10 Key

Considerations:
Hydropower Projects in Indonesia

Indonesia's ambitious promotion of renewable energy projects with an emphasis on hydropower has sparked
interest from local and international investors, developers and financiers. As of May 2020, the installed
hydropower plant capacity in Indonesia had reached 6.095 GW. It is targeted to reach 9.7 GW or around 17% of
national power generation in 20281. In a bid to further boost private investment, the government has issued
several regulations on renewable energy (including hydropower) and the parliament has finally passed the
Omnibus Law, which (among other things) seek to simplify and clarify procedures relating to licenses and
renewable tariff frameworks.

Foreign Investment Pre-Feasibility Study ("Pre-FS")

1 Restrictions 3 and Feasibility Study ("FS")

The maximum foreign ownership thresholds for electricity

generation (including hydropower projects) in Indonesia vary
depending on the capacity of the power plant, as indicated below. A Pre-FS and FS are part of the "pre-development"
stage of a hydropower project (similar to other power
projects). The "pre-development" stage refers to the
Maximum foreign period before execution of the Letter of Intent ("LOI")
Capacity KBLI No. Ref.
ownership by PLN, which is done before the execution
of the PPA. As with other power projects, the right to develop a
Less than 1 MW Closed power plant is only secured when the PPA is executed by PLN
and the IPP. However, once the LOI is signed (i.e., after the
1 - 10 MW 35111 49% project developer is declared the winning bidder), the IPP will
have a document in writing stipulating PLN's intention to execute
the PPA with the IPP.
Above 10 MW 95%2
Indonesia's regulatory framework does not prescribe the types of
Please refer to our publication on Joint Venture Projects in activities that must be covered in a Pre-FS and FS. The
Indonesia for further details on foreign investment in Indonesia regulations are silent on the requirement for consents, permits or
more generally. licenses to be obtained for Pre-FS and FS. Instead, the
requirements should be assessed on a case-by-case basis,
depending on the types of activities within Pre-FS and FS that will
be carried out. For example, if the site survey shows that the

2 Licenses targeted project location is in a protected or production forest

area, an approval for forest area utilization (i.e., survey activities)
may be required.
In general, the main license required for Independent Power However, some licenses can only be obtained after the IPP has
Producers ("IPP") is an electricity supply business license (Izin passed certain steps and obtained other licenses as pre-requisite
Usaha Penyediaan Tenaga Listrik or "IUPTL"). An IPP must documents. One example is an IUPTL, which requires a copy of a
obtain an IUPTL for power generation in order to sell electricity to PPA and several documents (e.g., financial close document from
the state-owned utility PT Perusahaan Listrik Negara ("PLN"). PLN).
Specifically for hydro projects, an IPP is required to obtain a water
resources business permit and to pay the water charge to the
government.
One of the key licenses that a hydro IPP needs is the location
permit (izin lokasi), which gives its holder an exclusive right to
acquire land and develop the project at a certain location. Given
the site-specific nature of hydro projects, this is one of the first
licenses that an IPP will need to obtain in order to secure its
project, even at the pre-development stage.

2
If the project is developed under the Public Private Partnership (PPP)
1
Based on PLN's 2019-2028 Electricity Supply Business Plan ("RUPTL"). scheme, the investment is open 100% for foreign ownership during the
concession period.

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4 Procurement Process
Direct Appointment vs Limited Tender
The procurement of renewable projects by PLN is regulated in
Minister of Energy and Mineral Resources ("MEMR") Regulation
No. 50 of 2017, as lastly amended by MEMR Regulation No. 4 of
2020 on Utilization of Renewable Energy for Electricity Supply
("MEMR Regulation 50/2017").
For existing hydro projects for which an IPP obtained a location
permit before 26 February 2020, PLN can procure the projects by
way of direct appointment. In addition, as a general rule, PLN can
also do direct appointment under certain conditions, including if
there is an electricity supply crisis in the local system, or if the
project is an expansion of an existing project at the same location.
For hydro projects utilizing water resources from state assets
(e.g., dams owned by the Ministry of Public Works and Housing),
the developer will have to participate in the selection process
carried out by the government institution holding the asset, but
PLN then will no longer need to do any tender. In this case, the
MEMR will assign PLN to buy electricity from the project.
Other than in the above circumstances, PLN will have to do direct
selection or limited tender to procure hydro projects. MEMR
Regulation 50/2017 requires a direct appointment process to be
completed within 90 days, and a direct selection process to be
completed within 180 days.
Mandatory Prequalification Process
Hydro developers need to be prequalified and shortlisted in PLN's
list of selected developers (daftar penyedia terseleksi or "DPT").
Only developers that have been included in the DPT can
participate in PLN's procurement process. Since 2017, PLN has
carried out two rounds of DPT process for hydro developers.
Specifically for the hydro DPT process, as well as the developers
(who can be in a consortium3) having to prequalify, the specific
project (which already has a feasibility study) has to prequalify.
This is slightly different from the DPT process for non-hydro
developers, where each company must individually prove its
financial and technical capability in order to pass the DPT
process.
3
Note, each consortium member will need to prequalify.
4
Under the Omnibus Law, an environmental permit (which was a
prerequisite to obtaining a business license) is removed as this will be
integrated in the business license. Consequently, companies are only
10 Key
Considerations:
Hydropower Projects in Indonesia
5 Tariffs
MEMR Regulation 50/2017 sets a ceiling tariff on hydropower plants
where the electricity produced is sold to PLN. The same concept
applies to other renewable power sources. Briefly, the ceiling tariff is
determined based on PLN's average cost of generation in a specific
region (biaya pokok penyediaan pembangkitan or "BPP") in the
previous year, as follows:
a) If the local BPP is higher than the average national BPP, the
ceiling tariff is the amount of the local BPP.
b) For projects in Sumatra, Java and Bali islands, or in other
local systems where the local BPP is equal to or lower than
the average national BPP, the tariff is determined based on
mutual agreement between PLN and the seller.
The current national BPP is 7.86 USD cents/kWh, while the local
BPP ranges from 6.91 USD cents/kWh to 21.34 USD cents/kWh.
The BPP figure reflects PLN's cost of generation, excluding
transmission and distribution costs. The transmission costs (i.e.,
the tariff component charged by IPP to PLN for the construction of
transmission lines to connect the plant to PLN's existing grid) is
determined based on business to business negotiation.
6 Environmental Considerations
The general perception is that hydropower plants are cleaner than
coal-sourced power generation. However, the environmental
impact can be significant and there are material environmental
concerns in relation to the implementation of hydro power plants,
e.g., large land area required, safety of fish and other biota in the
water. Therefore, certain companies operating in Indonesia
(including IPPs) are required by the prevailing laws and
regulations to observe key obligations with respect to
environmental protection and management, including by
preparing an environmental impact study (AMDAL or UKL-UPL) in
order to obtain a business license (i.e., IUPTL).4
Export credit agencies, multilateral lenders and development
finance institutions will also typically require environmental
reporting and compliance obligations that are up to international
standards, as a condition to financing. Likewise, investors and
lenders, under pressure from shareholders to deliver more
sustainable investments, will require greater accountability and
transparency with regard to environmental and sustainability
studies.
required to obtain an AMDAL approval or to provide a statement letter
undertaking to comply with the UKL-UPL standards before they can obtain
a business license.
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7 Run of River vs Peaker
Under MEMR Regulation 50/2017, electricity can be purchased
from a hydropower plant that utilizes power from the
stream/waterfall of river water or one that utilizes power from
dams/reservoirs or irrigation channels, whose construction is
multipurpose. This may be known as a "conventional hydropower
plant" or "run of river".
However, Indonesia is also adopting the internationally
recognized model of "peaking power plant" (or 'peakers') which
will operate during times of high demand of electricity. Commonly,
peakers are ramped up to 100% capacity as quickly as possible,
operated during high-demand periods, and then shut down.
However, recent trends have popularized peakers as the local
market attempts to shift to diversified renewable energy, in order
to deal with intermittency issues.
9 Local Content Requirements
Categories
The Electricity Law and its implementing regulations require that
electricity business services prioritize the use of local content.
This requirement is intended to maximize the utilization of local
content in the construction of electricity infrastructure for public
use.
Minister of Industry Regulation No. 54/M-IND/PER/3/2012 on
Guidelines on Use of Local Content for the Construction of
Electricity Infrastructure, as amended by Minister of Industry
Regulation No. 05/M-IND/PER/2/2017, regulates specific local
content provisions for a non-storage pump hydropower plant –
these content requirements apply to three categories: goods,
services, and goods and services combined. The initial
assessment of whether the requirement for local content for a
hydropower plant has been fulfilled is conducted by the
goods/services provider (i.e., by way of self-assessment).
Procurement of Imported Goods
MOI Regulation 54/2012 allows the procurement of imported
goods only in the following circumstances:
a) The goods cannot yet be produced in Indonesia.
b) Technical specifications of domestically produced goods
do not meet the requirements.
c) The quantity of domestic production is insufficient to fulfil the
need.
Sanctions
Failure to meet the local content requirements may result in
various administrative sanctions, including penalties and
blacklisting.
10 Key
Considerations:
Hydropower Projects in Indonesia
Government Guarantee
8
Business Viability Guarantee Letters ("BVGL") are
available for certain projects that are listed in the
Second Fast Track Program launched by the
government in 2010. The Minister of Finance will
guarantee certain PLN payment obligations under
the PPA. However, a number of projects under the Second Fast
Track Program have been successfully developed and have
obtained international project financing without BVGL.
A similar model of guarantee is also theoretically available for any
IPP projects under Presidential Regulation No. 4 of 2016, as lastly
amended by Presidential Regulation No. 14 of 2017 on
Acceleration of Power Infrastructure Development. However, in
the past five years, developers and international lenders have
been willing to do IPP projects without asking for government
guarantees.
10 Future prospects
Based on PLN's 2019-2028 RUPTL, there will be an additional
56.395 GW of power plants installed in the period from 2019 to
2028, whereby a total of 9.7 GW or 17.2% of the total target is
projected to be taken up by hydropower plants. Indonesia has
also set a target that 23% of the country's energy mix should be
from renewable sources by 2025.
Since mid-2019, the government has been preparing a draft
presidential regulation on procurement of renewable energy by
PLN. One of the changes expected in the presidential regulation
is from a BPP-based tariff to a feed-in-tariff and a ceiling tariff
without any tie-in to PLN's BPP. It is expected that a feed-in-tariff
will only be available for smaller scale projects. The draft
regulation is still under discussion and should be issued in the
near future. Once issued, we expect that MEMR Regulation
50/2017 will be amended to conform with the presidential
regulation.
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