Indonesia: Omnibus Law - Impacts on Electricity Law

In brief

On 5 October 2020, the Parliament approved the job creation law (RUU Cipta Kerja, commonly known as the "Omnibus Law"), which introduces key amendments to several sectors, including the electricity sector by amending Law No. 30 of 2009 on Electricity ("Electricity Law").

Contents

1. Key takeaways

2. Detailed Changes

Key takeaways

• The Omnibus Law does not make significant changes to the Electricity Law. The most notable change is what appears to be an attempt to give broader authority to the central government on the issuance of electricity licenses. We expect that details on how the authority to issue licenses is distributed between the central and provincial governments will be further clarified in the implementing regulations.

• In earlier drafts of the Omnibus Law, there was a plan to expand the definition of "captive power projects" to include supply of electricity to a generator's affiliates, not only for the generator's own use. But this change does not appear in the latest draft of the Omnibus Law. So for power developers and corporate buyers that are looking into having corporate power purchase agreements ("PPA") in Indonesia, the options to implement this scheme remain the same, i.e.,:

o rental of power plant arrangement, where the corporate buyer rents power generation equipment from the power developer

o integrated generation and distribution model, where the power developer applies to the government for the exclusive right to supply electricity within the business area (wilayah usaha) covering the corporate buyer's premises, and then enters into a PPA with the corporate buyer

• The Omnibus Law now clarifies that an integrated power developer can build its power plant and transmission line outside its business area. This change might help to foster the growth of renewable corporate PPAs in Indonesia (especially for larger size projects). But with the government's recent plan for a moratorium on the issuance of electricity licenses for captive projects and non-PLN projects, this impact of this change might be relatively marginal for now.

Detailed Changes

Authority for Issuance of Electricity Licenses

• Under the Electricity Law and Law No. 23 of 2014 on Regional Governments, the central government and provincial governments have authority to issue electricity licenses and approvals, including electricity supply licenses for public interest (Izin Usaha Penyediaan Tenaga Listrik or "IUPTL"), captive power licenses (Izin Operasi or Operational License), and electricity supporting services business licenses (Izin Usaha Jasa Penunjang Tenaga Listrik or "IUJPTL").

• The general rule under the Electricity Law is that the central government has authority to issue licenses for projects that are located in more than one province, or where the projects involve sales of electricity to PLN. The provincial government has the authority to issue licenses for projects that are located within one province.

• The Omnibus Law amends Article 5(2) of the Electricity Law, which sets out the authority of the provincial governments. In particular, it removes references to the provincial governments' authority to issue several licenses and approvals, e.g., the IUPTL, Operational License, approval of tariffs charged to consumers (including the authority of the Regional House of Representatives to issue approval of the tariff), and sale of excess power.

• However, other parts of the Omnibus Law suggest that the provincial government still has authority to issue electricity licenses. It is not clear what licenses are still under the authority of provincial governments, but we expect that this matter will be further detailed in the implementing regulations.

• What is clear under the Omnibus Law is that even where the provincial government has the authority to issue electricity licenses, it will be done subject to the norms, standards, procedures and criteria determined by the central government.

• As most electricity licenses are currently issued through the OSS system, in practice there might not be significant changes in the process of issuance of electricity licenses and approvals.

Business Area for  Integrated Electricity Supply

• As a general rule, the whole territory of the Republic of Indonesia is PLN's business area, and the Electricity Law states that one business area can only have one electricity supplier. The government has the authority to carve out a certain area from PLN's territory and give it to another company (having an integrated IUPTL), but in practice this can be quite difficult to do.

• The Omnibus Law does not change the above requirements. But it now clarifies that a company that has obtained a business area stipulation can build its power plants and transmission line outside its business area.

• So theoretically an electricity developer can be granted a business area that specifically only covers its customer's business premises, build its power plant at another location (where more land is available at a cheaper price), and enter into a direct or corporate power purchase agreement with the customer.

Express Prohibition to Rebuild Buildings and Plants Within the "Free Space" Around Electricity Transmission and Distribution Lines

• The implementing regulation of the Electricity Law requires owners of electricity networks to maintain a minimum area of "free space" around the transmission and distribution lines.  This means that the area within a certain distance from an electricity transmission/distribution line must be free from any buildings and plants.

• The Omnibus Law now includes an express prohibition for any person to build or to allow buildings and/or plants to be built within the "free space" if the right of way compensation has been paid for that land. Failure to comply with this requirement can result in administrative sanctions in the form of penalties, as well as criminal sanctions.

Criteria for Imposition of Criminal Sanctions

• The Omnibus Law provides additional qualifications for the imposition of criminal sanctions (i.e., the violation causes harm to other parties or the environment).

• The Omnibus Law also removes the imposition of criminal sanctions for IUPTL and Operational License holders that fail to comply with their obligation to pay right of way compensation in relation to construction of transmission and distribution lines.

• Contact Information

• Norman Bissett

Foreign Legal Consultant, Jakarta

norman.bissett@bakermckenzie.com

• Nadia Soraya

Partner, Jakarta

nadia.soraya@bakermckenzie.com

• Fanny Kurniawan

Associate Partner, Jakarta

fanny.kurniawan@bakermckenzie.com

• Karina Sungkono

Senior Associate, Jakarta

karina.sungkono@bakermckenzie.com

• Stephen Clugston

Counsel, Tokyo

stephen.clugston@bakermckenzie.com

• Martin David

Principal, Singapore

martin.david@bakermckenzie.com

• Kim Hock Ang

Principal, Singapore

kimhock.ang@bakermckenzie.com