW) and the rest of the world excluding United States. Having abundance geothermal potency that equal to 24.7 percent of total world geothermal reserves that reach 119.3 gigawatt, Indonesia is passed by Philippines in term of installed capacity, 14.47 percent versus 15.93 percent.
Again, tariff incentive still become obstacle in geothermal power plant development. To build one geothermal well, it is estimated cost about $12 million. Additional cost includes EPC for power plant that cost $2 million per MW and development and maintenance that cost 1 cent per kilowatt. As regulated in Government Decree Number 7/ 2017, exploration phase and production phase is set to 7 years and 30 years respectively.
“Currently Indonesia only have 1,698.5 megawatt installed capacity from 70 geothermal area. The problem is tariff in geothermal investment was more premium compared with coal for example. The schemes (ceiling price) is less friendly for IPP because it doesn’t calculate infrastructure development in remote area including road or port to mobilize rig utilities,” Remi Harimanda, Director of Ormat Geothermal Indonesia told The Insider Stories.
He pessimistic that the new scheme will trigger more geothermal development in outside Java and Sumatera, because maintenance is much bigger, compared to Java and Sumatra that only cost 7 cent per kilowatt.
Government financial incentives including VAT and duty exemption for good used for exploration (PMK 107/ 2016), 5 percent net income tax reduction for each year over 6 years (PP 18/ 2015), accelerated depreciation/ amortization (PP 18/ 2015), compensation for losses incurred over 5 years period but no more than 10 years (PP 18/ 2015), 10 percent withholding tax reduction on dividend to foreign investor (or such lower rate determined by double tax treaty (PP 18/ 2015) and land and building tax exemption (PMK 172/ 2016), he think is not enough to attract investor.
“There should be interesting tariff model so that investor will flood geothermal area bidding,” he said.
(Written by Yosi Winosa, Email: yosi_winosa@yahoo.co.id