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20 September, 2018
Major regulatory and policy updates for the Indonesian energy sector – increased biodiesel requirements, proposed limitation of crude exports/imports, and potential delay of existing power projects
In the shadow of an upcoming Presidential election and the recent external pressure on the value of the Indonesian Rupiah, the Indonesian Government has recently made several notable announcements regarding the Indonesian power and oil and gas sectors. Each announcement aims to reduce Indonesia’s current account deficit, which is currently at 3 percent of GDP.
In summary, the recent regulatory and policy changes are as follows:
In August 2018, the Indonesian President issued Regulation No. 66 of 2018 (Regulation 16) and the Ministry of Energy and Mineral Resources (MEMR) issued Regulation No. 41 of 2018 (Regulation 41) (together the Biodiesel Regulations) to help facilitate expansion of the mandatory use of 20 percent locally blended biodiesel (B20 fuel) in Indonesia in a bid to reduce imports of fuel.
On 4 September 2018, MEMR made a public announcement regarding its plan to delay the commercial operation date (COD) under power purchase agreements (PPAs) which have been signed with State Electricity Company PLN but which have not yet reached financial close. MEMR has also announced that it is planning to increase compliance with existing local content regulations in the power industry.
On 5 September 2018, MEMR issued Regulation No. 42 of 2018 (Regulation 42) which prioritizes local crude production over imported crude oil and requires upstream oil and gas contractors to first offer their local crude production to Pertamina in Indonesia prior to any export of crude production.
At the same time, the Indonesian Government (in preparation for the 2019 Presidential election) has assured the public that there will be no increase in subsidized and non-subsidized retail fuel prices or electricity prices, despite the deteriorating financial performance of Pertamina and PLN. These policy changes should be seen in the context of other recent measures to curb imports into Indonesia, including:
- discouraging State-owned enterprises (including PLN and Pertamina) from importing capital goods;
- an additional 7.5 percent tax on certain imported goods (expected to focus on consumer and luxury goods); and
- potential restrictions on ports of entry for certain imported goods.
While efforts to support the Indonesian Rupiah are a political reality at this stage of a Presidential election cycle and amid global currency turbulence, the proposed new regulations and policies will need to be carefully implemented to ensure that no long-term damage is caused to the Indonesian energy industry, which remains a crucial driver of the overall Indonesian economy.
Oil and gas industry
Prioritization of domestic crude
MEMR Regulation 42/2018 is significant for the Indonesian oil and gas industry as it requires Pertamina and all other Indonesian oil processing license holders to prioritize domestic crude oil (including condensate) (“Crude Oil”) and requires the purchase of domestic Crude Oil produced by PSC contractors in Indonesia prior to the import of any Crude Oil into Indonesia.
Even more significantly for the private sector, MEMR Regulation 42/2018 requires all PSC contractors to offer to sell their Crude Oil to Pertamina and/or other Indonesian oil processing license holders at least three months prior to the start of any export recommendation period. This offer to Pertamina and/or other Indonesian oil processing license holders must be negotiated by the relevant PSC contractors on a business-to-business basis, with the results of such negotiations then reported to the Indonesian Directorate General of Oil and Gas (DGOG) by Pertamina and/or other Indonesian oil processing license holders.
Notably, MEMR Regulation 42/2018 does not expressly set out the consequences if a PSC contractor fails to make the relevant offer to Pertamina and other Indonesian oil processing license holders (or fails to negotiate and agree the terms for such sale). However, the new regulation does state that further implementing regulations will be issued by the DGOG and SKK Migas to implement its provisions.
As a result, while it remains to be seen how the provisions of MEMR Regulation 42/2018 will be interpreted, implemented and enforced in practice – the issuance of MEMR Regulation 42/2018 does raise the risk that failing to agree terms for the sale of Crude Oil by PSC contractors to Pertamina and other Indonesian oil processing license holders may result in the limitation of the ability of such PSC contractors to freely export their Crude Oil.
Mandatory B20 fuel requirements
Under the new Biodiesel Regulations, all diesel fuel processing and trading/importing companies in Indonesia must mix biofuel with diesel based on a minimum level of biofuel utilization determined by MEMR. Based on the current policy of the Indonesian Government, starting on 1 September 2018, a mandate of B20 fuel applies to diesel fuel processing and trading/importing companies for both subsidized and non-subsidized diesel fuel. Failure to comply with this mandatory B20 fuel requirement may result in monetary fines (currently IDR 6,000 per litre of biofuel required to be mixed) and, ultimately, revocation of the company’s diesel fuel processing and/or trading license.
However, license holders will be exempted from such sanctions if there is delay, insufficient capacity and/or quality of biofuel supply in the market. The new Biodiesel Regulations also introduce mechanisms for the Indonesian Government to co-ordinate and procure the sale of biofuel to Indonesian diesel fuel processing and/or trading companies.
Power industry
Potential delay of power projects which have not yet achieved financial close
Over the last several years and in furtherance of President Jokowi’s signature 35GW power project program, PLN has been aggressively entering into new PPAs for independent power producers (IPPs) and developing its own power projects. However, the 2018 Electricity Plan(RUPTL) published earlier in the year expressly recognized PLN’s reduced ambitions for new power projects, including due to the reduced projected growth for electricity demand. MEMR has now announced its policy plans to delay the COD for PPAs already signed by PLN but which have not yet reached financial close. MEMR has stated that PPAs scheduled to reach COD in 2018-2019 will be delayed until 2020-2021 while PPAs scheduled to reach COD in 2020 or beyond will be delayed based on the needs of PLN.
While MEMR has released a list of projects which may be affected by this new policy (totaling 15.2 GW of power projects with a total investment value of US$23.9 billion), MEMR has not yet released any regulatory instruments or the details of any other legal basis for PLN to unilaterally delay the COD of projects with signed and legally binding PPAs. Consistent with the approach we have seen MEMR adopt in other industries (including oil and gas, and mining), we expect that PLN will, in practice, seek to implement the MEMR plan on a project-by-project basis through direct dialogue with the relevant IPP.
Predictably, the Indonesian IPP industry has reacted with concern to these plans by questioning the legal capacity of PLN to implement the plan, warning that the implementation of any such plan may result in international arbitration, and requesting further clarity from MEMR. While it remains to be seen how PLN will seek to implement MEMR’s plan, it does increase the risk of PLN refusing to grant waivers and exemptions under existing PPAs. This new policy direction from PLN also suggests that the development of new PPAs with PLN may be substantially slower until PLN works through its existing committed power projects (particularly in regions of over-supply or with high electrification).
This may also be an opportunity for PLN to reevaluate power projects which have failed to achieve financial close within the time-frames set out under the PPA.
Local content requirements
In addition to the above, MEMR has also announced its renewed policy plans to increase the local content of Indonesian power projects. It is understood that MEMR will implement the tightening of goods import plans for power projects in order to maximize the use of domestic products and reduce Indonesia’s current account deficit. While the relevant local content requirements for power projects have not yet been formally amended, this may be an inevitable consequence of these MEMR announcements.
Rooftop solar
On a separate note, we understand that MEMR is currently working on a new regulation for the Indonesian rooftop solar industry. We are hopeful that the new regulation will finally provide some clarity and legal basis for the installation of rooftop solar panels and the export of surplus generated power to PLN’s grid.
For further information, please contact:
David Dawborn, Partner, Herbert Smith Freehills
david.dawborn@hbtlaw.com
