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Indonesia – New Geothermal Law.

6 January, 2015

 

Legal News & Analysis – Asia Pacific – Indonesia – Energy & Project Finance

 

On 17 September 2014, the President of the Republic of Indonesia ratified and signed Law No. 21 of 2014 on Geothermal (New Geothermal Law) which introduces a new regime for geothermal business activities. The New Geothermal Law aims to accelerate the development of geothermal activities as an alternative energy source, as Indonesia has significant geothermal resources which have been underutilised so far. The New Geothermal Law replaces the existing Law No. 27 of 2003 on Geothermal (2003 Geothermal Law).


Why This Is Of Interest


The New Geothermal Law introduces new licenses in relation to geothermal activities which removes it from the sphere of mining activities (with the intention again of reducing the difficulties with developing these resources). These are (i) a Direct Use Permit (Izin Pemanfaatan Langsung) for direct utilisation of geothermal energy (i.e. activities that utilise geothermal resources for purposes other than generating electricity, covering tourism, agribusiness, industry and other business activities), and (ii) a Geothermal License (Izin Panas Bumi) for indirect utilisation of geothermal energy (ie electricity). Accordingly, the old Geothermal Mining Business License (Izin Usaha PertambanganPanas Bumi or IUP Panas Bumi), awarded under the 2003 Geothermal Law, is not acknowledged any more, subject to the transitional provisions mentioned below.


The New Geothermal Law appoints the Minister of Energy and Mineral Resources (MEMR), as the sole authority to organise and manage indirect utilisation of geothermal activities.
Provincial and regional governments used to manage all geothermal activities within their jurisdiction, but are now only  authorised to manage direct utilisation (i.e. non-electricity usage). This is intended to simplify the bureaucracy around the issuance of the Geothermal License, including bidding, and the ensuing management.


The New Geothermal Law requires the holder of a Geothermal License to pay a production bonus to the regional government, calculated as a percentage of gross income after first commercial production.


The law states the price of the geothermal energy will be set by central government. This is currently governed by MEMR  Regulation 17 of 2014, but the expectation is that there will be a further implementing regulation in due course.


The other matter that should be noted is the transition provisions for existing geothermal licenses. Under the New Geothermal Law, provided that exploitation has commenced by no later than 31 December 2014:

 

  • all pre-existing Geothermal Resources Authorisations (Kuasa Pengusahaan Sumber Daya Panas Bumi) remain valid for 30 years from the promulgation of the New Geothermal Law;
  • all Geothermal Joint Operation Contracts (Kontrak Operasi Bersama Pengusahaan Sumber Daya Panas Bumi) signed prior to the effective date of the New Geothermal Law remain valid until the expiration of the contracts; and
  • all Geothermal Resources Permits (Izin Pengusahaan Sumber Daya Panas Bumi) existing prior to the New Geothermal Law coming into effect remain valid until the expiration of those permits.

However, all Geothermal Mining Business Licenses existing prior to the New Geothermal Law must be adjusted into Geothermal Licenses issued by the Minister and then remain valid until the expiration of the permits. The MEMR will also issue Geothermal Licenses for companies which are already determined as the winning bidder of an indirect utilisation working area but have not been issued with a Geothermal License.


The requirement that pre-existing licenses only transition if the exploitation phase has started by the end of 2014 is problematic, because many projects will not have progressed that much and it would be considered onerous to apply afresh for a license. We expect that there will be further policy development on this to clarify the regime in this area.


All existing geothermal companies must provide production bonuses to the relevant regional governments as follows: (i) for those already in production, commencing 1 January 2015; and (ii) for those not yet in production, from the date of first commercial production.


The New Geothermal Law specifically obliges geothermal companies to obtain non-MEMR licenses (i.e. environmental license and forestry license). The forestry licence requirement is an issue because a high proportion of geothermal areas in Indonesia are in forest areas and a borrow-to-use permit for forests takes a long time to obtain.


The New Geothermal Law introduces administrative sanctions which previously were not specifically regulated under the 2003 Geothermal Law. On criminal sanctions, the New Geothermal Law provides longer prison sentences and higher fines for breach.
Lastly, unlike the 2003 Geothermal Law, the New Geothermal Law restricts the transfer of Geothermal Licenses to other companies.

 

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For further information, please contact:

 

Sean Prior, Partner, Ashurst
sean.prior@ashurst.com

 

Energy & Project Finance Law Firms in Indonesia

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