For the last few years, renewable energy has been one of the top growing industries in the world. With the rising awareness, people start to push for further sustainable technology development and renewable energy power plant. All countries are participating, including developing countries like Indonesia. But for the last few years, the growth remains unseen, Indonesia seems to still elect fossil fuel as their main source of energy. Regulation seems to be at fault for this stagnation.
We now can see that financial and technical are not the main issues. We have much affordable technology, the Levelized Cost of Energy (LCOE) of renewable energy source is cheaper every year, and yet we still have not seen the growth expected from the industry. It is just not many people investing in these projects.
What seems to be the problem for investors?
1. Auction Scheme
Since 2017, ESDM (Energy and Mineral Resources) Ministry has stated in Ministerial Decree No. 50 2017 that all renewable energy project tenders are done through auction in Indonesia. The winner of the auction is the IPP (Independent Power Producer — private company who owns power plant) that can sell the electricity with the cheapest price.
It is very clear how troubling this regulation is. Not that IPP company requires a generally bigger investment for renewable energy project, it also needs to come up with a business plan that will provide the cheapest selling price, even compared to fossil fuel power plant. Since PLN (Indonesia National Electricity Company) is the only company you can sell electricity to in Indonesia, they leave you with no choice.
2. Cheap Electricity Pricing
In Indonesia, our national electricity tariff is called BPP (Biaya Pokok Produksi). It is determined for each region due to our massive regional differences. Electricity tariff is the price of electricity PLN willing to pay to IPP company.
For instance, IPP wants to build solar power plant in Gorontalo. The production cost of solar power plant is approximately around Rp 2.100/kWh (by the time this article is written), but you can only sell it for Rp 1.900/kWh. How do you make a profit out of this? In addition, there is also this regulation:
When the local tariff is higher than national tariff, IPP can not get full payment and must oblige the 85% of the local tariff payment. If we use the same example, the maximum payment will be around Rp 1.600/kWh. This is a loss of Rp 500/kWh. Sure for solar power plant when the system is operating, the maintenance cost will be very low, but how about the other source of energy? In addition, this payment scheme does not look very promising in the eye of investors and financial institution.
Don’t forget, even when IPP can come up with a acceptable pricing somehow, it still has to become cheap enough to win the auction.
3. BOOT Scheme
BOOT is Build, Own, Operate and Transfer. When IPP win and build the project, it will own and operate the system for as long as the Power Purchase Agreement (PPA) states, and then it has to transfer the plant to the government.
This obviously makes it difficult for some investors. For government, this move is meant to ensure the national electricity production when the contract is up and to ensure that IPP will not violate its land usage by transforming the plant to something else.
For investors, this is obviously losing a valuable asset. The profit the plant produced might not be as profitable as it might seem and can only produce profit in a certain amount of time. For instance, the PPA states for 25 years of operation, after 25 years the land and building value has definitely changed and they can not make profit out of this, instead they have to transfer the plant to the government.
It is true this is a common scheme in many countries, but in a country where the tariff is cheap and the investment is huge like Indonesia, this might not be a wise business investment.
4. Difficult Financing Mechanism
The lack of incentives and subsidies from government makes it hard for the project to become bankable. This will lead in difficulties in acquiring loan from bank and financial institution. The terms and conditions are very tough for smaller IPP company.
For instance, due to the difficulties in reaching bankability, financial institution usually asks for a bigger warranty. If the project investment is Rp 100 billion, then the collateral should be Rp 120 billion. Plus, IPP can not put its own company as collateral. When IPP fails to meet its financing demand, it can not transfer the IPP to other company, PLN will re-auction the plant instead, making it even harder for small IPP developer to survive. It is easier for big capacity power plant (>10MW) to obtain these loans, but for smaller capacity power plant, which many small IPP trying to compete in, the regulations are still preventing them to acquire financing.
5. Lack of Political Will
Probably the biggest issue of them all. The lack of political will for the regulator itself. It is easy to see in the National Electricity Development Plan (or RUPTL in Indonesian) that fossil fuel is still the main source of energy development until 2028.
And then, IPP can also benefit from subsidies. With subsidies, IPP can obtain profit from the cheap tariff. All these years, government has been providing subsidies for fossil fuel. Why can not they provide subsidies as well for renewable energy?
Incentives can also become a solution in reaching bankability. Land incentive, for instance, will help enormously. Land acquisition cost can be 30–40% of the total investment for renewable energy power plant. Government can also provide discount on customs tariff for imported components.
Lastly, endorsement from government to bank or financial institution to ensure financing for smaller IPP to help development in small capacity renewable energy power plant will be great for further developments.
The support from government is really the last push to really develop renewable energy in Indonesia. Many investors are willing to invest in renewable energy these days. With the recently elected president and parliament members, we can hope that these people will make changes and improve regulations in many aspects, including renewable energy.
