Indonesia with its abundant natural resources, competitive land and labor prices, and supportive foreign investment policies, is an attractive destination for foreign investors, particularly for establishing factories. However, to ensure investment success, especially in energy-intensive sectors such as mining, textiles, and medical equipment production, it is crucial for investors to consider energy solutions, including the establishment of captive power plants. Captive power plants are electricity generation facilities owned and operated by a company to meet its internal energy needs, rather than for public sale.
Captive power plants are primarily built to provide a stable and reliable electricity supply for the companies that establish them. This is often necessary for industries with high energy consumption or in locations with unstable electricity supply. Unlike relying on public electricity grids, captive power plants offer greater flexibility and control over the electricity supply. This is particularly important in areas experiencing fluctuations in electricity supply or instability in electricity prices. Captive power plants can help reduce long-term energy costs for companies, especially when public electricity prices are high or unstable. Additionally, they can reduce reliance on external electricity providers and enhance the company’s energy independence.
Establishing captive power plants in Indonesia’s industrial areas can be an important step in supporting industrialization and meeting energy needs. This process involves adhering to strict legal requirements, signing various electricity supply and sale agreements, and maintaining ongoing operational management.
Establishing a captive power plant in Indonesia requires compliance with strict regulations. Companies must obtain several essential permits, including the Business Permit for Electricity Supply for Own Use (IUPTLS), which is required if the plant’s capacity exceeds 500 kilowatts. If the capacity is less, only a report to the General Electricity Authority is needed. The Location Permit must be applied for based on the project’s location. The Environmental Permit is necessary to ensure the project’s impact on the environment is controlled. This process involves submitting an Environmental Impact Analysis (AMDAL) report and obtaining approval from local environmental departments. Building Approval involves reviewing design drawings, construction plans, and safety evaluations. The project must be carried out by a licensed electricity support services contractor. Compliance with Employment and Safety regulations requires adherence to labor and safety regulations and establishing a comprehensive safety management system.
The process of establishing a captive power plant involves agreements on electricity supply and sale, including the Power Purchase Agreement (PPA), which is a contract between the power plant and the buyer, usually PT PLN. The PPA sets terms such as price, duration, and supply requirements and must comply with the policies of the Ministry of Energy and Mineral Resources. Network Access Agreements are needed to transmit electricity outside the area, requiring companies to sign agreements with PT PLN or other operators, covering transmission and maintenance costs. The Electricity Sale Agreement (ESA) for direct sales must specify the location, quality standards, and payment methods. If a company cannot meet all its electricity needs, it can lease electricity facilities or cooperate with other power plants.
After establishment, the success of a captive power plant operation requires strict management and compliance. The Feasibility Certification (SLO) from the National Electricity Safety Committee confirms that the facility meets safety standards. Environmental Compliance requires adherence to emission and noise regulations, with routine monitoring reports submitted. Social Impact Management (ESG) involves considering the impact on local communities, including managing emissions, water use, and noise. The company must provide fair compensation and collaborate with the local community. Risk Management addresses challenges such as fluctuating demand and changes in government policies, requiring companies to have emergency plans and effective maintenance systems to handle unexpected risks.
With flexible operational strategies, strict regulatory compliance, and effective risk management systems, companies can ensure project success and contribute to local economic development and community welfare. Overall, captive power plants offer a strategic solution for companies needing reliable and flexible energy sources, provided they comply with applicable regulations and manage operations and environmental impacts effectively.
If you, a prospective client, have further inquiries about the topic discussed above, Schinder Law Firm is one of many corporate law firms in Indonesia that has handled numerous similar matters, with many experienced and professional corporate and civil lawyers in its arsenal, making it one of the top consulting firms in Indonesia. Feel free to contact us at info@schinderlawfirm.com for further consultation.
Author:
Dewi Susanti