Indonesia is Opening More Opportunities in Power Sectors for Foreign Investment

According to PwC, Indonesia is well on its way to becoming the 4th largest economy in the world by 2050. Indonesia’s level of growth has constantly been on an uphill climb, with one primary industry that could easily benefit the energy industry. The government has set a 23% renewable energy target for the final energy consumption by 2025. An additional target is 25% of renewable energy generated by the power sector, which currently accounts for the largest share.

However, the Indonesian energy market has historically failed to gain significant traction and attract foreign investments due to frequent regulation changes and unappealing incentives. This market, controlled mainly by PLN or the State Electricity Company, has been preparing a detailed plan regarding demand, customers, electrification, transmission, and distribution systems for over ten years.

One such policy sees foreign investors transferring their projects to PLN at the end of every agreement period. This has proven less successful in increasing contributions from other renewable energy sources and has resulted in concern regarding return on investment.

Transitioning from Brown to Green Energy

Indonesia has shown its intent to transition to green energy through the gradual phase-out of oil, high-speed diesel, marine fuel oil, and industrial diesel oil. However, there is still a relatively high reliance on coal which will also be phased out to realize Indonesia’s Nationally Determined Contribution: a low-carbon future.

Indonesia commits to reducing emissions up to 29% by 2030. Hydropower and geothermal energies are well developed in Indonesia and are at the core of PLN’s future expansion plans. The Indonesian government is optimistic about transitioning towards renewables while accelerating a green tech-based economy. The government plans to utilize energy storage technologies and nuclear energy usage to achieve the ambitious goals.

There are ample opportunities related to Independent Power Producers developed and financed privately. The UK especially offers world-leading expertise in the renewable energy sector for foreign investment. It can benefit from downstream opportunities created by Indonesia’s business policies in the technical and market assistance areas. Another example can be found in consulting and engineering studies, supplying electro-mechanical equipment, and Engineering, Procurement and Construction (EPC) management, among others.

A Way to Becoming Part of Indonesia’s Great Transition

The energy regime in Indonesia is primarily based on privately owned and funded power producers that sell power to PLN by entering into a Power Purchasing Agreement (PPA). To ensure continuous growth of the sector, the Indonesian government has made it possible for foreigners to become part of the power industry and even the great transition into renewable energy.

Companies benefit from and succeed by establishing solid relationships with essential stakeholders and ground actors. Foreign companies often opt to develop offices in Indonesia to conduct market intelligence and, more importantly, liaise with PLN. Having a local office is also integral for the company’s growth as the Indonesian market is not transactional.

It may also be worth noting that foreign businesses should account for the possibility of changes in the regulatory and permit regime of the renewable energy sector as they are often adjusted to meet Indonesia’s ambitious goals.

Establishing a Representative Office for Power Supporting Companies

Foreigners looking to be part of the Indonesian power market often set up FROs, which are Foreign Representative Offices looking to engage in the power supporting business. The activities of FROs are limited to consultancy, construction, and maintenance of power installation. FROs are only able to perform activities that are of high cost. This requirement is set out through the minimum value of work.

Aside from that, FROs are also required to enter into a joint operation with a local power supporting service entity, employ more Indonesians than foreigners, prioritize local products, appoint an Indonesian as the head, and hold an essential qualification under Indonesian standards. These requirements are tangible proof of the Indonesian government’s scheme to increase the opportunities for work for Indonesians.

It often may be challenging to employ and manage Indonesian workers due to the complex manpower laws in Indonesia. Cekindo offers human resource and recruiting services to ease the burden for businesses looking to set up in Indonesia.

Businesses looking to do mechanical or electrical work relating to the power supply must acquire their license and certifications from the Directorate General of Electricity. Companies that conduct business concerning civil structure need to obtain certification in construction services from the Ministry of Public Works and Housing and the license and accreditation acquired from the Directorate General of Electricity. The business licensing process in Indonesia has gone through significant changes due to the recently enacted Omnibus Law, businesses may benefit from the services provided by Cekindo on business licensing.