New Geothermal Energy Law: New Hope for Geothermal Energy Development in Indonesia
Indonesia is one of the world's most volcanically active countries and among the countries with the greatest geothermal energy potential. Dwindling production of traditional energy sources such as oil and gas has the Government of Indonesia (GOI) seeking alternatives to maximize national energy production. That includes developing geothermal energy, which is expected to play a larger role in Indonesia's energy production going forward.
To this end, the GOI has introduced provisions to better manage geothermal energy, through a new law approved by the House of Representatives (DPR) in August 2014, Law No. 21 of 2014 (the "New Geothermal Law"). The New Geothermal Law was proposed by President Susilo Bambang Yudhoyono in August 2013. It contains new provisions that are more industry-friendly compared to the previous law on geothermal energy, Law No. 27 of 2003 ("Law 27/2003").
The highlights of the New Geothermal Law are as follows:
Separation from Mining Activities
One of the biggest philosophical changes in the New Geothermal Law is the separation of geothermal activities from other natural resources exploitation (such as hard mining or oil and gas exploitation). Law 27/2003 categorized geothermal exploitation as a mining activity and required the same type of mining business license (Izin Usaha Pertambangan or "IUP") for geothermal exploitation as for mining activities. The specific license for geothermal exploitation was the Izin Usaha Pertambangan - Panas Bumi or "IUP-PB".
The New Geothermal Law drops the term mining to establish a distinction that geothermal activities are not part of mining activities. We believe that the consequence of this will be that business players involved in geothermal exploitation will no longer be subject to the restrictions that apply to mining activities.
Many geothermal projects in Indonesia have been delayed by the prohibition on conducting geothermal activities in protected and conservation forest areas, which is where much of Indonesia's geothermal resources are concentrated. Previously, because geothermal activities were considered mining, they could not be done in protected forest areas, as prohibited by Law No. 41 of 1999 regarding Forestry, as amended by Law No. 19 of 2004 (the "Forestry Law").
The Forestry Law also stipulates that in general non-forestry activities can only be conducted in production and protected forest areas, which means that non-forestry activities such as geothermal activities cannot be done in conservation forest areas. Under the New Geothermal Law, geothermal activities in protected and conservation forest areas are permitted with the approval of the GOI. Given the contradiction between the New Geothermal Law, which allows geothermal activity in protected and conservation forest areas, and the Forestry Law, which says conservation forests are off-limits to all non-forestry activity, it remains to be seen whether geothermal activities will in fact be allowed in conservation forest areas.
Pursuant to the New Geothermal Law, geothermal operational activities consist of (i) Direct Utilization and (ii) Indirect Utilization.
Direct Utilization is defined in the New Geothermal Law as the utilization of geothermal energy directly, without any conversion process of the thermal/fluid energy to become any other form of energy for non-electricity purposes. Direct Utilization is allowed for various activities, such as tourism, agribusiness, industry and other activities that use geothermal energy directly, and a Direct Utilization Permit (Izin Pemanfaatan Langsung or "IPL") is required. An IPL is granted by the Minister of Energy and Mineral Resources (MEMR) or the relevant Governor or Regent/Mayor, depending on the production area.
Indirect Utilization is defined as the utilization of geothermal energy through conversion of the geothermal energy from thermal/fluid energy to electricity. The New Geothermal Law makes Indirect Utilization the main priority of geothermal activities. To engage in Indirect Utilization, a geothermal license (Izin Panas Bumi or "IPB") is required.
Under Law 27/2003, IUP-PB licensing power was spread among central and local Governments. Local Governments were also authorized to issue local regulations for the geothermal industry. This led to a chaotic bureaucracy and legal uncertainty that hindered the development of geothermal energy in Indonesia. The New Geothermal Law has addressed this issue, which will hopefully encourage development of the geothermal industry.
Under the New Geothermal Law, an IPB license can only be issued by the central Government in Jakarta. In addition, only the central Government can hold a tender for geothermal working areas. As the main priority for geothermal activities, Indirect Utilization is supervised closely by the central Government. Interestingly, the New Geothermal Law provides that even though an IPB itself cannot be transferred, the shareholding composition of the IPB holder can be changed through a transfer of share ownership on the Indonesian stock exchange after exploration is finished, subject to approval by the MEMR. This means that the transfer of shares of an IPB holder can only be done after the IPB holder is listed on the Indonesian stock exchange.
While we understand these provisions aim to prevent the sale and purchase of an IPB, we believe this may be an issue in the future should a shareholder, for whatever reason, wish to leave a company that holds an IPB. Pursuant to these provisions, the transfer could not be done immediately since it would require the conversion of the company to a publicly listed company, and it could not be done outside of the Indonesian stock exchange. We take this as the GOI requiring a high level of commitment from shareholders to enter the geothermal industry.
One obstacle to the development of the geothermal industry in Indonesia has been the low pricing for geothermal power and the high development costs. MEMR officials confirm that a new pricing regime will be formulated under an implementing regulation for the New Geothermal Law to address this issue. This implementing regulation, according to officials, will also consider the economical feasibility of all aspects of geothermal activities.
Benefits for Local Communities
The New Geothermal Law requires IPB holders to provide a production bonus to the local government whose authority covers the working area of the IPB holders. The production bonus is calculated as a certain percentage of the gross revenue as of the first unit once the IPB holder enters commercial production. It is expected that a Government Regulation will be issued to further regulate this production bonus. Until such Government Regulation is issued, we believe uncertainty will surround this production-sharing concept and arriving at a production sharing calculation will require extensive study and trial and error.
This article is intended for informational purposes only and does not constitute legal advice. This article should not be acted upon in any specific situation without appropriate legal advice.