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Indonesia’s Geothermal Business Legal Framework 

by Pudji W. Purbo (Partner), Fanny Kurniawan (Associate), and Prita Nazarudin (Associate).

Published: July, 2010 - Indonesia

Submission: July, 2010

 





The Legal Framework

In terms of legal framework, Indonesia’s current private sector development of the geothermal energy business is divided into three separate legal regimes.  The first regime started in 1981 under Presidential Decree No. 22 of 1981 amended by Presidential Decree No. 45 of 1991 (“PD 22/1981”) which still continues to apply as it is grandfathered by the later enacted Law No. 27 of 2003 on Geothermal Energy (“Law 27/2003”).  The second regime was under Presidential Decree No. 76 of 2000 (“PD 76/2000”) which was issued at the time Indonesia was still in the midst of recovery from the Asian economic and monetary crisis in 1997-1999. The third regime started when Law 27/2003 was enacted.  

For the purpose of describing the geothermal business legal framework, we outline the legal regimes that exist at present as follows:

1.       Pre-Law 27/2003 regime

Pre-Law 27/2003 regime is dominated by geothermal energy business development undertaken according to PD 22/1981. Under PD 76/2000 we noted that there were no significant work areas or business licenses granted or any development activities undertaken.


Under these two regimes, geothermal business was monopolized and conducted solely by Pertamina, the Indonesian state oil and gas company established pursuant to Law No. 8 of 1971 (which has now been transformed into PT Pertamina (Persero)), by way of a joint operation with geothermal contractors and based on a ‘Kuasa Pengusahaan’ which was an authority granted to Pertamina under PD 22/1981 to explore, exploit and develop geothermal resources in Indonesia under Pertamina’s monopoly. 


The underlying business concept of this regime was that Pertamina, as the holder of the ‘Kuasa Pengusahaan’, was granted a number of geothermal work areas by the Government of Indonesia (“GOI”) to be developed and exploited through either its own operation or a joint operation.

Through its own operation means that Pertamina was to develop and exploit geothermal energy using its own resources, whilst in joint operations Pertamina engaged private companies as contractors to develop and exploit geothermal energy under a joint operation contract.
 
The joint operation concept allows the development of geothermal energy in two business structure. In the first structure, Pertamina or its joint operation contractors develops and operates the steam field only, selling the steam to PLN, the Indonesian state-owned electricity company, or other parties for electricity generation under a steam sales contract.  The second structure allows Pertamina or its contractors to generate electricity and develop and operate the steam field, with the electric power produced sold to PLN under a joint operation contract and energy sales contract scheme.

A “joint operation contract” is a legal agreement between Pertamina and its contractors.  Under the contract, Pertamina is responsible for the management of the operation and the contractor is responsible for the production of geothermal energy from the contract area and the conversion of energy to electric power and the delivery of geothermal energy or electric power.  The contract generally allows operations for 42 years, including a production period of 30 years.  Pertamina has no equity stake in any of the projects, its role being to collect compensation as the resource holder.  The electric power is sold on the basis of an energy sales contract, which is normally denominated in dollars and obligates PLN to purchase electricity on a take-or-pay basis for a period of 30 years or more.  However, many energy sales contracts are being and have been renegotiated following the 1997 Asian economic and financial crisis.

The ”energy sales contract” is an agreement among the contractor as the geothermal resources developer, Pertamina as the seller, and PLN as the purchaser of geothermal energy in the form of electric power.  Under this agreement, the production period for delivery of geothermal energy from each unit is 30 years from the date of commercial generation for each unit.  The term of an energy sales contract is 42 years. 

This regime does not require the establishment of an Indonesian company or a foreign investment company as it adopts a similar concept to that of the oil and gas sector in that a permanent establishment [i.e. foreign established entity] can perform its activities in Indonesia.

Work Areas

Thirty three (33) geothermal work areas were granted to Pertamina; however, in 2002, 18 of these areas were returned to the GOI.

To date PT Pertamina (Persero) retains 15 work areas, which have a potential capacity of more than 100MW each; two of them are operated and developed by a joint venture subsidiary of PT Pertamina (Persero) and PT PLN (Persero) i.e. PT Geo Dipa Energi and the other work areas are developed by PT Pertamina Geothermal Energy either by its own operation or in joint operation with geothermal contractors. Each work area may contain several blocks of areas developed by different contractors.

The 15 work areas are:

  1. Sibayak-Sinabung, in North Sumatra;    
  2. Sibual-buali (Sarulla), in North Sumatra;        
  3. Sungai penuh, in Kerinci, Jambi, Sumatra;         
  4. Tambang Sawah-Hululais, in Bengkulu, Sumatra;          
  5. Lumut Balai, in South Sumatra;       
  6. Waypanas, in Lampung, Sumatera;   
  7. Cibeureum-Parabakti, in West Java;         
  8. Pengalengan, in West Java;    
  9. Kamojang-Darajat, in West Java;
  10. Karaha, Cakrabuana, in West Java; 
  11. Dieng Plateau, in Central Java;
  12. Tabanan, in Bali;
  13. Lahendong, in North Sulawesi;  
  14. Kotamobagu, in North Sulawesi; and      
  15. Iyang-Argopuro, in Probolinggo, East Java.

Role and Authority of the Regional Governments

The Central Government through the Ministry of Mines and Energy (“MEMR”) has full authority to foster and supervise existing geothermal projects.  As such, regional governments do not have authority over geothermal projects under this regime. However, in certain cases, the regional government’s involvement is required for the development of a project, for instance recommendation from regional government is a prerequisite to obtain a forestry license to enable exploration or exploitation in forest areas.


2.       Law 27/2003 regime

Law 27/2003 sets out a new and different business structure from the pre-Law 27/2003 regime as it no longer recognizes the monopoly of the geothermal business by Pertamina and the joint operation concept.  It introduces a structure where the geothermal business is undertaken by way of a tender for a certain work area and a business license.  All business entities may participate in bidding for a work area and the winner of the work area may obtain a business license.  However, one business entity can only hold one work area.  If a business entity already holds a work area and wishes to obtain other work areas, it must set up a separate legal entity for each further work area. 
 
As opposed to the pre-Law 27/2003 regime that featured a total-project concept from upstream to downstream geothermal energy development, the Law 27/2003 regime features an unbundling system under which the regime only regulates development of geothermal energy as far as upstream business activities and direct utilization of geothermal energy, whilst indirect utilization of geothermal energy for electric power generation at downstream level is subject to the prevailing laws and regulations on electricity.


2.1     Geothermal Upstream Business Activities

There are six phases of geothermal business activities under the Law 27/2003 regime:
(a)    Preliminary Survey;
(b)    Determination of Work Areas and Tenders for Work Area;
(c)    Exploration;
(d)    Feasibility Studies;
(e)    Exploitation; and
(f)    Utilization.

Preliminary Survey;

In this phase, the MEMR MR, the Governor or Regent/Mayor according to his/her respective authority, undertakes the preliminary survey for available geothermal energy resources.  The MEMR can assign this task to private business entities with the expertise and ability to conduct the preliminary survey by first offering a preliminary survey work in a public forum on a first come first served basis. A private business entity assigned to undertake the preliminary survey does not automatically obtain a work area. A preliminary survey assigned to a private entity must be completed in 1 (one) year, but the term can be extended once.

Determination and Tender of Work Areas;

Geothermal business activities are conducted in a certain work area.  The MEMR has the authority to plan, prepare and determine a work area based on studies and assessments of data obtained from the preliminary surveys.   The results of the studies and assessments are used as the basis for determining a work area, including the basic price for the data of the relevant work area and/or the amount of compensation awarded to the private parties conducting the assignment. Following completion of the studies and assessments, the Directorate General of Mineral Coal and Geothermal (“DGMCG”) within the MEMR proposes a certain area to the MEMR to be determined as a work area and to be offered through a tender.

The tender is administered by the MEMR, Governor or Regent/Mayor by establishing a tender committee who will determine the winner of the work area offered in competitive bidding process. The winner of the tender is granted a work area in which it may develop geothermal energy based on a geothermal business license (“IUP”) which must be obtained to undertake exploration, feasibility studies and exploitation activities.

An IUP is granted for a maximum period of 35 years for the activities which cover: (i) exploration; (ii) feasibility study; and (iii) exploitation. The term of each activity is further explained below.

Exploration;

This activity covers all geological investigations, geophysics, geochemistry, drill-testing and the drilling of exploration wells, etc. Exploration of geothermal resources can only be conducted by the holder of a IUP or by the MEMR.  This phase must be started within 6 months of an IUP being issued and must be completed within 3 years at the latest.  This term can be extended twice, each for a 1-year period.  The extension must be applied for at the latest 3 months prior to the expiry of the IUP.

Feasibility Study;

Following completion of the exploration activities and submission of a detailed exploration report to the MEMR, Governor, or Mayor/Regent, the holder of an IUP may undertake feasibility studies.  If the exploration activities were conducted by the MEMR, the holder of the IUP may directly commence the feasibility studies phase.

This phase must be completed within 2 years as of the expiry of the exploration phase, with no extension of the term available.

Exploitation;

Having completed the feasibility studies phase and obtained approval of the Environmental Impact Studies (AMDAL), the holder of the IUP may enter into the exploitation phase in which it is allowed to produce steam. The term of the Exploitation phase is 30 years which is extendable, each time for a further 20-year period.

Utilization.

This phase is commonly referred to as the downstream geothermal business activity and is entered into simultaneously with the exploitation phase. The steam from the wells may be utilized as follows:

  • Indirect utilization

Indirect utilization means for power generation purposes under the Electricity Law and     regulations.

  • Direct utilization:

Direct utilization of geothermal steam is for non-electric power needs (e.g. food drying and hot spring facilities).  It is to be further regulated under a Government Regulation.  To date no government regulation on the direct utilization of geothermal energy has been issued.


Work area

The maximum area that can be granted to the holder of an IUP, subject to relinquishment, is as follows:

  • Exploration: 200,000 hectares
  • Exploitation: 10,000 hectares (which can be increased with prior approval from the MEMR, Governor, or Regent/Mayor).

It is important to note that the area offered in a tender is usually on as is where is basis, which often becomes an issue that impedes the development of the project. It is important for interested bidder to make a thorough assessment and take into account other aspects related to the area, for example land clearance if there are people inhabiting the area, forestry license if the area is in forest area and overlapping areas with mining concessions, etc.

Rights and obligations of IUP Holders

IUP holders are entitled to conduct geothermal business activities (i.e. exploration, feasibility studies, and exploitation) within their respective work areas.  They are also entitled to utilize all government data and information related to their respective work area during the term of validity of their IUP.  As an economic incentive, IUP holders are entitled to enjoy certain tax breaks (i.e. import duty exemptions). IUP holders are also entitled to use public infrastructure, directly utilize the geothermal energy, sell the steam produced and obtain extensions to the terms of their IUPs.

IUP holders are required to submit periodically long-term exploration and exploitation plans as well as post mining plans to the Minister, Governor or Mayor covering their activities, planned budgets, and the volume of reserves.  IUP holders must also relinquish their work areas wholly or partly to the Minister, Governor or Regent/Mayor.  IUP holders are also required to pay State revenues i.e. taxes and non-tax State revenues.  The taxes consist of income tax, VAT, import duties and other levies on imports and excise, and regional taxes and levies.  Non-tax revenues consist of State levies in the form of fixed contributions, production contributions and bonuses.

Other than the above requirements, IUP holders must also comply with the regulations on environmental protection, health and safety in the work environment, and community development.


2.2     Geothermal Downstream Business Activities


Geothermal downstream business activities concern the utilization of geothermal energy for specific purposes. Law 27/2003 provides that geothermal energy can be utilized directly and indirectly. However, to date a regulation regarding the direct utilization of geothermal energy for specific purposes has yet to be issued.

Indonesia’s present development of geothermal energy at the downstream level is mainly associated with indirect utilization of geothermal steam or energy for the generation of electric power.  However, Law 27/2003 deregulates downstream business activities i.e. for electric power generation; therefore, the utilization of geothermal energy for electric power projects falls under the electric power regulations. 

If a business entity wishes to develop a geothermal energy based power plant from upstream to downstream activities, besides the requirement to obtain an IUP, it must obtain one of the following Electric Power Supply Business Licenses (depending on their needs):

(a)     Electric Power Supply Business License (IUPTL) for the supply of electric

power for the public’s interest. The electric power generated is to be sold to PLN or the holders of an integrated IUPTL; or

(b)     Electric Power Operating License (IO) - the electric power generated is for

the license holder’s own use, commonly referred to as a license for a captive power project.


Due to the enactment of the new law on electricity under Law No. 30 of 2009 on 23 September 2009, it is important to note that the supply of electric power is organized by the state and carried out by state-owned enterprises, regional government-owned enterprises, private business entities, cooperatives, and self-supporting social organizations.  Although PLN is no longer being the holder of the electric power supply concession, PLN has the first priority to conduct the supply of electric power for public purposes.  Regional government-owned enterprises, private business entities, and cooperatives are allowed to carry out an integrated business of electric power supply for a certain area which has not yet received electric power services. PLN will only be obligated to carry out the supply of electric power for those un-serviced areas, if regional government-owned enterprises, private business entities or cooperatives are unable to carry out the supply of electric power for those areas.

In terms of pricing, the GOI recently determined under Regulation of the Minister of Energy and Mineral Resources No. 32 of 2009 that the price for electricity bought by PLN from geothermal power producers is capped at 9.7 U.S. cents per kilowatt hour. This price cap is expected to attract investors to invest and boost up development of geothermal energy for electric power generation.


Tax and Fiscal Incentives

Since the advent of the geothermal era in Indonesia in the 1980s, there have been five significant changes to the related tax and fiscal regime. The first three changes were brought about under PD 22/1981, PD 76/2000 and Law 27/2003; and the latest two changes result from the prevailing laws and regulations on tax.

The development of tax and fiscal incentives in the geothermal industry in Indonesia can be divided into two major classes: pre-Law 27/2003 and post-Law 27/2003.

1.       Pre-Law 27/2003;

1.1     Presidential Decree No. 23 of 1981 in conjunction with Decree of the Minister of

Finance (“MOF”) No. 746/KMK.012/1981 (as amended) 22 December 1981 - 12 July 1992


Contractors were obliged to pay (i) corporate income tax of 40% on the contractors’ net income and (ii) another 10% tax for interest, dividends, and royalties, calculated on the contractor’s net income after the deduction of corporate income tax.


Amortization of certain fixed assets and other costs before production was 10 -12.5% per annum, except for generators and electric power transmission equipment which remains to be further stipulated by the MOF.


The Investment allowance provided by the Government was 20% of all costs borne by the contractor to develop geothermal facilities. Compensation for losses over the first five years after production could be deducted from taxable income for the following year.


1.2     Presidential Decree No. 49 of 1991 in conjunction with Decree of the MOF No.

766/KMK.04/1992 (as amended) 13 July 1992 – 31 December 2000


In this era, the Government was entitled to 34% of the contractor’s net income. This government portion was treated as payment of the contractors’ income tax. In its recent development, effective as of 1 January 2008, under Decree of the MOF No. 165/PMK.03/2008, part of the income tax owed by geothermal contractors was charged to the Government.

Value Added Tax (“VAT”) was applicable to the geothermal industry. VAT could be (i) deferred, in the case of indebted VAT on geothermal exploration and drilling services; or (ii) reimbursed, if the contractor had already paid the Government.

Depreciation was calculated according to MOF Decree No. 457/KMK.012/1984 under which costs were calculated proportionally per quarter as one fourth (¼) of annual depreciation.


1.3.    The third amendment to the Indonesian Income Tax Law (Law No. 17 of 2000) in

conjunction with GR 76/2000 1 January 2001 – 21 October 2003


Under GR No. 76 of 2000, tax and fiscal treatments applicable to the geothermal industry were to be determined by the prevailing Indonesian laws and regulations on tax, i.e. income tax, VAT, import duties and other levies. Under the then Indonesian tax law, income tax applicable to corporations was 30% of net income. The Government also provided a maximum investment allowance of 30%. However, we understand that no exploration activities have taken place since the promulgation of GR 76/2000.


2.       Law 27/2003;

2.1     The fourth amendment to the Indonesian Income Tax Law (Law No. 36 of 2008) in

conjunction with Government Regulation No. 62 of 2008 (“GR 62/2008”) on Amendments to Government Regulation No. 1 of 2007 on Income Tax Facilities for Capital Investment in Certain Business Sectors and/or Certain Regions 22 October 2003 – 27 January 2010


During this era, the new geothermal law was enacted and changed the mining authorization to a Geothermal Business License (IUP). This law is in line with GR No. 76 of 2000 under which tax and fiscal treatments applicable to the geothermal industry are to be determined by the prevailing Indonesian laws and regulations on tax.

Investment allowances for geothermal business activities from exploration to power generation were granted income tax facilities, including among other things, a net income reduction of 30% of the capital investment over a six-year period where the reduction is 5% for each year (note that corporate income tax applicable to contractors under Law No. 36 of 2000 was a flat 28% rate in the 2009 fiscal year and 25% starting from the 2010 fiscal year).


Some tax facilities were borne by the Government. Under MOF Regulation No. 242/PMK.011/2008, the Government bore VAT on imports of geothermal equipment for the 2009 fiscal year.


Also available to contractors was expedited depreciation and amortization for certain classes of tangible fixed assets.


2.2     MOF Regulation 21/PMK.011/2010 28 January 2010 – present

With the intention of reducing dependence on and preserving  non-renewable resources, i.e. fossil fuels, the Government is again creating tax and fiscal incentives to attract investors and to promote Indonesian renewable resources, i.e. through geothermal exploitation by promulgating Decree of the MOF No. 21/PMK.011/2010 on Tax and Fiscal Incentives for the Exploitation of Renewable Energy.

The incentives offered by the Government are income tax, VAT and import duty facilities and other facilities whereby tax due is covered by the Government.

Incentives offered on income tax are basically the same as those under GR 62/2008 including among other things, a net income reduction of 30% of capital investment over a six-year period where the reduction is 5% per year and expedited depreciation and amortization for certain classes of tangible fix assets.

Imports of strategic goods, i.e. machinery and equipment (excluding spare parts), required by geothermal contractors to produce taxable goods are exempt from VAT.

Imports of certain goods are exempt in accordance with the terms and conditions provided in the relevant regulations. For example, Regulation of the MOF No. 176/PMK.011/2009 on Import Duty Exemptions for Imports of Machinery and Goods and Materials for the Establishment or Development of an Industry in the Framework of Capital Investment, provides that an import duty facility may be granted for  equipment, goods and materials which (i) are not produced locally, (ii)  are produced locally, but do not meet the required specifications, or (iii) are produced locally, but not in sufficient quantity to meet the needs of the industry.

Tax facilities borne by the Government must first be determined under the state budget law, i.e. MOF Regulation No. 24/PMK.011/2010 which determines that VAT on imports of geothermal equipment will be borne by GOI for the 2010 fiscal year.


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