Indonesia Reduces Local Content Requirements to Boost Green Energy Investments

The Indonesian government has relaxed the local content requirements (LCR) for the development of electricity infrastructure under Ministry of Energy and Mineral Resources regulation 11 of 2024 (MEMR 11/2024) in a move aimed at attracting concessional funding for renewable energy projects from international development banks.

Indonesia is targeting a renewable energy mix of 23 percent by 2025, requiring an estimated US$167 billion to achieve this goal. The relaxation of LCR is expected to unlock significant foreign investment, which is crucial for meeting these ambitious targets. Reducing the LCR could also expedite the disbursement of funds from foreign lenders, such as those under the Just Energy Transition Partnership (JETP).

The Just Energy Transition Partnership (JETP)

The JETP is a new model for international cooperation on country-specific efforts to combat climate change. The model combines public and private investments to assist with climate financing for developing countries, particularly to transition energy generation away from fossil fuels. In addition to driving energy transition, the JETP model seeks to promote the green economy and address the economic and social needs of communities that are vulnerable to the effects of energy transitions.

JETP aims to mobilize US$20 billion over the next three to five years toward Indonesia’s adoption of renewable energy.

What are the new minimum local content requirement values?

Under MEMR 11/2024, the new minimum local content values are as follows.

• Geothermal powerplants – 20-29% depending on the capacity type
• Hydropower plants – 23-45% depending on the capacity type
• Solar powerplants – 20%
• Wind powerplants – 15%
• Biomass powerplants – 21%
• Biogas powerplants – 25.19%
• Waste powerplants – 16.53%

Exceptions for local content requirements

MEMR 11/2024 introduces several types of exceptions for the local content requirements. These fall under two categories; general exceptions, and projects funded by foreign loans.

General exceptions

The importation of goods for electricity infrastructure development is generally permitted under the following conditions:

1. The goods are not available from domestic producers;
2. Domestically produced goods do not meet the required technical specifications for the project; and/or
3. Domestic production is insufficient to meet demand, as verified by the relevant manufacturer or manufacturers’ association.

An independent verification agency must confirm compliance with any of the above conditions.

Projects funded by foreign loans

Electricity infrastructure projects funded by foreign loans are subject to local content requirements unless stated otherwise in the foreign loan agreement.

These exceptions are for projects that fulfill the following conditions:

• Up to 50 percent of the funding for the electricity infrastructure project is from multilateral or bilateral creditors; and
• The exception is intended for one project to fulfill the domestic electricity requirements.

The exception for electricity infrastructure projects funded by foreign loans or grants marks a significant shift from the previous system, where developers had to seek exemptions based on the “General Exceptions” criteria. This prior approach often placed the Ministry of Industry (MOI) in a challenging position of justifying any exemptions that were granted.

The potential impact of the LCR waiver

The introduction of the LCR waiver is a transformative step for Indonesia’s renewable energy sector. Initially, LCRs were designed to foster the growth of domestic goods and services in the supply chain. However, the slow progress of local supply chains, both in terms of quality and cost, combined with restrictive LCR policies, has hampered the sector’s growth. These issues created uncertainties that discouraged investment and impacted the bankability of projects, especially given the thin profit margins in the renewables sector, which is highly sensitive to supply chain inefficiencies and cost fluctuations.

By easing LCR requirements, Indonesia aims to address these challenges and attract more foreign investment into renewable energy projects. This policy is particularly relevant in the context of the JETP, which has experienced delays in fund distribution due to the restrictive nature of the original LCR regime. If effectively implemented, the LCR waiver could unlock substantial funding and stimulate rapid growth in Indonesia’s renewable energy sector.

Looking ahead: Opportunities and challenges

While introducing the LCR waiver presents significant opportunities, its success will depend on how consistently PLN and other stakeholders implement it in future power purchase agreements. Additionally, there is still a need to balance the promotion of local industries with the demand for high-quality, cost-effective solutions for renewable energy projects.

Another potential challenge lies in ensuring that the relaxed LCR policies do not undermine the long-term development of local supply chains. To strike this balance, the government may introduce additional policies to foster local capabilities while leveraging foreign investment and expertise.

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