Indonesia adds incentives for biomass and biogas development

Indonesia’s new regulation on the purchase of electricity from biomass and biogas power plant is a boost for the renewable energy industry, but investors should beware of the legal risks before putting down any money, reports Karry Lai.

The regulation, which the Ministry of Energy and Mineral Resources (MEMR) released in September 2016, awards biomass and biogas power projects on the basis of a direct appointment process. Feed-in tariffs denominated in US dollars are available for both conventional independent power projects and projects that involve the sale of excess electricity to PT Perusahaan Listrik Negara, Indonesia’s electricity distributor. The Indonesian government has set a target of generating 35 gigawatts of renewable energy within five years.

While lawyers have told Asialaw that securing a power purchase agreement (PPA) for biogas and biomass projects is easier than getting one for a conventional power project and tariffs are cheaper compared with other countries in the region, land acquisition issues, ownership limits and the lack of bankable PPAs stand in the way of foreign developers that want to get involved in Indonesia’s power generation industry.

Tariff and schedule

Priced in US dollars, the feed-in tariff is non-negotiable and cannot be changed. The level of the feed-in tariff is based on the location of the project, with those in less developed areas having a higher tariff; the capacity of the power plant and the voltage of the transmission network. Once a project is awarded by MEMR, a PPA needs to be signed within 30 days and investors must follow a mandatory timeline for the completion of the project. The term of the PPA is 20 years and is extendable.

Procedure for power purchase agreements

Businesses looking to develop biomass and biogas power plants need to submit these documents to the MEMR for consideration. They are:

  • a profile of the business entity and
  • feasibility study documents that include:
  • an estimate of the total investment;
  • the construction schedule;
  • a technical study on connecting to PLN’s grid, funding capability; and
  • a statement indicating the prioritising of local goods/services.

Stricter timeline

While the previous regulation gave developers 40 months from the execution of the PPA to reach commercial operation, the new one gives developers 36 months to achieve it. Failure to follow the timeline will result in discounted tariffs of up to 8%. If the project is not achieved within 48 months, the licence will be revoked and the developer will be banned from applying for the same project for two years.

Opportunities for investors

 
 Kirana Sastrawijaya

Compared with a traditional tender for power projects, getting a PPA is much easier for biogas and biomass projects. “With direct appointment for biogas and biomass projects, once they are permitted, the investor can directly sign a power purchase agreement, unlike conventional energy projects like coal fired power plants,” says Kirana Sastrawijaya, partner in the finance and projects practice at Hadiputranto, Hadinoto & Partners in Jakarta.

“With a public tender, it is riskier. It is more straightforward to accept a proposal and sign a power purchase agreement,” says Kim Hock Ang, principal in the finance and projects practice at Baker & McKenzie. Wong & Leow in Singapore. “The investor doesn’t need to incur cost in participating”

“The tariffs compare well with other countries in Asia, such as the Philippines, Vietnam, Thailand,” says Sastrawijaya.

Barriers for investors

Though the regulation is trying to encourage biomass and biogas projects, barriers that prevent their development still exist, including problems with land acquisition, foreign ownership limitations and access to bankable PPAs. “The government is finding that there are separate business to business negotiations going on to lower the price in power purchase agreements, so it is trying to find a solution to resolve that,” says Sastrawijaya.

Kim Hock Ang

“Investors want to get the security of a long term supply of biomass, so the location needs to be close to the substation,” says Ang. “There may be land acquisitions that need to be resolved for a long term generation plan.”

Foreign investors are limited to 95% ownership of projects with a capacity of more than 10 megawatts but the limitation is much higher for small projects. “There is a limit on foreign ownership of up to 49% if the generation capacity is less than 10 megawatts, so the potential is less for smaller projects,” says Sastrawijaya.

“In terms of financing, local lenders don’t do project finance, so the projects need to have offshore financing and they have been coming mostly from Japan, Korea, China and Europe,” says Ang. “Having a bankable PPA really helps.”

In its recent budget, the Indonesian parliament rejected the IDR1.1 trillion ($81.9 million) subsidy for renewable energy development which seems to be a step backwards in light of the new regulation. While the new regulation is a positive step to encourage biomass and biogas investment in Indonesia, there remains a number of barriers that investors need to be aware of.