Problems with non-geothermal regulations

Policymakers have had to address several regulatory conflicts arising from the geothermal framework under Law No. 27/2003, which fostered investment uncertainties and necessitated time-consuming processes to harmonise different views and regulations (Ginting et al. 2010, p. 5; Interview 16). Although the geothermal framework under Geothermal Law No. 27/2003 grandfathers all terms and conditions of existing geothermal operations in the old GWAs, developers faced disputes with local governments on tax issues. It took the central government several years to reach an

understanding with regional governments on the proper allocation of tax revenues (Ginting et al. 2010, pp. 3–4).53

Moreover, the fiscal decentralisation process also blurred the lines of authority between central and regional governments in regard to issuance of geothermal mining licenses (Izin Usaha Pertambanganan Panas Bumi (IUP)). Local governments claimed the rights for IUP issuance for themselves in the wake of fiscal decentralisation. However, Geothermal Law No. 27/2003 and GR No. 59/2007 state that both central and local governments have the right to issues the IUPs. The current interpretation by policymakers is that the regional government processes the IUP but with significant input from the MEMR in Jakarta (PWC 2011, p. 49).

One peculiarity of the regulatory framework is that the core of geothermal activities, the production of steam, is regulated under the 2003 Geothermal Law, but power generation is covered under the 2009 Electricity Law (Interview 1). This means there are two different regulatory regimes dealing with electricity generation from geothermal plants. This adds to administrative hurdles in processing the necessary documents for geothermal developers. Thus, project developers need to obtain an IUP and an IUKU to operate a fully integrated operation. Under the previous regulations, licences were integrated under the Joint Operation Contract arrangement (PWC 2011, p. 23).

The negative investment list provides another impediment to increased foreign investment flows into the geothermal sector. As stipulated in Presidential Regulations (PRs) No. 77/2007, 11/2007 and 36/2010, certain business activities in several sectors are either closed or impose limits to foreign investors. For example, all projects below a generation capacity of 10 MW are open to Indonesian developers only. Moreover, these projects need to be implemented in partnership with small/medium business and cooperatives, but the requirements for this cooperation are not clearly spelled out in the regulations. Lastly, support services in the geothermal sector such as OM and drilling allow only 90–95 per cent foreign ownership in equity shares (Norton Rose 2012).

53_{Amendment to Decentralization Laws No.22 and 25/1999): Law on Regional Autonomy No.32/2004}

Geothermal project developers also face laws to regulate forest land and protect conservation forests. Forest Law No. 41/199954 _{prevents specific economic activities to}

take place in the absence of government permits. This has caused uncertainties in the geothermal investment community, as many promising geothermal fields are located in protected forests. Only in February 2010, a Presidential Decree (PD) allowed for ‘strategic’ activities, including power plants, in protected forests.

The DG of Forest Protection and Nature Conservation under the MoEF has announced that geothermal projects do not need to obtain permits anymore to operate in protected forests, but they need to enter into profit-sharing arrangements with conservation funds to be paid to the MoEF (PWC 2011, p. 26). Energy projects of national significance are also exempted from a 2011 moratorium on permits for forest and peat land clearing. Geothermal Law No. 21/2014, finally allowed for geothermal activities to be conducted in production, protected and conservation forests.

Chevron, for instance, faced conflicting regulations that directly impacted its operations in both Darajat and Salak fields. The forest land status of the Salak geothermal field had been a conflict that had to be resolved with the MoEF. In 2003, the MoEF issued Decree No. 126 to change the status of the land from a ‘protected forest’ to a ‘national park’. Geothermal activities under the Forestry Law No. 41/1999 were prohibited. There were long negotiations with the MoEF until the conflict was resolved when the Ministry issued a letter and regulations that accommodated continued geothermal activities within national parks, because the approval of the geothermal field pre-dated the Forestry Law (Ginting et al. 2010; Interview 16).

Finally, land acquisition laws provide another set of hurdles for developers to clear before starting operation of power plants. For a long time, the prevalent regulatory instruments contained significant limitations to the extent investors could appropriate land (PWC 2011, p. 26).55 _{It was not until December 2011 that Parliament (DPR)}

approved a new Land Acquisition Law, designed by the National Land Agency. It imposes clear time limits on the land acquisition process and provides more investment

54 _{Together with amendments of 1/2004 and 19/2004.}

certainty, but this depends, again, on the timely and transparent implementation of GRs.56

An example is Star Energy’s Wayang Windu operations, for which PLN originally agreed to build two transmission lines for Unit 2. This was supposed to be completed in 2008, but as of 2011, PT Star Energy was still waiting for the line to be completed. The main reason is that the owners of two small parcels of land put up resistance. In many countries there are land laws, based on the principle of eminent domain, which state that the government will pay a fair price and compensate for land that is compulsorily acquired. This does not exist in Indonesia and people can hold on to their land. The new land law should improve the situation (Interview 15).