Home Blog Indonesia is Opening More Opportunities in Power Sectors for Foreign Investment Business Setup | Company Registration | Representative Office Indonesia is Opening More Opportunities in Power Sectors for Foreign Investment InCorp Editorial Team 21 February 2022 4 minutes reading time Table of Contents Transitioning from Brown to Green Energy A Way to Becoming Part of Indonesia’s Great Transition Establishing a Representative Office for Power Supporting Companies According to PwC, Indonesia is well on its way to becoming the 4th largest economy in the world by 2050. Indonesia’s level of growth has constantly been on an uphill climb, with one primary industry that could easily benefit the energy industry. The government has set a 23% renewable energy target for the final energy consumption by 2025. An additional target is 25% of renewable energy generated by the power sector, which currently accounts for the largest share. However, the Indonesian energy market has historically failed to gain significant traction and attract foreign investments due to frequent regulation changes and unappealing incentives. This market, controlled mainly by PLN or the State Electricity Company, has been preparing a detailed plan regarding demand, customers, electrification, transmission, and distribution systems for over ten years. One such policy sees foreign investors transferring their projects to PLN at the end of every agreement period. This has proven less successful in increasing contributions from other renewable energy sources and has resulted in concern regarding return on investment. Transitioning from Brown to Green Energy Indonesia has shown its intent to transition to green energy through the gradual phase-out of oil, high-speed diesel, marine fuel oil, and industrial diesel oil. However, there is still a relatively high reliance on coal which will also be phased out to realize Indonesia’s Nationally Determined Contribution: a low-carbon future. Indonesia commits to reducing emissions up to 29% by 2030. Hydropower and geothermal energies are well developed in Indonesia and are at the core of PLN’s future expansion plans. The Indonesian government is optimistic about transitioning towards renewables while accelerating a green tech-based economy. The government plans to utilize energy storage technologies and nuclear energy usage to achieve the ambitious goals. There are ample opportunities related to Independent Power Producers developed and financed privately. The UK especially offers world-leading expertise in the renewable energy sector for foreign investment. It can benefit from downstream opportunities created by Indonesia’s business policies in the technical and market assistance areas. Another example can be found in consulting and engineering studies, supplying electro-mechanical equipment, and Engineering, Procurement and Construction (EPC) management, among others. A Way to Becoming Part of Indonesia’s Great Transition The energy regime in Indonesia is primarily based on privately owned and funded power producers that sell power to PLN by entering into a Power Purchasing Agreement (PPA). To ensure continuous growth of the sector, the Indonesian government has made it possible for foreigners to become part of the power industry and even the great transition into renewable energy. Companies benefit from and succeed by establishing solid relationships with essential stakeholders and ground actors. Foreign companies often opt to develop offices in Indonesia to conduct market intelligence and, more importantly, liaise with PLN. Having a local office is also integral for the company’s growth as the Indonesian market is not transactional. It may also be worth noting that foreign businesses should account for the possibility of changes in the regulatory and permit regime of the renewable energy sector as they are often adjusted to meet Indonesia’s ambitious goals. Establishing a Representative Office for Power Supporting Companies Foreigners looking to be part of the Indonesian power market often set up FROs, which are Foreign Representative Offices looking to engage in the power supporting business. The activities of FROs are limited to consultancy, construction, and maintenance of power installation. FROs are only able to perform activities that are of high cost. This requirement is set out through the minimum value of work. Aside from that, FROs are also required to enter into a joint operation with a local power supporting service entity, employ more Indonesians than foreigners, prioritize local products, appoint an Indonesian as the head, and hold an essential qualification under Indonesian standards. These requirements are tangible proof of the Indonesian government’s scheme to increase the opportunities for work for Indonesians. It often may be challenging to employ and manage Indonesian workers due to the complex manpower laws in Indonesia. Cekindo offers human resource and recruiting services to ease the burden for businesses looking to set up in Indonesia. Businesses looking to do mechanical or electrical work relating to the power supply must acquire their license and certifications from the Directorate General of Electricity. Companies that conduct business concerning civil structure need to obtain certification in construction services from the Ministry of Public Works and Housing and the license and accreditation acquired from the Directorate General of Electricity. The business licensing process in Indonesia has gone through significant changes due to the recently enacted Omnibus Law, businesses may benefit from the services provided by Cekindo on business licensing. Read Full Bio Verified by Daris Salam COO Indonesia at InCorp Indonesia With more than 10 years of expertise in accounting and finance, Daris Salam dedicates his knowledge to consistently improving the performance of InCorp Indonesia and maintaining clients and partnerships. Frequently Asked Questions What kind of license does a PMA company need to get? In Indonesia, the licensing system has been updated with the implementation of the Omnibus Law. Businesses are categorized into four risk levels based on the PMA company classification. Licensing requirements vary accordingly, with three main types: Business Identification Number (NIB) Low-risk businesses needing only an NIB Standard Certification Standard Certification is necessary for medium-low and medium-high-risk businesses Licenses/Permits High-risk businesses require licenses/permits Additionally, basic requirements, including business location, must be met. Many licensing processes are facilitated through the Online Single Submission (OSS) platform managed by the Investment Coordinating Board (BKPM). Are there investment facilities provided for foreign investors in Indonesia? A newly established PMA company in Indonesia is typically provided with import facilities, tax holidays, tax allowances, or investment allowances. Import facilities Investors in Indonesia, particularly in manufacturing, may benefit from import tax exemptions for capital goods and raw materials through the Master List Facility. The imported goods must meet specific criteria, such as not being produced locally or not meeting industry demand despite local production. Tax holiday The government offers CIT reductions of 50% or 100% for 5–20 years for listed pioneer industries, based on investment value. After this period, a CIT reduction of 25% or 50% applies for two fiscal years. Non-listed sectors can also apply by meeting criteria demonstrating pioneer industry status. Pioneer industries are industries that have a wide range of connections, provide additional value and high externalities, introduce new technologies, and have strategic value for the national economy. Tax allowance For companies in certain designated areas or regions, the government may provide the following tax concessions: Net income reduction up to 30% of the amount invested, prorated at 5% annually for six years, on condition that the assets invested are retained for the same duration. Accelerated depreciation and/or amortisation deductions An extension of tax losses carried forward for a maximum of ten years A 10% (or lower if treaty relief is available) withholding tax rate on dividends paid to non-residents The applicant eligible has to meet high-level-criteria for the above tax facilities: High investment value or for export purposes High manpower absorption High level of local content Investment allowance The government offers a reduction in net income of up to 60% of the investment, distributed at 5% annually over six years of commercial production, contingent upon the retention of invested assets for the same duration. To qualify, applicants must meet business line eligibility criteria and employ a minimum of 300 Indonesian workers in the project. Super deduction This facility could be granted to certain businesses, such as: 60% reduction in net income of the amount of tangible fixed assets invested for labor-intensive industries, distributed throughout a certain time frame. Up to 200% reduction in the gross income of the amount spent for human resources development in certain competency activities. Up to 300% reduction in gross income of the amount spent for certain R&D activities in Indonesia. Can investors own shares with preferential rights? Under Indonesian Company Law, shareholders can hold shares with various preferential rights, such as voting rights, nomination rights for board members, priority dividend or liquidation proceeds, and options for conversion or withdrawal after a set period. Can Investors 100% own a PT PMA Company? According to Presidential Regulation No. 10/2021 and the amended version, all businesses are open for domestic and foreign investment with these limitations and classifications: Eight businesses are closed to foreign investment and may be operated by the central government. Designated business sectors or joint ventures with cooperatives (koperasi) and micro, small, and medium enterprises Open businesses are subject to specific conditions, such as those that are exclusively available to 100% local investors, those with restricted foreign shareholding, and investments requiring special licenses Certain sectors are closed to foreign investment, including narcotics cultivation, gambling, and environmental conservation activities.