Solar power companies in Indonesia are struggling to keep their margins intact. The Government of Indonesia had announced a renewable energy target of 23% to reach by 2025.

In order to push installations of renewable energy, the Government has introduced various regulations through different ministries. However, companies are protesting against some of the regulations as they feel they are not conducive for solar power development in the country.

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The Energy and Mineral Resources Ministry has introduced regulations on licensing of rooftop solar PV systems and feed-in-fees for exporting excess power into the grid of the state utility PT PLN.

In 2017, the Government introduced MEMR Regulation 50/2017, through which a new mechanism was introduced to determine the tariff at which PT PLN will purchase electricity from Independent Power Producers (IPPs). This provided PT PLN greater control over prevalent tariffs in the sector through negotiations and benchmarking against the applicable Electricity Generation Basic Cost (Biaya Pokok Penyediaan Pembangkitan or “BPP”).

The BPP reflects the cost for PT PLN in generating power and in procuring it from third-party suppliers but does not include the cost for transmitting it. The tariff calculation for solar PV technology is done as:

  • If local BPP is greater than national BPP from the previous year, the tariff shall be set at a maximum 85% of the local BPP.
  • If national BPP is greater than or equal to local BPP from the previous year, the tariff shall be based on a mutual agreement between the IPP and PLN.

This regulation presented a challenge to solar PV investors since their offer price to PT PLN was no longer tied directly to their respective production costs but rather to the cost of producing energy generally and from whatever source in a given region. Also the annual calibration of BPP gave rise to fluctuation in the price at which the companies sold power to PT PLN.

In November 2018 the Ministry introduced the MEMR Regulation 49/2018 for rooftop solar PV installations. Under this regulation, all rooftop solar PV installations require prior verification and approval from PT PLN’s local distribution company and the process of verification and approval should be completed within 15 days.

The verification required information on PT PLN customer identification number, installed capacity of the planned rooftop PV system, specifications of the equipment to be installed and a one-line diagram of the planned PV system. The regulation also introduced the calculation for electricity bills for customers of PT PLN with rooftop solar PV installations.

The bills are to be calculated on a monthly basis based on the kilowatt per hour (kWh) import value minus the kWh export value. The export value will be calculated at 65% of the applicable PT PLN tariff. The rooftop solar PV developers have concerns around the additional requirement for approval as well as the 65% multiplier.

Under the previous government, the multiplier was not in place, so the difference between import value and export value was considered for calculating the customer bills. Under the current government, if the import value is same as earlier then the difference between import value export and 65% of export value is considered for calculating the customer bills, thereby making the bills more inflated. As a result, customer interest in setting up rooftop solar PV is lowered.

Currently, all renewable energy projects in Indonesia are developed under the build, own, operate and transfer (BOOT) scheme where PT PLN is the sole off-taker of the electricity produced. The independent power producers (IPPs) own and operate the production facilities for limited period as mentioned in the power purchase agreement (PPA) with PT PLN.

In 2017, through the MEMR Regulation 10/2017, the Government introduced certain mandatory requirements for PPAs which had bankability provisions around risks related to government force majeure (GFM) and natural force majeure (NFM) which can affect the grid and the relevant parties to the PPAs.  Before the introduction of this regulation, the GFM events were divided into two scenarios, namely the unjustified government action or inaction (e.g., revocation of permits without valid or legal cause) and changes in laws & regulations.

The government risks were passed on to PT PLN which was then able to manage the risks through various provisions. The company used to either make deemed dispatch payments to cover revenue loss in case the plant stops its operations due to GFM events or make tariff adjustments to compensate for the cost impacts loss.

PT PLN also adjusted the payments of termination amount which equals to outstanding project debt plus lost future equity returns if the PPA is terminated due to prolonged GFM events.

As such the insecurity around constant income for solar developers prevailed in the market. In 2018, the government amended the regulation with MEMR Regulation 10/2018 where parties to the PPA have the freedom to negotiate terms in case of any GFM. But in case of NFM, the PT PLN has the provision to pay deemed dispatch if there is disruption in PT PLN’s grid due to any NFM events like flood, lightning etc.

There was no provisioning for NFM under MEMR Regulation 10/2018 for PPA bankability. This meant that in case of NFM clarity whether the developers would be getting paid by PT PLN for the units they are sending to the grid was unavailable. This created a state of dilemma amongst solar developers whether to go ahead with investments.

The Ministry of Industry (MOI) has also implemented regulations which says that companies can build solar plants only if they meet the 60% local content requirement (LCR). Since most of the equipment is being imported it is becoming difficult for investors to meet the LCR.

As per GlobalData at the end of 2018, Indonesia reported a total capacity installation of over 65GW. The country is mainly driven by fossil fuels, with more than 85% of the country’s cumulative capacity coming from thermal technology, mainly coal. The country has over 30GW of coal power installations at the end of 2018.

Indonesia has set a renewable energy target of 23% of its energy mix by 2025 but at the end of 2018 it has just installed 106MW of solar and 85MW of wind installations respectively. In order to increase renewable energy contributions the country has to come up with incentives and regulations that can improve investments in the renewable energy sector.

Figure 1: Capacity Mix, Indonesia, 2018

Source: GlobalData

Indonesia has strong solar potential but a series of policy missteps have retarded the growth of the technology. The country has launched its Electricity Supply Business Plan (RUPTL) 2019-2028 which has a reduced focus on solar, withPT PLN reducing its solar plan by 137 MW. Looking at the successful experience of solar in a number of countries worldwide, Indonesia must devise regulations to have strong solar set up in order to tap its potential so that the technology can contribute more to the country’s generation mix.