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W&P Newsletter – Energy Update: Greater Flexibility in Energy Sector

The Indonesian Government recently issued two implementing regulations for the Omnibus Law in the energy sector, namely Government Regulation No. 25 of 2021 on the Energy and Mineral Resources Sector (“GR 25”) and Government Regulation No. 23 of 2021 on Forestry (“GR 23”).

Below are the key points of the two regulations mentioned above.

  1. GR 25: Coal Mining, Geothermal Energy, and Electricity
    There are 3 sub-sectors in the energy industry that are specifically impacted by GR 25, namely coal mining, geothermal energy, and electricity.
    1. Coal Mining
      Subject to prior approval from the Minister of Finance, GR 25 now allows a 0% royalty rate for the following businesses, provided they undertake coal value-added activities within Indonesia:
        • Production Operation Mining Business License (Izin Usaha Pertambangan Operasi Produksi or IUP OP);
        • Special Production Operation Mining Business License (Izin Usaha Pertambangan Operasi Produksi Khusus or IUPK OP); and
        • Special Mining Business License (Izin Usaha Pertambangan Khusus).
    • The so called ‘value-added activities’ refer to certain activities that aim at improving the coal quality with or without changing the original physical or chemical nature of the coal. This incentive is expected to encourage coal mining companies to process their coal domestically and to boost coal processing activities within the country.
    1. Electricity
      GR 25 provides increased flexibility to investors in conducting the electricity business in Indonesia, as explained below:
      • A foreign representative office is now allowed to conduct electricity supporting services (“ESS”) in the forms of (i) consultancy, (ii) construction and installation, and (iii) maintenance of electric power installations, provided that the value of the services meets the set minimum thresholds[1] and certain requirements, for example, the use of Indonesian employees and the establishment of a joint operation with a domestic ESS business entity.
      • Previously, business entities conducting an integrated electricity supply business for public interest were only permitted to conduct power generation and transmission in one designated working area. According to GR 25 it appears such businesses are now permitted to conduct power generation and transmission outside their designated working area. It remains unclear on how this provision works as GR 25 does not provide further elaboration. It is therefore recommended that businesses intending to conduct any power generation and/or transmission activities outside their designated working areas to first check and discuss the interpretation and details of this provision with the officials.
      • To ensure smooth delivery and reliable supply of electricity for public interest, businesses conducting electricity supply business for public interest are now permitted to distribute power supply and have powerlines going through areas with gas pipeline network and infrastructures as well as forestry areas. This new policy was not regulated in the previous regulations.
    1. Geothermal Energy
      The administrative sanctions and their corresponding procedures for non-compliance are now much clearer under GR 25, ranging from the issuance of warning letters to the revocation of business authorizations. GR 25 also introduces new monetary sanctions for holders of Geothermal Energy Business License (“Geothermal License”) that have committed certain violations, including a penalty of IDR 100 billion for those who transfer their Geothermal License to other business entities or transfer their share ownership through the Indonesian Stock Exchange prior to exploration activities without obtaining approval from the MEMR or  a penalty of IDR 50 billion for failure to carry out reclamation activities and preserve the environmental functions prior to returning their working area (applicable to each and every well within the relevant working area).

  1. GR 23: Mining Activity Within Forest Area
    As a general rule, forestry areas can only be used for activities not directly related to forestry activities, such as mining, if they have strategic purposes and cannot be avoided.

    As regards the strategic mining activities with significant impact on forestry areas, GR 23 removes the requirement to obtain prior approval from the House of Representatives of Indonesia (Dewan Perwakilan Rakyat or DPR) in relation to the grant of a borrow-and-use permit (currently referred to as ‘Forestry Area Utilization Approval’ (Persetujuan Penggunaan Kawasan Hutan or “PPKH”)). Now that such requirement is removed, the award of a PPKH will be solely determined by the Minister of Environment and Forestry. This relaxation is expected to simplify the process of obtaining authorizations to conduct strategic mining activities in forestry areas.

    Although underground mining activities within a protected forest area that potentially bring certain adverse impact on the environment, such as land subsidence, are prohibited, GR 23 opens a possibility for mining companies to apply to the Minister of Environment and Forestry for an exemption from the prohibition provided that the mining company can meet a certain set of standard requirements.

 

For further information on the above, please contact W&P team members: scestakarani@wplaws.com, rjenie@wplaws.com.

 

[1] For construction and installation works: having a value of at least IDR 100 billion, while for consultancy and maintenance of electricity installations: having a value of at least IDR 10 billion.