The Indonesian government plans to simplify and reduce local content requirements (TKDN) in the electricity sector to at least 25 percent to boost investment in renewable energy, which has been moving at a snail pace due to various barriers, especially unattractive pricing and the restrictive TKDN itself.

The government plans to revoke Industry Ministerial Regulation No. 54/2012 on local content requirements for the electricity sector, which has set different local content requirements for each type of electricity generations with different capacity, transmissions, substations and even electricity distribution networks.

The 2012 industry ministerial regulation, for example, sets local content requirements for micro hydro power plant of up to 15 megawatts (MW) at 64.2 percent for material goods, 86.02 percent for services and 70.76 percent for a combination of goods and services. The regulation sets different requirements for goods, services and a combination of goods and services for different capacities of hydropower plants, i.e. 15 to 50 MW capacity (with combined local content requirements of 51.6 percent), 50 to 150 MW capacity (49 percent) and over 150 MW capacity (47.6 percent). That is only for hydro power plants. The regulation also sets different rules for different capacities of coal-fired power plants, geothermal, gas and solar power plants.

The decision to revoke the industry ministerial regulation was taken following a joint ministerial meeting hosted by Coordinating Maritime Affairs and Investment Minister Luhut Binsar Pandjaitan. When the industry ministerial regulation is revoked, the regulation on local content would revert to Government Regulation no. 29/2018, which sets local content requirements for all industries at 25 percent.¹ 

The problematic industry ministerial regulation has been seen as discouraging investment into renewable energy because the local content requirements often inflate the costs or, in the case of solar energy, local producers just do not enough capacity to meet the requirements. Currently, Indonesia only has one manufacturer capable of producing solar modules with a capacity of 560 watt-peak, while most other manufacturers can only produce modules with a capacity of 450 watt-peak. The other 21 suppliers are assembling companies that import solar cells from abroad. As a result, domestically produced solar modules are about 30-44 percent more expensive than imported products.² 

Thus, the revocation of the industry ministerial regulation is expected to attract more investment into renewable energy, which has been fluctuating at a lower base of below US$2 billion a year. Realized investment in the renewable energy amounted to US$1.55 billion in 2021, or below the government target of $2.04 billion, $1.5 billion in 2022 and $1.48 billion in 2023. This year, the government has set the target of realized investment in renewable energy at $2.6 billion.

According to state electricity company PT PLN, there are nine projects with total investment of Rp 51 trillion ($3.18 billion) facing funding problems because of local content requirements. PLN executive vice president of renewable energy Zainal Arifin explained international financial institutions like the World Bank, Asian Development Bank (ADB) and Japan International Cooperation Agency (JICA) could not disburse their loans due to local content requirements because their funding sources were from multiple countries.³  Thus, with the revocation of the ministerial regulation on local contents, funding for these nine projects shall have no more barriers to proceed.

Nine renewable energy projects with foreign funding hindered by local content requirements: