On 21st October 2016, Solarplaza organized the webinar “Emerging Opportunities in the Indonesian Solar Market”, as a preparation for the 5-day Solar PV Trade Mission to Jakarta, to take place from 27 February to 3 March 2017. Kirana Sastrawijaya, from international law firm Baker & McKenzie, and Andre Susanto, from energy consulting firm Blue Jay Energy, joined the webinar as speakers, shedding light on project development and the state of the solar industry in Indonesia. The entire video recording of the webinar and the speakers’ slides can be freely accessed here.
Andre Susanto, a clean energy consultant based in Jakarta and partner of several Solarplaza events in South East Asia, sees immense potential for the development of solar PV in Indonesia. As a developing country home to 250 million people, Indonesia’s demand for electricity is growing at an unprecedented pace.
The government has extensive plans to incentivise solar energy development by mandating a new solar regulatory framework. Considering Indonesia’s high level of natural irradiance, the coming years will provide ample opportunities for investors to fund solar projects with lucrative returns.
Potential investors must be wary, however, since Indonesia presents unique challenges as well as opportunities. The country’s plentiful irradiance comes at the price of erratic climate; this unpredictability necessitates accurate on-site surveying of project areas, which could discourage developers who are used to relying primarily on desk studies.
Desk studies can also lull project developers into a false sense of security. For example, they frequently tend to overstate the capacity of local infrastructure.
Developers must be vigilant when receiving reports of highways and ports, especially for the more remote parts of Indonesia, since in reality they may discover only dirt paths and wooden jetties.
This can cause significant logistical struggles for projects constructed in those areas, especially when moving heavy equipment.
Indonesia’s island geography impacts not only the logistical side of solar development, but also the financial. Currently there is no nation-wide electrical grid in Indonesia. Instead, the government operates over 600 different medium-to-large power grids across the 922 permanently inhabited islands. One side effect of this is the proliferation of private PPAs, wherein foreign companies develop solar projects with the goal of selling the energy directly to a private customer, usually a major local corporation.
Andre notes, however, that these challenges can in fact be viewed as an opportunity: few developers are willing to brave the risks involved, which means that competitors are fewer and more scattered. This, combined with decreasing equipment costs, makes Indonesia a country with great potential. For example, rooftop PV systems are approaching grid parity and will likely be an attractive investment opportunity in the near future.
Walkthrough for Applying to Develop Solar in Indonesia
The Indonesian government has ambitious plans for increasing the share of renewable energy in the country’s electricity generation. Its target for 2025 is to have renewables represent 23% of total capacity, for approximately 28.75 GW, of which 6.4 GW will be solar.
The Indonesian regulatory framework regarding solar energy is still very young, with the first iteration introduced in 2013. After a series of court challenges by a consortium of local PV manufacturers, the government finally mandated an improved framework, which was supposed to come into effect on October 25, 2016.
The deadline was pushed back to early 2017 after the government dismissed the Minister of Energy over citizenship allegations. The situation has since been resolved with the appointment of a new Energy Minister, Iganisius Jonan, who has vowed to carry the new solar framework to completion.
There are two significant differences introduced in this new, long-awaited framework. Firstly, the maximal tariff was decreased from the Rupiah equivalent of USD0.30 to USD0.25. Unlike most countries, which feature a nation-wide tariff, Indonesia’s island geography has forced the government to adopt separate tariffs for its numerous different grids. This is due to the fact that maintenance and connection costs vary considerably between grids.
Since the new framework changes the maximal tariff, regions with lower tariffs like Java and Bali are largely unaffected. Papua is the most affected region by this change, since its tariff is the highest in Indonesia.
The second and more important difference is the transition from a tender process to a selection on a first-come, first-served basis. This change significantly alleviates any potential conflicts of interest within the government. Bidding during a tender process is supposed to be anonymous, but the possibility of leaking confidential information can turn away foreign investors. Transitioning to a first-come, first-served process is better both in terms of fairness and accountability.
The specifications of the tariff mandated by the government are strict, but lucrative. Although payments are made in Rupiah, the local currency, the tariff is fixed and is not subject to escalation over the full 20-year span of the PPA. Furthermore, the tariff is calculated without factoring in the interconnection costs, which are borne by the developer. This greatly enhances the prospects of plants located in areas with favorable grid access.
Source: Andre Susanto, Blue Jay Energy
Kirana Sastrawijaya explains in detail the application process for becoming a solar PV developer in Indonesia. The process can be divided into three crucial steps: the first step is qualifying as an approved developer candidate through the registration process. The entire registration can be done online and public calls to apply are made up to a month before registration opens.
Usually an application takes about a week to be verified by the government. After all applications have been processed, the successful applicants are announced and are presented with an offer for capacity quota. The applicants must then file applications requesting capacity quota over a two-month period. While previously this process was conducted on a tender basis, the most recent regulations changed it to a first-come first-served basis, making the timing of the application extremely important.
No more than 20% of a region’s total capacity quota can be allocated to a single applicant, with a maximum allocation of 20 MW. For regions with less than 10 MW total capacity quota there is no maximum.
The final step involves signing the actual PPA, which must happen within one month after capacity quota has been allocated. Financial closure is required no later than 6 months after signing the PPA.
Once the payment has been settled the applicant must obtain a Temporary Electric Power Supply Business License (IUPTL). The Commercial Operation Date (COD) must occur within 12 months of the IUPTL for projects smaller than 10 MW and within 24 months of the IUPTL for projects above 10 MW. Delaying the COD can result in significant tariff reductions and even revocation of the PPA.
The requirements set by the Indonesian Foreign Investment Body (BKMP) can present serious challenges to foreign developers. For example, the BKMP may require applicants to state the location, scale and capital investment of their project before the applicants have received confirmation about their capacity quota.
In some cases the BKMP can grant as little as 3 years for the implementation of an investment, which wouldn’t be enough time considering the fact that an applicant may end up waiting 2 years for the approval of their application.
In addition, there are certain restrictions on the degree of participation foreign companies can have in developing solar in Indonesia. For projects under 10 MW the foreign investor can have up to 49% ownership, which increases to 95% for projects larger than 10 MW. Thus, in order to participate foreign companies will always require a local Indonesian-established partner. Although these requirements will likely be loosened in the future, currently the local partner must be responsible for 25.63% of goods and 100% of services provided.
There is much uncertainty around specific fringe situations, like a single company applying for multiple projects in cooperation with different local partners. However, Kirana emphasizes that the uncertainty will decrease dramatically as the government approaches the finalization of the framework.
Want to learn more? Stream the entire webinar here or join us at the Solar PV Trade Mission Indonesia, in Jakarta from 27 February - 3 March 2017. Register now!
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