Alternating currents: Investors must be agile to keep up with changes in regulation and Government plans

Jakarta, 12 July 2018 – The development of the power sector is crucial for Indonesia’s continued economic development. To sustain this development, it is critical that the Government and PLN address the many pressing challenges that investors believe constrain the growth of the Indonesian power sector. The investment requirement is substantial, and the private sector will play an indispensable role and therefore, their views must be taken seriously.

PwC Indonesia has launched the second edition of its Indonesian Power Industry Survey in association with the Independent Power Producers Association of Indonesia (“APLSI”) to better understand the current condition of the electric power industry in Indonesia, and the opportunities and challenges the future holds, including the investors’ views on the impact of frequently changing regulations and the plans of the Government of Indonesia on the development of the power sector in Indonesia.

Yanto Kamarudin, Energy, Utilities & Mining Partner at PwC Indonesia, commented:

“The purpose of Alternating Currents: Indonesian Power Industry Survey 2018 is to help inform the public and private sector in Indonesia and abroad about Indonesia’s power industry and to highlight some of the challenges the country faces in attracting investment and achieving the industry’s full potential.”

Arthur Simatupang, the Executive Chairman of APLSI, commented:

“As an organization which represents more than 30 members operating various power plant projects in Indonesia, we are delighted to work with PwC Indonesia on this report. We hope that this report will serve as a positive contribution from the private sector. We thank PwC Indonesia for their work on the survey, as we are keen to understand further our members’ inputs to help make decisions for the positive development of the Indonesian power industry.”

The key findings this year are:

1.      Electricity planning

96% of respondents believe that the 2017 RUPTL was not designed to adequately anticipate and respond to the current and future challenges in the power sector.

2.     Investor confidence

Only 39% feel that the regulatory and legal framework in Indonesia is supportive of private investment (down from 89% last year).

3.     Investor returns

Indonesia faces stiff competition from other attractive investment destinations for multinational companies such as Vietnam and the Philippines.

4.     Regulations

Two of the most significant regulations introduced to the sector in recent years (MoEMR Regulation No. 10/2017 and No. 12/2017) are perceived to have a negative impact on investors’ future projects. Subsequent regulations that amended or revoked the regulations issued in early 2017 were more positively viewed.

5.     Energy policy and market design

94% of respondents believe that regulatory uncertainty is a major barrier to investing in new large-scale power generation projects. Close behind, 71% of respondents believe that the lack of standard, bankable Power Purchase Agreements (“PPA”) is also a major barrier.

6.     Energy Trilemma

Affordability is now considered the main priority in the Energy Trilemma (over Sustainability/Clean Power and Security of Supply), reflecting the current policy focus on cost.

7.     Renewables and technology development

Reductions in the cost of renewable energy generation and the availability of cost-efficient storage technology are expected to have the largest impact on the Indonesian power sector.

8.     Energy access

As an archipelago, the availability of affordable off-grid solutions will be a key driver of increasing electrification rates in rural areas.

9.     Megatrends, growth and infrastructure

New disruptive technologies, especially energy storage, are expected to have an impact on Indonesia’s energy mix.

Regulation and reform; too many changes

61% of survey respondents believe that the regulatory and legal framework in Indonesia is not supportive of private investment. Respondents believe that some of the regulations implemented in 2017 regarding PPA risk allocation, share transfer restriction and IPP tariffs have had a negative impact on companies’ future plans. There have been reports of difficulty in financing projects as a result of these changes.

Stakeholder priorities; cost is king

Governments and industry across the world are aware of the ‘Energy Trilemma’ – the trade-off between “security of supply”, “affordability” and “sustainability/clean power”. Survey participants ranked affordability as the foremost priority in 2018, followed by “security of supply” and then “sustainability/clean power”. Given these priorities, we would expect the policy focus to remain on coal in the short term. In the future, participants view that “affordability” will remain the top priority. This view is consistent with the Government’s plan to reduce retail electricity tariffs.

Challenges; insufficient incentives

48% of respondents believe that a lack of transparency in the procurement and bidding of new projects is a major barrier to investing in large-scale generation. Therefore, it is key for the Government to increase transparency from the earliest decisions to final awards. An increase in transparency could be positive for businesses also. Access to project information, as well as past procured contracts, allows businesses to make more appropriate bids.

Demand and technology shaping the landscape; renewables continue to catch-up

We have identified a number of global megatrends shaping the economy and landscape of the power sector. Three things stood out as the most influential on the Indonesian power sector according to survey respondents, namely: population growth, megacities and new disruptive technologies.  The advancement of renewable power generation and battery storage could be a game-changer in the Indonesian power landscape.

“We wanted to provide an illustration of the agility exhibited by investors in the sector over the last year in reaction to changes in regulations and Government plans for the sector. In this report, we looked at issues like electricity planning, investor confidence, investor returns, regulations and other critical issues. We hope the Government can take on-board this constructive feedback and work closely with IPPs to help further electrify Indonesia for the benefit of all Indonesians” Kamarudin added.