The power sector in Indonesia is at a critical stage and is facing significant challenges to sustain economic growth, meet growing demand and improve access. The reality is that a large number of Indonesians still do not have access to affordable and reliable electricity.
In a concerted effort to overhaul the power sector and accelerate the development of additional power capacity, the government of Indonesia:
* in late 2009, passed Law No.30 of 2009 on Electricity (Electricity Law of 2009), which ends the state electricity company, PT Perusahaan Listrik Negara's (PLN) monopoly, and gives private investors an opportunity to actively participate in the electricity sector;
* in early January 2010, passed Presidential Regulation No.4 of 2010 (PR No.4/2010) which provides a mandate to PLN to expedite the construction of power projects using renewable energy, coal and gas; the construction of these power projects can be carried out through cooperation with private investors (Electricity Generation Program II); and
* in late January 2010, passed Minister of Energy and Mineral Resources Regulation No. 2 of 2010 on the list of power projects to be constructed using renewable energy, coal and gas.
This article gives some background to the electricity landscape in Indonesia and on recent developments in electricity supply and distribution, including the key provisions of Electricity Generation Program II under PR No.4/2010 and the related provisions in the Electricity Law of 2009 for private investors to consider.
Background to the Electricity Landscape in Indonesia
"Sectors of production which are important for the country and affect the lives of the people shall be controlled by the state" (Article 33 paragraph 2 of the 1945 Constitution of the Republic of Indonesia as amended).
To implement the mandate contained in Article 33 paragraph 2 of the 1945 Constitution, PLN held the exclusive right and monopoly to supply and distribute electricity for public use in Indonesia. PLN's role in the supply and distribution of electricity for the country was confirmed by Law No.15 of 1985 on Electricity (Electricity Law of 1985).
In 2002, in an attempt to overhaul the electricity sector by opening it up to the private sector and thereby providing competition to PLN, the government passed Law No.20 of 2002 (Electricity Law of 2002) to replace the Electricity Law of 1985. However, in late 2004, the Electricity Law of 2002 was annulled following a challenge to the Constitutional Court since certain key provisions were held to contravene the Constitution.
In 2006, PLN's dependence on oil fuel for its power plants, and the fluctuation in oil prices, led to a sharp increase in PLN's production costs and higher power subsidies. At the same time there were power supply shortages and an increased demand for electricity. The government instructed PLN to carry out a "crash program" for the construction of power plants using fuels other than oil. The first "crash program" was mandated in 2006 under the Electricity Law of 1985 (Electricity Generation Program I).
Electricity Law of 2009
On 8 September 2009, the Indonesian House of Representatives (DPR) passed the Electricity Law of 2009, which introduced significant changes to the electricity sector, including PLN's role.
With the rising demand for electricity supply, the Electricity Law of 2009 allows entities other than PLN to participate in the electricity supply business in Indonesia. State owned companies, regional owned companies, private business entities, cooperatives and community initiatives (swadaya masyarakat) may supply electricity for public use. However, the right of first priority is still vested in state owned companies (in this case PLN).
Electricity Generation Program II
On 8 January 2010, the President issued PR No.4/2010 to expedite the diversification of fuel for power projects to non-oil fuels as mandated under the Electricity Law of 2009.
PR No.4/2010 expressly invites private investors to participate in the construction of power plants, including the related transmission lines and for PLN to purchase the electricity and further supply to end users.
The capacity of the power plants and the locations are set out in Minister of Energy and Mineral Resources Regulation No.2 of 2010.
Key features of Electricity Generation Program II
* PR No.4/2010 expressly provides that PLN may cooperate with private investors under the scheme where the private investors construct the power plants, including the related transmission lines, and PLN purchases the power.
Such an explicit provision was absent from Presidential Regulation No.71 of 2006 in respect of Electricity Generation Program I.
* The introduction of a government guarantee with respect to the business feasibility of PLN, which will be regulated by the Minister of Finance.
The content and form of the government guarantee are still unclear as the details will be provided "in accordance with the prevailing regulations". Accordingly, at this stage, we cannot determine whether this government guarantee would entail prolonged negotiations with the government and private investors, which could ultimately delay the construction of the power plants.
* The introduction of certain exemptions from import duties and other facilities, which will be regulated by the Minister of Finance.
Again, it is still unclear as to the other types of facilities that will be provided to private investors and the terms and conditions of such exemptions and facilities.
Key Issues for Investors to Consider
Licences
Under the Electricity Law of 2009 there are two types of electricity licences:
(a) Provision of electricity business:
(i) Electricity Business Licence for Public Use (Izin Usaha Penyediaan Tenaga Listrik, IUPTL); and
(ii) Electricity Business Licence for Own Use (Izin Operasi);
(b) Electricity-supporting businesses:
(i) Electricity Supporting Services Licence (Izin Usaha Jasa Penunjang Tenaga Listrik); and
(ii) Electricity Supporting Industry licence (Izin Usaha Industri Penunjang Tenaga Listrik).
An IUPTL covers the following activities:
* electricity/power generation;
* transmission;
* distribution; and/or
* sale of electricity.
The Electricity Law of 2009 further provides that the supply of electricity for public use may be carried out as an integrated activity (covering all activities from construction to distribution and sale of electricity) by one entity within one business area. The limitiation for an entity to operate in one business area also applies for distribution and/or sale of electricity to the public. The business areas will be determined by the central government.
An IUPTL may be granted either by the central government or the regional government according to their respective authorities.
However, where:
* the relevant business area crosses multiple provinces;
* the business entity is a state owned company; or
* the business entity sells its power or leases its transmission line to a holder of an IUPTL,
then the licence must be granted by the central government.
Therefore, a private investor will need to obtain an IUPTL issued by the central government since the electricity will be sold to PLN.
The Electricity Law of 2009 does not provide specific details on the terms and conditions of the IUPTL and the procedure to be followed for the granting of the IUPTL. These matters are expected to be dealt with in a further government regulation.
Use of PLN's transmission facilities
PR No.4/2010 appears to imply that a private investor will not be required to construct its own transmission line/facilities and that it may use other transmission lines. Although the Electricity Law of 2009 contains the right of the central government or the regional government to approve a fee for the use of transmission lines, it is not explicity stated that IUPTL holders would be given the right to access PLN's transmission lines.
Land acquisition
PR No.4/2010 provides that for the implementation of Electricity Generation Program II, all licences relating to environmental impact analysis (AMDAL), release and compensation of transmission lines and the land acquisition process should be completed within 120 days by the relevant government institution or agency of the submission of the relevant applications. This provision however appears only to relate to power plants to be constructed by PLN and does not appear to extend to construction to be carried out by private investors.
The Electricity Law of 2009 contains provisions which provide greater protection to land owners. Namely, land owners are entitled to receive compensation for land and any plants and buildings on the land that will be directly used by the IUPTL holders as well as any land that will be indirectly used by the IUPTL holders for transmission lines which will result in the diminution of the economical value of the land, buildings and plants. Compensation calculations will be regulated in a government implementing regulation.
IUPTL holders must also consider community rights (tanah ulayat), other land rights and other users of state land.
There have been discussions that the government (through the National Land Agency) will issue a law on land acquisitions specifically for infrastructure projects. It is still unclear when this law will be passed.
Tariffs and sale price determination
Under the Electricity Law of 2009 the determination of electricity tariffs to end customers by IUPTL holders may be made by the central government with the approval of the DPR or by the central government with the approval of the regional DPR based on the guidelines stipulated by the central government. The Electricity Law of 2009 further provides that electricity tariffs may differ from one region to another. In determining the tariffs the central government must consider national and regional interests as well as the interests of end customers.
The central government and the regional government according to their respective authorities must approve the sale price and the fees for the use of transmission lines.
Use of local content
The Electricity Law of 2009 and PR No.4/2010 require that IUPTL holders prioritise the use of local content. Neither the Electricity Law of 2009 nor PR No.4/2010 provides the minimum percentage requirements for local content. It is expected that these requirements will be stipulated in implementing regulations to be issued by the relevant Ministries.
Concluding remarks
The government recognises the importance of the role of private investors in the development of additional power capacity in Indonesia and the Electricity Law of 2009 and PR.No.4/2010 establish the legal framework for cooperation between the government and private investors.
The Electricity Law of 2009 provides some degree of certainty for foreign private investors investing in the power sector notwithstanding PLN's dominant role. The guarantee and facility initiatives under PR.No.4/2010 show the government's seriousness and commitment in attracting private investors.
However, since many of the specific details of the Electricity Law of 2009 and PR.No.4/2010 will be contained in forthcoming implementing regulations, it may be some time before we can determine whether the government's recent initiatives can achieve the desired objective of accelerating the development of additional power capacity for Indonesia.