Unbundling Electricity Business Activities: A Threat to State Control?
On 29 November 2024, the Indonesian Constitutional Court (Mahkamah Konstitusi or “MK”) issued decision number 39/PUU-XXI/2023 (“MK Decision 39”) which might affect the Independent Power Producer (“IPP”) business scheme in Indonesia due to its “unbundling” nature.
Unbundling Electricity Business
The concept of unbundling electricity business activities is outlined in Article 10, paragraphs (1) and (2) of Law No. 30 of 2009 on Electricity, as amended by Law No. 6 of 2023 (“Electricity Law”). This law categorizes electricity business activities into four segments: (i) generation; (ii) transmission; (iii) distribution; and/or (iv) sale (“Electricity Businesses”), which, according to it, may be conducted in an integrated manner. Previously, the use of the word “may” allowed these activities to be conducted either in an integrated manner or separately, giving businesses the flexibility to choose their model.
Nevertheless, MK Decision 39 has declared the phrase “may” in Article 10, paragraph (2) unconstitutional and has no binding force, arguing that allowing IPP to unbundle Electricity Businesses undermines state control over electricity operations, as mandated by the 1945 Indonesian Constitution. This ruling suggests that, if followed, the unbundling of electricity generation, transmission, distribution, and sale may no longer be permissible in Indonesia.
Historical Context over Unbundling Electricity Business
This is not the first time MK has ruled against unbundling in the electricity sector. Previous decisions include:
- MK Decision No. 001-021-022/PUU-I/2003 dated 15 December 2004
In this decision, MK annulled Law No. 20 of 2002 on Electricity (“Law 20/2002”), arguing that unbundling would weaken the state-owned entities and compromise electricity reliability to both commercial and non-commercial sectors. Additionally, MK found that unbundling is neither profitable nor efficient, instead becoming a heavy burden for the state. The court deemed the unbundling scheme contrary to Article 33 of the 1945 Indonesian Constitution, emphasizing that electricity supply for the public interest must remain under state control to ensure reliability and efficiency.
- MK Decision No. 111/PUU-XIII/2015 dated 14 December 2016 (“MK Decision 111”)
In this decision, MK ruled that unbundling electricity business activities as governed under Article 10 paragraph (2) of Law No. 30 of 2009 on Electricity before amended by Law No. 6 of 2023 (“Electricity Law 2009”) is conditionally unconstitutional if it is construed to justify the practice in such a way that eliminates state control.
The Directorate General of Electricity of the Minister of Energy and Mineral Resources (“DGE”), through Press Release No. 00122.Pers/04 dated 15 December 2016 (“MEMR Statement 0122”), stated that this decision does not revoke relevant articles of the Electricity Law 2009 but serves as guidance to avoid policies contradicting the 1945 Constitution. The DGE also stated that the government retains control over the electricity tariffs, distribution and sale areas, licensing, electricity prices, and lease of electricity networks. They also assured that the government’s 35,000 MW electricity project would not be affected by the decision and would ensure no implementing regulations contradict MK Decision 111.
The recent MK Decision 39 reiterates the court's stance against unbundling, asserting that the amendments introduced by Law No. 6 of 2023 on the Stipulation of Government Regulation in Lieu of Law No. 2 of 2022 on Job Creation into Law (“Job Creation Law”) had “reactivated” the unbundling scheme under Article 10 paragraph (2) of Electricity Law 2009, which MK had previously declared to be conditionally unconstitutional and have no binding force under MK Decision 111.
What does the future have in store?
The immediate impact of MK Decision 39 on existing and future unbundled electricity business activities by IPPs remains uncertain. While the ruling is final and binding, the lack of guidance on the implementation of MK Decision 39 from the Ministry of Energy and Mineral Resources (“MEMR”) leaves many questions unanswered.
On 9 December 2024, MEMR issued a press release No. 648.Pers/04/SJI/2024 (“MEMR Statement 648”) acknowledging the MK Decision 39 and announced ongoing discussion with various stakeholders to interpret its legal ramifications. They advised all relevant parties to wait for the official policy that will be applied by the government in response to the decision. MEMR also stated that they will review all electricity-related regulations to ensure that the supply of electricity, a crucial sector impacting many lives, remains firmly under state control.
Given its uncertainty, it is advisable for stakeholders to await further clarification from the government. The development of new projects and the continuation of existing unbundled projects may be affected, including whether such a decision applies with retroactive effect. Stakeholders are urged to stay informed and prepared for potential changes in the regulatory landscape.
***
By partners Mr. Emir Nurmansyah (enurmansyah@abnrlaw.com), Ms. Serafina Muryanti (smuryanti@abnrlaw.com), Mr. Maher Sasongko (msasongko@abnrlaw.com), associates Ms. Adya Sepasthika (asepasthika@abnrlaw.com), Mr. Kenny Poltak (kadrianus@abnrlaw.com), and Jason Daniel Edgar (jedgar@abnrlaw.com).
This ABNR News and its contents are intended solely to provide a general overview, for informational purposes, of selected recent developments in Indonesian law. They do not constitute legal advice and should not be relied upon as such. Accordingly, ABNR accepts no liability of any kind in respect of any statement, opinion, view, error, or omission that may be contained in this legal update. In all circumstances, you are strongly advised to consult a licensed Indonesian legal practitioner before taking any action that could adversely affect your rights and obligations under Indonesian law.
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NEWS DETAIL
16 Jan 2025
Unbundling Electricity Business Activities: A Threat to State Control?
On 29 November 2024, the Indonesian Constitutional Court (Mahkamah Konstitusi or “MK”) issued decision number 39/PUU-XXI/2023 (“MK Decision 39”) which might affect the Independent Power Producer (“IPP”) business scheme in Indonesia due to its “unbundling” nature.
Unbundling Electricity Business
The concept of unbundling electricity business activities is outlined in Article 10, paragraphs (1) and (2) of Law No. 30 of 2009 on Electricity, as amended by Law No. 6 of 2023 (“Electricity Law”). This law categorizes electricity business activities into four segments: (i) generation; (ii) transmission; (iii) distribution; and/or (iv) sale (“Electricity Businesses”), which, according to it, may be conducted in an integrated manner. Previously, the use of the word “may” allowed these activities to be conducted either in an integrated manner or separately, giving businesses the flexibility to choose their model.
Nevertheless, MK Decision 39 has declared the phrase “may” in Article 10, paragraph (2) unconstitutional and has no binding force, arguing that allowing IPP to unbundle Electricity Businesses undermines state control over electricity operations, as mandated by the 1945 Indonesian Constitution. This ruling suggests that, if followed, the unbundling of electricity generation, transmission, distribution, and sale may no longer be permissible in Indonesia.
Historical Context over Unbundling Electricity Business
This is not the first time MK has ruled against unbundling in the electricity sector. Previous decisions include:
- MK Decision No. 001-021-022/PUU-I/2003 dated 15 December 2004
In this decision, MK annulled Law No. 20 of 2002 on Electricity (“Law 20/2002”), arguing that unbundling would weaken the state-owned entities and compromise electricity reliability to both commercial and non-commercial sectors. Additionally, MK found that unbundling is neither profitable nor efficient, instead becoming a heavy burden for the state. The court deemed the unbundling scheme contrary to Article 33 of the 1945 Indonesian Constitution, emphasizing that electricity supply for the public interest must remain under state control to ensure reliability and efficiency.
- MK Decision No. 111/PUU-XIII/2015 dated 14 December 2016 (“MK Decision 111”)
In this decision, MK ruled that unbundling electricity business activities as governed under Article 10 paragraph (2) of Law No. 30 of 2009 on Electricity before amended by Law No. 6 of 2023 (“Electricity Law 2009”) is conditionally unconstitutional if it is construed to justify the practice in such a way that eliminates state control.
The Directorate General of Electricity of the Minister of Energy and Mineral Resources (“DGE”), through Press Release No. 00122.Pers/04 dated 15 December 2016 (“MEMR Statement 0122”), stated that this decision does not revoke relevant articles of the Electricity Law 2009 but serves as guidance to avoid policies contradicting the 1945 Constitution. The DGE also stated that the government retains control over the electricity tariffs, distribution and sale areas, licensing, electricity prices, and lease of electricity networks. They also assured that the government’s 35,000 MW electricity project would not be affected by the decision and would ensure no implementing regulations contradict MK Decision 111.
The recent MK Decision 39 reiterates the court's stance against unbundling, asserting that the amendments introduced by Law No. 6 of 2023 on the Stipulation of Government Regulation in Lieu of Law No. 2 of 2022 on Job Creation into Law (“Job Creation Law”) had “reactivated” the unbundling scheme under Article 10 paragraph (2) of Electricity Law 2009, which MK had previously declared to be conditionally unconstitutional and have no binding force under MK Decision 111.
What does the future have in store?
The immediate impact of MK Decision 39 on existing and future unbundled electricity business activities by IPPs remains uncertain. While the ruling is final and binding, the lack of guidance on the implementation of MK Decision 39 from the Ministry of Energy and Mineral Resources (“MEMR”) leaves many questions unanswered.
On 9 December 2024, MEMR issued a press release No. 648.Pers/04/SJI/2024 (“MEMR Statement 648”) acknowledging the MK Decision 39 and announced ongoing discussion with various stakeholders to interpret its legal ramifications. They advised all relevant parties to wait for the official policy that will be applied by the government in response to the decision. MEMR also stated that they will review all electricity-related regulations to ensure that the supply of electricity, a crucial sector impacting many lives, remains firmly under state control.
Given its uncertainty, it is advisable for stakeholders to await further clarification from the government. The development of new projects and the continuation of existing unbundled projects may be affected, including whether such a decision applies with retroactive effect. Stakeholders are urged to stay informed and prepared for potential changes in the regulatory landscape.
***
By partners Mr. Emir Nurmansyah (enurmansyah@abnrlaw.com), Ms. Serafina Muryanti (smuryanti@abnrlaw.com), Mr. Maher Sasongko (msasongko@abnrlaw.com), associates Ms. Adya Sepasthika (asepasthika@abnrlaw.com), Mr. Kenny Poltak (kadrianus@abnrlaw.com), and Jason Daniel Edgar (jedgar@abnrlaw.com).
This ABNR News and its contents are intended solely to provide a general overview, for informational purposes, of selected recent developments in Indonesian law. They do not constitute legal advice and should not be relied upon as such. Accordingly, ABNR accepts no liability of any kind in respect of any statement, opinion, view, error, or omission that may be contained in this legal update. In all circumstances, you are strongly advised to consult a licensed Indonesian legal practitioner before taking any action that could adversely affect your rights and obligations under Indonesian law.