Indonesia in search of affordable feed-in tariffs for green energy

business February 18, 2017 01:00


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THE INDONESIAN government needs to put its full weight behind reducing the possibility of illegal charges, extortion and licensing costs in order to develop renewable energy.

The Energy and Mineral Resources Ministry has recently issued the latest feed-in tariff (FIT) for renewable energy (RE). As one man’s disaster is another man’s delight, the new FIT makes some people happy, while others have worries.

Unlike previously when each RE’s FIT was outlined in different regulations, the latest regulation covers all FITs for all types of RE into one regulation, the Energy and Mineral Resources Minister Decree (MD) No 12 of 2017. MD No 12/2017 sets the FIT based on business-to-business (B2B) negotiation between independent power producers (IPPs) and state-owned electricity company PLN.

The government stipulates the maximum FIT reference ranges from 85 per cent up to equal to PLN’s regional production costs (BPP). Currently the Java-Madura-Bali interconnection grid has the lowest BPP of around 800 rupiah (Bt2) per kilowatt-hour and Papua has the highest at around 2,500 rupiah, as compared with the national average BPP of 1,400 rupiah.

As stipulated in MD No 12/2017, if the BPP in the project location is lower than the national average, the maximum price follows the regional BPP. On the contrary, if it is higher, the maximum price follows 85 per cent of the regional BPP. As a result, eastern Indonesian regions (such as Papua and Maluku) will have higher FITs, since their current BPPs are relatively higher compared with other areas in Indonesia.

Given that the previous FITs were generally higher than the BPPs, the decree probably makes IPPs unhappy, since it might threaten their business profitability. It should also be highlighted that naturally with IPPs having a lower bargaining position than PLN, the result of price negotiations will most likely favour PLN’s interest – as happened from 2006 to 2009.

These aforementioned points are in accordance with the government’s intention to reduce the current BPP in order eventually to cut retail electricity subsidies.

From our perspective, three important points can be drawn from this regulation.

First, inconsistent and fluctuating regulations might cause investors, (especially foreign investors who establish consortia with Indonesian business groups) to withdraw from the arena because of the constantly changing investment climate.

Second, trying to put our feet in the government’s shoes, we understand why the government issued this regulation. The government might have decided to revise the FIT since the previous high FIT did not bring about a significant increase in RE share.

The RE share in the energy mix is currently only 5 per cent, far below the target of 23 per cent of national energy mix in 2025. The common bottleneck in FIT implementation is PLN’s reluctance to accept the previous FIT and buy electricity from private RE sources.

PLN tends to resist the investment proposals of private RE providers since they claim that the FIT is too high and exacerbates their budget. Hence FIT subsidies for RE were discussed during the previous energy and mineral resources minister’s tenure, with the option of allocating state budget funds to cover the excess of the BPP price.

Yet such ideas were not well received either by the House of Representatives or the Finance Ministry, which have lately been tightening their belts.

As a response, Energy and Mineral Resources Minister Ignatius Jonan made the decision to reduce the FIT to less than the BPP. This decision is a reflection of the government’s strategy to push PLN to purchase RE from IPPs.

Third, by designing the FIT to be higher for eastern Indonesia, seemingly the government wants to prioritise RE for such regions. Currently eastern Indonesia has a lower electrification ratio than the average national rate. Setting higher FITs for the eastern part of Indonesia is an effort to bring more IPP investment, yet the profitability of investing in this area is still in question since the electricity demand is not as high as in Java or Sumatra.

To conclude, IPPs might find the new FITs unattractive. The government needs to make more effort to maintain IPPs’ appetite for RE projects. We recommend that the government support RE investment by implementing other policies. Some basic de-risking policies can be used to increase the business profitability, particularly in regard to project financing.

The optimisation of Sarana Multi Infrastruktur (SMI) by providing soft loans for IPPs might be one of the solutions. SMI (assigned by the government to fund infrastructure projects) currently acts like a conventional bank, applying a business-as-usual interest rate of 12-13 per cent, making it hard for RE investments to compete with other infrastructure investment proposals. In addition, endorsing foreign grants to subsidise RE investments can also be one of the solutions, given the difficulty in allocating subsidies from the state budget.

For that, an endorsement directive from the Energy Ministry to donors is essential in easing project financing. The government could also establish a pool for foreign grants using the two-step loans model, in which the funds pass through multiple financial institutions before being allocated as loans to IPPs.

Finally, no less important is the government’s support for reducing the possibility of illegal charges, extortion and licensing costs. Surveys of investors point out the aforementioned practices could potentially escalate capital expenditure by up to 5 per cent.

The licensing mechanism is supposed to be simplified. Currently the Investment Coordinating Board has implemented a one-stop integrated services scheme. However, it is still limited to basic licensing for investment. Apart from that, regional licences and the borrow-to-use land permit are often cited as obstacles for investors. Some respondents even describe them as “too many doors to be knocked”.

Moving forward, let us wait and see whether the new regulation has potential. Otherwise the government still has to find another solution to provide a cheap, environmentally friendly, and reliable energy source. However, as expressed by Danish energy-policy academic Benjamin Sovacool, one key element in RE development is that comprehensiveness in policy is important and no single policy is a panacea.

Indonesia might still need to go through a long journey to find the right policies for RE development, and the first steps are always the hardest.