Funding and Fiscal Support for Indonesia's Energy Transition 

Introduction

As a part of Indonesia's international commitments to accelerate its energy transition, the Government of Indonesia (GoI), in late 2022, enacted Presidential Regulation No. 112 of 2022 on the Acceleration of Renewable Energy Development for the Supply of Power (PR 112/2022). One of the key policies set out in PR 112/2022 is the plan to progressively phase out coal-fired power plants (CFPPs). To this effect, PR 112/2022 provides that the GoI may provide fiscal support for the early retirement of CFPPs, through funding and financing frameworks, including blended finance sourced from the State Budget (the APBN) and/or other sources.

As a further implementation of this aspect of Indonesia's energy transition plans, the Minister of Finance (MOF) has now just issued MOF Regulation No. 103 of 2023 on the Provision of Fiscal Support through a Funding and Financing Scheme in the Framework of Accelerating Energy Transition in the Electricity Sector (MOF 103/2023). 

One of the main objectives behind MOF 103/2023 is to provide a framework for the implementation of the significant pledges that were made by donor countries of the International Partners Group (IPG - led by the United States and Japan and includes the European Union, Canada, Denmark, Norway, and the United Kingdom) at the 2022 G20 Summit under the umbrella of the Just Energy Transition Partnership (JETP). The JETP aims to mobilize an initial US$20 billion in public and private funding to decarbonize Indonesia's energy sector using a mix of grants, concessional loans, market-rate loans, sovereign guarantees, and private investments. As part of the JETP funding implementation process, the GoI is to ensure that the utilization of such financing is disbursed through a structured, transparent and well-targeted mechanism. MOF 103/2023 provides the framework for the GOI to screen and select eligible projects (both early CFPP retirement and the development of new renewable energy power plants - REPPs) to receive JETP funding as well as additional funding from other sources such as from the State budget and future external funding which is not part of JETP package.

In this article, we provide an overview of the funding and financing mechanism introduced by MOF 103/2023, including the criteria and requirements for specific projects to obtain fiscal support and/or funding. For further a commentary on PR 112/2022, please refer to our previous article.

Establishment of the Energy Transition Platform

MOF 103/2023¹ introduces an "Energy Transition Platform", which is one of the GoI's fiscal measures established to support²: 

The Energy Transition Platform is established to obtain financing from international financial institutions and/or other institutions/agencies and channeling the funds to support Indonesia's energy transition (please see further below).³  

The Energy Transition Platform will be managed by a "Platform Manager". Pursuant to MOF 103/2023, MOF designates PT Sarana Multi Infrastruktur (Persero) (SMI), a state-owned enterprise (SOE) under the supervision of the MOF, as the Platform Manager.⁴ 

Sources of Funds for the Energy Transition Platform

The sources of funds which can be made available for the Energy Transition Platform may come from: (i) the State Budget and/or (ii) other sources which may be obtained by the Platform Manager based on:⁵

1. Funding Cooperations for the energy transition between the Platform Manager and the following parties:

a) international financial institutions in the form of:⁶

• institutions established based on international agreements, whether multilateral, regional or bilateral;
• any institution established by a country that has diplomatic and/or trade relations with the GOI to support international economic development through the implementation of development financing activities, including infrastructure financing; and/or
• multilateral, regional or bilateral cooperation forums or programs held for purposes that are in line with the objectives of establishing the Energy Transition Platform, including cooperation forums in the field of financing climate change and/or sustainable development.

b) other institutions/agencies in the form of:⁷

• public service agencies, whether established by the central government or regional governments which carry out duties and functions of providing financing instruments;
• institutions or bodies established under Indonesian law to support the economy and/or sustainable development, institutions or bodies established in countries that have diplomatic and/or trade relations with Indonesia;
• philanthropic institutions; and/or
• funds in the fields of development financing, infrastructure financing, and climate change.

2. Other forms of Cooperations than Funding Cooperations.

The Funding Cooperations with international financial institutions and/or other institutions/agencies are intended to:

a) create a coordinated and integrated blended finance mechanism by utilizing instruments available to international financial institutions or other institutions/agencies in the context of managing the Energy Transition Platform; and/or

b) increase the funds available to the Energy Transition Platform through other sources to support the acceleration of the energy transition in the electricity sector.⁸

Funding Cooperations will be carried out through a Funding Cooperation Agreement to be entered into by the Platform Manager and the relevant institution/agency, and will contain provisions regarding technical assistance and other in-kind support (such as assistance in the preparation of transactions and management of the Energy Transition Platform, provision of human resources or other forms of support).⁹

We also understand from various briefings from the JETP Secretariat that besides the funding and coordination framework under MOF 103/2023, JETP funding may also be channeled directly to certain projects by donor countries and multilateral development banks (MDBs).

Utilization of the Energy Transition Platform

MOF 103/2023 provides that the Energy Transition Platform facilities may be utilized for:¹⁰

1. CFPPs whose operating period will be shortened (mainly PLN plants);

2. CFPPs whose power purchase agreement will be terminated early (mainly IPPs); and/or

3. development of renewable energy power plants (REPPs) as treplacement for early retired CFPPs, including:

a) REPPs which are developed simultaneously as part of the CFPPs which will be retired early;

b) REPPs which are developed separately from the CFPPs which will be retired early; and/or

c) electricity transmission development as part of the development of REPPs.

The utilization of the Energy Transition Platform for CFPPs shall fulfil the following criteria:¹¹

As at the date of this article, the roadmap on the early retirement of CFPPs is still being prepared and is yet to be issued by MEMR.¹²

As for the utilization of the Energy Transition Platform for the development of REPPs, eligible projects are required to:¹³

1. to be included in the business plan for electricity supply (i.e., RUPTL), whether located inside or outside of PLN's business area (or other business areas/ wilayah usaha);
2. use the proven technology which is already in service in Indonesia or abroad for the development of REPPs;
3. be categorized as green as projects or yellow projects based on the Indonesian Green Taxonomy document published by the Indonesian Financial Services Authority (Otoritas Jasa Keuangan or OJK);
4. to be committed to implement Environmental, Social and Corporate Governance (ESG) principals in carrying out the electricity supply business activities; and/or
5. other criteria, with reference to MOF's policies.

With regards to the 3rd criteria above, OJK (the financial market authority) has recently issued the first edition of the Indonesian Green Taxonomy in 2022. The Indonesian Green Taxonomy classifies projects/business activities into three categories: 

1. Green Projects which are business activities that protect, restore, and improve the quality of environmental protection and management, as well as climate change mitigation and adaptation, and comply with the governance standards by government, and apply best practices at both the national and international level; 

2. Yellow Projects which are business activities that fulfil some of the green category threshold but further determination of benefits for environmental protection and management must still be conducted through the assessment and involvement of other best practices; and 

3. Red Projects which are business activities that do not meet the Yellow and/or Green criteria/threshold. We note that such classification will need to be further specified per sector by the relevant sectoral ministries.

Energy Transition Platform Facilities – Types and Procedure

MOF 103/2023 provides the following types of Energy Transition Platform facilities¹⁴ which can be provided by the Platform Manager:

1. Loan facilities or other forms of financing in the form of:

a) government investment in accordance with the relevant regulations;

b) government guarantee as set out in the relevant regulations on infrastructure financing to SOEs; and/or

c) other form of supports.

2. Facilities through Public Private Partnerships (PPP), which may be granted government support in accordance with the relevant PPP regulations.¹⁵ 

The parties who may apply for financing through the Energy Transition Platform facilities are:¹⁶

• PLN;
• subsidiaries of PLN;
• business entities holding a permit for electricity supply business activities (IUPTL);
• shareholders of business entities holding permits for electricity supply business activities;
• sponsors of business entities holding business permits for electricity supply business activities;
• investors; and/or
• applicants of other related Energy Transition Platform facilities.

The procedure to obtain an Energy Transition Platform Facility is as follows:

1. The applicant applies for the relevant Energy Transition Platform facility to the Platform Manager;
2. The Platform Manager conducts assessment on the application, including initial verification of the applicant;
3. In the event, the application is declared worthy to be considered, the Platform Manager shall carry out a further assessment of the application;
4. The Platform Manager submits the results of the assessment and recommendations to the Steering Committee, which is a committee to be established by the MOF and consisting of officials from the relevant sectoral ministries and its members;
5. The Steering Committee reviews and discusses the results of the assessment and recommendations. In the framework of the review and discussion, the Steering Committee may invite the Platform Manager, PLN, and/or other related parties;
6. The Steering Committee submits recommendations for decisions on projects that will receive facilities, including support that will be provided through the Energy Transition Platform, to the Head of Fiscal Policy Agency;
7. The Head of the Fiscal Policy Agency submits recommendations from the Steering Committee to the MOF; and
8. The MOF, through the Head of the Fiscal Agency, conveys its decision to the Platform Manager.

Government Stakeholders in the Energy Transition Platform

To support the implementation of the Energy Transition Platform, MOF 103/2023 mandates (i) the establishment of a Steering Committee and (ii) the designation of SMI as Platform Manager.

Steering Committee

The Steering Committee is a committee to be established by MOF which will carry out the direction and technical functions as well as making decisions related to the provision of fiscal support for the management of the Energy Transition Platform. The chairman and deputy chairman of the committee will be MOF officials, while its members will consist of officials from MOF, MEMR, the Ministry of SOEs, Ministry of Environment and Forestry, Coordinating Ministry of Maritime Affairs and Investment, as well as the Coordinating Ministry of Economic Affairs.¹⁷

The main tasks of the Steering Committee include:¹⁸

1. determining the projects (screening) that will be submitted for application to obtain Energy Transition Platform facilities, including deciding on priorities for utilizing the Energy Transition Platform;

2. making recommendations for the Energy Transition Platform facilities schemes; and

3. developing cross-ministerial cooperation regarding the energy transition.

Platform Manager

The main tasks of SMI as the Platform Manager are, among others:¹⁹

1. coordinating with stakeholders in the context of managing the Energy Transition Platform;

2. seeking external funding (i.e. other than from the State Budget);

3. provide Energy Transition Platform facilities to projects that fulfil the relevant criteria; and

4. provide input and/or considerations to the Steering Committee.

Conclusion

Following the issuance of PR 112/2022 late last year which introduced a renewed procurement and tariff regime for REPPs as well as paved the way for a moratorium on the development of new CFPPs, the enactment of MOF 103/2023 represents a further significant step forward in Indonesia's energy transition journey.

Despite this significant progress in providing a framework for the implementation of the JETP funding through the ad hoc bodies and process now established by the GOI, certain sensitive issues also need to be addressed to fully unlock support for Indonesia's energy transition. These include:

Indonesia's current restrictive local content requirements which do not align with funding conditions of most of the IPG donor countries and MDBs. We understand that the local content regulations and requirements applicable to the development of REPPs are currently being reviewed to allow for more flexibility for the main stakeholders (such as PLN, the Ministry of Industry and developers) to facilitate the release of funding under the JETP umbrella and from MDBs;

• the rapid development of new off-grid CFPP generation capacity which is mainly supporting certain downstreaming industries (such as nickel smelters) and which are creating concerns amongst IPG members as they are changing the CO2 reduction assumptions which was agreed as baseline for the JETP funding package.
• the necessary support for the communities which are reliant on CFPPs and the related supply chains to be able to find alternative employment and sources of income; and 
• decommissioning plans and ensuring that CFPPs and owners which are to receive funding or other forms of support from the Energy Transition Platform are legally bound to taking the relevant plants offline.

The success of the framework and process laid out in MOF 103/2023 will depend on the implementation of an efficient coordination and collaboration among government stakeholders, industry participants, and international financial institutions, and the selection of projects which are not prima facie commercially viable without support such as critical transmission projects which have been identified as a priority from the GOI's side, as well as certain CFPP early retirements. 

Whilst it is acknowledged that the current funding which has been pledged will only be sufficient to support the early retirement of a limited part of the current operating fleet, the early retirement of CFPPs forms an integral part of the GOIs and the International Partnership Group's plans for a just transition of Indonesia's energy sector and initial transactions have been identified under the Asian Development Bank's Energy Transition Mechanism (ETM). It will have to be seen if the funding and refinancing required for such transactions can attract sufficient financiers and donors' interest in light of the increasing restrictions which institutional and commercial lenders as well as government institutions face in extending funding to coal-related transactions and assets.

Authors: Frédéric Draps, Partner; Dan Trevanion, Foreign Legal Consultant; Khairunissa Yuliandhini, Associate; Rachelia Jumanti, Junior Associate; Jean-Louis Neves Mandelli, Partner; Alfred Ng, Partner; Scott Baggett, Partner.

^{1. MOF 103/2023 came into effect on 13 October 2023.}

^{2. Article 1 item 1 of MOF 103/2023.}

^{3. Article 9 of MOF 103/2023.}

^{4. Article 10 of MOF 103/2023.}

^{5. Article 3 of MOF 103/2023.}

^{6. Article 21(1) of MOF 103/2023.}

^{7. Article 21(2) of MOF 103/2023.}

^{8. Article 20(2) of MOF 103/2023.}

^{9. Article 22 of MOF 103/2023.}

^{10. Article 4 of MOF 103/2023.}

^{11. Article 5 of MOF 103/2023.}

^{12. Pemerintah Masih Godok Peta Jalan Pensiun Dini PLTU Batu Bara Halaman all - Kompas.com.}

^{13. Article 6 of MOF 103/2023.}

^{14. Article 24 of MOF 103/2023.}

^{15. Article 24.}

^{16. Article 25(1) of MOF 103/2023.}

^{17. Article 11 of MOF 103/2023.}

^{18. Article 12 of MOF 103/2023.}

^{19. Article 17 of MOF 103/2023.}