The Utilization of Renewable Energy

With mounting evidence of climate change, public awareness of the measures being taken to come to grips with the looming crisis is greater than ever before. Initiatives such as the United Nations Framework Convention on Climate Change (UNFCCC) demand that member states take immediate action to meaningfully reduce emissions. Pursuant to the Glasgow Climate Pact, UNFCCC recently declared a target of global net-zero emissions by 2050, with a maximum 1.5^oC increase in the global average temperature. As a party to this commitment, Indonesia now stands side-by-side with other nations preparing to shoulder the burden of climate stewardship.

One way to address the issue is the development of renewable energy. Unfortunately, the transition to renewables comes at a cost that is not particularly affordable for developing countries. Hence, creativity will be required in order for Indonesia to follow other nations in transitioning away from fossil fuels.

A recent projection by the Ministry of Energy and Mineral Resources indicates that an investment of $1.108 billion in renewables is required in order to bring emissions down to Indonesia’s nationally determined contribution (NDC) target as set forth in the Paris Agreement. Unless the government is able to attract investment to fund the transition to renewables from the private sector, such targets seem unrealistic for a developing country.

In an effort to achieve its NDC, [1] the Indonesian government recently announced its intention to transition to renewable energy sources for electricity generation. Technology such as carbon capture, utilization, and storage (CCUS),  as well as renewable energy-based power generation, have been officially incorporated into the country’s energy policy at the highest levels. Among other green-energy schemes, waste-to-energy technology — where electricity is generated by utilizing municipal waste in place of coal – has drawn considerable investor attention.

Waste to Energy

It is generally known that Indonesia is currently struggling to manage its solid waste, i.e. the garbage that is generated by consumers and businesses on a daily basis. According to a release by the World Bank in 2020, Indonesian cities and municipalities generate an estimated 105,000 tons of solid waste daily, yet 40% of Indonesians still lack access to basic waste collection services.[2] The high rate of waste generation and lack of sanitation services thus creates a severe waste management hazard for Indonesia.

Waste-processing electrical energy installations are known by the Indonesian acronym PLTSa. This technology is believed capable of killing two birds with one stone by simultaneously improving management of solid waste while increasing the proportion of energy that comes from renewable sources within the country’s energy plan. If waste can be used to fuel electrical generation, then the country would be less dependent on coal, a non-renewable resource which also contributes to harmful emissions.

The government had been pursuing waste-to-energy for some time. In 2018, a presidential regulation (PR 35/2018) mandates the construction of PLTSa facilities on an accelerated basis.[3] This is one of Indonesia’s efforts to manage waste and effect the shift to renewable energy.

As quoted by Detik Finance, Joko Widodo recently said that he has been interested in waste-to-energy plants since the time he was the mayor of Surakarta. The president is encouraging the regional governments to build PLTSa facilities as soon as possible. He said that PR 35/2018 was specifically drafted to overcome hurdles he himself had experienced as the head of regional government, namely the former stipulation that an underlying regulation from the central government was required before the provinces could built PLTSa facilities.[4]

PLTSa Construction Regions

PR 35/2018 appoints twelve regional governments to administer the acceleration of PLTSa construction in their respective areas:

1. DKI Jakarta;
2. Tangerang City;
3. Tangerang Selatan City;
4. Bekasi City;
5. Bandung City;
6. Semarang City;
7. Surakarta City;
8. Surabaya City;
9. Makassar City;
10. Denpasar City;
11. Palembang City; and
12. Manado City.

As of recently, out of the twelve designated municipal governments, only three regional government had completed the construction of PLTSa facilities. Of the three, just two – Cempo PLTSa in Surakarta and Benowo PLTSa in Surabaya – had commenced commercial operation. DKI Jakarta has completed the construction of its PLTSa facility, but the commencement of commercial operations is currently on hold pending the signing of a power purchase agreement with the State Electricity Company (PLN).

PLTSa Scheme

Based on the PR 35/2018, a regional government initiates the construction of a PLTSa by preparing the following:

1. Pre-feasibility study for PLTSa development;
2. Availability of waste in accordance with the pre-feasibility study;
3. Waste treatment method accords with waste management policy;
4. Site for PLTSa construction to be in compliance with the regional spatial layout plan.

Regional governments may hold a tender to select a private company to develop the PLTSa and act as waste manager or, alternatively, appoint a regionally-owned enterprise (BUMD). While the PLTSa is in the construction phase, the regional government is required to submit a proposal to the ministry of energy and mineral resources (ESDM) to assign PLN to purchase the electricity generated from the PLTSa. The ESDM Minister then assigns PLN to purchase electricity from the PLTSa at a price determined based on the capacity of PLTSa as specified in PR 35/2018, as follows:

A. For PLTSa with a capacity of up to 20 MW, the price is $13.35 cent/kWh;

B. For PLTSa with a capacity of over 20 MW, the price is $[14,54 – (0,076 x the capacity of PLTSa)].

The agreed price will then be stated in a power purchase agreement between PLN and the business entity, whether a BUMD or a private company.

PLTSa Waste-to-Energy Projects as a Private Investment Opportunity  

The mechanism for the construction of PLTSa as regulated in the PR 35/2018 opens up an investment opportunity for private parties. As previously explained, private parties may be selected via tender to build PLTSa facilities and take over as waste manager. They will then receive their profit from the sales of electricity to PLN. This mechanism opens up opportunity for investors to be involved in the PLTsa projects whether as the project owners, constructors, operators, and/or lenders.

Waste Collection and Tipping Fee

One of the core aspects in the scheme of PLTSa operation is the tipping fee, which is a fee that is charged by waste manager as a compensation for managing the waste by the regional government, according to PR 35/2018 . This tipping fee does not include the cost incurred by the waste manager to collect, transport, and process the waste.

The tipping fee is allocated from the regional government’s budget. As per PR 35/2018, the central government may support regional governments by making allocations from the central budget to cover tipping fees. Specifically, upon recommendation from the ministry of environment, the ministry of finance may offer subsidies amounting to Rp 500,000 per ton of waste to the regional governments.

Regulatory and Fiscal Incentives for Investment in PLTSa

Various regulations are already in place to help ensure the commercial viability of PLTSa-generated power. Under ESDM Ministry Regulation No. 4/2020, the ESDM minister can instruct PLN to buy PLTSa electricity at a determined price as per the proposal of the regional governments. Further, as per Ministry of Environment Regulation No. 24/2019, regional governments are also eligible to receive the incentive of up to Rp 500,000 per ton of PLTSa-processed waste from the Ministry of Finance.

Investors looking to invest in the construction of a PLTSa may also apply for special tax incentives. Ministry of Finance Regulation No. 130/2020 provides that investors who are investing in certain industries, including PLTSa facilities, may apply for tax holiday. For investments worth at least Rp 500 billion (about $U.S. 32 million), the government may grant a reduction of corporate income tax that can reach up to 100% over a 5-20 year timeframe. Meanwhile, investors who are investing Rp 100 billion ($U.S. 6.4 million) to Rp 499 billion are eligible for tax cuts reaching up to 50% for five years. These incentives clearly demonstrate that the Indonesian government envisions a very substantial role for private investors in the waste-to-energy market in Indonesia.

Green Bond Funding Opportunity

As businesses compete for opportunities to associate themselves with the “e” in ESG (environmental, social, governance) and investors become increasingly fluent in the language of sustainability, investing in Indonesia’s renewable energy sector carries a number of unique advantages. Among these is access to green bonds, an elite fixed income financial instrument issued to fund and develop green projects. Over recent months high-profile green bond issuers include Maersk, with a fleet of carbon-neutral methanol-powered vessels funded by €500-million worth of green bonds; and Indonesian state bank BRI, which has issued green bonds that have been oversubscribed by 4.4 times with the funds to be for projects deemed environmentally friendly.

Likewise, private parties investing in Indonesia’s waste-to-energy scheme by developing PLTSa plants may reasonably expect to raise funds by issuing green bonds or turning to banks issuing such bonds or else granting green loan to such private parties.

[1] Energy and Natural Resources Ministry Press Release No. 79.Pers/04/SJI/2022

[2] https://www.worldbank.org/en/news/press-release/2019/12/05/cleaning-up-indonesias-urban-solid-waste

[3] Presidential Regulation No. 35/2018 on the Acceleration of Construction of Waste Processing Installations into Electrical Energy Based on Environmentally Friendly Technology.

[4] https://finance.detik.com/berita-ekonomi-bisnis/d-5560685/jokowi-acungi-2-jempol-program-sampah-jadi-listrik-di-surabaya

This newsletter is for informational purposes only and solely intended to provide general information and should not be treated as legal advice, nor shall it be relied upon by any circumstance or create any relationship. All summaries of the laws, regulation and practice in the contents are subject to change. Specific legal advice should be sought by interested parties to address their particular circumstances.

If you have any question on the above and/or wish to discuss the impact of these legal and commercial developments in your particular case, please reach out to Cylvie Nuraini at cylvie@sapartnerslaw.com and/or Dimas Anggana at dimas@sapartnerslaw.com.