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

Indonesia: In search of affordable feed-in tariffs for green 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 percent
up to equal to the regional PLN's production cost (BPP). Currently the
Java-Madura-Bali interconnection grid has the lowest BPP of around Rp 800
(six US cents) per kWh and Papua has the highest at around Rp 2,500, as
compared to the national average BPP of Rp 1,400.

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 percent of the
regional BPP. As a result, eastern Indonesian regions (e.g. Papua, Maluku)
will have higher FITs since their current BPPs are relatively higher
compared to 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 favor PLN's interest - as happened during 2006 to 2009.

These aforementioned points are in accordance with the government's
intention to reduce the current BPP in order to eventually 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 due to 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 percent, far below the
target of 23 percent 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, the current Energy and Mineral Resources Minister Ignatius
Jonan took 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 prioritize RE for such regions. Currently eastern
Indonesia has a lower electrification ratio as compared to 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
Sumatera.

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
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 optimization 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 to 13 percent, making it
hard for RE investments to compete with other infrastructure investment
proposals.

In addition, endorsing foreign grants to subsidize 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 twostep 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 percent.

The licensing mechanism is supposed to be simplified. Currently the
Investment Coordinating Board has implemented a onestop integrated services
scheme. However, it is still limited to basic licensing for investment.
Apart from that, regional licenses 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 Benjamin Sovacool, one key element in RE
development is that comprehensiveness in policy is important and no single
policy is a panacea.

Our country 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.

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Link to Original Article:
http://www.thejakartapost.com/academia/2017/02/13/in-search-of-affordable-fe
edin-tariffs-for-green-energy.html

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John Diecker
APT Consulting Group Co., Ltd.

www.aptthailand.com