Waste to energy in Indonesia: opportunities and challenges

'Nationally strategic' WtE projects in Legok Nangka, Bandung and South Tangerang, each with 10-20MW of offtake power capacity, are expected to be tendered in the coming year while the Indonesian Minister of Energy and Mineral Resources (MEMR) announced a further 12 plants, with a combined capacity of 234MW, in February 2020, just before the shutdown.

While the timetable for delivery of these plants is likely to be disrupted by the pandemic a healthy pipeline of projects, coupled with a number of recent regulatory reforms, means the long-term future of WtE projects in Indonesia remains bright. Indeed, market sounding activities for a proposed WtE facility in Bali took place in November 2020 and steps continue towards implementation of a number of WtE tender opportunites in Semarang and Jakarta for 2021-22.

The opportunity

Indonesia has a dedicated regulatory regime for WtE projects. Presidential Regulation No. 35 of 2018 concerning the Acceleration of Municipal Waste to Energy Power Plant Development (the 2018 Regulation) was introduced to incentivise investment in new WtE power projects in 12 named cities.

Under the 2018 Regulation, waste management can be procured through a public-private partnership (PPP), or solely by a state-owned enterprise if no private sector participant is interested or if the entity fails the selection process. Indonesia's foreign direct investment rules do not always require foreign WtE developers to appoint a local partner.

Developers receive 'tipping fees' to dispose of waste, paid by the local government and calculated based on the weight of the waste managed by the developer, effectively capped at a maximum of IDR 500,000 (around US$35) per tonne of waste - currently the amount of support local governments receive from the national government. They also receive a fixed feed-in tariff for energy supplied to the grid at more attractive rates than are generally available to renewable developers.

The regulatory framework

In 2017, the MEMR enacted Regulation No. 50 of 2017 on the Utilisation of Renewable Energy Resources for Electricity Procurement (the 2017 Regulation). This regulation was intended to improve the tendering and procurement regime for renewable independent power projects (IPPs) and regulate tariffs, among other things.

However, the 2017 Regulation is generally regarded as having little positive impact on Indonesia's development of IPP projects due to the strict requirements it imposes around procurement and a requirement for mandatory transfer of project assets to the state-owned electricity distribution utility, PT Perusahaan Listrik Negara (Persero) (PLN), once any associated power purchase agreement (PPA) comes to an end.

It is therefore encouraging to see that the 2017 Regulation has since been amended, most recently by MEMR Regulation No. 4 of 2020 (the 2020 Regulation). The 2020 Regulation allows procurement to take place by way of direct appointment instead of direct selection in limited circumstances; does away with the mandatory transfer requirement; and requires PLN to prioritise the acquisition of electricity from renewable IPPs, without the caveat of associated restrictions on generation capacity. See our Out-Law analysis on the 2020 Regulation for more details of the changes.

However, the new regulation has not amended the pricing regime under the 2017 Regulation. Prices remain benchmarked to BPP ('cost of generation provision', reflecting the cost to PLN of procuring power) or based on case by case negotiations between the developer and PLN. This means that, for those WtE projects covered by the 2018 regulation, the fixed feed-in tariff regime is likely to be more attractive to developers.

The challenge

In 2015, the MEMR published a Waste to Energy Guidebook aimed at those developing WtE projects in Indonesia. Although somewhat superseded by recent developments, the guidebook remains a useful starting point for developers and investors unfamiliar with the Indonesian WtE market.

Among other things, the guidebook provides an illustrative risk allocation for a typical project:

• public responsibility for site procurement and preparation, but private responsibility for unforeseen ground conditions, artefacts etc.;
• private responsibility for most operating risks other than interface/network connectivity risks;
• public responsibility for revenue, demand forecasts and payments, but private responsibility for tariff estimates and financing;
• public responsibility for political events other than general changes in law;
• shared responsibility for force majeure events.

For the private partner, counterparty risk where the procuring authority is a regional government may be of concern. This risk can be mitigated by credit enhancement, such as guarantees from the Indonesia Infrastructure Guarantee Fund (IIGF). Other potential risks and issues include community acceptance of WtE projects and relocation of affected residents; stakeholder management including coordination with regional and central government and PLN; and other regulatory processes and licence-related issues.

A further degree of complexity arises from the fact that WtE developers generally act as both waste manager, entering into a waste supply contract with the relevant regional government; and power generator, entering into a power purchase agreement (PPA) with PLN. Appropriate licences must be sought for both roles.

Written by James Harris and Benjamin Tay of Pinsent Masons MPillay, the Singapore joint law venture between MPillay and Pinsent Masons, and Jardin Bahar of Jardin Legal, Indonesia. A version of this article appeared in Project Finance International.