Local content requirements – benefits or disincentive?
Under the previous rules on local content requirements (LCR) for the development of electricity infrastructure1, projects were required to comply with stringent LCR thresholds in terms of the proportion of locally sourced goods and/or services. For example, solar modules on solar projects were subject to an LCR of 60 percent.
LCRs were originally introduced to incentivise the development and use of local goods and services in electricity infrastructure supply chains. However, the slow growth of relevant domestic supply chains (both in terms of quality and cost) combined with the overly-restrictive LCR and its unclear application hindered the growth of Indonesian renewables by creating uncertainties and bankability challenges. This is all the more so since in order for renewables to be economical, the already thin profit margins are highly sensitive to supply chain process and cost inefficiencies.
There were also concerns that this more restrictive regime was hampering investment in the sector including the distribution of funds from a partnership with the United States (U.S.) known as the Energy Transition Partnership (JETP). In 2022, it was announced that JETP was to invest US$21.6 billion in public and private financing to drive the growth of renewable energy in Indonesia over a five year timescale.
Moreover, in late 2023, PT PLN (Persero), Indonesia’s state-owned electricity company, shared its concerns that the exacting requirements were hindering investment. Nine renewable energy projects, collectively valued at approximately IDR 51 trillion (US$3.2 billion) were said to be facing financing challenges due to the stringent rules.
The situation threatened to present a substantial setback to Indonesia’s ambitious climate goals, which include a target of net zero emissions by 2060, a 23 percent new and renewable energy mix by 2025 and a 31 percent new and renewable energy mix by 2050 in accordance with the National Energy Policy under Government Regulation No. 79 of 2014 and the Electricity Supply Business Plan of 2021 to 2030 (known as RUPTL / Rencana Usaha Penyediaan Tenaga Listrik).
In order to address the situation, on 31 July 2024, a new regime of content requirements was introduced through a new LCR (“TKDN” or “persyaratan Tingkat Komponen Dalam Negeri”) regime.
New regulations on electricity infrastructure LCR
The government has issued three new regulations relaxing the LCR provisions, namely:
- Minister of Industrial Affairs (MOI) Regulation regarding Guideline on the Use of Domestic Products for Electricity Infrastructure Development as amended (MOI Regulation 33/2024)
- Minister of Energy and Mineral Resources (MEMR) Regulation No. 11 of 2024 on the Use of Domestic Products for Electricity Infrastructure Development (MEMR Regulation 11/2024).
- MOI Regulation No. 34 of 2024 regarding the Procedure for Calculating the Value of the Domestic Component Level of Solar Module Products (MOI Regulation 34/2024).
MOI Regulation 33/2024 primarily serves to revoke the previous MOI Regulation No. 54/M-Ind/Per/3/2012 as amended (MOI Regulation 54/2012), which governed the use of domestic products in electricity infrastructure development. Likewise, MOI Regulation 34/2024 revokes the MOI Regulation No. 04/M-IND/PER/2/2017 on provisions and procedures for the assessment of domestic component levels in solar power plants.
Separately, the MEMR has now become the designated regulatory authority for LCR in electricity infrastructure development. Under MEMR Regulation 11/2024, the Director General of Electricity (DGE) and the Director General of New Renewable Energy and Energy Conservation (DGNRE-EC) will oversee LCR implementation, depending on the energy source used in the particular power plant. MOI will still supervise the LCR for solar modules manufacturing under MOI Regulation 34/2024.
This regulatory shift aims to streamline the governance of LCR in Indonesia's electricity sector whilst promoting investment in renewable energy projects.
Changes in LCR fulfilment obligation for electricity infrastructure development
The use of domestic goods and services remains mandatory for the development of electricity infrastructure by certain state-owned enterprises and private businesses which, in the procurement of goods and services:
- utilise financing from the state/regional revenue and expenditure budget;
- use the public-private partnership scheme; and/or
- exploit state-controlled resources.
MEMR Regulation 11/2024 provides the possibility of an LCR waiver in respect of electricity infrastructure projects that meet specific funding criteria. Specifically, an exemption may apply to projects where at least 50 percent of the development fund is provided through loans or grants by foreign development banks or financial institutions. Such waivers were not provided under MOI Regulation 54/2012.
New minimum LCR values
MEMR 11/2024 does not directly regulate the new minimum LCR value for the development of electricity infrastructure. The minimum LCR value is regulated under MEMR Decree 191/2024, which generally contains a lower combined LCR (i.e. goods and services combined).
The following table provides a comparative analysis of the combined LCR provisions of renewable power plants between MEMR Decree 191/2024 and MOR Regulation 54/2012:
Power Plants
|
Combined LCR
|
Capacity/
Type
|
MEMR Decree 191/2024
|
Capacity/
Type
|
MOI Regulation 54/2012
|
Geothermal Power Plant
|
0-60 MW
|
24%
|
0-5 MW per unit
|
42.00%
|
>60 MW
|
29%
|
5-10 MW per unit
|
40.45%
|
Partial Project
|
20%
|
10-60 MW per unit
|
33.24%
|
60-110 MW per unit
|
29.21%
|
>110 MW per unit
|
28.95%
|
Hydro Power Plant
|
0-10 MW
|
45%
|
0-15 MW per unit
|
70.76%
|
>10-50 MW
|
35%
|
15-50 MW per unit
|
51.60%
|
>50 MW
|
23%
|
50-150 MW per unit
|
49%
|
>150 MW per unit
|
47.60%
|
Solar Power Plant
|
N/A
|
20%
|
Scattered-Stand Alone
|
45.90%
|
Centralized-Stand Alone
|
43.72%
|
Centralized-Connected
|
40.68%
|
Wind Power Plant
|
N/A
|
15%
|
Unregulated
|
Biomass Power Plant
|
N/A
|
21%
|
Unregulated
|
Biogas Power Plant
|
N/A
|
25.19%
|
Unregulated
|
Waste Power Plant
|
N/A
|
16.53%
|
Unregulated
|
The calculation methodology for the LCR as stipulated in MEMR Decree 191/2024 is further delineated by the DGE or the DGNRE-EC, contingent upon the specific power plant category. It is noteworthy that electrical infrastructure designated for cross-border electricity transactions is subject to distinct LCR provisions.
Independent Power Purchasers are required to undergo verification by an accredited verification institution possessing a valid Electricity Support Services Business Permit prior to the handover from the service providers prior to commercial operations being achieved. The verification outcomes must be submitted to the DGNRE-EC (for renewable energy facilities) with a duplicate provided to the DGE. These verification results will serve as the foundation for determining the imposition of sanctions or the conferment of awards on the service user.
Special LCR relaxation for solar power plants
The government provides a temporary LCR criteria relaxation for solar power plants whose power purchase agreements are signed no later than 31 December 2024 and are planned to operate commercially by 30 June 2026 under the power supply business plan. Relaxation is provided for solar power plant developments that meet the following criteria:
- listed in a meeting convened by the Coordinating Minister for Maritime and Investment Affairs;
- using solar modules assembled locally or imported wholly by manufacturers who have an investment commitment to locally produce and meet the LCR for solar modules by the conclusion of 2025.
A boost to green energy
The energy transition faces numerous challenges, yet promising developments are emerging. A restructured feed-in tariff system, combined with innovative pricing mechanisms and consistent policy frameworks, has the potential significantly to enhance renewable energy adoption and attract substantial foreign investment.
Nevertheless, the introduction of the LCR waiver is a particularly noteworthy development. While still in its nascent stages, this policy could prove transformative for renewable energy projects, provided the apparent regulatory intent is reflected consistently by PLN in future power purchase agreements.
The government’s new regulations should offer far greater flexibility in the application of LCR provisions relating to projects financed through foreign grants or loans. It is too early to tell just what effect the changes will have on investment since a comprehensive analysis of this new policy framework is contingent upon two forthcoming regulatory instruments concerning LCR for cross-border electricity sales and the methodology for calculating LCR.
Given the recent implementation of these regulations, some initial challenges may arise. It is reasonable to anticipate further clarifications as the policy is refined. To mitigate potential regulatory scrutiny, it is imperative to remain apprised of any updates. In the interim, noting the LCR waiver's potential impact on project financing, investors are advised to carefully evaluate how these changes may affect their business models and supply chains.
Authored by Mochamad Kasmali (Infrastructure, Energy, Resources and Projects), Matt Bubb, Stephen Clugston (Infrastructure, Energy, Resources and Projects), Karina Antonio (Infrastructure, Energy, Resources and Projects), and Nigel Sharman.
References
1 Ministry of Industrial Affairs (MOI) Regulation No. 54/M-IND/PER/3/2012
2 https://www.thejakartapost.com/business/2023/12/21/local-content-rules-holding-back-9-renewable-energy-projects-pln-says.html