Brief Notes for Indonesia’s Feed-in Tariff (FIT) Implementation

By : Massita Ayu Cindy

In March 2017, the Indonesian government authorized the General Planning for National Energy (RUEN) under the Presidential Regulation Number 22 of 2017. One of the most important aspects in the RUEN is the stipulation of the New and Renewable Energy (NRE) target of at least 23 percent (92,3 MTOE) in 2025 and continue to be at least 31.2 percent (315,7 MTOE) in 2050 of total primary energy use. In addition, the Ministry of Energy and Mineral Resources (MEMR) has also formulated a new regulation concerning the Utilization of Renewable Energy Resources for Electricity Supply under the MEMR Regulation No.12/2017 in January 2017. Still, MEMR Regulation 12/2017 has raised many protests from relevant parties, especially regarding the reference tariff, which stated that the ceiling price would be taken based on the local cost of generation (Biaya Pokok Penyediaan Pembangkitan, BPP). In some regions especially in the urban area, the BPP is way lower than the Levelized Cost of Electricity (LCOE) of most types of renewable energy plants in Indonesia. As a result, seven months later after the publication of MEMR Regulation 12/2017, the government introduced its revision under the MEMR Regulation 50/2017. It seems that in 2017, the government manages to show their ambition in accelerating the NRE development, especially in the power generation sector.

Unlike several years ago in which State-owned Electricity Utility (Perusahaan Listrik Negara, PLN) owned and operated almost all the nation power generations, in recent years about half of the new capacity were came from the private sector or Independent Power Producer (IPP) under a particular Power Purchase Agreement (PPA). The presence of the IPP as investors is essential to achieve the national energy target since it is almost impossible for PLN to do all the tasks alone. Thus, it is necessary to bring the proper investment climate to boost up the development of NRE in Indonesia. On the contrary, the latest Renewable Energy Country Attractiveness Index (RECAI) report from Ernst and Young in 2017 has shown very different result. Indonesia laid in the rank 38 of the top 40 most attractive countries in 2015 and 2016, while Indonesia is no longer classified as the top 40 in 2017[1]. Furthermore, although there were 70 contracts which were signed by IPP – PLN in 2017, but only 17 projects have started the construction phase in 2018, while about 46 projects considered as failed and should be re-evaluated or even to be stopped by the government. The project failure itself probably caused by financial problems such as loan disapprovals and the unattractive Internal Rate of Return (IRR). Many believe that the tariff government proposed in Feed-in Tariff (FiT) was way lower than the LCOE which make it economically hard or even impossible for some projects, as well as the implementation of Build, Own, Operate, Transfer (BOOT) in most of the NRE sector except for waste to energy sector which has become another issue. Thus, it is understandable if government prioritize affordability rather than the high cost of green energy as it was delivered by the Minister of Energy and Mineral Resources[2], although it should not obstruct the development of renewable energy. It is necessary to formulate the optimum contract scheme so that both the government and investors could achieve their interests.

Figure 1. Economic Instrument for Renewable Energy

Source : Renewable Global Status Report 2017, REN21.

According to REN21, there are two most prominent forms of Feed-in policies for renewable power promotion in 2016; (1) feed-in tariffs (FITs) and (2) feed-in premiums (FIPs).[3] The Feed in Tariff (FIT) is the most popular economic instrument scheme which is used in more than 50 countries around the world[4] (see Figure 1). It is a policy that sets a guaranteed price for every kilowatt-hour of electricity produced by the power producer of renewable energy over a specified period. The payment could be based on varying aspects such as the technology type, resource quality, location and also capacity size. While the FIT provides the “fix-price” over some period of times, some countries such as Spain applys a different approach by giving a premium price which is higher than the electricity market price or called feed-in premiums (FIPs). Unlike the FIT, the FIP is highly dependent on the electricity market price as the payment price reference. The premium could be added in two ways, by “constant adder” above the market price or “sliding adder” within certain cap and floor price. Another economic instrument used in achieving the renewable energy target is through quota obligation and tender scheme. Quota obligation, or commonly named Tradeable Green Certificates (TGC) or Renewable Portfolio Standard (RPS), is the economic instrument which obligates producer, consumer or supplier to provide a certain amount of renewable energy capacity in a given year. For example, in California, suppliers have to provide 33 percent of renewable energy for their retail by 2020 and 50 percent by 2030.[5] There are some options that could be selected to accommodate the quota obligation; 1) produce renewable energy; 2) buy renewable electricity; and 3) trade certificate. Conforming to the Renewable Global Status Report 2017, the tender scheme was one of the most rapidly expanding economic instrument for large scale of renewable energy project. Such as the project tender in general term, the lowest bidder is chosen to run the project. This allows the government to get the minimum price for the project. However, there are usually issues with cheap technologies and high insecurity of the industry due to the discontinued project.[6]

In Indonesia, the Feed In tariff was introduced in July 2016 along with the new MEMR regulation No. 19/2016 on power purchase of solar photovoltaic (PV) power generator. Subsequently in 2017, the Ministry of Energy and Mineral Resources applied the FIT to the new power purchase agreement (PPA) for of all kind of the renewable energy, except the municipal waste energy under the MEMR regulation No.12/2017. The implementation of FIT itselfs did not guarantee the success of renewable energy development in the country. In fact, there is no economic instrument that proven to be the best instrument to support the development of renewable energy so far; with each has its advantages and disadvantages. For FIT implementation, the common problems are:

• First, since FIT is generally designed to offer a stable revenue within the contract period, it does not address the fact that the renewable energy is a high up-front investment.
• Second, it is hard to establish the fixed price and the price policy in the long-term contract since the energy market is hard to be predicted. If the price is set too high, the electricity price will be increased, and in the long term, the price will be considered an extravagance due to the trajectory characteristic of the energy price. On the other hand, if it is set too low, it surely will not interest the investors to participate in the development of the renewable energy business.
• Third, even though the FIT is subjected to the inflation, many countries did not yet add the annual inflation as an essential variable in the FIT payment contract. For example, in Indonesia and Malaysia, they operate a flat tariff structure, which means that the tariff is not adjusted for inflation and currency fluctuation.[7]

The FIT also could be differentiated based on the project-specific tariff design and the ancillary tariff design elements. The FIT based on the project-specific tariff design could be divided into four possible design elements[8] :

(Source: NREL. A Policymaker’s Guide to Feed-in Tariff Policy Design. (July 2010))

The advantages and disadvantages of every FIT design should be adjusted with the government main objectives on developing the renewable energy so that the optimum result could be achieved. Generally, there are three main objective used by government as their foundation on developing the renewable energy:

1. Accelerate the Renewable Energy development to achieve RE goals;
2. Increase job opportunities and economic growth;
3. Reduce the Green House Gases (GHG) emission

Indonesia can learn from one of the most successful country such as Germany on how to implement the proper Feed-in Tariff. Germany has a well established FIT which creates more than 340,000 jobs and replace €50 billion worth of energy import every year[9]. There are at least three stages[10] used by the Germany’s government on developing the established FIT. The first stage was started in 2000 – 2009 by focusing on the accelerate the increases of domestic renewable energy. On this stage, the regulation was formed to allow “Transparency, Sustainability, and Certainty” to the investors. The second stage was started in 2009 to 2011 with objectives was to adjust the FIT regulation so that the annual increase of solar panel installation could be regulated. In 2012, the renewable energy price became more competitive compared to the conventional energy such as fossil fuel, so in the third stage, the Germany’s government was gradually remove the FIT incentives. The Germany’s Feed-in Tariff is successfully make the renewable energy price in German become much lower to more than 55 percent in 12 years as could be seen in the Figure 2.

Figure 2 Germany’s Solar PV Price History

Source : https://ekonomienergi.wordpress.com/tag/feed-in-tariff-indonesia/

As the conclusion, the decision Indonesia’s government made to adapt the fixed price Feed-in Tariff as the national renewable energy economic instrument is in the right path. Most developing countries are implementing Feed-in Tariff since it considers to be the most suitable economic instrument to the developing country situations including Indonesia. Feed-in Tariff has proved less costly and low risk with the efficient payment which is closely tied to the actual cost of RE generation compared to another economic instrument. Countries such as German have successfully implement Feed-in Tariff and make it become incubator of renewable energy technology and innovation. However, it is essential to highlight few critical points on how to achieve a successful Feed-in Tariff policy. These include:

1. Ensure the long-term transparency, certainty, and stability renewable energy investment climate. The rapid changes either in the policy or payment levels can lead to the unattractive investment climate both on the upstream and downstream side of renewable energy chain.
2. Feed-in Tariff payment should cover the renewable energy generation costs. It is known that the renewable energy generation cost is higher than the conventional generation cost. The incentives should be given by the government to be the economically attractive business. The incentive is then could be reduced gradually corresponding to the domestic RE generation development respectively.
3. Provide transparency and uniformity policy regarding the RE development for every province in Indonesia. It is important to ensure the effective procedures by giving a nondiscriminatory standard for RE development.
4. Set the annual national RE generation target for every renewable energy. It will help government integrate renewable electricity with another related sector so that the more aggressive renewable energy targets would be achieved.
5. Put the national inflation in the variable to be considered on the FIT incentive payment. It will reduce the adverse effect of the national financial viability to the renewable energy development.

References

California Energy Commission Document– Tracking Progress. Retrieved September 21, 2018 from http://www.energy.ca.gov/renewables/tracking_progress/documents/renewable.pdf

Ernest and Young. Renewable Energy Country Attractiveness Index (RECAI).

Halstead, M., Mikunda, T., Cameron, L. 2015. Policy Brief Indonesian Feed-in Tariff: Challenges and Options. Climate and Development Knowledge Network (CDKN).

Jabobs, David. 2009. Best Practice Examples – Quota Obligations and Tender Schemes. Environmental Policy Research Centre Freie Universität Berlin.

NREL. 2010. A Policymaker’s Guide to Feed-in Tariff Policy Design.

Pilih Energi Murah atau Terbarukan Ini Jawaban ESDM. 2017 Michael Agustinus. Retrieved September 21, 2018, from  https://finance.detik.com/energi/d-3434257/pilih-energi-murah-atau-terbarukan-ini-jawaban-esdm .

REN 21. 2017. Renewables 2017 Global Status Report. Retrieved September 21, 2018 from http://www.ren21.net/gsr-2017/chapters/chapter_05/chapter_05/#figure_46 .

Tampubolon, A. P. 2016. Feed-in Tariff (FIT) PLTS – Jerman vs Indonesia. Retrieved September 21, 2018 from https://ekonomienergi.wordpress.com/tag/feed-in-tariff-indonesia/ .

UK Can Learn From Germany’s Feed-In Tariff Lessons. 2011 Greg Barker. Retrieved September 21, 2018 from https://www.theguardian.com/environment/2011/mar/21/germany-feed-in-tariff .

* This opinion piece is the author(s) own and does not necessarily represent opinions of the Purnomo Yusgiantoro Center (PYC)

[1] Renewable Energy Country Attractiveness Index (RECAI) by Ernst and Young

[2] https://finance.detik.com/energi/d-3434257/pilih-energi-murah-atau-terbarukan-ini-jawaban-esdm

[3] http://www.ren21.net/gsr-2017/chapters/chapter_05/chapter_05/#figure_46

[4] https://helapco.gr/pdf/FiT_vs_FiP_NREL.pdf

[5] California Energy Commission Document– Tracking Progress

[6] Environmental Policy Research Centre, Freie Universität Berlin

[7] Climate and Development Knowledge Network (CDKN). Policy Brief Indonesian Feed-in Tariff: Challenges and Options.

[8] NREL. A Policymaker’s Guide to Feed-in Tariff Policy Design. (July 2010)

[9] https://www.theguardian.com/environment/2011/mar/21/germany-feed-in-tariff

[10] https://ekonomienergi.wordpress.com/tag/feed-in-tariff-indonesia/