New regulation for biomass and biogas power plants in Indonesia-

On August 4, 2016, Ministry of Energy and Mineral Resources (MEMR) Regulation No. 21 of 2016 on the Purchase of Electric Power from Biomass and Biogas Power Plants by PT Perusahaan Listrik Negara (PLN) was enacted (Regulation 21).

Regulation 21 replaces MEMR Regulation No. 27 of 2014 on the Purchase of Electric Power from Biomass and Biogas Power Plants  by PLN (Regulation 27).  The structure of Regulation 21 is similar to recent regulations issued on mini-hydro projects, with which it shares a number of features. A feed-in tariff (FiT) will apply to biomass and biogas power plant projects, priced in $, without escalation and not subject to any negotiation. Unlike the previous regulation, which only provided FiT for up to 10MW projects, Regulation 21 also sets tariffs for projects higher than 10MW. The FiT levels will be differentiated based on the location of the projects (on the general principle that projects in less developed areas enjoy a higher FiT than projects developed in developed areas such as West Java); and a mandatory timeline for the award and completion of biomass and biogas power plant projects.

Power purchase procedures

Under Regulation 21, business entities intending to develop and operate biomass and biogas power plants must first secure approval as the developer of biomass and biogas power plants. The application for the approval is submitted to the MEMR through the Directorate General of New and Renewable Energy and Energy Conservation (Energi Baru, Terbarukan, dan Konservasi Energi (EBTKE). The documents that must be submitted with the application include a profile of the applying business entity and the feasibility study documents that have been verified by PLN.

No later than seven business days after the business entity submits a complete application, the examination team will convey its examination result. EBTKE will issue its decision no later than seven business days after it receives the examination result from the examination team.

No later than 30 business days after EBTKE issues the stipulation, PLN and the developer must sign a power purchase agreement (PPA) with a 20-year term, which is extendable. A copy of the executed PPA will be delivered to the MEMR through EBTKE. Financial close must be achieved no later than 12 months after the execution of the PPA. While Regulation 27 gave developers 40 months after the execution of the PPA to achieve the Commercial Operation Date (COD), Regulation 21 only gives developers 36 months to achieve COD. Failure to achieve the COD within 36 months after the execution of the PPA will lead to deduction of FiT ranging from 3 per cent to 8 per cent. If the developer cannot achieve COD within 48 months after the execution of the PPA, the stipulation as a biomass or biogas power plant developer will be revoked.

Feed-in tariffs

Regulation 21 sets out the following tariffs for the purchase of electric power from biomass and biogas power plants:

The tariff for biomass and biogas power plant projects is determined by considering the capacity of the biomass and biogas power plants; the voltage of PLN’s transmission network; and the location of the biomass and biogas (F factor). Further, the above tariffs :

  • Include costs of procurement and interconnection from the biomass and biogas power plants to PLN’s network;
  • Require no further negotiation with PLN;
  • Are set out without escalation;
  • Require no tariff approval from the MEMR;
  • Apply when the biomass and biogas power plants have achieved their commercial operation date according to the milestone schedules agreed in the PPA.

 

All tariffs for biomass and biogas power projects are set out in dollars (cent per kWh) but payments will be made in Indonesian rupiah based on the Jakarta Interbank Spot Dollar Rate (JISDOR) on the date agreed in the PPA. This provision is in line with Bank Indonesia regulations on mandatory use of rupiah. Previously, under Regulation 27, the tariffs for biomass and biogas power projects were set out in Indonesian rupiah.

Purchase of excess power

PLN may purchase excess power from biomass or biogas power plants owned by the holder of an operation permit. An operation permit is a licence to generate power for own use. Regulation 21 specifies the tariff for the purchase of excess power and therefore, tariff approval from the MEMR for the purchase of excess power is not required.

The purchase of excess power by PLN will be set out under a PPA. The period of the PPA is based on the agreement of the operation permit holder and PLN. The holder of an operation permit selling its excess power to PLN in accordance with Regulation 21 is not required to obtain approval as a biomass and biogas power plant developer.

Transitional provisions – Existing biomass and biogas projects

The transitional provisions of Regulation 21 appear to suggest the following adjustments to the new FiTs:

  • Existing biomass and biogas projects that have obtained approval from EBTKE and an IUPTL but have not executed a PPA and have not started operations before the enactment of Regulation 21 are entitled to adjust their tariff to the new tariffs set out in Attachment I and Attachment II of Regulation 21.
  • Existing biomass and biogas projects that have obtained approval from EBTKE, obtained an IUPTL, executed a PPA, and have operated before the enactment of Regulation 21 are entitled to adjust their tariff to 85 per cent of the tariff stated in Attachment I and Attachment II of Regulation 21.
  • Existing biomass and biogas projects that have obtained approval from EBTKE, obtained an IUPTL and executed a PPA but have not begun operations before the enactment of Regulation 21 are entitled to adjust their tariff to the new tariffs set out in Attachment I and Attachment II of Regulation 21.

To adjust the tariff, business entities intending to develop and operate biomass and biogas power plants must submit an application on tariff adjustment to the MEMR through the Directorate General of EBTKE. The tariff adjustment will be further stipulated in the PPA without negotiation, escalation and approval from the MEMR, and will not apply retroactively.

Conclusion

Regulation 21 is a positive signal to the market as the government has taken a step to attract and address the concerns of investors in biomass and biogas power projects. In return, developers are being asked to speed up development of such power projects. This recent regulatory change is consistent with the broader regulatory reforms being made across the power sector – all aimed at getting new power generation projects up and in operation as soon as possible, to enable the government to meet its aggressive electrification and infrastructure development goals.

However, the success of this biomass/biogas programme, and more broadly the renewable sector aims of the government, is going to be largely determined by the two other key stakeholders in the renewable energy sector: namely, PT PLN (Persero) and the Indonesian Parliament.

PLN has raised issues over the affordability of other renewable energy FiT regimes recently introduced by the government (most notably the mini-hydro programme), and has not been willing to adopt the tariff regimes set out by the government under those regimes.

As part of recent state budget deliberations, the Indonesian Parliament recently rejected the proposed IDR 1.1 trillion subsidy for the development of renewable energy.  If PLN can develop a solid and bankable PPA, then on paper at least the future of biomass and biogas projects looks bright. However, until there is key stakeholder alignment with regard to Indonesia’s renewable energy programme (and the cost to the country implementing that programme), there are concerns that, as with other recent renewable reforms introduced, such as the mini-hydro and the solar programme, the development of biomass and biogas projects will remain in a state of limbo.

Luke Devine is a foreign legal consultant in the Finance and Projects Practice Group of Hadiputranto, Hadinoto & Partners and is head of Baker McKenzie’s energy, mining and infrastructure group in Asia-Pacific. Devine has many years of experience acting for developers, lenders, governments and contractors involved in energy and infrastructure development and financing across a wide range of energy, natural resources and infrastructure sectors such as power, oil and gas, mining, construction, water and transportation, and also has significant experience in relation to climate change projects.

Kirana D. Sastrawijaya is a partner in the Finance and Projects Practice Group of Hadiputranto, Hadinoto & Partners, the member firm of Baker McKenzie in Indonesia, with more than 10 years of experience of legal practice. Sastrawijaya specialises in power development, power M&A, infrastructure construction and project financing.