What Renewable Energy Requirements Exist Under PERMENESDM 12/2017?

1.0 Introduction and Regulatory Context

Minister of Energy and Mineral Resources Regulation No. 12 of 2017 (PERMENESDM 12/2017) concerning the Utilization of Renewable Energy Sources for Electricity Supply represents a pivotal yet controversial policy intervention in Indonesia's energy transition trajectory. Enacted on January 27, 2017, and effective from January 30, 2017, this regulation introduced a fundamentally new approach to renewable energy power purchase agreements by establishing tariff caps based on local generation cost parity rather than feed-in tariffs or renewable energy premiums. The regulation's core mechanism—limiting renewable energy purchase prices to maximum 85% of local Biaya Pokok Penyediaan (BPP) Pembangkitan or Generation Cost Basis—marked a decisive shift from previous policies that offered fixed premium tariffs to incentivize renewable energy development. Minister Ignasius Jonan explicitly framed this policy as serving dual objectives: enhancing cost efficiency for independent power producers while generating competitive electricity prices that PT Perusahaan Listrik Negara (Persero) could absorb without financial distress. However, the regulation triggered immediate criticism from renewable energy industry associations who argued that 85% tariff caps made many projects economically unviable, effectively creating disincentives for investment precisely when Indonesia needed accelerated renewable capacity additions to meet national energy mix targets.

The regulatory imperative underlying PERMENESDM 12/2017 emerged from persistent tensions between Indonesia's renewable energy ambitions and fiscal realities of state-owned utility PLN. Presidential Regulation No. 79 of 2014 concerning National Energy Policy established ambitious targets: achieving 23% renewable energy share in the national energy mix by 2025 and 31% by 2050, requiring massive expansion beyond the approximately 12% share prevailing in 2017. However, previous ministerial regulations offering attractive feed-in tariffs for renewable energy had created situations where PLN purchased renewable electricity at prices significantly exceeding PLN's generation costs from fossil fuel plants, contributing to utility financial stress that required periodic government subsidies. The Ministry of Energy and Mineral Resources diagnosed this problem as unsustainable: renewable energy expansion that systematically weakened PLN's financial position would ultimately require either electricity tariff increases politically unpalatable for government or expanding subsidies that burdened state budgets. PERMENESDM 12/2017 sought resolution through market-based pricing mechanisms linking renewable energy tariffs to local generation cost benchmarks, theoretically enabling renewable expansion where cost-competitive while preventing financially destabilizing purchases where expensive.

PERMENESDM 12/2017 consolidated and replaced six prior ministerial regulations governing technology-specific renewable energy purchases: regulations covering geothermal power, hydroelectric facilities up to 10 MW, waste-to-energy plants, solar photovoltaic systems, and biomass/biogas facilities. This regulatory consolidation aimed to establish unified principles across renewable technologies while eliminating regulatory fragmentation that had created inconsistent treatment of different renewable sources. The regulation encompasses seven renewable energy categories explicitly defined in Pasal 3: solar radiation, wind, hydropower, biomass, biogas, municipal waste, and geothermal heat. For each technology, the regulation establishes procurement mechanisms (competitive tender versus benchmark pricing), must-run obligations requiring PLN to operate facilities continuously, and tariff calculation formulas distinguishing between high-cost and low-cost electricity regions. This comprehensive framework reflects technical recognition that renewable energy sources exhibit vastly different characteristics: solar and wind generation's intermittency and weather-dependence justify competitive tender mechanisms ensuring lowest-cost procurement, while baseload-capable technologies like geothermal and run-of-river hydropower can utilize benchmark pricing reflecting predictable operational profiles.

The regulation's positioning within Indonesia's energy policy hierarchy operates at the ministerial level, deriving authority from Energy Law No. 30 of 2007 and Electricity Law No. 30 of 2009, both of which mandate renewable energy prioritization for national energy security and environmental sustainability. However, PERMENESDM 12/2017's practical implementation occurred within constrained parameters established by Government Regulation No. 14 of 2012 (as amended by No. 23 of 2014) governing electricity business activities, which requires PLN power purchases to maintain utility financial viability. This regulatory tension—between renewable energy mandates requiring prioritized purchases and financial sustainability requirements limiting purchase prices—defines PERMENESDM 12/2017's essential character as compromise legislation attempting to balance competing objectives. Notably, the regulation's lifespan proved brief: PERMENESDM No. 43 of 2017 amended certain provisions within months, before PERMENESDM No. 50 of 2017 entirely superseded the regulation later that year, reflecting continuing policy instability as government sought optimal balances between renewable energy acceleration and cost containment. This rapid regulatory turnover demonstrates the politically fraught nature of renewable energy pricing in Indonesia's electricity sector.

PERMENESDM 12/2017 emerged within the context of Indonesia's 35,000 MW electricity capacity addition program announced in 2014, which initially emphasized coal-fired generation for rapid capacity expansion at lowest upfront costs. By 2017, growing climate change commitments under the Paris Agreement and recognition of renewable energy's declining costs globally prompted reconsideration of heavily coal-dependent approaches. The regulation represented government attempts to enable renewable energy participation in national electrification without abandoning cost-optimization priorities that favored fossil generation. This policy tension manifested in the regulation's tariff structure: the 85% cap theoretically enabled renewable projects in high-cost regions (such as remote islands with expensive diesel generation) while effectively excluding renewables from Java-Bali where abundant coal resources created low generation costs. Industry critics argued this approach inverted proper energy planning logic by prioritizing short-term cost minimization over long-term energy security, environmental sustainability, and technological diversification. Understanding PERMENESDM 12/2017 requires recognizing it as regulatory artifact of specific historical moment—caught between international climate commitments, domestic fiscal constraints, and institutional path dependencies favoring conventional generation.

2.0 Key Definitions and Scope

PERMENESDM 12/2017's Pasal 1 establishes definitional frameworks that operationalize renewable energy procurement mechanisms. The regulation defines "Sumber Energi Terbarukan" (Renewable Energy Sources) as "sumber energi yang dihasilkan dari sumber daya energi yang berkelanjutan jika dikelola dengan baik, antara lain panas bumi, angin, bioenergi, sinar matahari, aliran dan terjunan air, serta gerakan dan perbedaan suhu lapisan laut" (energy sources produced from energy resources that are sustainable if managed properly, including geothermal heat, wind, bioenergy, solar radiation, water flow and falls, and ocean layer movement and temperature differences). This definition encompasses both established technologies like hydropower and geothermal alongside emerging sources including ocean thermal energy conversion, reflecting comprehensive vision of renewable energy portfolio. Critically, the definition's qualifier "jika dikelola dengan baik" (if managed properly) acknowledges that renewable resources require sustainable management—improperly managed biomass harvesting or unsustainable hydropower development can deplete resources, distinguishing renewable energy from inherently unlimited sources.

The regulation introduces "Biaya Pokok Penyediaan Pembangkitan" (Generation Cost Basis), abbreviated BPP Pembangkitan, as the fundamental metric determining renewable energy purchase prices. Pasal 1 defines BPP Pembangkitan as "biaya penyediaan tenaga listrik oleh PT PLN (Persero) di Pembangkitan Tenaga Listrik, tidak termasuk biaya penyaluran tenaga listrik" (electricity supply costs by PT PLN (Persero) at Power Generation, not including electricity transmission costs). This specification excludes transmission and distribution costs, focusing strictly on generation expenses including fuel, operations, maintenance, and capital recovery for PLN's generating assets in specific electricity systems. BPP calculations occur at subnational scale—each of PLN's regional electricity systems maintains distinct BPP reflecting local fuel costs, generation mix, and operational efficiency. The regulation's tariff formulas reference both "BPP Pembangkitan di sistem ketenagalistrikan setempat" (Generation Cost Basis in the local electricity system) and "rata-rata BPP Pembangkitan nasional" (national average Generation Cost Basis), with price determination hinging on whether local costs exceed or fall below national averages. This dual-benchmark approach creates geographic differentiation: high-cost regions (typically island systems dependent on expensive diesel generation) permit higher renewable energy prices, while low-cost regions (Java-Bali with cheap coal) constrain renewable tariffs.

The regulation distinguishes between two procurement categories reflecting technology characteristics. "Pembangkit tenaga listrik yang memanfaatkan Sumber Energi Terbarukan berbasis teknologi tinggi, efisiensi sangat variatif, dan sangat tergantung pada tingkat radiasi atau cuaca setempat seperti energi sinar matahari dan angin" (power plants utilizing Renewable Energy Sources based on high technology, highly variable efficiency, and heavily dependent on local radiation levels or weather such as solar energy and wind) undergo procurement through "sistem pelelangan berdasarkan Kuota Kapasitas" (tender system based on Capacity Quota) as specified in Pasal 4 ayat (1). This tender mechanism applies specifically to solar photovoltaics and wind power, acknowledging these technologies' intermittency and rapid cost evolution justify competitive procurement to achieve lowest prices. Conversely, renewable technologies excluding solar and wind utilize "harga patokan atau melalui mekanisme pemilihan langsung" (benchmark pricing or direct selection mechanism) per Pasal 4 ayat (2), reflecting more predictable cost structures and baseload capabilities for hydropower, biomass, biogas, waste-to-energy, and geothermal facilities.

The regulation defines "Pembangkit Listrik Tenaga Surya Fotovoltaik" (Solar Photovoltaic Power Plant), abbreviated PLTS Fotovoltaik, as "pembangkit listrik yang mengubah energi matahari menjadi listrik dengan menggunakan modul fotovoltaik yang langsung diinterkoneksikan ke jaringan tenaga listrik PT PLN (Persero)" (power plant that converts solar energy to electricity using photovoltaic modules directly interconnected to PT PLN (Persero)'s electricity grid). This definition emphasizes grid interconnection, excluding off-grid solar systems from the regulation's scope—PERMENESDM 12/2017 governs only grid-connected renewable generation sold to PLN, not standalone rural electrification projects. Similarly, "Pembangkit Listrik Tenaga Air" (Hydropower) distinguishes sources including "tenaga dari aliran/terjunan air sungai" (power from river water flow/falls) and "tenaga air dari waduk/bendungan atau saluran irigasi yang pembangunannya bersifat multiguna" (water power from reservoirs/dams or irrigation channels with multipurpose development), acknowledging hydropower's diversity from run-of-river to storage facilities and recognizing irrigation infrastructure's dual purposes.

The regulation establishes "Kuota Kapasitas" (Capacity Quota) as "jumlah maksimum kapasitas pembangkit yang ditawarkan kepada badan usaha dalam suatu periode untuk harga pembelian tenaga listrik yang ditentukan" (maximum total generating capacity offered to business entities in a period for determined electricity purchase prices). This quota mechanism enables PLN to control renewable energy penetration rates, preventing system integration challenges from excessive intermittent generation. Pasal 5 ayat (2) specifies minimum tender packages of 15 MW for solar photovoltaics, with installations potentially dispersed across multiple locations—this aggregation approach enables competitive bidding for projects collectively sufficient to attract serious developers while accommodating distributed deployment. The regulation defines "Pengembang Pembangkit Listrik" (Power Plant Developer), abbreviated PPL, as "Badan Usaha penyediaan tenaga listrik yang bekerja sama dengan PT PLN (Persero) melalui penandatanganan perjanjian jual beli/sewa jaringan tenaga listrik" (Business Entity for electricity supply that cooperates with PT PLN (Persero) through signing power purchase/grid rental agreements). This definition encompasses independent power producers selling electricity to PLN under Power Purchase Agreements (PJBL), establishing developers as private or state-owned enterprises distinct from PLN's generating subsidiaries.

Matrix 1: Renewable Energy Technology Categories Under PERMENESDM 12/2017

3.0 Core Requirements and Provisions

3.1 PLN Renewable Energy Purchase Obligations

PERMENESDM 12/2017's foundational obligation appears in Pasal 2 ayat (1): "Dalam rangka penyediaan tenaga listrik yang berkelanjutan, PT PLN (Persero) wajib membeli tenaga listrik dari pembangkit tenaga listrik yang memanfaatkan Sumber Energi Terbarukan" (In order to provide sustainable electricity supply, PT PLN (Persero) is obligated to purchase electricity from power plants utilizing Renewable Energy Sources). This mandatory purchase obligation establishes renewable energy's prioritized status in Indonesia's electricity sector, preventing PLN from exclusively relying on fossil fuel generation despite potential cost advantages. The obligation's qualifier "dalam rangka penyediaan tenaga listrik yang berkelanjutan" (for sustainable electricity supply) frames renewable energy procurement not as environmental luxury but as fundamental requirement for long-term energy security, acknowledging finite fossil fuel reserves and climate change imperatives. However, Pasal 2 ayat (2) immediately constrains this obligation: "Pemanfaatan Sumber Energi Terbarukan untuk penyediaan tenaga listrik sebagaimana dimaksud pada ayat (1) harus mengacu pada Kebijakan Energi Nasional dan Rencana Umum Ketenagalistrikan" (Renewable Energy Source utilization for electricity supply as intended in paragraph (1) must refer to National Energy Policy and General Electricity Plan). This reference to planning documents enables PLN to limit renewable energy purchases to quantities consistent with system planning rather than accepting unlimited renewable capacity offers.

The regulation's most contentious provision establishes must-run obligations with specific capacity limits. Pasal 4 ayat (3) mandates: "PT PLN (Persero) wajib mengoperasikan pembangkit tenaga listrik yang memanfaatkan Sumber Energi Terbarukan sebagaimana dimaksud pada ayat (1) dan ayat (2) dengan kapasitas sampai dengan 10 MW (sepuluh megawatt) secara terus-menerus (must-run)" (PT PLN (Persero) is obligated to operate power plants utilizing Renewable Energy Sources as intended in paragraphs (1) and (2) with capacity up to 10 MW (ten megawatts) continuously (must-run)). This must-run requirement prevents PLN from curtailing small-scale renewable generation to prioritize cheaper fossil fuel plants, ensuring renewable facilities actually dispatch electricity rather than remaining idle despite power purchase agreements. The 10 MW capacity threshold reflects technical judgment that facilities of this scale integrate into electricity grids without requiring major dispatch modifications or system balancing infrastructure. However, critics noted this threshold excludes larger renewable projects from must-run protections—a 50 MW wind farm could face curtailment if PLN determines system conditions warrant prioritizing other generation sources, undermining project financial viability despite having signed power purchase agreements.

The regulation's treatment of solar photovoltaics establishes specific preconditions for PLN purchases. Pasal 5 ayat (1) permits solar procurement only when three conditions exist: "(a) sistem ketenagalistrikan setempat dapat menerima pasokan tenaga listrik yang menggunakan sumber energi sinar matahari" (local electricity system can receive electricity supply using solar energy source); "(b) dimaksudkan untuk menurunkan BPP Pembangkitan di sistem ketenagalistrikan setempat" (intended to reduce Generation Cost Basis in local electricity system); and/or "(c) memenuhi kebutuhan tenaga listrik di lokasi yang tidak ada sumber energi primer lain" (meet electricity needs in locations without other primary energy sources). These conditions grant PLN substantial discretion to reject solar proposals: condition (a) enables refusal based on claimed grid integration challenges, condition (b) requires demonstration of cost reduction (difficult when 85% BPP caps exceed solar costs in high-BPP regions), and condition (c) limits solar primarily to remote areas lacking alternatives. The regulation's tender structure specified in Pasal 5 ayat (2) requires "minimum total paket yang ditawarkan sebesar 15 MW (lima belas megawatt)" (minimum total offered package of 15 MW (fifteen megawatts)), potentially deterring smaller developers lacking capacity to bid large projects while theoretically improving economies of scale.

Wind power provisions in Pasal 6 mirror solar photovoltaic requirements almost identically, establishing parallel preconditions: system capacity to receive wind power, intention to reduce local generation costs, and/or meeting electricity needs where alternatives absent. This parallel structure reflects regulatory treatment of solar and wind as similarly intermittent technologies requiring identical procurement approaches. However, wind power's geographic specificity—limited to areas with adequate wind resources—means condition (a) regarding system acceptance often proves determinative. Indonesia's limited wind resources concentrate in specific regions including southern Java, eastern Indonesia, and certain coastal areas; the regulation provides no mechanisms to prioritize wind development in resource-rich areas, instead leaving procurement decisions to PLN's assessment of whether proposals meet the three conditions. The regulation's minimum 15 MW tender package for wind power creates practical challenges given Indonesia's nascent wind industry—requiring multi-turbine projects as minimum viable packages potentially excludes demonstration projects that could prove technology suitability before larger commitments.

For hydropower, the regulation establishes capacity-dependent requirements addressing operational reliability. Pasal 7 ayat (3) specifies: "Tenaga Air dengan kapasitas paling tinggi 10 MW (sepuluh megawatt) harus mampu beroperasi dengan faktor kapasitas (capacity factor) paling sedikit sebesar 65% (enam puluh lima persen), sedangkan kapasitas lebih dari 10 MW (sepuluh megawatt) beroperasi dengan faktor kapasitas (capacity factor) tergantung kebutuhan sistem" (Hydropower with capacity maximum 10 MW (ten megawatts) must be able to operate with capacity factor at least 65% (sixty-five percent), while capacity above 10 MW (ten megawatts) operates with capacity factor depending on system needs). This 65% capacity factor minimum for small hydropower reflects baseload expectations—small run-of-river projects must demonstrate consistent generation rather than seasonal intermittency to justify PLN purchase commitments. The regulation exempts larger hydropower from fixed capacity factor requirements, acknowledging storage reservoirs enable flexible operation serving peak demand rather than continuous baseload, with actual operation "tergantung kebutuhan sistem" (depending on system needs) based on PLN dispatch decisions balancing grid supply and demand.

Matrix 2: PLN Purchase Obligations by Technology

3.2 Tariff Calculation Formulas and Regional Differentiation

PERMENESDM 12/2017's tariff structure operates through dual-threshold formulas distinguishing high-cost and low-cost electricity regions. For solar photovoltaics, Pasal 5 ayat (3) establishes the high-cost region formula: "Dalam hal BPP Pembangkitan di sistem ketenagalistrikan setempat di atas rata-rata BPP Pembangkitan nasional, harga pembelian tenaga listrik dari PLTS Fotovoltaik sebagaimana dimaksud pada ayat (2) paling tinggi sebesar 85% (delapan puluh lima persen) dari BPP Pembangkitan di sistem ketenagalistrikan setempat" (In case Generation Cost Basis in local electricity system is above national average Generation Cost Basis, electricity purchase price from Solar Photovoltaic Plant as intended in paragraph (2) is maximum 85% (eighty-five percent) of Generation Cost Basis in local electricity system). This 85% cap creates significant discount relative to PLN's actual generation costs—in regions where PLN generates electricity at Rp 2,000/kWh, solar developers receive maximum Rp 1,700/kWh, theoretically providing PLN with Rp 300/kWh cost savings that justify renewable energy purchases despite intermittency challenges. However, industry critics argued the 85% level set arbitrarily provided insufficient returns given solar projects' capital intensity, extended payback periods, and financing costs exceeding fossil fuel projects due to perceived technology risks.

The low-cost region formula appears in Pasal 5 ayat (4): "Dalam hal BPP Pembangkitan di sistem ketenagalistrikan setempat sama atau di bawah rata-rata BPP Pembangkitan nasional, harga pembelian tenaga listrik dari PLTS Fotovoltaik sebagaimana dimaksud pada ayat (2) sebesar sama dengan BPP Pembangkitan di sistem ketenagalistrikan setempat" (In case Generation Cost Basis in local electricity system is equal to or below national average Generation Cost Basis, electricity purchase price from Solar Photovoltaic Plant as intended in paragraph (2) equals Generation Cost Basis in local electricity system). This formula eliminates the 85% discount, instead matching renewable energy prices to local generation costs. The regulation's logic holds that in low-cost regions—primarily Java-Bali where abundant coal resources enable generation costs around Rp 1,050/kWh in 2017—requiring PLN to purchase renewable energy at prices exceeding local generation costs would impose unreasonable financial burdens. However, this parity pricing potentially renders solar development uneconomic: if solar project costs require Rp 1,500/kWh tariffs for viability but local BPP equals Rp 1,050/kWh, developers face unprofitable operations unless dramatic cost reductions materialize. The formula effectively channels solar development toward high-cost regions while excluding renewable energy from Indonesia's largest electricity market.

Identical dual-threshold formulas apply to wind power (Pasal 6), hydropower (Pasal 7), biomass (Pasal 8), and biogas (Pasal 9), creating consistent treatment across technologies with similar generation profiles. For example, hydropower tariffs follow the 85% cap in high-cost regions: "Dalam hal BPP Pembangkitan di sistem ketenagalistrikan setempat di atas rata-rata BPP Pembangkitan nasional, harga patokan pembelian tenaga listrik dari Tenaga Air sebagaimana dimaksud pada ayat (2) paling tinggi sebesar 85% (delapan puluh lima persen) dari BPP Pembangkitan di sistem ketenagalistrikan setempat" (Pasal 7 ayat (4)), and match local BPP in low-cost regions (Pasal 7 ayat (5)). This formulaic consistency simplifies administration while treating diverse technologies identically despite varying cost structures—small hydropower typically requires lower tariffs than solar photovoltaics due to longer operational lifetimes and lower technology risks, yet receives identical 85% caps potentially creating windfall profits for hydropower developers while constraining solar viability.

Waste-to-energy facilities receive preferential tariff treatment acknowledging dual public benefits. Pasal 10 ayat (4) grants 100% BPP pricing in high-cost regions: "Dalam hal BPP Pembangkitan di sistem ketenagalistrikan setempat di atas rata-rata BPP Pembangkitan nasional, harga patokan pembelian tenaga listrik dari PLTSa sebagaimana dimaksud pada ayat (3) paling tinggi sebesar BPP Pembangkitan di sistem ketenagalistrikan setempat" (In case Generation Cost Basis in local electricity system is above national average Generation Cost Basis, benchmark price for electricity purchase from Waste-to-Energy Plant as intended in paragraph (3) is maximum equal to Generation Cost Basis in local electricity system). This 100% cap—versus 85% for other renewables—reflects waste-to-energy's municipal waste management services that justify higher payments beyond mere electricity value. However, Pasal 10 ayat (5) introduces negotiated pricing in low-cost regions: "Dalam hal BPP Pembangkitan di sistem ketenagalistrikan di wilayah Sumatera, Jawa, dan Bali atau sistem ketenagalistrikan setempat lainnya sama atau di bawah rata-rata BPP Pembangkitan nasional, harga pembelian tenaga listrik dari PLTSa ditetapkan berdasarkan kesepakatan para pihak" (In case Generation Cost Basis in electricity system in Sumatra, Java, and Bali regions or other local electricity systems equals or is below national average Generation Cost Basis, electricity purchase price from Waste-to-Energy Plants is determined based on agreement of parties). This negotiated pricing potentially enables above-BPP tariffs recognizing waste services, though leaves actual prices to case-by-case negotiations without regulatory floors.

Geothermal power receives identical preferential treatment: 100% local BPP cap in high-cost regions (Pasal 11 ayat (3)), and negotiated pricing in Java-Sumatra-Bali systems regardless of BPP levels (Pasal 11 ayat (4)). This special status acknowledges geothermal development's unique challenges including extensive exploration risks, long development timelines, and substantial upfront capital requirements that justify premium pricing relative to other renewables. The regulation's specification of negotiated pricing specifically for "sistem ketenagalistrikan Sumatera, Jawa, dan Bali" (Sumatra, Java, and Bali electricity systems) recognizes these regions contain Indonesia's most promising geothermal resources—the volcanic arc along Sumatra and Java holds world-class geothermal potential that government seeks to develop despite low coal-based BPP that would otherwise preclude development under standard formulas. This geographic carve-out enables geothermal projects in optimal resource locations rather than constraining development to high-cost remote systems with inferior resources.

Matrix 3: Tariff Calculation Formulas by Technology and Regional Cost Context

3.3 Due Diligence, Standards, and Handover Requirements

PERMENESDM 12/2017 establishes comprehensive due diligence obligations preceding power purchase agreement execution. Pasal 12 ayat (1) mandates: "Dalam rangka pembelian tenaga listrik sebagaimana dimaksud dalam Pasal 5 sampai dengan Pasal 11, PT PLN (Persero) wajib melakukan uji tuntas (due diligence) atas kemampuan teknis dan finansial dari PPL" (In order to purchase electricity as intended in Articles 5 through 11, PT PLN (Persero) is obligated to conduct due diligence on technical and financial capabilities of Power Plant Developers). This due diligence requirement protects PLN from contracting with developers lacking capacity to complete projects, preventing situations where signed agreements fail to materialize into operating facilities. Technical due diligence assesses developers' engineering capabilities, construction experience, technology provider credentials, and project implementation plans, while financial due diligence examines equity commitments, financing arrangements, creditworthiness, and financial projections demonstrating project viability. Pasal 12 ayat (2) permits PLN to delegate due diligence to "pihak procurement agent yang ditunjuk oleh PT PLN (Persero)" (procurement agent parties appointed by PT PLN (Persero)), enabling use of specialized consultants for technical and financial assessments beyond PLN staff expertise.

The regulation establishes domestic content prioritization requirements addressing local industry development. Pasal 13 ayat (1) directs: "Dalam melakukan pelelangan, pemilihan, atau penunjukan PPL, PT PLN (Persero) mengutamakan PPL yang menggunakan tingkat komponen dalam negeri sesuai dengan ketentuan peraturan perundang-undangan" (In conducting tenders, selection, or appointment of Power Plant Developers, PT PLN (Persero) prioritizes Power Plant Developers using domestic component levels according to statutory regulations). This local content preference aims to maximize economic benefits from renewable energy development by ensuring turbines, panels, construction materials, and services source locally rather than importing complete systems. However, the regulation's language "mengutamakan" (prioritizes) creates preference rather than absolute requirement, acknowledging Indonesia's domestic renewable energy manufacturing capacity remained limited in 2017—requiring 100% domestic content would render many projects infeasible. The regulation delegates actual local content percentages to separate implementing regulations, enabling flexibility as domestic manufacturing capabilities evolve.

Equipment standards requirements appear in Pasal 13 ayat (2) and ayat (3), establishing hierarchical acceptance criteria. Domestic components must meet either: "(a) standar nasional Indonesia di bidang ketenagalistrikan" (Indonesian National Standards in electricity sector), "(b) standar internasional" (international standards), or "(c) standar negara lain yang tidak bertentangan dengan standar International Organization for Standardization (ISO) atau International Electrotechnical Commission (IEC)" (other countries' standards not contradicting ISO or IEC standards). This three-tier hierarchy prioritizes Indonesian standards when available while accepting international standards or compatible national standards recognizing domestic standard-setting often lags behind technology evolution. Construction standards follow identical hierarchies while adding "(d) standar yang berlaku di PT PLN (Persero)" (standards applicable at PT PLN (Persero)), acknowledging PLN's internal technical specifications developed through decades of grid operation experience may impose requirements beyond general standards for grid compatibility and operational safety.

Infrastructure handover requirements address post-construction asset transfer to PLN and regional governments. Pasal 7 ayat (7) specifies hydropower "menggunakan pola kerja sama membangun, memiliki, mengoperasikan dan mengalihkan (Build, Own, Operate, and Transfer/BOOT)" (uses cooperation pattern of build, own, operate, and transfer (Build, Own, Operate, and Transfer/BOOT)), establishing that developers construct facilities, retain ownership during power purchase agreement terms (typically 20-30 years), operate generation, and ultimately transfer assets to PLN or government after agreements conclude. This BOOT structure dominates Indonesian power sector transactions, enabling private capital mobilization for construction while ensuring eventual public ownership of strategic energy infrastructure. For grid connection infrastructure, multiple provisions permit developers to construct evacuation networks connecting generation sites to PLN substations through "mekanisme yang saling menguntungkan (business to business)" (mutually beneficial mechanism (business to business)) as stated in Pasal 7 ayat (8), Pasal 8 ayat (6), Pasal 9 ayat (6), and Pasal 11 ayat (6). These business-to-business provisions enable negotiated cost-sharing for transmission lines rather than requiring PLN to fund all connection infrastructure, though create potential disputes when developers and PLN disagree on appropriate cost allocations for shared-use infrastructure.

The regulation establishes transparency requirements for PLN regarding system readiness and local generation costs. Pasal 14 ayat (1) mandates PLN must: "(a) menginformasikan secara terbuka kondisi sistem ketenagalistrikan setempat yang siap menerima pembangkit tenaga listrik yang memanfaatkan Sumber Energi Terbarukan" (openly inform conditions of local electricity systems ready to receive power plants utilizing Renewable Energy Sources) and "(b) menginformasikan secara terbatas rata-rata BPP Pembangkitan pada sistem ketenagalistrikan setempat kepada PPL yang berminat mengembangkan pembangkit tenaga listrik yang memanfaatkan Sumber Energi Terbarukan" (limitedly inform average Generation Cost Basis in local electricity systems to Power Plant Developers interested in developing power plants utilizing Renewable Energy Sources). This dual disclosure requirement—open information on grid readiness, limited information on BPP to interested developers—aims to balance transparency enabling informed investment decisions against commercial sensitivity of cost data. PLN must report this information to the Minister quarterly or as needed (Pasal 14 ayat (2)), creating accountability for disclosure compliance though enforcement mechanisms remain unspecified.

Matrix 4: Due Diligence, Standards, and Implementation Requirements

4.0 Implementation Challenges and Industry Response

PERMENESDM 12/2017's implementation triggered immediate controversy within Indonesia's renewable energy sector, with industry associations and developers arguing the regulation's tariff caps rendered many projects economically unviable. The Indonesian Renewable Energy Society (Masyarakat Energi Terbarukan Indonesia/METI) publicly criticized the 85% BPP cap as inconsistent with Energy Law No. 30 of 2007 and Government Regulation No. 79 of 2014 mandating renewable energy prioritization. METI argued that requiring renewable energy to undercut fossil fuel costs by 15% inverted proper energy policy logic: if renewable energy delivers environmental benefits, energy security advantages, and long-term cost stability absent from fossil fuels, rational policy should accept modest price premiums during transition periods until technological learning curves reduce renewable costs below fossil alternatives. Industry analysis suggested that in many high-cost island systems where diesel generation costs reached Rp 2,500-3,000/kWh, even 85% BPP caps (Rp 2,125-2,550/kWh) could support solar or wind development. However, in Java-Bali systems with coal-based BPP around Rp 1,050/kWh, parity pricing essentially excluded utility-scale solar requiring Rp 1,500/kWh+ tariffs for commercial viability given 2017 technology costs and financing conditions in Indonesia.

The regulation's rapid amendment and subsequent replacement demonstrated continuing policy instability. PERMENESDM No. 43 of 2017, issued just months after the original regulation, modified certain provisions though maintained the fundamental 85% BPP cap structure. Later in 2017, PERMENESDM No. 50 of 2017 entirely replaced PERMENESDM 12/2017, introducing revised tariff mechanisms and procurement procedures reflecting government recognition that initial approaches inadequately incentivized renewable energy development. This regulatory churn created planning uncertainty for developers: projects under development when PERMENESDM 12/2017 enacted faced questions about whether to proceed under original terms or await potentially more favorable successor regulations, delaying investment decisions and slowing renewable energy deployment contrary to acceleration objectives. The regulation's brief operative period (approximately 11 months before supersession) meant few projects actually completed procurement under its provisions, limiting real-world testing of whether tariff formulas could successfully balance cost containment and investment attraction.

The must-run provision's 10 MW capacity threshold created practical limitations for larger projects. While small-scale renewable facilities received must-run protections ensuring dispatch priority, utility-scale projects above 10 MW faced potential curtailment risks that complicated project financing. International lenders providing debt financing for renewable energy projects typically require revenue certainty that must-run status provides; without such protections, projects face "take-or-pay" risk where PLN refuses to dispatch generation despite power purchase agreements. This risk manifests in lower debt ratios, higher interest rates, and increased equity requirements that collectively raise levelized costs, potentially rendering projects uneconomic at regulated tariff caps. The regulation provided no compensation mechanisms for curtailment of above-10 MW facilities, leaving developers exposed to uncompensated lost generation when PLN determines system conditions warrant prioritizing other generation sources.

The transparency requirements regarding BPP disclosure generated implementation challenges. While Pasal 14 required PLN to inform developers about local BPP levels, PLN historically treated generation cost data as confidential commercial information not publicly disclosed. The regulation's language "menginformasikan secara terbatas" (limitedly inform) suggested selective disclosure to serious developers rather than public transparency, creating information asymmetries where developers lacked full data for investment decisions until late stages of project development. Additionally, BPP calculations' complexity—incorporating fuel costs, operating expenses, capital recovery, and demand forecasts—meant "average" BPP figures oversimplified actual cost variations across times of day, seasons, and load conditions. A solar project generating primarily during midday might compete against mid-merit generation at different costs than average BPP, yet tariff formulas referenced annual averages without temporal differentiation.

5.0 Legal and Policy Implications

PERMENESDM 12/2017 represents critical juncture in Indonesia's energy policy evolution, demonstrating tensions between renewable energy commitments and cost-optimization imperatives that continue to shape sector development. The regulation's core innovation—linking renewable energy tariffs to local generation cost benchmarks rather than technology-specific feed-in tariffs—reflected market-oriented policy approach attempting to avoid subsidization while enabling renewable energy where cost-competitive. Theoretically, this approach promotes economically efficient renewable development: projects materializing in high-cost systems where renewable energy delivers genuine cost savings, while low-cost systems maintain fossil fuel dominance until renewable technology costs decline sufficiently to compete without premium pricing. However, this market logic potentially sacrifices strategic considerations including technology diversification, supply chain development, emissions reduction pathways, and energy security improvements that justify proactive renewable energy deployment even at modest cost premiums during transition periods.

The regulation's brief lifespan and rapid replacement underscore fundamental policy instability plaguing Indonesia's renewable energy sector. Investors require stable, predictable regulatory frameworks for capital-intensive infrastructure projects with 20-30 year investment horizons. Frequent regulatory changes—particularly revisions to fundamental aspects like tariff calculation methodologies—generate risk premiums that manifest in higher required returns, reduced developer interest, and ultimately slower deployment than stable policy environments achieve. PERMENESDM 12/2017's experience demonstrates the hazards of implementing major policy shifts without extensive stakeholder consultation and impact modeling: the regulation's tariff caps apparently reflected government assumptions about renewable energy costs and investor return requirements that proved inconsistent with market realities, necessitating rapid revision when investment failed to materialize at anticipated levels. More robust policy development processes incorporating detailed techno-economic modeling and extensive industry engagement might have identified unworkable provisions before formal enactment.

The differential treatment of waste-to-energy and geothermal facilities—granting 100% BPP pricing and negotiated tariffs versus 85% caps for other technologies—establishes precedent for policy tools recognizing renewable energy's non-electricity benefits. Waste-to-energy's premium pricing acknowledges municipal solid waste management services that reduce landfill requirements, prevent methane emissions, and address urban sanitation challenges beyond mere electricity generation. Geothermal's preferential treatment reflects exploration risk, development complexity, and strategic value of developing indigenous energy resources. This differentiated approach suggests pathways for future policy evolution: rather than uniform pricing across renewable technologies, sophisticated frameworks could incorporate multi-criteria valuation encompassing energy security contributions, emissions reduction, local economic development, and energy system resilience—potentially justifying varied tariff structures reflecting diverse technology characteristics and policy objectives beyond least-cost electricity supply.

The regulation's emphasis on sustainability planning, operator capacity building, and post-construction management reflects important recognition that infrastructure construction represents merely initial stage of service delivery requiring decades of operational excellence. Provisions mandating PLN technical guidance to regional governments for post-handover operations, requirements for operator capability assessment, and specifications of maintenance planning alongside construction address chronic challenges in Indonesian infrastructure: premature deterioration of newly built facilities due to inadequate operations, insufficient maintenance funding, and untrained personnel. However, actual enforcement of these sustainability requirements remained uncertain—the regulation provided limited detail on required operator qualifications, maintenance budget adequacy standards, or remedies when handover recipients lack capacity to maintain performance after asset transfer. Future regulatory iterations could strengthen sustainability provisions through explicit minimum standards for operator training, mandatory maintenance reserves, and performance monitoring continuing after construction completion.

For entities planning renewable energy development in Indonesia, PERMENESDM 12/2017's legacy offers critical lessons despite supersession. First, regulatory stability should not be assumed—developers must maintain flexibility to adapt to policy changes while recognizing that signed power purchase agreements typically contain change-in-law provisions protecting existing projects from adverse regulatory amendments. Second, tariff negotiations should carefully address ambiguities in cost calculation methodologies, BPP reference years, and indexation mechanisms given BPP's fluctuation with fuel prices and demand patterns. Third, must-run protections warrant serious attention in contract negotiations, with developers above 10 MW capacity seeking contractual curtailment compensation given regulatory protections' absence. Fourth, due diligence requirements necessitate robust demonstration of technical and financial capabilities early in development processes, as PLN's authority to reject developers failing capability assessments creates significant screening barriers. Finally, domestic content compliance and standards certification warrant early attention rather than late-stage afterthoughts, as non-compliance can delay commissioning and jeopardize commercial operation date achievement critical for project financing.

Matrix 5: Implementation Success Factors and Persistent Challenges

Official Source: Permen ESDM No. 12 Tahun 2017 - BPK RI

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