The Indonesian government has eased its local content requirements in the energy sector to attract concessional funding for renewable energy projects from international development banks, according to a report from Reuters. The news agency cited the Deputy Minister of Maritime Affairs and Investment, who stated that a new regulation has been passed, exempting projects funded by at least 50% of foreign multilateral or bilateral lenders from the local content rules.
Indonesia’s current regulations require that all infrastructure for electricity intended for public consumption use domestically produced goods and services. Industry Ministerial Regulation No. 54/2012 mandates a local content requirement of 40% for solar power projects, 50% for hydropower plants, and at least 30% for geothermal plants. These rules are part of the country’s broader local content requirements (LCRs), designed to ensure that foreign investment supports the development of domestic manufacturing and technological capabilities.
Ongoing concerns exist that local content requirements (LCRs) in the energy sector have slowed the release of funds from the USD 20 billion Just Energy Transition Partnership (JETP). Announced in November 2022, JETP aims to support Indonesia’s transition to net zero by 2050 and facilitate its shift from coal-powered electricity to cleaner energy sources. Under this partnership, an International Partners Group (IPG), including the Group of Seven countries, Norway, and Denmark, has committed to mobilizing USD 10 billion in financing, with an additional USD 10 billion from a private sector alliance.
In August 2023, a former U.S. ambassador to Indonesia argued that the JETP presented a valuable opportunity for Indonesia to accelerate its shift to green energy and enhance its appeal to foreign investors. However, he pointed out that “the current regulatory environment, including Jakarta’s local content requirement, makes renewable energy investment less attractive.”
Another assessment published on the JETP Indonesia website states that local content regulations “limit developers’ ability to procure supplies outside Indonesia, where the costs of renewable energy components for solar PV, wind, and batteries have significantly decreased in recent years.” Consequently, these higher prices and capacity limitations directly affect the demand for renewable energy.
As a result, there is growing pressure on the government to reconsider its local content requirements. JETP Indonesia has urged the government to “revisit existing regulations for LCR application on government procurements funded by multinational development banks.”
The new regulation allows solar power plant projects to use imported panels, provided the project operator secures ministerial approval, signs a power purchase agreement by the end of 2024, and ensures the plant is operational by the first half of 2026. Additionally, the solar panels must be sourced from companies that commit to investing in a production facility in Indonesia.
The adjustment does not represent a complete departure from the existing local content requirements but rather an alteration to balance the need for foreign investment with the growth of local industries. It remains to be seen whether this new regulation will successfully achieve this balance or if Jakarta will need to implement more significant changes to its LCR framework further.
(Source: The Diplomat)
