CDM Development in Indonesia NEDO 2006-2

CDM Development in Indonesia -Enabling Policies, Institutions and

Programmes, Issues and Challenges 2006 (Second Edition)

New Energy and Industrial Technology Development Organization

(NEDO)

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CDM Development in Indonesia-Enabling Policies, Institutions and Programmes, Issues and Challenges 2006 (Second Edition) Compiled by “CDM development in Indonesia” Editorial Team in Cooperation with Yayasan Pelangi Indonesia, under the Supervision of NEDO Representative Office in Jakarta. “CDM development in Indonesia” Editorial Team: Supervisor : Mr. Masanori Kobayashi, Chief Representative, NEDO Jakarta Office Chief Editor : Ms. Moekti H. Soejachmoen, Executive Director, Yayasan Pelangi Indonesia Coordinator : Ms. Yamada Fumiko, Expert Staff, NEDO Jakarta Office Editorial Staff : Ms. Suryani Aris, Researcher, Yayasan Pelangi Indonesia : Ms. Martha Maulidia, Researcher, Yayasan Pelangi Indonesia : Mr. Lauri Myllyvirta, Intern, Yayasan Pelangi Indonesia All rights reserved. No part of this report may be reproduced or quoted in any form by any means, without the written permission of New Energy and Industrial Technology Development Organization (NEDO).

7th Floor Summitmas I Jl. Pangeran Antasari No. 10 Jl. Jend. Sudirman Kav. 61-62 Kebayoran Baru – Jakarta 12150 Jakarta 12190 Ph. (62-21) 7280 1172 Ph. (62-21) 252 3480 Fax (62-21) 7280 1174 Fax (62-21) 252 3478 E-mail: [email protected] www.nedo.go.jp www.pelangi.or.id

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Glossary ACE The ASEAN Centre for Energy,

http://www.aseanenergy.org/ace/aboutace/background.htm ADB The Asian Development Bank, www.adb.org AIJ Activities Implemented Jointly ALGAS Asia Least-Cost Greenhouse Gas Abatement Strategy AMDAL Environmental Impact Analysis APBN Indonesia’s State Budget API Indonesian Geothermal Association APEKSI Association of Indonesian Municipalities, www.apeksi.or.id APKASI Association of Indonesian Regencies APHI Association of Indonesian Forest Concessionaires ASEAN Association of Southeast Asian Nations, http://www.aseansec.org/home.htm Bapedalda Regional Environmental Impact Management Agency Bappedal Environmental Impact Management Agency Bappenas National Development Planning Agency, www.bappenas.go.id BBM Fuel oil BCPA Bilateral CER Purchase Agreement BI Central Bank of the Republic of Indonesia, www.bi.go.id BPMIGAS Executive Board for Oil and Gas Upstream Operations, www.bpmigas.com BKPM Investment Coordination Agency, www.bkpm.go.id BMG Meteorology and Geophysics Agency, www.bmg.go.id BOE barrel oil equivalent BPPT Agency for the Assessment and Application of Technology www.bppt.go.id BSN National Standard Agency CDM Clean Development Mechanism CDM EB CDM Executive Board CER Certified Emission Reduction CERUPT Certified Emission Reduction Unit Procurement Tender CGI Chevron Geothermal Indonesia CH4 Methane CIDA Canadian International Development Agency, www.acdi-cida.gc.ca CIFOR Center for International Forestry Research, www.cifor.cgiar.org CREATA Center for Research on Engineering of Agriculture CO2 Carbon dioxide COP Conference of the Parties to the UNFCCC CPO Crude Palm Oil CTI Climate Technology Initiative Delri Delegation of Republik Indonesia for international climate related negotiation Depdagri Ministry of Home Affairs of the Republic Indonesia, www.depdagri.go.id Dephub Ministry of Transportation of the Republic Indonesia, www.dephub.go.id Dephut Ministry of Forestry of the Republic Indonesia, www.dephut.go.id Depkes Ministry of Health of the Republic Indonesia, www.depkes.go.id Depkeu Ministry of Finance of the Republic Indonesia, www.depkeu.go.id

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Deplu Ministry of Foreign Affairs of the Republic Indonesia, www.deplu.go.id Deptan Ministry of Agriculture of the Republic Indonesia, www.deptan.go.id DJLPE Directorate General of Electricity and Energy Utilization,

www.djlpe.esdm.go.id Ditjen MIGAS Directorate General of Oil and Gas, http://www.migas.go.id/index5.php DJMBP Directorate General of Mineral, Coal and Geothermal, http:/djgsm.esdm.go.id/DKP Ministry of Maritime and Fisheries DNA Designated National Authority; Indonesian DNA known also as KN-MPB:

http://dna-cdm.menlh.go.id DPR House of Representatives of the Republic Indonesia, www.dpr.go.id DOE Designated Operational Entity Depperin Ministry of Industry of the Republic Indonesia, previously Ministry Industry

and Trade (Depperindag), www.dprin.go.id EIA Environmental Impact Assessment EIA The Energy Information Administration of the U.S. Department of Energy,

www.eia.doe.gov ER emission reductions ERPA Emission Reduction Purchase Agreement ESDM Ministry of Energy and Mineral Resources of the Republic Indonesia,

www.esdm.go.id ESCO Energy services company ETS Emission Trading Scheme FBI Forum Biodiesel Indonesia or Indonesian Biodiesel Forum GDP Gross Domestic Product GEF The Global Environmental Facilities, www.gefweb.org GGFR Global Gas Flaring Reduction, www.worldbank.org/ogmc/global_gas.htm GHG greenhouse gas GOI Government of Indonesia GTZ The German Technical Cooperation (www.gtz.de,

http://www2.gtz.de/indonesia/) GTZ-MHPP GTZ – micro hydro power project GW giga watt IEA International Energy Agency, www.iea.org IETA International Emissions Trading Association IGES Institute for Global Environmental Strategies,

http://www.iges.or.jp/en/index.html IPB Bogor Institute of Agriculture, www.ipb.ac.id IPCC Intergovernmental Panel on Climate Change, www.ipcc.ch IPP Independent Power Producers IRR Internal Rate of Return ITB Bandung Institute of Technology, www.itb.ac.id JAMALI Jawa-Madura-Bali grid system JBIC Japan Bank for International Cooperation, www.jbic.go.jp/english JCF Japan Carbon Fund JI Joint Implementation

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JICA Japan International Cooperation Agency, www.jica.or.id JKAP Japan Kyoto Mechanisms Acceleration Program JOA Joint Operating Agreements JOC Joint Operating Contracts KADIN Indonesian Chamber of Commerce and Industry, www.kadin-indonesia.or.id KEN Kebijakan Energi Nasional (The National Energy Policy of Indonesia) KfW German Development Bank KLH Ministry of Environment of the Republic Indonesia, www.menlh.go.id Komnas National Commission KN-MPB Komisi Nasional Mekanisme Pembangunan Bersih or the National

Commission on CDM, http://dna-cdm.menlh.go.id KP The Kyoto Protocol kWh kilo watt hour LAPAN National Space and Aviation Agency, www.lapan.go.id LPND Ristek Non-Departmental Government Agency on Research and Technology LULUCF Land Use, Land-Use Change and Forestry MARKAL Market Allocation, an energy system modeling tool prepared by BPPT and

KFA Juelich, a research center in Germany, to predict the Indonesian energy market starting from the supply side, the transformation, transmission, distribution up to the end-users. The prediction was made based on technology options and energy mix. MARKAL also predict the environmental impact of such energy development, including technology options for end-users to mitigate CO2 emissions. Many studies related to energy sector were then based on MARKAL prediction, including NSS Energy.

Menristek Ministry of Research and Technology of the Republic Indonesia, www.ristek.go.id

METI Japan Ministry of Economy, Trade and Industry of Japan, www.meti.go.jp/english/index.html

METI Indonesian Renewable Energy Society, www.meti.or.id MK Constitutional Court MKI Indonesian Electrical Power Society MMSCFD million standard cubic feet per day MOP Meeting of the Parties to the Kyoto Protocol MOU Memorandum of Understanding MSW Municipal Solid Waste MW mega watt Mt Million tonnes NEDO New Energy and Industrial Technology Development Organization of Japan,

www.nedo.go.jp/english/index.html and www.nedojakarta.org NGO non-governmental organizations NSS National Strategy Study on Clean Development Mechanism in Indonesia ODA Official Development Assistance P3TEK Center for Research and Development of Energy and Electricity Technology PCF Prototype Carbon Fund of the World Bank, www.prototypecarbonfund.org PCN Project Concept Notes

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PDD Project Design Document PDF Project Development Facility PGN, PT State Gas Company, www.pgn.co.id PIE Center for Energy Information PIN Project Identification Notes PLN, PT State Electricity Company, www.pln.co.id PLTA Hydro power plant POME Palm oil mill effluent PPA Power Purchase Agreement PPLH Center of Environmental Management - Pusat Pengelolaan Lingkungan

Hidup, regional office of KLH PREGA Promotion of Renewable Energy, Energy Efficiency and Greenhouse Gas

Abatement PSC Production Sharing Contract PSO Public Service Obligation Pertamina, PT State Oil and Gas Company, www.pertamina.com PU Ministry of Public Works Puspiptek Centre for Research, Science and Technology of BPPT in Serpong RE Renewable Energy RKP Annual Government Work Plan – formulated by Bappenas SSN SouthSouthNorth program, http://www.southsouthnorth.org TA Technical assistance TAGP Trans ASEAN Gas Pipeline TAF The Asia Foundation, www.asiafoundation.org tCO2e tonnes of carbon dioxide equivalent TCF trillion cubic feet tpd tonnes per day TWh terra watt hour UNFCCC United Nations Framework Convention on Climate Change, http://unfccc.int UNDP United Nations Development Programme, www.undp.org UNESCAP United Nations Economic and Social Commissions for Asia and the Pacific,

www.unescap.org US-AEP US-Asia Environment Partnership VAT Value Added Tax VER Verified Emission Reduction VROM The Netherlands’ Ministry of Housing, Spatial Planning and the Environment,

www.vrom.nl/international/ WB The World Bank, www.worldbank.com YBUL Yayasan Bina Usaha Lingkungan

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Table of Contents Glossary .......................................................................................................................................i Table of Contents......................................................................................................................vi List of Tables.............................................................................................................................xi List of Figures ..........................................................................................................................xii

1 CDM legal framework ................................................................................................13

1.1 Background..............................................................................................................13 1.2 National Policy and Institutional Framework..........................................................14

1.2.1 History ...............................................................................................................14 1.2.2 Ratification of the Kyoto Protocol ....................................................................16 1.2.3 Komisi Nasional Mekanisme Pembangunan Bersih (KN-MPB) ......................16

1.2.3.1 Members of the Commission.........................................................................17 1.2.3.2 Secretariat ......................................................................................................18 1.2.3.3 Technical Team .............................................................................................18 1.2.3.4 Expert Group .................................................................................................19 1.2.3.5 Stakeholder Forum ........................................................................................20 1.2.3.6 Procedure for CDM project approval ............................................................20 1.2.3.7 Criteria and indicators for assessing projects ...............................................23 1.2.3.8 CDM Projects Approved and Under Reviewed by KN-MPB.......................25

1.2.4 Environmental Impact Assessment (AMDAL) .................................................28 1.3 Significant events in CDM development in Indonesia............................................28

2 Main stakeholders in CDM development..................................................................30

2.1 Indonesian government agencies.............................................................................30 2.1.1 Ministry of Environment (KLH) and Relevant Agencies .................................30 2.1.2 Ministry of Energy and Mineral Resources (ESDM)........................................32

2.1.2.1 Directorate General of Mineral, Coal and Geothermal (DGMCG/ DJMBP)33 2.1.2.2 Directorate General of Electricity and Energy Utilization (DGEEU/ DJLPE)

.....................................................................................................................34 2.1.2.3 Center for Research and Development of Energy and Electricity Technology

(P3TEK) ......................................................................................................35 2.1.2.4 Directorate General for Oil and Gas (Ditjen MIGAS) ..................................36 2.1.2.5 Center for Energy Information (PIE).............................................................36

2.1.3 Executive Agency for Upstream Oil and Gas Activity (BPMIGAS)................37 2.1.4 National Development Planning Agency (Bappenas) .......................................38 2.1.5 Agency for the Assessment and Application of Technology (BPPT)...............39 2.1.6 Ministry of Forestry (Dephut) ...........................................................................40 2.1.7 Ministry of Foreign Affairs (Deplu)..................................................................42 2.1.8 Ministry of Agriculture (Deptan) ......................................................................44

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2.1.9 Ministry of Industry (Depperin) ........................................................................44 2.1.10 Ministry of Transportation (Dephub) ................................................................45 2.1.11 Ministry of Home Affairs (Depdagri) ...............................................................46 2.1.12 Ministry of Finance (Depkeu) ...........................................................................47 2.1.13 Ministry of Public Works (PU) .........................................................................48 2.1.14 Coordinating Ministry of Economic Affairs (Menko Perekonomian) ..............49

2.2 State-owned companies ...........................................................................................50 2.2.1 State Electricity Company (PT. PLN (Persero)) ...............................................50 2.2.2 State Oil and Gas Company (PT. Pertamina (Persero)) ....................................51 2.2.3 State Gas Company (PT. PGN) .........................................................................52 2.2.4 PT. KONEBA....................................................................................................53

2.3 Private sector ...........................................................................................................54 2.3.1 Project Developers.............................................................................................54

2.3.1.1 PT. Indocement Tunggal Prakarsa Tbk. ........................................................54 2.3.1.2 BP ..................................................................................................................54 2.3.1.3 ChevronTexaco Indonesia .............................................................................55 2.3.1.4 PT. Petromat Agrotech ..................................................................................55 2.3.1.5 PT. Murini Samsam and PT. Multimas Nabati Asahan ................................56 2.3.1.6 PT. Indotirta Suaka........................................................................................56 2.3.1.7 PT. Lunto Bioenergi Prima............................................................................56 2.3.1.8 PT. Navigat Organic Energy Indonesia.........................................................57 2.3.1.9 PT. Bukaka Teknik Utama ............................................................................57 2.3.1.10 PT. Bioenergi Surya Persada .........................................................................57 2.3.1.11 PT. Agricinal .................................................................................................57 2.3.1.12 PT. Medco Ethanol Lampung........................................................................58 2.3.1.13 Others ............................................................................................................58

2.3.2 Private Intermediaries........................................................................................59 2.3.2.1 DP Solusi .......................................................................................................59 2.3.2.2 Carbon and Environmental Research Indonesia (CER Indonesia)................59 2.3.2.3 Eco Securities Indonesia................................................................................59 2.3.2.4 Byun & Co.....................................................................................................60

2.4 Foreign and International Stakeholders...................................................................61 2.4.1 The World Bank (WB) ......................................................................................61 2.4.2 The Asian Development Bank (ADB) ..............................................................63 2.4.3 The German Technical Cooperation (GTZ) ......................................................64 2.4.4 Japanese Ministry of Economy, Trade and Industry (METI)............................64 2.4.5 The New Energy and Industrial Technology Development Organization

(NEDO) .............................................................................................................66 2.4.6 Japan Bank for International Cooperation (JBIC).............................................68 2.4.7 Japan Carbon Finance (JCF) .............................................................................68 2.4.8 The Institute for Global Environmental Strategies (IGES) ...............................70 2.4.9 Japan International Cooperation Agency (JICA) ..............................................70 2.4.10 KfW Carbon Fund .............................................................................................70 2.4.11 The Canadian International Development Agency (CIDA)..............................72 2.4.12 The United Nations Development Programme (UNDP)...................................72 2.4.13 Dutch Government ............................................................................................73

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2.4.14 Danish Government...........................................................................................74 2.4.15 Austrian Government ........................................................................................75 2.4.16 Canadian Government .......................................................................................76

2.5 NGOs, Research Organizations and Professional Associations..............................78 2.5.1 Yayasan Pelangi Indonesia (Pelangi) ................................................................78 2.5.2 Yayasan Bina Usaha Lingkungan (YBUL).......................................................79 2.5.3 WWF Indonesia.................................................................................................79 2.5.4 Center for International Forestry Research (CIFOR)........................................80 2.5.5 Energy Research and Development Group of ITB (KPP Energi ITB)..............81 2.5.6 Centre for Research on Engineering of Agriculture (CREATA-IPB)...............81 2.5.7 Indonesian Renewable Energy Society (METI)................................................82 2.5.8 Indonesian Chamber of Commerce and Industry (KADIN) .............................82 2.5.9 Indonesian Geothermal Association (API)........................................................85 2.5.10 Association of Indonesian Municipalities (APEKSI) and Association of

Indonesian Regencies (APKASI) ......................................................................85 2.5.11 Association of Indonesian Forest Concessionaires (APHI) ..............................85 2.5.12 Indonesian Electrical Power Society (MKI)......................................................86 2.5.13 Forum Biodiesel Indonesia................................................................................87

3 Research and capacity building on CDM..................................................................88

3.1 The Asia Least Cost Greenhouse Gas Abatement Strategy (ALGAS) ...................88 3.2 The First National Communication under the UNFCCC ........................................88 3.3 Workshop of DJLPE and ECN................................................................................89 3.4 The National Strategy Study (NSS) on CDM in Energy Sector..............................89 3.5 The National Strategy Study (NSS) on CDM in Forestry Sector............................90 3.6 CDM ASEAN (ACE-EAEF)...................................................................................90 3.7 Capacity building by Pelangi in cooperation with IGES.........................................90 3.8 Capacity building by YBUL....................................................................................91 3.9 ADB Technical Assistance on CDM forestry .........................................................92 3.10 UNDP Workshop on CDM .....................................................................................93 3.11 CDM Institution Building Project supported by GTZ.............................................94 3.12 Climate Technology Initiative - CTI/Industry Joint Seminar .................................95 3.13 World Bank CDM Workshop..................................................................................96 3.14 The National Dialogue – What’s Next After Ratification of the Kyoto Protocol ...96 3.15 Roundtable Discussion on Financing CDM ............................................................96 3.16 ADB Technical Assistance on Gas Generation from Waste in Palm Oil Industry .97 3.17 The Global Gas Flaring Reduction Partnership.......................................................98 3.18 IGES Integrated Capacity Strengthening Program .................................................99 3.19 Workshop on Financing Modalities of CDM..........................................................99 3.20 SouthSouthNorth Project.......................................................................................100 3.21 Danish CDM Project Development Facility in Indonesia .....................................101 3.22 Workshop on Landfill Gas Utilization ..................................................................101 3.23 Executive Workshop – Training on the CDM.......................................................102 3.24 ADB Technical Assistance on Institutionalizing the CDM Project ......................102

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4 The Status of Energy Sector in Indonesia ...............................................................104 4.1 Indonesia’s primary energy resources ...................................................................104

4.1.1 Non renewable energy resources.....................................................................104 4.1.1.1 Oil ................................................................................................................104 4.1.1.2 Natural gas...................................................................................................106 4.1.1.3 Coal..............................................................................................................106

4.1.2 Renewable energy potentials ...........................................................................107 4.1.2.1 Hydropower.................................................................................................107 4.1.2.2 Geothermal ..................................................................................................108 4.1.2.3 Biomass and Biofuels ..................................................................................108 4.1.2.4 Solar Energy ................................................................................................109 4.1.2.5 Wind Energy................................................................................................109 4.1.2.6 Wave and Tidal Energy ...............................................................................110

4.2 Electricity Supply ..................................................................................................111 4.3 National Energy Challenges ..................................................................................112

4.3.1 Institutional analysis in Indonesia ...................................................................113 4.3.2 Energy Policy and Regulatory Framework .....................................................113 4.3.3 Development of Energy Price .........................................................................114 4.3.4 Challenges in Oil and Gas Sector ....................................................................114 4.3.5 Challenges for Coal Utilization .......................................................................115 4.3.6 Renewable Energy Development ....................................................................116 4.3.7 Limited Access to Electricity ..........................................................................116

4.4 Energy Policy and Regulatory Framework ...........................................................117 4.4.1 National Energy Policy....................................................................................117

4.4.1.1 Green Energy Policy....................................................................................117 4.4.1.2 Energy subsidy removal program................................................................118

4.4.2 Regulatory Framework on Energy Sector .......................................................118 4.4.2.1 Electricity Law and Regulations..................................................................119 4.4.2.2 Oil and Gas Law..........................................................................................120 4.4.2.3 Geothermal Law ..........................................................................................121 4.4.2.4 Energy Bill...................................................................................................122 4.4.2.5 Regulations on Biofuels ..............................................................................122

5 Development in energy sector for CDM Projects in Indonesia.............................123

5.1 CDM projects under development.........................................................................123 5.2 Potentials of future CDM projects in Indonesia ....................................................124

5.2.1 Biomass, biogas and biofuels ..........................................................................125 5.2.2 Geothermal ......................................................................................................126 5.2.3 Hydropower .....................................................................................................127 5.2.4 Agricultural methane capture ..........................................................................128 5.2.5 MSW and landfills...........................................................................................129 5.2.6 Gas Flaring ......................................................................................................129

5.3 Current investment conditions relevant to CDM projects .....................................131

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6 Recommendations......................................................................................................132 6.1 The problem with awareness and capacity ............................................................132

6.1.1 Awareness raising and capacity building ........................................................132 6.1.2 The institutional factor ....................................................................................133 6.1.3 Capacity building for ministries and other government institutions ...............134 6.1.4 Collaboration, coordination and partnership ...................................................134 6.1.5 Capacity building for private sector and intermediaries..................................135 6.1.6 Regional cooperation.......................................................................................135

6.2 The policy barriers.................................................................................................136 6.3 The financial barriers.............................................................................................138 6.4 The governance barriers ........................................................................................139

References ..............................................................................................................................141 Appendix ................................................................................................................................148

Appendix 1: Integration of Sectoral Criteria and Indicators into National Sustainable Development Criteria and Indicators...............................................................148

Appendix 2: Environmental Impact Assessment (AMDAL) ..........................................153 Appendix 3: Investment in Indonesia..............................................................................162

CDM Development in Indonesia

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List of Tables Table 1.1 National sustainable development criteria and indicators .........................................24 Table 1.2 List of Projects Submitted to Indonesian DNA (KN-MPB)......................................26 Table 1.3 Key CDM related events in Indonesia ......................................................................28 Table 2.1 CDM Project Developers and Project Titles ............................................................58 Table 2.2 List of the recent CDM projects supported by NEDO ..............................................68 Table 2.3 Potential CDM Projects under the support of CDM & JI Office Canada .................77 Table 3.1 Capacity building activities by Pelangi in cooperation with IGES ...........................91 Table 3.2 Capacity building activities by YBUL in cooperation with IGES (October 2003 –

March 2004) ...............................................................................................................92 Table 4.1 Renewable energy potential and capacity connected to grid...................................110 Table 4.2 Installed Capacity (in MW) of Java-Bali Power Generation System in 2005 (1st

quarter) .....................................................................................................................111 Table 5.1 Indonesia’s proven geothermal reserves (MW) ......................................................127 Table 5.2 Estimates of technical potential for agricultural gas capture and bio-energy projects

..................................................................................................................................129


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List of Figures Figure 1.1 Draft of Structure of the National Commission on Climate Change (Komnas

Perubahan Iklim) .....................................................................................................15 Figure 1.2 The Structure of KN-MPB.......................................................................................17 Figure 1.3 Flowchart of approval process by KN-MPB............................................................22 Figure 2.1 Organizational chart of KLH ...................................................................................31 Figure 2.2 Organization chart of ESDM ...................................................................................33 Figure 2.3 Organizational Chart of DJMBP..............................................................................34 Figure 2.4 Organizational Chart of DJLPE ...............................................................................35 Figure 2.5 Organizational chart of Ditjen MIGAS....................................................................36 Figure 2.6 Organizational chart of BPMIGAS..........................................................................38 Figure 2.7 Organizational chart of Bappenas ............................................................................39 Figure 2.8 Organizational chart of BPPT ..................................................................................40 Figure 2.9 Organizational chart of Dephut................................................................................41 Figure 2.10 Organizational Chart of Deplu ...............................................................................43 Figure 2.11 Organizational chart of Deptan ..............................................................................44 Figure 2.12 Organizational chart of Depperin...........................................................................45 Figure 2.13 Organizational chart of Dephub.............................................................................46 Figure 2.14 Organizational chart of Depdagri...........................................................................47 Figure 2.15 Organizational chart of Men PU ............................................................................49 Figure 2.16 Japan Kyoto Mechanisms Acceleration Programme (JKAP) ................................65 Figure 2.17 Scheme of Upfront Payment Programme for CDM/JI Projects.............................67 Figure 2.18 ERs Purchase Structure ..........................................................................................69 Figure 2.20 Contractual structure of the KfW Carbon Fund ....................................................71 Figure 2.21 Organizational chart of KADIN.............................................................................84 Figure 4.1 Sources of Primary Energy Supply in 2003...........................................................104 Figure 4.2 Indonesian oil production 1990-2003 ....................................................................105 Figure 5.1 Number of Potential CDM Projects by category ...................................................123 Figure 5.2 Potential annual CERs created by CDM project category .....................................124 Figure 5.3 Gas flaring in Indonesia, 1990-2003......................................................................130


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1 CDM legal framework

1.1 Background Indonesia is an archipelagic country that comprises about 17,000 islands and spreads over a total area of 191 million hectares. It has 241.9 million inhabitants in (July 2005 est.) with a population increase rate of 1.45 percent per year1. Indonesia suffered from a severe economic crisis in 1997–1998, which caused a drastic devaluation of its currency (Rupiah). Currently, the economic situation has been improving although the economic growth has not reached its pre-crisis level. Major export products of the country include manufactured goods, petroleum, natural gas and related products. GDP growth had increased to 5.1% in 2004 and projected to grow 5.5% in 2005 and 6% in 2006.2

As a developing country, Indonesia can take part in Clean Development Mechanism (CDM). CDM is one of three flexible mechanisms of the Kyoto Protocol, giving developing countries opportunities to sell emission reduction credits to developed countries. CDM generates emission credits through projects that reduce greenhouse gas (GHG) emissions in various sectors. Moreover, it can contribute to the improvement of the economy and sustainable development in Indonesia. CDM revenue can be regarded as new additional financing source for project investment while CDM projects must be proven to support sustainable development in host country.

In 2001, Indonesia’s Ministry of Environment (Kementerian Lingkungan Hidup or KLH) conducted a study on CDM entitled National Strategy Study on CDM in Energy Sector in Indonesia (NSS), which assessed the potential of CDM and its implementation in non LULUCF sector. According to NSS report, Indonesia has a potential of 2% share of CDM global market with a total volume of 125-300 million tonnes. With a range of Certified Emission Reduction (CER) price of US$1.5–US$5/tCO2, the potential revenue is between US$187.5 million and US$1,650 million, that is US$106 million–US$309 million of costs and a gain of US$81.5–US$1,260 million profit.3

After the inclusion of carbon sinks in CDM as agreed in the Marrakesh Accord, KLH commenced its National Strategy Study on CDM in Forestry Sector. The study did not only cover the forestry sector but also other activities in the area of land use, land use change and forestry (LULUCF) according to the UNFCCC. According to the report, the potential of CDM volumes from LULUCF in Indonesia is 53 million tonnes4. The potential revenue is between US$ 79.5 million and US$ 265 million, assuming same CER price range as above.

In order to participate in CDM, Indonesia has ratified the Kyoto Protocol through the Law

1 http://www.cia.gov/cia/publications/factbook/geos/id.html#People, visited on January 20, 2006 2 Asian Development Bank, Asian Development Outlook 2005 (2005) 3 Ministry of Environment Republic of Indonesia, National Strategy Study on the Clean Development Mechanism in Indonesia (Jakarta: 2001) 4 Ministry of Environment Republic of Indonesia, National Strategy Study on CDM in Forestry Sector – a Technical Report (Jakarta: 2003)


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No. 17/2004 and submitted this instrument of ratification to the UN. Indonesia has legalized the establishment of the National Commission on Clean Development Mechanism that serves as the Designated National Authority, through Minister of Environment Decree No. 206/2005. The Decree was promulgated on July 21, 2005.

1.2 National Policy and Institutional Framework

1.2.1 History At the United Nations Conference on Environment and Development (UNCED) held in Rio de Janeiro, Brazil, 1992, the United Nations Framework Convention on Climate Change (UNFCCC) was adopted as a global effort to control climate change. Indonesia strongly supports the objective of the UNFCCC to prevent the anthropogenic gas concentration in the atmosphere from rising to a level that would endanger the existence of life on earth. To indicate its firm support and serious concern regarding global warming, Indonesia signed the UNFCCC on June 5, 1992 and ratified it through Law No. 6/1994 on the Ratification of the UNFCCC.

The document was submitted on August 23, 1994, to the Secretariat General of the U.N. Therefore Indonesia is legally included as a Party to the UNFCCC, which implies that Indonesia is bound by the rights and obligations stipulated thereby.

In order to properly address climate change issues, KLH established the National Commission on Climate Change (Komnas Perubahan Iklim) in 1992 with Ministerial Decree (Kepmen) No. 35/MENKLH/8/1992. The membership consists of KLH, Ministry of Research and Technology (Kementerian Riset dan Teknologi or Menristek), Meteorology and Geophysics Agency (Badan Meteorologi dan Geofisika or BMG), Ministry of Health (Departemen Kesehatan or Depkes), Ministry of Industry and Trade (Departemen Perindustrian dan Perdagangan or Deperindag), Ministry of Forestry (Departemen Kehutanan or Dephut) , Ministry of Agriculture (Departemen Pertanian or Deptan), Ministry of Energy and Mineral Resources (Departemen Energi dan Sumber Daya Mineral or ESDM), National Space and Aviation Agency (LAPAN) and representatives from related non-governmental organizations (NGOs) and experts.

The decree was then revised by KLH with the Ministerial Decree No. 53/2003. While the initial membership included NGO representatives and experts, the latest Commission is more focused on ministries that are engaged in environmental issues. The Ministry of Industry and Trade has been split into Ministry of Trade and Ministry of Industry, based on the Presidential Decree no. 187/M/2004 issued on October 2004. Ministry of Industry remains member of the Commission.

Komnas Perubahan Iklim, chaired by KLH, is an advisory body that provides assistances to the Government of Indonesia (GOI) in crafting policies and general guidance on how to anticipate the impacts of climate change. It should monitor and evaluate existing policies on climate change as well as their implementation. In addition, Komnas Perubahan Iklim supports the involvement of the government in the growing international commitment to climate change issues. It develops national, regional and international


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partnerships with the purpose of combating climate change.

A technical team shall support the commission to provide data and information that will act as basis for the making of policy, strategy and program, which include inter alia capacity development, information system and database. However, the team has been facing constraints such as lack of institutional mechanism and funding. It only works upon necessity to assess environmental projects, mainly with multilateral/bilateral organizations in the relevant field.

Komnas Perubahan Iklim has not been functioning as expected since it was established. To reactivate the institution and to respond to more challenging and demanding international fora, KLH is working on redefining and strengthening of roles of Komnas Perubahan Iklim. The most important step being taken is the ongoing empowerment of its members. According to the Ministerial Decree No. 53/2003, the Commission consists of 16 echelon I level officials. A drafted new membership is under consideration, in which the Commission would consist of 18 members from various ministries and institutions. The same ministries and institutions will have their echelon II level representatives in the Technical Team as in the current arrangement. Working groups on mitigation and adaptation will be constituted. This body will also be supported by an ad-hoc group of experts, who will give advice to Delegation of Republic Indonesia (Delri) in international climate negotiation. Any changes to the former decree will be stipulated by an amendment to the decree. The draft of organization structure is presented in the following figure:

Figure 1.1 Draft of Structure of the National Commission on Climate Change (Komnas Perubahan Iklim)

Secretary: Deputy Min. for Env. Conservation of KLH

Vice Secretary: Head of BMG

Chair:Minister of Environment

Secretariat /Support. Unit:Climate & Atmospheric Affairs, KLH

Bappenas Deplu Dephut PU DESDM Deperindag Dephub Deptan Depkes Depdagri Depkeu Menristek DKP LAPAN

KLH = Ministry of the EnvironmentBMG = Agency for Meteorology and GeophysicsBappenas = National Development Planning AgencyDeplu = Ministry of Foreign AffairsDephut = Ministry of ForestryPU = Ministry of Housing and Regional InfrastructureDESDM = Ministry of Energy and Mineral ResourcesDeperindag = Ministry of Industry and Trade

Dephub = Ministry of Transportation Deptan = Ministry of AgricultureDepkes = Ministry of HealthDepdagri = Ministry of Home AffairsDepkeu = Ministry of FinanceMenristek= Ministry of Research and TechnologyDKP = Ministry of Maritime and FisheriesLAPAN = National Institute for Space & Aeronautics


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1.2.2 Ratification of the Kyoto Protocol Indonesia signed the Kyoto Protocol in 1997. The ratification process was launched with an academic paper on Ratification of Kyoto Protocol in 2002, outlining the consequences of implementing the Protocol. The paper was used as the scientific basis of the draft law for ratification. A formal Letter of Initiative (Surat Izin Prakarsa) was issued in August 2003 by the President to the House of Representatives (DPR), stating that the government is ready to ratify the Protocol. The government also submitted all the necessary documents, including the academic paper.

After a series of consultations, on June 28, 2004, the DPR passed a law on ratification of the Kyoto Protocol. This decision was taken during one of its plenary sessions and has been introduced as Law No. 17/2004, signed by the Secretary of State on July 28, 2004.

The instrument of ratification was deposited by the government to the U.N. Secretariat General on December 3, 2004, qualifying Indonesia’s full participation in the first Meeting of the Parties of the Kyoto Protocol. The meeting was held simultaneously with the 11th Conference of the Parties (COP 11/ MOP1) in Montreal, Canada from November 28 to December 9, 2005).

1.2.3 Komisi Nasional Mekanisme Pembangunan Bersih (KN-MPB) The National Commission on CDM (Komisi Nasional Mekanisme Pembangunan Bersih or KN-MPB) is the DNA of Indonesia. The Minister of Environment has legalized the establishment of the National Commission on Clean Development Mechanism through Minister of Environment Decree No. 206/2005 that was signed on July 21, 2005. The Decree regulates the following:

- composition and tasks of the KN-MPB - mechanism of meeting and coordination of the KN-MPB - project approval procedure - Sustainable Development criteria and indicator - members of the Technical Team - Terms of Reference of the Technical Team - reporting mechanism to the Minister of Environment - budget/ financial sources of the Commission

The State Minister of Environment launched KN-MPB on October 27, 2005. The event that was held to declare the formal operation of the National Commission on CDM was attended by CDM stakeholders from government agencies, private sector, professional associations, NGOs, donor agencies, and press. The attendees also participated in a panel discussion with topic “The roles of Clean Development Mechanism in Sustainable Development from Economic and Environmental Perspectives”.

The main role of KN-MPB is to approve a proposed CDM project in Indonesia on condition that it fulfills Indonesia’s sustainable development criteria. KN-MPB also tracks the progress of each proposed CDM project including its registration to the CDM-EB, its implementation, and transaction later. KN-MPB will communicate and report this progress to CDM-EB.


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KN-MPB consists of nine members and is chaired by the Deputy III to the Minister of Environment for Nature Conservation Enhancement and Environmental Destruction Control. The KN-MPB is supported by the Secretariat and Technical Team.

When necessary, KN-MPB may ask for assistance to an Expert Group and/or arrange a Special Meeting of the Stakeholder Forum. Figure 1.2 describes the structure of KN-MPB.

Figure 1.2 The Structure of KN-MPB

1.2.3.1 Members of the Commission The members of KN-MPB are appointed by their respective institutions. They are chaired by the representative from KLH, in this case Deputy Minister III Nature Conservation Enhancement and Environmental Destruction Control. KN-MPB membership is enacted by the same decree on the KN-MPB Establishment: Minister of Environment Decree No. 206/ 2005.

KN-MPB consists of nine representatives from the following institutions (names of members in parentheses as of April 2006):

• Ministry of Environment or KLH (Chairperson), represented by Deputy Minister III for Natural Resources Conservation Enhancement and Environmental Degradation Control (Dra. Masnellyarti Hilman, MSc.)

• Ministry of Energy and Mineral Resources or ESDM, represented by Expert Staff to the Minister of Energy and Mineral Resources for Region and Environment (Dr. M. Hikman Manaf, ME.)

• Ministry of Forestry or Dephut, represented by Expert Staff to the Minister of Forestry for Forestry Partnership (Dr. Ir. Sunaryo, MSc.)

• Ministry of Industry or Depperin, represented by Head of Research and Development Body on Industry and Trade (Rifana Erni, S. Teks, MBA.)

• Ministry of Foreign Affairs or Deplu, represented by Directorate General Multilateral Affairs (Mochamad Slamet Hidayat, SH, MBA.)

Members of the Commission

Secretariat

Expert Group

Technical TeamStakeholder

Forum


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• Ministry of Home Affairs or Depdagri, represented by Director General of Regional Development Counseling (Drs. H. Syamsul Arief)

• Ministry of Transportation or Dephub, represented by Expert Staff to the Minister of Transportation for Environment (Dr. Ir. H. Abdul Razak Manan, MM, M.Si.)

• Ministry of Agriculture or Deptan, represented by Head of Agriculture Research and Development Body (Dr. Ir. Achmad Suryana, MS.)

• National Development Planning Board or Bappenas, represented by Deputy Minister for Natural Resources and Environment (Ir. Bemby Uripto, MSc.)

The Commission has the authority to approve or reject the project on this basis. They base their decision on the evaluation by the Technical Team. When required, the recommendation also accommodates advice from the Expert Group as well as input from a Stakeholder Forum. Furthermore, they should approve and deliver the results of document tracking, project monitoring and evaluation, as well as the annual report to the UNFCCC Secretariat.

In addition, Commission Members develop policies and guidelines for awareness raising purposes (i.e. communication, capacity building and marketing information).

1.2.3.2 Secretariat The main function of the Secretariat is to assist in the daily operations of KN-MPB. During the evaluation process of project proposals, the Secretariat provides administrative support to the Technical Team and the Expert Group. The Secretariat also assists KN-MPB in organizing a Special Meeting of the Stakeholder Forum.

Moreover, the Secretariat helps KN-MPB in case of an appeal against the Commission’s decisions. The Secretariat is regulated by Decision of Head of National Commission on CDM No.1/2005 on “Secretariat of National Commission on Clean Development Mechanism”, which was signed on October 20, 2005. The decision determines the membership and operating procedure of the Secretariat. The Ministry of Environment (KLH) acts as the Secretariat of KN-MPB with its staff working as coordinator, secretary and five other members.

1.2.3.3 Technical Team The Technical Team is responsible for doing technical evaluation of each proposed CDM project. The evaluation will be based on sustainable development criteria and indicators. For that purpose, it may ask for inputs from the Expert Group and other stakeholders. Its evaluation report (recommendation) will be presented to KN-MPB through the Secretariat.

A technical team for each particular project proposal is tailored upon request from Members of the Commission through the Secretariat. During the evaluation process, the team may ask advices on specific topic from the Expert Group through the Secretariat with permission from Members of the Commission. The Technical Team members may also bring the proposed project to be discussed in the evaluation meeting of Sectoral Working Group. The Working Group is part of each associated ministry with members having expertise on specific sector. The task of the Working Group is to assess the


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projects on particular sector as an addition to the assessment carried over by the KN-MPB. As of May 2006 only Ministry of Forestry (Dephut) and Ministry of Energy and Mineral Resources (ESDM) have established Working Groups.

The Technical Team consists of both permanent and non-permanent members. Permanent members are representatives of nine ministries and of one national NGO, while non-permanent members are from any relevant ministries and provincial/district/municipal government, local NGOs, or any other experts. The representatives from ministries are echelon II level officials.

The ten members of Technical Team are as follows (names of members in parentheses as of April 2006):

• Ministry of Environment or KLH (Chairperson), represented by Acting Deputy Assistant for Climate Change Impact Control (Ir. Sulistyowati, MM.)

• Ministry of Energy and Mineral Resources or ESDM, represented by Technical Director of Mineral and Coal (Ir. Suyartono, MSc.)

• Ministry of Forestry or Dephut, represented by Head of Research and Development Center for Biotechnology and Forest Tree Seed (Dr. Ir. Nur Masripatin, M.For.Sc.)

• Ministry of Forestry or Dephut, represented by Head of Sub Directorate of Environmental Service Utilization (Dr. Joko Prihatno)

• Ministry of Industry or Depperin, represented by Head of Research and Development Center for Regional Resources and Environment (Ir. Agus Wahyudi, SE, MM.)

• Ministry of Foreign Affairs or Deplu, represented by Acting Director of United Nation’s Economic Development and Environment (Salman Al Farisi, SE.)

• Ministry of Home Affairs or Depdagri, represented by Director of Facilitation of Space Planning and Environment (Prof. Dr. Tjahya Supriatna, SU.)

• Ministry of Transportation or Dephub, member is not yet nominated. • Ministry of Agriculture or Deptan, represented by Head of Research Center for

Agro-climate and Agriculture Hidrology : (Dr. Kasdi Subagyono) • Ministry of Agriculture or Deptan, represented by Head of Soil Research Division,

Research Center for Soil and Agro-climate (Dr. Fahmudin Agus.) • Ministry of Agriculture or Deptan, represented by Head of Veterinary Research

Division, Research Center for Animal Husbandry (Dr. Abdul Adjid.) • National Development Planning Board or Bappenas, represented by Director for

Natural Resources Control and Environment (Dr. Agus Prabowo.) • Non-Governmental Organization (Eka Melisa from WWF Indonesia)

1.2.3.4 Expert Group During the evaluation process, KN-MPB may ask assistance from an Expert Group. Its function is to provide additional evaluations and a second opinion on the project proposal, if requested by Members of the Commission through the Secretariat. Another Expert Advisor for the same proposal may also be asked to assist the Technical Team in


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its evaluation.

The Expert Group must base its evaluation of a project proposal on sustainable development criteria and indicators. A task assigned to the Expert Group has to be completed within five working days and the evaluation reports produced must be submitted to the Secretariat.

1.2.3.5 Stakeholder Forum A Stakeholder Forum is an informative consultation forum to convey information on the proposed CDM project and to accommodate comments as well as complaints on the project proposal. Thus, Stakeholder Forum provides input on project proposals. It is a participative and open multiparty discussion, in contrast to the technical experts’ discussion.

The KN-MPB may organize a Stakeholder Forum Meeting whenever necessary, e.g. whenever they need additional information, input, support and discussion from stakeholders.

The Forum will be held at the local level and notes of meetings have to be included in the project application form as an attachment. If a Stakeholder Forum is held, the outcomes are to be taken into account by the Commission in its decision.

1.2.3.6 Procedure for CDM project approval A Project Proponent is required to prepare several documents in order to apply for national approval. The application consists of:

• National Approval Application Form stating that the project fully complied with sustainable development criteria

• Project Design Document • Environmental Impact Analysis (EIA) report • Notes of public consultation on local stakeholders • Recommendation letter from Ministry of Forestry (only for forestry CDM project) • Other supporting documents to justify that the project has supported sustainable

development in Indonesia

An application should be submitted to the Secretariat of KN-MPB to be processed further (see Figure 1.3, p. 11). The whole process is discussed below:1

1. Project proponent (or together with consultant) prepares application documents. 2. The application documents are submitted to the Secretariat to be processed. The

Secretariat checks if the application documents are complete. The Secretariat immediately informs the public about the project proposal by posting it at the KN-MPB website (http://dna-cdm.menlh.go.id) to ensure that all application documents are accessible to the public. Any interested stakeholders are invited to give comments on the project. All comments received will be posted at the KN-MPB website.

1 http://dna-cdm.menlh.go.id/en/approval/, visited on May 30, 2006


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3. The Secretariat submits proposals and comments to the Members of the Commission and presents them in a one-day Internal Coordination Meeting. At that meeting, Members of the Commission decide whether to assign Expert Group to perform additional evaluation on the Project Proposal and submit its report as a second opinion. In this case, the Expert Group has five days to conclude their evaluation (step 3a, optional).

4. During Internal Coordination Meeting, the Commission assigns the Technical Team to evaluate project proposals based on sustainable development criteria and indicators. If necessary, the Team member from the same sector as the Proposed Project can take the application documents to the Sectoral Working Group, which has been established in the ministries (step 4a, optional). The Technical Team may also ask assistance from the Expert Group (step 4b), upon approval from Members of the Commission. The Technical Team has to conclude the evaluation within 21 days. If the Technical Team or Expert Group finds that the provided data are not sufficient, they will write a note on the data required in their Evaluation Report.

5. The Technical Team and Expert Group respectively submit the Evaluation Report and Additional Evaluation Report to the Secretariat. The Secretariat then forwards both reports to the Members of the Commission. Both reports are made available to the public by posting them at KN-MPB website.

6. Members of the Commission receive both reports and stakeholders comments that are communicated through the KN-MPB website, sent by e-mail or post to the Secretariat. After considering all inputs, members of the Commission decide whether to approve the project proposal or not. The National Commission Decision-making Meeting is to be concluded within one day.

6a If there is any essential difference of opinions between the stakeholders, members of the Commission may hold a Special Meeting of Stakeholder Forum where they convey the project proposal as well as compiling aspirations, supports and criticisms from participants of the Stakeholder Forum Special Meeting. The maximum duration of the Stakeholder Forum Special Meeting is one day.

7. If KN-MPB cannot make a decision because of incomplete data in the project proposal, the project proponent is given 3 months time to resubmit the revised project proposal to the Secretariat. The Secretariat treats a revised project proposal in the same way as a new one.

8. Secretariat submits National Commission Approval to Project Proponent. 9. If the Proposed Project does not meet the criteria, it may be re-submitted for National

Approval after modifying the project design.

This procedure is expected to take eleven weeks, from the submission of application documents to the decision making of the Commission Members, including the optional evaluation by Expert Advisors as well as a Special Meeting of the Stakeholder Forum.


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Figure 1.3 Flowchart of approval process by KN-MPB 1

1 http://dna-cdm.menlh.go.id/en/approval/, visited on May 30, 2006


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1.2.3.7 Criteria and indicators for assessing projects 1 A key requirement for CDM projects, as stated in the Marrakech Accords, is that projects should assist the host country in achieving sustainable development. KN-MPB should evaluate every CDM project proposal to make sure that Indonesia’s requirements for sustainable development are fulfilled. In order to ensure a transparent and accountable evaluation process, KN-MPB bases its work on a set of agreed and published national sustainable development criteria and indicators.

Relationship between national and sectoral criteria

The set of national criteria and indicators are used as the main tool in the evaluation process. Thus, all proposed projects should be evaluated in light of the national criteria and indicators. Sectoral Technical Team Members from the related ministries will use the sectoral sets of criteria and indicators as additional reference.

National sustainable development criteria and indicators are based on sectoral sustainability criteria and indicators suggested by relevant ministries, namely Ministry of Energy and Mineral Resources, Ministry of Forestry, Ministry of Transportation, Ministry of Agriculture, and former Ministry of Trade and Industry. Each relevant ministry prepared a set of sustainable development criteria and indicators to screen CDM project in the sector, based on their sectoral development priorities and policies. The objective is that the future CDM projects in Indonesia will support sectoral development. Moreover, sustainability criteria and indicators resulted from the SouthSouthNorth study project were also used; all of them are integrated and used as references in developing national criteria.

The national set should be applicable for CDM project in all sectors, thus it remains general yet accommodative to the sectoral ones. For example, the first criterion, “Environmental sustainability by practicing natural resource conservation or diversification”, is derived from the following sectoral criteria:

Energy sector:

• Criterion 1: encourage energy diversification or conservation programs • Criterion 2: encourage development of clean energy or clean energy technology • Criterion 3: encourage preservation of environmental functions

Transportation sector:

• Criterion 1: promote an integrated urban transport system • Criterion 3: increase traffic and urban transport safety • Criterion 5: supporting the environmental quality, especially air quality

Industry sector:

• Criterion 1: Promote energy conservation programs • Criterion 2: Promote development of clean technology (cleaner production)

1


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• Criterion 3: Promote conservation of ecological functions • Criterion 7: Efficient and optimum natural resource utilization

Forestry sector:

• Criterion B.1: Biodiversity maintenance • Criterion B.2: Water conservation • Criterion B.3: Land conservation • Criterion B.4: Ecosystem stability of protected areas

Agriculture sector:

• Criterion I: Ecological consistency

A matrix explaining the integration of sectoral criteria and indicators into the national criteria and indicators is available in Appendix 1.

National criteria and indicators

The criteria and indicators are categorized into four groups (see Table 1.1):

• Environmental sustainability • Economic sustainability • Social sustainability • Technological sustainability

The National Sustainable Development Criteria and Indicators have been revised several times to accommodate inputs gathered in the Consultation Meetings, and the process for evaluation of criteria and indicators has been extensively discussed. A proposed project must fulfill all applicable individual indicators in order to be approved. The “checklist” method is used in the evaluation of CDM projects. The Technical Team, and Expert Advisor(s) must tick each indicator with “yes”, “no”, or “not applicable”. The proposed project will pass the sustainability criteria if “no” is never ticked. Any scoring method is not applied in order to keep the evaluation process more objective.

Table 1.1 National sustainable development criteria and indicators Environmental Sustainability Criterion: Environmental sustainability by practicing natural resource conservation or diversification Indicator: Maintains sustainability of local ecological functions Indicator: Not exceed the threshold of existing national, as well as local, environmental standards (does not cause air, water and/or soil pollution) Indicator: Maintains genetic, species, and ecosystem biodiversity and not permitting any genetic pollution Indicator: Complying with existing land use planning Criterion: Local community health and safety Indicator: Not imposing any health risk Indicator: Complying with occupational health and safety regulation Indicator: There is a documented procedure of adequate actions to be taken in order to prevent and manage possible accidents


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Economic Sustainability Criterion: Local community welfare Indicator: Not lowering local community’s income Indicator: There are adequate measures to overcome the possible impact of lowered income of community members Indicator: Not lowering local public services Indicator: An agreement among conflicting parties is reached, conforming to existing regulation, dealing with any lay-off problems Social Sustainability Criterion: Local community participation Indicator: Local community has been consulted Indicator: Comments and complaints from local communities are taken into consideration and responded to Criterion: Local community social integrity Indicator: Not triggering any conflicts among local communities Technological Sustainability Criterion: Technology transfer Indicator: Not causing dependencies on foreign parties in knowledge and appliance operation (transfer of know-how) Indicator: Not using experimental or obsolete technologies Indicator: Enhancing the capacity and utilization of local technology

1.2.3.8 CDM Projects Approved and Under Reviewed by KN-MPB As of April 2006, the National Commission on CDM has approved 5 projects and is currently reviewing one project that was submitted in December 2005.

The procedure that a CDM project proposal has to undergo includes:

- Submission of 25 copies of PDD to the Secretariat. - Distribution of the copies to each Technical Team and National Commission

members. - Presentation of the PDD to the Technical Team. - Assessment by the Technical Team on the Sustainable Development component

of the project based on the Criteria and Indicators as promulgated in the Ministerial Decree No. 206/2005.

- If necessary, the Technical Team will seek advice from Expert Group and/or Stakeholder Forum.

- Submission of report by the Technical Team to the Secretariat. - A closed decision-making meeting to discuss the recommendations from the

Technical Team which has to be attended by the Head of the National Commission. The meeting will result in approval or rejection of a proposed


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project. - The National Commission will issue an approval/rejection letter within a few days.

The whole process should not take more than 3 months.

The latest project proponents presented their PDDs to the Technical Team by December 21, 2005. The decision-making meeting took place on December 23, 2005 and its result was announced to the project owners one week later on December 27, 2005.

Table 1.2 List of Projects Submitted to Indonesian DNA (KN-MPB)

No. Project Title/ Owner

Project Owner

Description Emission Reduction (tonnes CO2)

Status

1 CDM SOLAR COOKER PROJECT Aceh 1

PT Petromat Agrotech

One of the main reasons of deforestation in Indonesia is the use of firewood for cooking. The project strives to transfer and spread most advanced technologies of solar cookers and of heat retaining containers (to finish cooking by unattended simmering and to separate mealtime and cooking time).

24,500 Approved by DNA and registered to CDM Executive Board

2 Indocement Alternative Fuels Project

PT Indocement Tunggal Prakarsa

The purpose of this project is to reduce CO2 emissions through use of alternative fuels in clinker burning. Coal, oil, and natural gas are the traditional fuel inputs into the cement production process.

2,469,337 Approved by DNA and under validation process by CDM EB

3 Indocement Blended Cement Project

PT Indocement Tunggal Prakarsa

The aim of this project is to manufacture and sell a new type of cement (herein after called “blended cement”) categorized under a new Cement Standard (Indonesian standard SNI 15-7064-2004) (SemenPortland Komposit). This new cement type has been introduced as part of Indocement’s efforts to increase the amount of various additive materials in the cement while maintaining a similar or improved cement quality compared to Ordinary Portland Cement (OPC).

5,260,470 Approved by DNA and under validation process by CDM EB


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Table 1.2 List of Projects Submitted to Indonesian DNA (KN-MPB) – continued No. Project Title/

Owner Project Owner

Description Emission Reduction (tonnes CO2)

Status

4 MNA Biomass 9.7 MWe Condensing Steam Turbine

PT Multimas Nabati Asahan

The project consists of the construction of a new boiler and condensing steam turbine for the production of electricity running on Palm Kernel Shell (PK Shell) and palm kernel fibre. Both PK Shell and fibre are biomass produced as by-products from the production of palm oil and palm kernels from palm fruit in a Palm Oil Mill. These by-products are commonly used as fuel for Palm Oil Mills on Sumatra who are self sufficient in their own heat supply. Even if the biomass is used fuel for the Palm Oil Mills there is a surplus of biomass especially PK Shell. On Sumatra this surplus is not transported over large distances.

611,800 Approved by DNA and under validation process by CDM EB

5 MSS Biomass 9.7 MWe Condensing Steam Turbine

PT. Murini Samsam (MSS)

The project consists of the construction of a new cogeneration unit running on Palm Kernel Shell (PK Shell) and palm kernel fibre. Both PK Shell and fibre are biomass produced as by-products from the production of palm oil and palm kernels from palm fruit in a Palm Oil Mill. These by-products are commonly used as fuel for Palm Oil Mills on Sumatra who are self sufficient in their own heat supply.

611,800 Approved by DNA and registered to CDM EB1

6 Methane Capture and Combustion from Swine Manure Treatment Project at PT. Indotirta Suaka Bulan Farm in Indonesia

PT. Indotirta Suaka and Mitsui & Co. Ltd

Methane Capture and Combustion from Swine Manure Treatment Project is a project which collects and combusts methane from the manure treatment system of the pig farm by installing the anaerobic digesters. By flaring the captured methane, greenhouse gas emissions will be reduced.

1,660,518 Approved by DNA 2

Source: http://dna-cdm.menlh.go.id/en/projects/ visited March 1, 2006

1 The project was registered to CDM EB on June 17, 2006 2 The project was approved by DNA on May 23, 2006


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1.2.4 Environmental Impact Assessment (AMDAL)1 Environmental Impact Assessment (Analisis Mengenai Dampak Lingkungan or AMDAL) is an integrated process for the review of proposed businesses and project activities on their impacts on the environment, including ecological, socio-economic and cultural components. It is a key component needed for decision-making process. The latest regulation of AMDAL is Government Regulation (PP) No. 27/1999, which has replaced all preceding regulations.

Environmental Impact Assessment is required for certain project activities by Indonesia’s regulation. Generally, EIA is undertaken for proposed activities that are likely to have significant adverse impacts on environment and are subject to a decision of a competent national authority (Rio Principle 17, 1992).

Depending on the type and scale of the project, a CDM project may require an EIA. EIA is important for a proposed CDM project since the environmental impacts of project activities should be described in the PDD (Project Design Document). Stakeholder Comments (part of the PDD) can be compiled in conjunction with the public process of EIA.

Detail information regarding AMDAL i.e. project activities which require AMDAL, the procedures, parties involved and other important issues related to AMDAL are further elaborated in the Appendix 2.

1.3 Significant events in CDM development in Indonesia Development of CDM in Indonesia is summarized as follows:

Table 1.3 Key CDM related events in Indonesia Date/Time Events

June 1992 Indonesia signed the UNFCCC 1992 Minister of Environment Decree No. 35/1992 on the establishment of

the National Commission on Climate Change was issued August 1994 Indonesia ratified the UNFCCC through Law No. 6/1994

1995-1997 Asia Least Cost Greenhouse Gas Abatement Strategy (ALGAS) Project (see Chapter 3)

1997 Indonesia signed the Kyoto Protocol 1998-1999 Indonesia: The First National Communication under the UNFCCC

(see Chapter 3) 2001 NSS on CDM in Indonesia for Energy Sector ended (see Chapter 3)

Minister of Environment Decree No. 53/2003 on The National Commission on Climate Change replaced Minister of Environment Decree No. 35/1992 Series of national consultation meeting to establish Indonesian DNA NSS on CDM in Indonesia for Forestry Sector

2003

Start of CDM ASEAN activities (see Chapter 3) 2004 A CDM project proposal, Wayang Windu Geothermal Power Unit II,

was not qualified as a CDM project (under CERUPT scheme)

1 Information in this sub-chapter is summarized from http://www.menlh.go.id/amdalnet


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March 18 – 19, 2004 Skill-share workshop for ASEAN DNA members (see Chapter 3) April 1, 2004 President Megawati Soekarnoputri signed an assignment letter to the

Office of the State Minister for the Environment to discuss the draft for ratification of the Kyoto Protocol with the House of Representatives1

April 21, 2004 Meeting for facilitation of the ratification of Kyoto Protocol by the Government of Indonesia; resulted in establishment of “Tim Sukses” (Small Expert Team)

June 28, 2004 The DPR approved the ratification of the Kyoto Protocol July 28, 2004 Secretary of State Bambang Kesowo formally signed the Kyoto

Protocol ratification, marking the promulgation of Law No. 17/2004 Soft launching of DNA website, www.dna-cdm.menlh.go.id September 2004

National Dialogue (see Chapter 3) December 3, 2004 Indonesia submitted Kyoto Protocol ratification instrument to the UN

Secretary General in New York December 17, 2004 Representative of Indonesia was elected as Alternate Member of

CDM Executive Board (Ms. Liana Bratasida, Expert Staff to Minister of Environment for Global Environment Affairs)

February 23, 2005 Signing of Memorandum of Understanding on Cooperation under The Clean Development Mechanism Projects between The Ministry of the Environment of the Republic of Indonesia and The Ministry of Housing Spatial Planning and the Environment of the Netherlands.

February 28, 2005 Roundtable Discussion on Financing CDM Projects: A Way to Support Sustainable Development

July 21, 2005 Signing of Minister of Environment Decree on “KN-MPB” July 27, 2005 Workshop on Danish CDM Project Development Facility.

Memorandum of Understanding on Climate Change Initiatives was signed between Indonesia and Denmark.

October 20, 2005 Head of KN-MPB Decree on “Secretariat of KN-MPB” was signed October 27, 2005 Launching Event of KN-MPB

December 7, 2005 Memorandum of Understanding was signed between The Ministry of Agriculture, Forestry, Environment and Water Management of the Republic of Austria and The Ministry of the Environment of the Republic of Indonesia on Cooperation under The Clean Development Mechanism.

December 8, 2005 Letter of Intent was signed between The Government of Canada and The Government of Republic of Indonesia on Clean Development Mechanism Initiatives.

December 10, 2005 Ms. Inar Ichsana Ishak was elected as Alternate Member of Compliance Committee for the facilitative branch.

1 The Jakarta Post, House expected to discuss Kyoto Protocol ratification (Jakarta: April 8, 2004)


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2 Main stakeholders in CDM development

2.1 Indonesian government agencies

2.1.1 Ministry of Environment (KLH) and Relevant Agencies The State Ministry of Environment (Kementerian Negara Lingkungan Hidup or KLH) supports the President on environmental issues. At the beginning, KLH had a function as the policy maker while environmental controlling and monitoring were coordinated through Environmental Impact Management Agency (Badan Pengendalian Dampak Lingkungan or Bapedal). Bapedal’s functions and organization were incorporated into KLH through the Presidential Decree (Keppres) No. 2 and 4 of 20021, according to which KLH is responsible in establishing policies and coordinating environmental conservation as well as for monitoring and controlling environmental impacts based on existing regulations/laws.

The implementation of environmental policy and the monitoring of impact to the environment at regional level are managed by Center of Environmental Management (Pusat Pengelolaan Lingkungan Hidup or PPLH) – formerly known as Regional Environmental Impact Management Agency (Badan Pengendalian Dampak Lingkungan Daerah or Bapedalda). There are five PPLH established in 5 regions (Sumatera, Java, Kalimantan, Bali-Nusa Tenggara, Sulawesi-Maluku-Papua), and they are under the direct command of KLH. In addition, Bapedalda at provincial/prefectural/municipal level remained functioning for continuously addressing relevant issues in the jurisdiction and they are under the command of the head of the concerned local government.

KLH is assigned to be the national focal point for the UNFCCC in Indonesia, and the Deputy Minister III for Nature Conservation Enhancement and Environmental Degradation Control holds the position of Indonesia’s official contact person. So far KLH has initiated activities in capacity building and in raising awareness about climate change related issues. KLH filled the leading role in the process of national ratification of Kyoto Protocol as well as of setting up KN-MPB.

To endorse the legal status of the DNA, KLH has issued a Ministerial Decree No. 206/2005 on the establishment of the National Commission on Clean Development Mechanism. The State Minister of Environment launched KN-MPB on October 27, 2005. KN-MPB is chaired by Deputy Minister III for Nature Conservation Enhancement and Environmental Destruction Control from KLH. Furthermore, the ministry hosts the Secretariat of KN-MPB.

The organizational structure of KLH is shown in the following figure 2.1.

1 Pelangi, Penggugatan terhadap penggabungan LH dan Bapedal, http://www.pelangi.or.id/news.php?hid=20, site visited on April 12, 2005


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Figure 2.1 Organizational chart of KLH 1

1 Redrawn from http://www.menlh.go.id/organisasi.htm, visited on February 06, 2006


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2.1.2 Ministry of Energy and Mineral Resources (ESDM) The Ministry of Energy and Mineral Resources (Departemen Energi dan Sumber Daya Mineral or ESDM) aims at supporting the President on issues related to energy and mineral resources. Its vision is to ensure that the use of energy and mineral resources improves people’s welfare through sustainable development.1

The ministry has defined sustainable development criteria and indicators for activities in the energy sector, enforced through the issuance of a Ministry of Energy and Mineral Resources Decree 953.K/MEM/2003. These criteria and indicators for the energy sector are used by the sectoral CDM team to evaluate the projects in that sector (see Figure 1.3 for detailed process on CDM approval), while DNA evaluates the project on the basis of the national criteria and indicators for sustainable development.

In addition, ESDM established a national team for CDM in the energy sector to address potential CDM projects in Indonesia, and has been active in the consultation process to establish CDM team in the energy sector. 2

Some sections in the Ministry have been actively involved in the development of CDM in Indonesia:

• Directorate General of Electricity and Energy Utilization (Direktorat Jendral Listrik dan Pemanfaatan Energi or DJLPE)

• Center for Research and Development of Energy and Electricity Technology (Puslitbangtek Energi dan Ketenagalistrikan or P3TEK)

• Directorate General for Oil and Gas (Direktorat Jenderal Minyak dan Gas or Ditjen MIGAS)

• Research and Development Bureau of the Ministry of Energy and Mineral Resources (Balitbang Energi dan Sumberdaya Mineral, Departemen Energi dan Sumber Daya Mineral)

• Furthermore, the Director Technique of Mineral and Coal of ESDM is appointed as one of Technical Team members of KN-MPB.

The new organizational structure of the ministry has been established according to Ministry of Energy and Mineral Resources Regulation No. 0030/ 2005 on July 20, 2005. The newly established Directorate General of Mineral, Coal and Geothermal is essential to CDM development. Geothermal is an attractive alternative resources for electricity generation with less GHG emission. Thus, geothermal plant is also potential to be registered as CDM project in some cases.

1 http://www.esdm.go.id/content.php?content_id=19, visited on March 8, 2004 2 http://www.mesdm.net/berita_mesdm.php?news_id=51, visited on March 3, 2004


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Figure 2.2 Organization chart of ESDM1

2.1.2.1 Directorate General of Mineral, Coal and Geothermal (DGMCG/ DJMBP) Directorate General of Mineral, Coal and Geothermal (Direktorat Jenderal Mineral, Batubara dan Panas Bumi or DJMBP) duties are to formulate and implement policies and technical standardization in mineral, coal and geothermal.

The Directorate is formulating geothermal policy under a program called Geothermal Barrier Removal Program. This program is aimed to analyze and overcome policy barriers in developing geothermal power plants in Indonesia. Currently the Ministry is seeking fund through the Directorate to finance the program. 2

1 Appendix, Ministry of Energy and Mineral Resources Regulation No. 0030 of 2005, July 20, 2005 2 Personal communication with Hikman Manaf, January 27, 2006


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Figure 2.3 Organizational Chart of DJMBP1

2.1.2.2 Directorate General of Electricity and Energy Utilization (DGEEU/ DJLPE)

Directorate General of Electricity and Energy Utilization (Direktorat Jenderal Listrik dan Pemanfaatan Energi or DJLPE) formulates and implements policies and technical standards on electricity and energy utilization. Its other duties are:

• to prepare the policies in the electricity and energy utilization sectors; • to implement the policies on electricity and energy utilization in accordance with

applicable laws and regulations; • to formulate standards, norms, criteria guidelines and procedures in electricity and

energy utilization sectors; and • to provide technical advice and evaluation.

The Directorate General prepared an academic paper i.e. a preliminary draft version of the Bill on Energy. The Convention of Climate Change was a reference to this draft.

Two important works of DJLPE are the National Electricity General Plan (Rencana Umum Ketenagalistrikan Nasional or RUKN) and Electricity and Energy Statistics (Statistik Ketenagalistrikan dan Energi). Both are produced annually. The data provided in the two documents might be useful in baseline determination of a CDM power project.

DJLPE’s activities are supported by its four directorates:

• Directorate of Direction of Electricity Program (Directorate Program) The Directorate is responsible for policy or master plan for electricity development.

• Directorate of Direction of Electricity Business (Directorate Business)

1 Redrawn from http://www.djgsm.esdm.go.id, visited on February 20, 2006


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The Directorate is mainly responsible in regulating license, price, subsidy, commercial activities and consumer protection in electricity business.

• Directorate of Electricity Technology and Environmental Protection The Directorate is responsible for technology and standardization of electricity and environmental protection of electricity generation, transmission and distribution.

• Directorate of New and Renewable Energy and Energy Conservation. As reflected in its name, the Directorate is responsible for renewable energy and energy conservation. This Directorate is committed in CDM promotional activities in Indonesia. DJLPE through this directorate takes the duty mandated by the Ministry of Energy and Mineral Resources to assist promoting and developing CDM. It also facilitated the development of baseline of Jawa, Madura and Bali (JAMALI) Grid.

Figure 2.4 Organizational Chart of DJLPE1

2.1.2.3 Center for Research and Development of Energy and Electricity Technology (P3TEK)

The Center for Research and Development of Energy and Electricity Technology (Pusat Penelitian dan Pengembangan Energi dan Kelistrikan or P3TEK) was established in 2001. It aims at conducting research and technology development on energy and electricity.2 The center provides services for engineering, construction and commissioning of RE based power plant (geothermal and micro hydro) as well as for power transmission and distribution system.3

1 Redrawn from http://portal.djlpe.esdm.go.id, visited on February 15, 2006 2 http://p3tek.com/content/profil/sejarah.htm, visited on March 9, 2005 3 http://www.litbang.esdm.go.id/konsultasi_p3tek.php?PHPSESSID=b47446548f0fea12180d16917566c2f7, visited on May 3, 2006


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Even though, none of P3TEK staff is appointed as Member of Technical Team of KN-MPB, a number of P3TEK staff has been actively involved in the initiatives to promote CDM projects. P3TEK is one of active members of ESDM technical team for evaluating potential CDM projects within the energy sector.

2.1.2.4 Directorate General for Oil and Gas (Ditjen MIGAS) The Directorate General of Oil and Gas (Ditjen MIGAS) is responsible for all aspects of the petroleum and gas industry, including its development, employee training and promulgating regulations. The involvement of Ditjen MIGAS in CDM is related to CDM activities in oil and gas sector.

Ditjen MIGAS in cooperation with NEDO has been implementing the Model Project for Flare Gas and Hydrogen Recovery Systems in an Oil Refinery. The pilot project was implemented in Balikpapan refinery in the eastern part of Kalimantan. Following the successful completion of equipment installation, demonstrative operation commenced and a dissemination seminar was held on June 23, 2005. 1

General Director of Oil and Gas

Secretary of General Directorate

Director of Oil and Gas Exploration and

Exploitation

Director of Oil and Gas Enterprise and

Supervision

Director of Oil and Gas Engineering

Director of Oil and Gas Processing and

Commerce

Figure 2.5 Organizational chart of Ditjen MIGAS2

2.1.2.5 Center for Energy Information (PIE) Center for Energy Information (Pusat Informasi Energi or PIE) is an energy policy study unit within the ESDM that develops information systems on energy and mineral resources, and conducts research concerning national energy policy. In 2002 PIE published Indonesia’s Energy Outlook 2010, an official report on the future of the energy sector in Indonesia.

1 http://www.nedo.go.jp/english/archives/170624/170624.html, visited on June 5, 2006 2http://www.migas.go.id/index5.php?option=content&task=view&id=120&Itemid=55, visited on March 9, 2005


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2.1.3 Executive Agency for Upstream Oil and Gas Activity (BPMIGAS) Executive Agency for Upstream Oil and Gas Activity (Badan Pelaksana Kegiatan Usaha Hulu Minyak dan Gas Bumi or BPMIGAS) was established as required by Oil and Gas Law No. 22/2001 (see section 4.4.2.2 about Oil and Gas Law). This upstream implementing body took over the role previously played by Pertamina in regulating and managing oil and gas contractors.

BPMIGAS main tasks and authorities are:

• to provide recommendations to the Minister in preparing and offering work areas and cooperation contracts;

• to sign cooperation contracts; • to control upstream business operations; and • to appoint sellers of the government's share of oil and gas.

The organization at BPMIGAS is shown in Figure 2.6. The Environmental Section of the Support Operation Division, as the relevant section in BPMIGAS, has participated in a number of discussions including those with KLH, GGFR, and ESDM.

Since BPMIGAS manages all the Production Sharing Contracts’ (PSC) on upstream activities in Indonesia, proposals on CDM projects dealing with oil and gas companies in Indonesia should be submitted to this agency. On the other hand, all energy activities dealing with petroleum and gas fall under the Directorate General of Oil and Gas. Furthermore, CDM has not been taken into account in the current contracts even though the CER potential is very high. Therefore there is a need to establish law/regulation concerning CDM in oil and gas sector to determine its rules.


38

Figure 2.6 Organizational chart of BPMIGAS1

2.1.4 National Development Planning Agency (Bappenas) The most essential role of the National Development Planning Agency (Badan Perencanaan dan Pembangunan Nasional or Bappenas) is to consolidate the planning of the development sectors and merge them into a consolidated national planning. The State Minister for Development Planning heads this agency. In performing his duties, he is assisted by several deputies. The Deputy Head of Bappenas for Natural Resources and Environment has the duty to enact policies as well as to conduct coordination and evaluation on national development planning with regards to natural resources and environment. As a development planning agency, Bappenas also gets involved in the membership of KN-MPB.

1 http://www.bpmigas.com/organisasi.asp, visited on March 13, 2006


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Minister for National

DevelopmentPlanning / Head of

Bappenas

Deputy ofHuman

Resourcesand Culture

Deputy ofPoverty

Alleviation,Employment &Small/Medium

Enterprises

Deputy ofPolitics, Lawand National

Defence

Deputy ofEconomy

Deputy ofNatural

Resourcesand

Environment

Deputy ofFacility and

Infrastructure

Deputy ofDecentralizati

on andRegional

Development

Deputy ofDevelopment

Financial

GeneralInspectorate

Secretariat of Minister/ General Secretariat

of Bappenas

Senior Advisors

Figure 2.7 Organizational chart of Bappenas1

2.1.5 Agency for the Assessment and Application of Technology (BPPT) The Agency for the Assessment and Application of Technology (Badan Pengkajian dan Penerapan Teknologi or BPPT) is a non-department government agency under coordination of the State Ministry of Research and Technology. BPPT supports the government in technology assessment and application and has the authority to compose the national planning and policy in technology application. In addition, it has the authority to give recommendations and to audit new technologies.

In 1999, BPPT conducted some studies on GHG emissions in Indonesia and was being involved in Activities Implemented Jointly (AIJ) project of hybrid energy in Sulawesi.2 In September 2004, BPPT began a pilot biodiesel project, as part of the government's efforts to promote environmentally friendly energy.3 Biodiesel which is manufactured from off-grade-quality crude palm oil (CPO) is used to operate 23 commuter buses belonging to the agency. The BPPT began producing biodiesel at its laboratory in Serpong, Banten in 2003 and now has a capacity of 1,500 liters a day. During the pilot project, each of the BPPT buses uses about 30 liters of biodiesel every day. The research involves automotive companies PT Astra Isuzu International and PT Pantja Motor, and the Japan-Indonesia Science and Technology Forum.

1 Redrawn from http://www.bappenas.go.id/index.php?module=ContentExpress&func=display&ceid=2002, visited on March 13, 2006 2 Ministry of Environment Republic of Indonesia, National Strategy Study on CDM in Indonesia (2001) 3 S.P. Setiogi, “Trial begins for environmentally friendly fuel” in The Jakarta Post (September 28, 2004), http://www.terranet.or.id/beritanya.php?id=10476, visited on February 18, 2005


40

In addition to the existing biodiesel production of 1.5 tons per day, BPPT has a new biodiesel factory with capacity of 3 tons per day, which is due to start operation in July 2006. The second pilot factory is located not so far from the first one, within the Puspiptek zone. The second factory will use multiple raw materials such as crude palm oil (CPO) in various quality, jatropha oil, low quality oil, cooking oil production waste and copra.

The market of the product is secured. Retail consumers use about 1 ton per day and possibly more from industrial sector. Other potential consumers are government institutions, which are asked to use biodiesel, in a circulation letter from Minister of Energy and Mineral Resources. 1

Figure 2.8 Organizational chart of BPPT 2

Alternative and renewable energy is one of the focus areas of BPPT’s Science and Technology Achievement for the period of 2005-2009. Ministry of Research and Technology and Non-Departmental Government Agency on Research and Technology (LPND Ristek) are developing various plant-based alternatives to fossil fuels. Jatropha curcas or jarak pagar is one of the main interests. About 1000 Jatropha trees will be planted in an area of 2 ha.

The planting program of plant suitable for bioenergy production is based on an action plan from Task Force Energy of the Ministry of Research and Technology in cooperation with experts and researchers from LPND Ristek. A Jatropha curcas research and technology consortium has been established under the Centre for Research, Science and Technology (PUSPIPTEK) Serpong. It is expected to find solutions to national energy problems by developing bioenergy-based alternatives to fossil fuels.3

2.1.6 Ministry of Forestry (Dephut) Ministry of Forestry (Departemen Kehutanan or Dephut) is a member of KN-MPB as there is potential for CDM projects in the forestry sector. Dephut, in collaboration with JICA, has conducted a Study on Carbon Sequestration by Forest Management in Bogor, West Java

1 http://www.bppt.go.id, visted on February 17, 2006 2 Redrawn from http://www.bppt.go.id, visited on February 20, 2006 3 http://www.bppt.go.id, visited on February 17, 2006


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under the AIJ project.1

As stated in its Strategic Planning (2005 – 2009), the ministry shall actively involve in the implementation of international convention under UNFCCC and support related policy formulation in the forestry sector.2 The section responsible for CDM in Ministry of Forestry is the Directorate General of Forestry Protection and Nature Conservation (Dirjen PHKA).

In 2003 the National Strategy Study (NSS) on CDM in Forestry Sector was published by KLH, funded by World Bank and AusAID. The Ministry of Forestry is willing to pay close attention to CDM issues as Indonesia, according to the result of the National Strategy Study, has a large potential for CDM projects in the forestry sector. Indonesia has about sixteen million hectares land suitable for CDM projects, equal with mitigation potential of about 28 Mt CO2 per year.3

CDM team members in the Ministry have adequate knowledge on CDM issues and have been preparing to handle CDM projects in forestry sector. They have also prepared the sustainability criteria and indicators for CDM projects in the forestry sector, that are mostly based on the criteria and indicators in the National Strategy Study. Furthermore, Dephut has two representatives in the KN-MPB’s Technical Team. This Technical Team supports the KN-MPB by assessing the technical aspects of CDM projects.

Minister forForestry

GeneralSecretariat

GeneralInspectorate

Research andDevelopment

of Forestry

Senior Advisors

Directorate Generalof Land

Rehabilitation andSocial Forestry

DirectorateGeneral ofForestry

Program Control

DirectorateGeneral ofForest and

NaturalConservation

Agency ofForestryPlanning

Figure 2.9 Organizational chart of Dephut4

1 Ministry of Environment Republic of Indonesia, National Strategy Study on CDM in Indonesia (2001) 2 http://www.dephut.go.id/INFORMASI/INTAG/Renstra_KL_0509/matrik_renstra_0509.pdf, visited on March 13, 2006 3 Ministry of Environment Republic of Indonesia, National Strategy Study on CDM in Forestry Sector in Indonesia (2003) 4 Redrawn from http://www.dephut.go.id/INFORMASI/SETJEN/ST_NM/DEP.HTM, visited on March 13, 2006


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2.1.7 Ministry of Foreign Affairs (Deplu) According to Article 31 of the Presidential Decree No. 9/2005, the Ministry of Foreign Affairs assists the President in administering part of the Government’s duty in the field of international politics and international diplomacy. One of Deplu’s authorities is to manage the implementation of international treaties that has been signed by Indonesia, including the UNFCCC and the Kyoto Protocol. This has to be done in coordination with the relevant institution (the National Focal Point).

The Minister of Foreign Affairs is assisted by a Secretary General, an Inspector General and four Senior Advisors (also called Expert Staff). In addition, one Head of Policy Analysis and Development Agency as well as seven Director Generals are responsible directly to the Minister. The recent structure is a result of reorganization based on Presidential Decree No. 9/2005 and Minister of Foreign Affairs Decree No. SK 02/OT/VIII/2005/01 of 2005. Several changes were made during the reorganization including the merger of former Directorate General of Multilateral Economic, Finance and Development Affairs and the former Directorate General of Multilateral Politic, Social and Security Affairs into Directorate General of Multilateral Affairs. The reorganization was aimed to develop Deplu into a more reliable, responsive and professional organization.

The seven Directorate Generals are as follows:

• Directorate-General for Asia-Pacific and African Affairs • Directorate-General for American and European Affairs • Directorate-General for ASEAN Cooperation • Directorate-General for Multilateral Affairs • Directorate-General for Information and Public Diplomacy • Directorate-General for Law and International Treaties • Directorate-General for Protocol and Consular Affairs

In the area of climate change, especially related to CDM, Deplu has a very important role in facilitating the negotiation process for Indonesia to enter in any bilateral and multilateral CDM agreement. The Director-General for Multilateral Affairs is also a member of KN-MPB, while the Director of Development, Economic and Environmental Affairs is a member of the Technical Team of KN-MPB.

Deplu was actively involved in the ratification process of the Kyoto Protocol. Furthermore, it co-organized the National Dialogue – “What’s Next After Ratification of the Kyoto Protocol” held in September 2004. 1

1 Refers to sub-chapter 3.14


43

Figure 2.10 Organizational Chart of Deplu 1

1 Redrawn from http://www.deplu.go.id/download/strukturbaru.pdf, visited on February 13, 2006


44

2.1.8 Ministry of Agriculture (Deptan) Ministry of Agriculture (Departemen Pertanian or Deptan) assists the President in administering part of the Government’s duties in the field of agriculture and plantation.1 The research center of Deptan, Pusat Penelitian dan Pengembangan Tanah dan Agroklimat (Puslitbangtanak), is getting involved in CDM in order to enable projects to be carried out in the agricultural sector. In addition, Deptan has its representative in DNA, acting as a member of the KN-MPB.

Deptan holds a key role for biodiesel development in Indonesia. Deptan elaborates policies and development plans to secure the supply of both palm oil and Jatropha as biodiesel’s raw material. The approaches to improve productivity of palm oil are not limited to land extensification, but also to the intensification and rehabilitation of existing plantations. In case of Jatropha Curcas, Deptan applies the policies to improve productivity through selection of best variety and the use of critical land for Jatropha plantation.2

General Inspectorate General Secretariat

Senior Advisors

Directorate Generalof AgriculturalInfrastructureDevelopment

Directorate Generalof Food Crops

ProductionDevelopment

Directorate Generalof Holticulture


Directorate Generalof Estate Crops


Directorate Generalof LivestocksProduction

Development

Directorate Generalof Agriculture Product

& MarketingDevelopment

Agency forAgriculture Research

& Development

Agency for HumanResource

Development

Agency for FoodSecurity &Community

Empowerment

Agency forAgricultureQuarantine

Minister of Agriculture

Figure 2.11 Organizational chart of Deptan3

2.1.9 Ministry of Industry (Depperin) Ministry of Industry (Departemen Perindustrian or Depperin) - formerly part of Ministry of Industry and Trade (Depperindag) - is responsible to assist President in governing the industrial sector. Industrial sector has potential to hold CDM project from various emission

1 http://www.deptan.go.id/english/index.html, visited on February 18, 2005 2 Presentation of Directorate General of Estate Crops Production Development during Policy Dialogue on Biodiesel: Opportunities and Challenges, hosted by KLH in October 2005 3 Redrawn from http://www.deptan.go.id/index.html ,visited on March 14, 2006


45

reduction methods such as applying energy efficiency measures, improving the process technology and using alternative materials. Therefore, Depperin is considered as one of the main stakeholders of CDM in Indonesia.

The former Depperindag was separated into two ministries namely Ministry of Industry (Departemen Perindustrian or Depperin) and Ministry of Trade (Departemen Perdagangan) since October 2004. However, only Ministry of Industry resumes its representative in KN-MPB membership and the Technical Team.

Senior Advisors

SecretariatGeneral

InspectorateGeneral

Directorate General ofMetal, Machinery,Textile and Other

Industry

Directorate General ofAgro and Chemical

Industry

Directorate General ofSmall and Medium

Industry

Directorate General ofTransportation andTelematics Industry

Agency of IndustrialResearch andDevelopment

Minister for Industry

Figure 2.12 Organizational chart of Depperin1

2.1.10 Ministry of Transportation (Dephub) Ministry of Transportation (Departemen Perhubungan or Dephub) helps the President to manage national transportation. The Directorate General of Land Transportation (Dirjen Perhubungan Darat) is the Dephub division most relevant to CDM. Dephub is entitled to join the KN-MPB both in the Komnas itself as well as in the Technical Team.

Current Indonesian transportation sector causes air pollution problems and loss of productivity due to congestion. Therefore mitigating GHG emissions in transportation sector will provide large ancillary benefits. Policy measures in transportation will cover promotion of the use of public transportation, road pricing for regularly congested areas, and controlling vehicle emissions as well as promotion of the use of cleaner fuels. 2,1

1 Redrawn from http://www.dprin.go.id/Content1.asp?mode=1#org, visited on March 6, 2006 2 Ministry of Environment Republic of Indonesia, National Strategy Study on CDM in Indonesia (2001)


46

Senior Advisors

InspectorateGeneral

SecretariatGeneral

Directorate General ofLand Transportation

Directorate General ofSea Transportation

Directorate General ofAir Transportation

Directorate General ofRailway

Transportation

Agency for Researchand Development

Minister forTransportation

Agency for Educationand Training

Agency for NationalSearch and Rescue

Figure 2.13 Organizational chart of Dephub 2

2.1.11 Ministry of Home Affairs (Depdagri) With the enactment of Law no. 22/1999, the Ministry of Home Affairs (Departemen Dalam Negeri or Depdagri) has a new role in supervising the regional governments in the decentralized system.

Following the abolishment of the Ministry of Regional Autonomy in August 2000, Depdagri became the Ministry of Home Affairs and Regional Autonomy with the tasks to establish national regulations and policies as well as to support effective governance of regional governments. In addition, it is supposed to develop and maintain the relations between central and regional/local governments.

Depdagri is also a member of KN-MPB because all CDM projects have to be arranged in cooperation with the respective local governments. The Research and Development Center of Regional Resources and Environment (Litbang Sumberdaya Wilayah dan Lingkungan Hidup) has been appointed to deal with CDM.

1 M. Natsir, CDM Potential Overview in Indonesia and Environmental Policy for Transportation Sector in Indonesia, a presentation at International Workshop on CDM/JI in the Transport Sector (Japan: March 27- 28, 2003) 2 Redrawn from http://www.dephub.go.id/ , visited on March 6, 2006


47

Senior Advisors

InspectorateGeneral

SecretariatGeneral

DirectorateGeneral ofNationalityand Politics

DirectorateGeneral of

Governance

DirectorateGeneral ofRegional

Autonomy

DirectorateGeneral ofRegional

Development

Technical Unit

Minister for Home Affairs

Agency for Researchand Development

DirectorateGeneral ofCommunity

Empowerment

DirectorateGeneral of

PublicAdministration

DirectorateGeneral ofRegionalFinancial

Development

Agency for Educationand Training

Figure 2.14 Organizational chart of Depdagri 1

2.1.12 Ministry of Finance (Depkeu) The Ministry of Finance (Departemen Keuangan or Depkeu) as stipulated in the Decree of President of Republic of Indonesia No. 102 of 2001 has been assigned to assist the President in maintaining government duties on the state’s finance and assets.2

Depkeu prepares annually propositions for the state budgets, grants, government expenditures and middle term expenses. Furthermore, Depkeu has to allocate the government expenditures correctly as stipulated by the National Development Program (PROPENAS) and the State Budget Regulation (UU APBN). In 2003, a unified budgeting process was laid down in Law 17/2003, resolving the division of labor between Depkeu and Bappenas. Formerly, routine expenditures were under the responsibility of Depkeu, while the development expenditures were handled by Bappenas. After the division, Depkeu is responsible for creating an action plan plan or “Rencana Kegiatan” based on the annual government work plan (RKP) formulated by Bappenas.

The Minister of Finance is assisted by Senior Advisors, a Secretary General and an Inspectorate General. There are six Directorate Generals, as stated below: 1 Redrawn from http://www.depdagri.go.id/konten.php?nama=Organisasi&op=struk_org, visited on March 6, 2006 2 http://www.depkeu.go.id/Ind/Organization/TugasFungsi.htm#pusintek, visited on March 6, 2006


48

• Directorate General of Budget (Ditjen Anggaran dan Perimbangan Keuangan) Task: To formulate and implement policy and technical standard in fiscal, budget and financial balance sectors.

• Directorate General of Taxes (Ditjen Pajak) Task: To formulate and implement policy and technical standard in taxation based on existing laws and policies.

• Directorate General of Customs (Ditjen Bea Cukai) Task: To formulate and implement policy and technical standard for customs based on existing laws and policies.

• Directorate General of Finance Institutions (Ditjen Lembaga Keuangan) Task: To formulate and implement policy and technical standard for finance institutions, accounting and auditing based on existing laws and policies.

• Directorate General of Treasury (Ditjen Perbendaharaan) Task: To formulate and implement policy and technical standard in treasury based on existing laws and policies.

• Directorate General of State Loan and Auction (Ditjen Piutang dan Lelang Negara) Task: To formulate and implement policy and technical standard in state loan and auctions both as defined by State Loan Committee and based on ministry policies and existing laws.

In addition, this ministry includes the following agencies and center: • Agency for the Controlling of Stock Exchange (Bapepam) • Agency for Economic Analysis, Finance and International Cooperation Board /Badan

Pengkajian Ekonomi Keuangan dan Kerja Sama Internasional (Bapekki) • Agency for Financial Education and Training (BPPK) • Center for Financial Information and Technology (PUSINTEK)

2.1.13 Ministry of Public Works (PU) Tasks, functions, organizational hierarchies and frameworks for ministries of Republik Indonesia are defined in the Presidential Regulation no. 9/2005. As stated in this regulation, task of the Ministry of Public Works is to assist President in carrying out part of governmental responsibilities in public works.

The responsibilities of Ministry of Public Works include the formulation of national policies, implementation policies and technical policies regarding public work and settlement affairs and carrying out government affairs for public works. The ministry is also in charge of setting up policies in the following areas:

a. Infrastructure development based on regional planning for border areas, isolated areas, conflict areas, as well as disaster and potential disaster areas, in order to attain a peaceful Indonesia.

b. Supervision in managing the infrastructure to support regional autonomy and to apply principles of good governance, in order to realize impartial and democratic Indonesia.

c. Infrastructure development based on regional planning to support centers of production and food security, to ensure balanced regional development, to improve


49

the quality of housing and settlements and to push forward construction industry, in order to achieve Indonesia’s welfare.

General Inspectorate

General Secretariat

Senior Advisors

Directorate General of

Regional Planning

Directorate General of Water

Resources

Directorate General of Road

Infrastructure

Directorate General of Infrastructure Design

Agency for Construction and Human Resource

Agency for Research &

Development

Minister of Public Works

Figure 2.15 Organizational chart of Men PU 1

2.1.14 Coordinating Ministry of Economic Affairs (Menko Perekonomian) Status, Tasks, Functions, Responsibilities of State Coordinating Ministries are regulated by Presidential Decree No. 100/M/2001 as amended in 2002. Each ministry is responsible directly to the President.

The task of the Coordinating Ministry of Economic Affairs is to support the President in coordinating and synchronizing the preparation and formulation of policies in economic affairs and their implementation.

The functions of the Coordinating Ministry are as follows: a. To coordinate state ministries and heads of non-departmental government agencies in

integrated task accomplishment in economic affairs, including problem solving in carrying out tasks.

b. To coordinate and increase the integration in preparation and formulation of government policies, plans, programs and activities of all Departments and Non-Departmental Government Agencies dealing with economic affairs.

c. To monitor the implementation of policies, programs and activities as mentioned in the previous points (a. and b.).

The current mandate of the Coordinating Ministry in the renewable energy development is to coordinate the policies of supply and utilization of biofuels and to periodically report to the President on the status of biofuels. 2

1 Redrawn from http://www.pu.go.id/profil/organisasi/organisasi.htm, visited on February 17, 2006 2 Presidential Instruction no. 1/2006 on biofuels as alternative fuels


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2.2 State-owned companies

2.2.1 State Electricity Company (PT. PLN (Persero)) The state-owned electricity company PT. Perusahaan Listrik Negara (PLN) was established in 1964. In late 1993, the Minister of Mines and Energy issued a broad policy framework (“Sasaran & Kebijakan Pengembangan Subsektor Ketenagalistrikan” or "Goals and Policies for the Development of the Electricity Subsector") to guide long-term restructuring of the sector.1

One of the first steps was transforming PLN in 1994 from a government-owned utility company into a public limited liability company (Persero). A year later PLN's Java-Bali generation facilities were unbundled into two newly established companies, i.e. PT. PLN Pembangkit Tenaga Listrik Jawa-Bali I (PLN PJB I) and PT. Indonesia Power.

The electricity industry has been negatively affected by the prolonged economic crisis in 1997. PLN used to buying some of its electricity from Independent Power Producers (IPPs) in US dollar while electricity charges were collected in local currency, which had plummeted through the crisis. As a result, in 1998 PLN suffered substantial losses.

PLN was no longer the sole player in the power sector due to the market liberalization policy for the electricity sector issued in August 1998. The competition was expected to force PLN to improve energy efficiency and upgrade its plants.2 In early 2005, however, the monopoly of PLN has been reinstated and the major part of efforts for liberalization was spoiled as the Constitutional Court (Mahkamah Konstitusi, MK) surprisingly annulled the Law no. 20/2002.

Concerning CDM projects, the NSS mentions that the difficult financial situation of PLN has caused the company to concentrate on restoring its short-term financial viability at the cost of longer term projects.3 This has greatly limited the volume of CDM projects in the power sector (co-generation, fuel switch, renewable energy, etc).

PLN has executed some AIJ projects, such as the enhancement of operational management in Suralaya power plant pursued together with Chubu Electric Power Company (CEPCO) and METI Japan. Some feasibility studies on small hydro in Papua and renewable energy in East and West Nusa Tenggara (NTT and NTB) were also carried out by PLN. In addition, PLN has conducted an analysis on the use of three energy efficient light bulb technologies in cooperation with Arkonin Engineering Manggala Pratama.

PLN got involved in Sarulla geothermal project which was planned to be a CDM project under the SouthSouthNorth (SSN) program but then failed. Sarulla project was previously owned by Unocal and its development had been suspended since 1998 due to economic crisis. Afterward, PLN agreed to take over all assets from Unocal in July 2003. PLN’s Tender Committee then selected PT Geo Dipa Energy – a joint venture of PLN and Pertamina – to develop the 300 MW Sarulla geothermal power plant in North Sumatra on May 23, 20054.

1 http://www.indonesiapower.co.id/eng/psekilas.htm, visited on February 21, 2006 2 Ministry of Environment Republic of Indonesia, National Strategy Study on CDM in Indonesia (2001) 3 Ibid. 4 http://www.usembassyjakarta.org/econ/energy_highlight_may05.html, visited on April 11, 2006


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Construction is expected to start in August 2006 and the power plant is scheduled to be operational in 2009. PT Geo Dipa Energy subsequently formed an entity with PT Bukaka Teknik Utama to develop this field.

PLN signed a contract with Japanese Sumitomo Corporation to construct the Lahendong II geothermal power project in North Sulawesi in October 2006. The 20-MW power project is an extension of the Lahendong I plant with the same capacity. The project’s engineering, procurement and construction (EPC) will be financed through an Asian Development Bank (ADB) loan, and construction will take approximately 20 months. Electricity production is expected to begin in June 2007, adding to North Sulawesi’s current 171 MW production capacity.1 PLN is developing the project as a CDM candidate project and in the process of dealing with World Bank PCF as potential buyer (as of February 2006).2 Further development of Lahendong site is Lahendong III – 20 MW power plant project which will be funded by JBIC.

Almost at the same time, PLN announced its deal with Indonesian Star Energy on the price of electricity produced at its Wayang Windu 110 MW geothermal power plant, located 40 kilometers south of Bandung, West Java. Star Energy acquired the geothermal plant from a Deutsche Bank-led consortium in November 2004 and subsequently commissioned a project to double the capacity of the plant by 2008. Star Energy has identified the possibility to develop the project as a CDM project, supported by a consultant.3

PLN says it plans to increase its geothermal capacity to 2,000 MW by the year 2009.4

2.2.2 State Oil and Gas Company (PT. Pertamina (Persero)) Pertamina was established in 1957 as a state owned company with Law No. 8/1971. The law was annulled with the enactment of Law No. 22/2001 on Oil and Gas in November 2001. Law No. 22/2001 and Government Regulation No. 31/2003 changed Pertamina’s title into PT. Pertamina (Persero) as well as its legal status into a limited liability company.5 Under this new regulation, all assets of Pertamina including its subsidiaries and joint ventures will serve as the capital base of the new entity.

The law also stipulates the end of Pertamina’s monopoly over downstream oil distribution and marketing of fuel products. Pertamina’s upstream responsibilities to manage the Production Sharing Contracts (PSCs) were shifted to the BPMIGAS.

Pertamina is the 9th largest producer of crude oil in Indonesia with a share of around 3 percent. It ranked as the 5th in production of natural gas in 2002 with a share of 8 percent.6 The company has planned a total investment of US$2.08 billion over five years. Two-thirds of the investment will be in upstream business and the remainder in downstream. Pertamina

1 http://www.usembassyjakarta.org/econ/energy_highlight_oct05.html, visited on April 11, 2006 2 Personal communication with Udibowo Ciptomulyono of PLN, received on February 17, 2006 3 Personal communication with Alex Smillie of Star Energy, received on April 28, 2006 4 Ibid no. 2 5 http://www.pertamina.com/pertamina.php?page=1&irwcontents=1&lang=1, visited on April 20, 2006 6 Embassy of the United States of America in Indonesia, Petroleum Report Indonesia 2002 – 2003 (Jakarta: 2004), http://jakarta.usembassy.gov/econ/petro2003-toc.html, visited on April 20, 2006


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needs funds to upgrade its aging refineries, LPG and fuel depots and distribution infrastructure, to replace and supplement its old shipping fleet, as well as for upstream acquisitions.

Pertamina legally owns the geothermal steam and is responsible for supervising the exploration and production of geothermal energy. It has identified at least 80 feasible geothermal fields with estimated geothermal production potential of 20,000 MW. 400MW of geothermal capacity can replace a typical fossil fuel fired power plant, delivering a significant reduction in GHG emissions. 1

Pertamina’s involvement is crucial to the development of geothermal power generation projects, one of the most promising sectors for CDM projects in Indonesia. Pertamina appointed Unocal to explore and operate geothermal resources under joint operating contracts (JOC). In 2002, Pertamina reached an agreement with Unocal Geothermal of Indonesia, Ltd. (UGI) and Dayabumi Salak Pratama, Ltd. (DSPL) on pricing and production regarding Gunung Salak geothermal project.2 In 2005 the operation of this geothermal site was shifted to Chevron Geothermal Salak, after Chevron's merger with Unocal.

Chevron Energy Indonesia and Pertamina are jointly developing Darajat III geothermal power project in Garut, West Java, the construction of which was launched by the Minister of ESDM in November 2005. The 110 MW Darajat III is an expansion of the current Darajat complex, including the 90 MW Darajat II (operated by Chevron) and 55 MW Darajat I (operated by PLN).3

In February 2006, Pertamina and Para Group signed a MOU to develop three geothermal power projects, Kamojang Unit 6 (West Java), Ulu Belu (Lampung, Sumatra) and Lumut Balai (South Sumatra). The three projects have a combined production capacity of 1,060 MW. Construction schedule has not been announced yet.4

2.2.3 State Gas Company (PT. PGN) PT. Perusahaan Gas Negara Tbk (PGN) is a state-owned gas transmission and distribution company. It manages and develops the Indonesian Gas Transmission Network and is the largest distributor of gas.

PGN delivers gas principally to Jakarta, Cirebon, Bogor, Medan, Surabaya and Palembang. The whole distribution system for these cities is comprised of about 2,700 km of pipeline. PGN as a national public utility enterprise is obliged (by government regulation No. 37 of 1994) to develop infrastructure for natural gas transmission and distribution across the archipelago in order to transport gas to an array of existing and future consumers, such as households, industrials and commercials.

PGN was listed in the Jakarta Stock Exchange and Surabaya Stock Exchange in late 2003. Consequently, the Indonesian government sold about 39% of its share in PGN.

1 Ministry of Environment Republic of Indonesia, National Strategy Study on CDM in Indonesia (2001) 2 http://www.unocal.com/uclnews/2002news/072302.htm, visited on April 20, 2006 3 http://www.usembassyjakarta.org/econ/energy_highlight_nov05.html, visited on April 11, 2006 4 http://www.usembassyjakarta.org/econ/energy_highlight_feb06.html, visited on April 11, 2006


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PGN has purchased a fully integrated Gas Management System for its new pipeline supplying gas to Singapore. In addition, it is planning an Integrated Transmission System (ITS). The ITS will eventually link the islands of Sumatra, Java and Kalimantan via a 3,600km integrated gas pipeline.1

The Trans-ASEAN gas pipeline (TAGP) project was conceived in the 2nd ASEAN Informal Summit in December 1997. Its master plan, which was completed in April 2001, identified seven possible interconnections. A four-year study on the feasibility of these connections was started in 2005 with funding from U.S. Trade and Development Agency.2 Expansion of gas pipelines could create opportunities for fuel-switching CDM projects.

2.2.4 PT. KONEBA PT. Konservasi Energi Abadi (KONEBA) is a state-owned energy services company (ESCO). The company was established in 1987 as a public-private entity by a group of fertilizer companies especially to cut energy use in this energy-intensive industry, using a US$ 5 million loan from the World Bank. Due to performance and financial problems, it was taken over completely by the government with the Depkeu taking over all the debts commitments, and was put under the supervision of ESDM3.

KONEBA provides consulting services in energy management and engineering.4 Its main service areas are energy efficient design of processes and equipment as well as engineering energy supply systems. Activities include energy consumption surveys in industrial, transportation and commercial building sector. The company has also carried out energy audits in various industries (fertilizer, textile, mining, cement, steel, pulp and paper, ceramics), commercial buildings and power plants.5 KONEBA has received supports from Hagler-Bailly, Inc. (USA), a diversified international management and technical consulting firm with proven expertise in energy management, international development and economic analysis. 6

The company also has a renewable energy division and currently plans micro-hydro and wind power plants. The renewable energy projects will apply for CDM credits. 7

1 Embassy of the United States of America in Indonesia, Petroleum Report Indonesia 2002 – 2003 (Jakarta: 2004) 2 http://www.usembassyjakarta.org/econ/energy_highlight_sep05.html, visited on April 20, 2006 3 Agus P. Sari, personal communication, received on April 8, 2005 4 http://www.koneba.co.id/main.php, visited on April 20, 2006 5 http://www.koneba.co.id/main.php?page=services, visited on March 15, 2006 6 http://www.serd.ait.ac.th/cogen/Partners/partners.html, visited on February 22, 2005 7 Rizka Elyza, personal communication, received on February 2, 2006


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2.3 Private sector

2.3.1 Project Developers

2.3.1.1 PT. Indocement Tunggal Prakarsa Tbk. Indocement is the second largest cement producer in Indonesia 1 with a total annual production of 15.4 million tons of clinker. It was established in 1985 and currently operates 12 plants, nine of which are located in Citeureup, Bogor, West Java; two in Palimanan, Cirebon, West Java; and one in Tarjun, Kotabaru, South Kalimantan.

Heidelberg Cement Group from Germany, one of the world’s leading cement manufacturers, based in Germany and operating in 50 countries, acquired a majority in the company in 2001.2 In 2004 Indocement and the World Bank signed an agreement on the first cement sector CDM candidate projects under the Prototype Carbon Fund (PCF).

The projects aim at reducing GHG emissions at Indocement's plants in Citeureup, Cirebon and Tarjun, one by switching to alternative fuels and the other by reducing energy consumption in the grinding phase by selection of materials. The estimated reduction is 10 million tonnes of GHGs, three million tonnes of which will be sold to the PCF.3 Indocement has submitted the project’s methodology to CDM EB in 2004, and some revisions have already been made. At the moment the methodologies for alternative fuels (ACM0003)4 and alternative materials (ACM0005) 5 have been approved as consolidated baseline methodologies. The two project activities already granted the host country approval from KN-MPB in late December 2005. However, they are still in the process of final validation before proceeding with registration to CDM-EB.

2.3.1.2 BP The BP group started oil production in Indonesia in 1971. BP is one of the largest gas producers. In partnership with the Indonesian upstream operations authority BPMIGAS, BP has invested over US$6 billion in its Indonesian operations over the last 30 years. After acquiring the gas station chain Arco’s in 2000, all BP business areas - exploration and production, chemicals, downstream, and solar - are represented in the company’s Indonesian operations.6

BP operated a global internal emissions trading system between 1999 and 2001 that helped reduce the company’s GHG emissions by 10%.7 As a member of World Bank's Global Gas

1 The largest cement producer in Indonesia is PT. Semen Gresik 2 http://www.indocement.co.id/en/overview.asp, visited on April 20, 2006 3 http://www.indocement.co.id/en/more.asp?newsnum=80, visited on April 20, 2006 4http://cdm.unfccc.int/methodologies/DB/U2P67MPD8B1NO042ZTNSWCAVOSS9F5/view.html, visited on April 20, 2006 5http://cdm.unfccc.int/methodologies/DB/G6JNR2F5F10ZBE3D5M0YUEWP8OAVTM/view.html, visited on April 20, 2006 6 Embassy of the United States of America in Indonesia, Petroleum Report Indonesia 2002 – 2003 (Jakarta: 2004) 7 http://www.pewclimate.org/what_s_being_done/in_the_business_community/trading.cfm, visited on


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Flaring Reduction (GGFR) program1, BP is also looking for opportunities to carry out GHG emission reduction projects under CDM in Indonesia. However, there are still policy barriers to carbon trading and CER ownership in oil and gas industry in Indonesia under the current PSC scheme. Therefore, removing this barrier is also one of the objectives of GGFR in Indonesia.

2.3.1.3 ChevronTexaco Indonesia ChevronTexaco Indonesia is the Indonesian subsidiary of ChevronTexaco. The company has conducted oil and gas exploration in Indonesia since 1970. In the 1990s, one of ChevronTexaco’s affiliates, Amoseas Indonesia, invested in electric power generation using geothermal and other forms of clean power production. Now, Chevron Geothermal Indonesia (CGI) operates 145 megawatts (MW) of geothermal energy in the Garut area of West Java. Chevron has built and operates the Darajat II power plant (90 MW). A CGI-operated geothermal field also supplies the steam to Darajat I, a 55 MW power plant built and operated by PLN. Expansion of the Darajat power complex with Darajat Unit III is scheduled to begin operation in 2006.2

CGI is searching for approval of Darajat Unit III as a CDM project. For this purpose, the company has submitted a new methodology to CDM EB. The baseline methodology was not approved3 and the EB suggested ChevronTexaco to use consolidated baseline methodology for grid-connected electricity generation from renewable sources (ACM0002).4 In order to apply this methodology, ChevronTexaco facilitated the calculation of emission factor for Jawa-Madura-Bali (JAMALI) grid system. Based on the calculation, the emission factor for JAMALI system (0.728 tCO2eq/kWh) was launched in a stakeholders meeting April 2006 and reported to KN-MPB.

In April 2005, Chevron merged Unocal into a network of huge oil and natural gas production in Southeast Asia.5 As a result of the acquisition, the operation of the geothermal plant in Gunung Salak, West Java has come to be under Chevron Geothermal Salak.6

2.3.1.4 PT. Petromat Agrotech PT. Petromat Agrotech’s core business is renewable energy, especially solar drying, solar home systems and agricultural engineering. The company implemented a solar cooker project in Aceh with the support of Klimaschutz e.V., which successfully registered as the first Indonesian CDM project. The project uses renewable energy by introduction of solar cookers

April 20, 2006 1 A public-private partnership aiming to support national government and the petroleum industry in their efforts to reduce flaring and venting of natural gas associated with the extraction of crude oil. GGFR is further elaborated in section 3.17 2 http://www.chevron.com/operations/docs/indonesia.pdf, visited on April 20, 2006 3 http://cdm.unfccc.int/UserManagement/FileStorage/CDMWF_775807808, visited on April 20, 2006 4 http://cdm.unfccc.int/UserManagement/FileStorage/eb15repan2.pdf, visited on April 20, 2006 5 R. Gold, Chevron Buys Unocal in $16.8 Billion Deal, Asian Wall Street Journal (April 5, 2005) 6 http://www.chevron.com/operations/docs/indonesia.pdf, visited on April 20, 2006


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and heat retaining containers, reducing use of non-sustainable fuel wood.1

2.3.1.5 PT. Murini Samsam and PT. Multimas Nabati Asahan PT. Murini Samsam (MSS) and PT. Multimas Nabati Asahan (MNA) both are part of the Wilmar group – a Singaporean based large palm oil and palm kernel oil producer in South East Asia. Both companies are planning installation of new cogeneration units at their plants as CDM projects. The units will be fed with palm kernel shell and palm kernel fiber, both by-products of palm oil production. This project will help reducing fuel consumption of diesel generators as well as electricity demand from the Sumatra grid and therefore will reduce GHG emissions.2

Both projects have been granted national approval from KN-MPB in December 2005. The MSS project has been registered to CDM-EB on June 17th 2006 while MNA project is in the process for registration to CDM-EB.

2.3.1.6 PT. Indotirta Suaka PT. Indotirta Suaka - a private Indonesian company plans a project on methane capture and combustion from swine manure treatment in cooperation with Mitsui & Co., LTD. The project site, “Bulan Farm”, is a large-scale swine husbandry farm located on Bulan Island in Riau province. Currently, pig manure from this farm is treated in an open lagoon system with anaerobic treatment and the sludge is discharged to a tapioca farm (used as fertilizer). The lagoons emit large amounts of methane that currently is not being recovered. The project will capture the methane by installing covered anaerobic digesters instead of current open lagoons. Captured methane will be flared in order to reduce greenhouse gas emissions.3

The project was initiated through NEDO's CDM Feasibility Study, which financially assisted the feasibility study and PDD development during JFY2004/2005. The CDM project was submitted at the end of 2005 and was approved by DNA on May 23, 2006.

2.3.1.7 PT. Lunto Bioenergi Prima PT. Lunto Bioenergi Prima is a company focusing on local bioenergy. Together with Bronzeoak4, a UK-based company on renewable energy, PT. Lunto has been developing a CDM project in Bandarjaya Village, Lampung. The power plant will use rice husks—otherwise regarded as waste—to produce 3 MW of electricity, helping to reduce power deficit in the area. The electricity from the plant is estimated to meet the needs of 42,000 people in 8,500 households. The CDM process of this project is suspended due to the ongoing PPA negotiation. In addition, PT. Lunto is also developing a CDM project on palm oil waste power plant (10.5 MW) in Riau, Sumatra. 5

1 http://dna-cdm.menlh.go.id/en/projects/?pg=projects, visited on April 20, 2006 2 Ibid 3 Ibid 4 www.bronzeoak.com 5 www.iges.or.jp/.../Day%201/CDM%20and%20Benefit%20for%20Company%20-%20Iwan%20Sutanto%20-%20PT.%20Lunto.pdf, visited on April 20, 2006


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2.3.1.8 PT. Navigat Organic Energy Indonesia PT. Navigat Organic Energy Indonesia (PT NOEI) is a joint venture of PT. Navigat, the Indonesian distributor of GE Jenbacher gas engines, and Organics Group plc, a UK based company specializing in waste management and energy recovery from waste. PT NOEI is currently developing an integrated solid waste management project in Bali, which involves a gasification, landfill gas and anaerobic digestion (GALFAD) plant at the TPA Suwung landfill site in Bali. The scheme will generate electricity from municipal solid waste and will be used to supply electricity to the local grid. PT. NOEI has submitted a project methodology and it has been successfully approved by the EB. The approved methodology was then incorporated to the approved baseline methodology AM0025 “Avoided emissions from organic waste through alternative waste treatment processes”, valid since March 03, 2005.1

2.3.1.9 PT. Bukaka Teknik Utama PT. Bukaka Teknik Utama is a private company established in 1978. The company specializes in engineering, fabrication and construction in the infrastructure, transportation, telecommunication and energy sectors.2 The company’s involvement in energy sector started in 1988 and it has initiated several hydropower projects, most notable of which is a 180 MW run-off river hydropower plant in Poso, Central Sulawesi. At the moment, the AMDAL study has been accomplished and the plant construction has begun. The company is planning the development of other 14 hydropower plants including an 18 MW plant in Tamboli, South-East Sulawesi.3

2.3.1.10 PT. Bioenergi Surya Persada PT. Bioenergi Surya Persada is an engineering company for environmental, mechanical-electrical, agricultural and organic fertilizer industries. The company is currently developing a power plant using municipal solid waste (MSW) as fuel source in Malang, East Java – a project which will potentially be carbon financed. The power plant will handle about 500 tonnes per day (tpd) of municipal solid waste. In addition, the company plans to develop similar projects in other cities e.g. Surabaya (1000 – 2000 tpd), Jakarta (1000 tpd) and Batam (500 tpd). In Sidoarjo, the municipal solid waste (150 tpd) will be treated to produce compost/fertilizer. The company plans to develop those projects under CDM scheme.4

2.3.1.11 PT. Agricinal PT. Agricinal is a public company concentrating on palm plantations, palm nursery, palm oil processing, livestock, and fishery. The company is pursuing a CDM project in its palm oil processing unit, located in the centre of its 8900 ha palm oil plantation in North Bengkulu district, Bengkulu Province. The project will replace the conventional palm oil mill effluent

1 http://cdm.unfccc.int/methodologies/DB/97ZN8KB4VIQAOQSTJPFV95DD3RVCEK/view.html, visited on April 17, 2006 2 http://www.bukaka.com/AboutUs.php, visited on April 20, 2006 3 Personal communication with KH Pranoto of Bukaka Teknik Utama, received in April 25, 2006 4 Personal communication with Gogh Youdihanto, received on April 18, 2006


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(POME) treatment with that a technology that captures and flares the methane from anaerobic digestion. Furthermore, the new treatment will produce cattle feed as a by-product.1

2.3.1.12 PT. Medco Ethanol Lampung PT. Medco Ethanol Lampung is a joint venture of PT. Medco Ethanol Indonesia – a subsidiary of PT. Medco Energi Internasional Tbk and PT. Trada Bioenergy Indonesia. The joint venture will be started by building an ethanol plant in Kotabumi – North Lampung in the 3rd quarter of 2006 and the production is planned to start in early 2008. The plant is designed to produce ethanol both from tapioca and from molasses (sugar cane). With ethanol production capacity of 180 kiloliters per day, the expected carbon emission reduction from methane capture and electricity generation would be 200kt/year. Discussion with potential carbon buyers is still ongoing.2

2.3.1.13 Others In addition to the aforementioned project developers, there are more companies involved in CDM projects development. Those companies develop CDM projects in various sectors including geothermal energy, waste-to-energy, micro-hydro, biomass, biofuels, etc. Some of the companies are listed in the following table.

Table 2.1 CDM Project Developers and Project Titles 3

Project Developer Project Title

CREATA Utilization of Combined Solar, Wind and Biomass for a Small Agro-Processing Unit

Pacific Consultants International Bio-Diesel Fuel Production Project (Small scale) PT Gikoko Kogyo Indonesia Cahaya Biomass Waste to Electricity for a Furniture Factory

PT. Inti Indo Sawit Subur Methane Recovery Project at PT. Inti Indo Sawit Subur Buatan I in Riau, Indonesia

PT. Magma Nusantara Limited/Star Energy Wayang Windu Geothermal (110MW)

PT. Sinar Mas Agro Resources Technology (SMART) Tbk Palm oil waste power plant in Riau

Tokyo Electric Power Company (TEPCO) and PT Gunung Madu Plantations (PT GMP)

Repowering bagasse power plant at the sugar factory in Lampung Tengah

1http://www.iges.or.jp/en/cdm/pdf/indonesia/fy2004/Material/Preparatory%20Meeting/Presentation/Role%20of%20CDM%20in%20Energy%20Project%20-%20Ervan%20Maksum.pdf, visited on April 20, 2006 2 Personal communication with Panya Siregar, Project Director of MEL, received on March 3, 2006 3 Project developers’ information was gathered from various publicly available sources.


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2.3.2 Private Intermediaries

2.3.2.1 DP Solusi DP Solusi or PT. Dwikarsa Primarta is a consulting company specializing in climate, energy and environmental solutions. Along with global changing attitudes toward sustainable development, the company is focusing their business in the greenhouse gases mitigation technologies, development of CDM projects, and renewable energy and energy efficiency projects.

As for CDM, the company provides service in project pre-screening to identify prospective CDM projects, development of CDM PIN and Project Design Document (PDD) required to support a CDM project, assistance during validation and verification stage, as well as preparation of pre-feasibility study and/or feasibility study for renewable energy and energy efficiency projects.

The company has involved in some activities related to CDM projects such as preparation of CDM PDD for Indocement to reduce the GHG emissions by reducing the clinker to cement ratio and partially replace fossil fuel by alternative fuel for clinker burning, as well as preparation of PIN and PDD for small scale run-off hydro project. DP Solusi has also assisted a leading Japanese Trading House to review, analyze and document law and legislations related to CDM development in Indonesia1.

2.3.2.2 Carbon and Environmental Research Indonesia (CER Indonesia) Carbon and Environmental Research Indonesia (CER Indonesia) was established in 2004. CER Indonesia aims at conducting environmental studies as well as implementing capacity building activities for empowering community and stakeholders. Furthermore, CER Indonesia assists communities and stakeholders in designing program for environmental projects by optimizing the use of local and global environmental funds.

The scope of CER Indonesia activities include research and development, education, training, workshop, seminar, and community based development and public awareness programs as well as consultancy services on policies development and CDM project design.

Since 2004, CER Indonesia has been involved in some projects on energy, climate change and CDM. CER Indonesia supported the IGES Capacity Strengthening Program for CDM by preparing CDM Country Guide for Indonesia and organized seminar in regional level. The organization is also actively involved with GGFR partnership to promote gas flaring reduction projects.2

2.3.2.3 Eco Securities Indonesia EcoSecurities Indonesia is part of EcoSecurities Limited – a corporation dealing with carbon projects worldwide. In Indonesia, the entity provides financial support as well as consultation service to the CDM projects and assists the project developers throughout the process 1 DP Solusi information sheet/flyer 2 http://www.cerindonesia.org/activities.php, visited on April 20, 2006


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starting from an initial assessment to project documentation, formal approval processes and finally transaction of emission reductions.

There are three phases of a CDM project in which EcoSecurities engages. The first phase is project origination, the stage where the potential project is recognized and assessed by experts to determine whether the project could financially benefit from carbon transaction. The second stage is implementation, where EcoSecurities assists the project developer in developing the required project documents (PDD) and passing the registration and validation process. In the last stage - purchase of the emission reductions, the company offers several options: direct purchase of the credits through Emissions Reduction Purchase Agreements (ERPAs), finding other buyers in the global market, or acquiring the credits from various carbon facilities that the company cooperates with.1

Presently, EcoSecurities Indonesia is working on assisting several CDM projects ranging from biomass, hydropower, landfill gas utilization and biofuel.

2.3.2.4 Byun & Co Byun & Co. is a boutique investment bank, which specializes in "Northeast Asia - Southeast Asia" business links and projects, especially with respect to environmental and carbon finance related matters. Since 2002, Byun & Co. has been engaged in Advisory services for the Clean Development Mechanism (CDM) under the Kyoto Protocol. The firm provides CDM Advisory for various projects including renewable energy, reforestation and methane avoidance/capture. The scope of work includes analyzing the feasibility of carbon finance, estimating the impact of carbon credits (amount and value of carbon credits), brokerage of carbon credits and project documentation/certification. The firm provides CDM related services ranging from preparation of PIN, PCN, PDD, baseline study, monitoring methodology, project validation and project registration2.

At the moment, Byun & Co. is engaged in two CDM projects in Indonesia. The first project is a 19.2 MW biomass power plant in Gianyar, Bali with potential emission reduction of 260,000 tons CO2/year. Up to date, the project’s feasibility study has been completed and a preliminary MoU with rice waste supplier has been signed. The project developer is currently negotiating the power purchase agreement (PPA) with PLN. The draft of PDD is ready and the estimated delivery time of emission reduction is mid 2007. 3

The second project is methane capture from palm oil waste in Sumatera which could potentially reduce carbon emission of 80,000 – 120,000 tons CO2/year. The project is expected to deliver emission reduction in the first quarter of 2007. The draft of PDD has been accomplished. 4

1 http://www.ecosecurities.com/development-intro.php, visited on April 20, 2006 2 http://www.byunco.com/en/page82310.htm visited on 28/02/2006 3 Personal communication with Vernon Z. Tan, received in March 15, 2006 4 Ibid


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2.4 Foreign and International Stakeholders

2.4.1 The World Bank (WB) The World Bank (WB) has established several carbon finance initiatives. It manages about $1 billion to purchase carbon credits from CDM and JI projects.1 The World Bank’s carbon funds include Prototype Carbon Fund (PCF), Community Development Carbon Fund (CDCF), BioCarbon Fund, and other funds.

The Prototype Carbon Fund (PCF) was established in 1999 by the Executive Directors of the World Bank as a partnership among seventeen companies and six governments. 2 It was the first international carbon fund, aimed to pilot the concept and offer a "learning-by-doing" opportunity to its stakeholders. It includes both CDM and JI projects. Each investor is entitled to a share of the credits that corresponds to initial investment in the fund. As a pilot activity, the PCF does not intend to compete in the Emission Reductions market; it is limited to US$180 million and will be terminated in 2012. 3 Japan is the biggest contributor to the fund through JBIC and Japanese private sector participants. As of June 2004, Japan has contributed US$8.76million or approximately 17% out of total US$52.72million paid.4

In Indonesia, PCF buys credits from Indocement Sustainable Cement Production CDM project. This project became PCF’s first cement sector project.5

Besides PCF, there are seven funds established to purchase emission reduction in which CDM projects from developing world are eligible to be considered:6

1. Community Development Carbon Fund is a fund which provides carbon finance to small-scale projects in the poorer areas of the developing world. The Fund became operational in July 2003 and the first tranche is closed to further subscriptions. The CDCF supports projects that combine community development attributes with emission reductions and will use financial innovation to improve the lives of the poor.

2. BioCarbon Fund – a fund which is dedicated to projects that sequester or conserve carbon in forest and agro-ecosystems (LULUCF sector). It aims to deliver cost-effective emission reductions, while promoting biodiversity conservation and poverty alleviation. The Fund started operations in May 2004 and has a total capital of $53.8 million. Tranche One of the BioCarbon Fund is concluded and a new call for projects (Tranche Two) is opened.

3. Italian Carbon Fund was commenced in fall 2003 after the World Bank agreement with the Italian government. The fund purchases GHG emission reductions from CDM and JI projects.

1 http://carbonfinance.org/Router.cfm?Page=ProjDev&ItemID=24671, visited on April 26, 2006 2 http://carbonfinance.org/, visited on April 26, 2006 3 http://carbonfinance.org/pcf/router.cfm?Page=About, visited on April 26, 2006 4 Prototype Carbon Fund Annual Report 2004 p39, http://carbonfinance.org/docs/2004PCFAR.pdf downloaded on April 26.2006 5 http://carbonfinance.org/pcf/router.cfm?Page=Projects&ProjectID=3160, visited on April 26, 2006 6 http://carbonfinance.org/Router.cfm?Page=Funds&ItemID=24670, visited on April 26, 2006


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4. The Netherlands CDM Facility was established with an agreement between the World Bank and the Netherlands in May 2002. The Facility supports projects in developing countries that generate potential credits under CDM.

5. Danish Carbon Fund was established in January 2005. Investors are two Danish public sector participants and five Danish private sector participants with a total of 58 million euros in August 2005. The portfolio can include CDM and JI projects based on various technologies, including wind power, combined heat and power, hydropower, biomass, and landfills.

6. Spanish Carbon Fund was created in 2004 by an agreement between Spain and the World Bank. This fund purchases credits from CDM, JI Mechanism, and from the Emissions Trading Scheme (ETS) of the European Union.

7. Umbrella Carbon Facility is an aggregating facility to pool funds for the purchase of emission reductions from large CDM/JI projects.

World Bank provides the following forms of assistance for developers of CDM projects in its portfolio:1

1. Support for preparation of the CDM documents and securing the carbon assets. The support can be in the form of advance payment, offering certainty and limiting risks.

2. Allows sale of either VERs (Verified Emission Reductions) or CERs (Certified Emission Reductions). Also in the case of VERs, the emission reductions will be paid for only when the process of creating the carbon assets is completed (upon an independent validation and issuance of each yearly or periodic verification report), but World Bank takes care of the process. Selling CERs provides a better price. This is a better option especially if the regulatory risk is low, i.e. in projects where applicable baseline and monitoring methodologies have already been approved, or in sectors where the approval of the methodology is highly likely.

3. For projects which are marginal in terms of IRR, the carbon facilities offer:

a. A carbon payment stream beyond 2012 to ensure the viability of the project

b. Up to 25% of the value of the emission reduction purchase agreement (ERPA) can be paid upfront and undiscounted, in cases where it can be demonstrated that such advance payment is absolutely necessary.

Additionally, the World Bank has supported capacity-building activities related to climate change and CDM in Indonesia:2

• National Strategy Studies (NSS) Program. Since 1997, initially with the support of Switzerland and subsequently of other donors, the Bank has assisted 26 client countries to develop national policies on Joint Implementation (JI) and the Clean Development Mechanism (CDM) under the Kyoto Protocol. The Indonesian NSS in energy sector was part of this program (further details in section 3.4).

1 http://carbonfinance.org/Router.cfm?Page=ProjDev&ItemID=24671, visited on April 26, 2006 2 Verified with personal communication with Farida Zaituni of the World Bank, received on April 24, 2006


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• The workshop “Introduction to Clean Development Mechanism: Lessons Learned from World Bank Carbon Funds and Other Carbon Buyers”, was organized in May 2004 in cooperation with KLH and YBUL (further details in section 3.13).

• The workshop “National Dialogue - What is Next after Ratification of Kyoto Protocol” in collaboration with KLH, Deplu, Pelangi, GTZ, & NEDO in September 2004 (further details in section 3.14).

• The workshop “Landfill Gas Utilization”, in September 2005 with NEDO, Danish Embassy and KLH (further details in section 3.22).

• The Executive Workshop – Training on CDM, held in January 2006 in cooperation with KLH, NEDO and the Danish Embassy (further details in section 3.23).

• The Global Gas Flaring Reduction (GGFR) Partnership – a public private partnership aims at enabling gas flaring reduction projects (further details in section 3.17).

2.4.2 The Asian Development Bank (ADB) The Asian Development Bank (ADB) is a multilateral development finance institution dedicated to reduce poverty in Asia and the Pacific region. Established in 1966, it now consists of 63 members, mainly from the region.1 It aims at helping its developing member countries (DMCs) – including Indonesia – reduce poverty by focusing on pro-poor sustainable economic growth, inclusive social development, and governance for effective policies and social development, as well as governance for effective policies and institutions.2

For several years, ADB has been involved in energy issues to address regional and global environmental impacts. From 1995 – 1999, ADB administered technical assistance for greenhouse gas abatement by developing national level GHG inventories for 11 countries through ALGAS program (see section 3.1). In 1999 - 2000, ADB supported capacity building on CDM by producing and disseminating a technical manual on designing CDM projects, as well as through several national and regional workshops aiming at enhancing the abilities of policy makers from developing countries to understand the implications of Kyoto Protocol.

In August 2003, ADB established its CDM Facility that provides opportunities to DMCs to access additional financial resources for emission reductions projects in order to promote sustainable development. Under its Renewable Energy, Energy Efficiency and Climate Change (REACH) program, ADB supported various climate change related projects in Indonesia:3

• A regional technical assistance (TA) on Promotion of Renewable Energy, Energy Efficiency and Greenhouse Gas Abatement (PREGA) which was co-financed by Dutch Cooperation Fund.

1 http://www.adb.org/About/default.asp, visited on February 22, 2005 2T. Kubo, Mainstreaming CDM in ADB Project Financing, presentation at CDM Investor Forum (Manila: October 27, 2004), http://cd4cdm.org/countries%20and%20regions/Asia/Manila%20Forum/2_second_Kubo.pdf, visited on February 22, 2005 3 http://www.adb.org/reach/default.asp, visited on April 19, 2006


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• Technical assistance (TA) on Carbon Sequestration through CDM in Indonesia, financed by the Canadian Cooperation Fund on Climate Change (further details in section 3.9).

Asian Development Bank also provided technical assistance (TA) to Indonesia on gas generation from waste in the palm oil sector, which took place between September 2004 and May 2005 (refer to section 3.16). The ongoing project is a technical assistance to the Government of Indonesia for institutionalizing the CDM, detailed in section 3.24.

2.4.3 The German Technical Cooperation (GTZ) The Deutsche Gesellschaft für Technische Zusammenarbeit or the German Technical Cooperation (GTZ) GmbH is an international cooperation enterprise for sustainable development with worldwide operations. It was established in 1975 and is organized as a private company owned by the German Federal Government. GTZ supports technical cooperation projects and facilitates the establishment of new projects and programs commissioned by the German Federal Ministry for Economic Co-operation and Development (BMZ).1

GTZ has been working in Indonesia since it was founded and has supported Indonesian government in issues related to CDM since 2001. GTZ and World Bank assist Indonesia to explore the opportunities and benefits they may have when participating in CDM in order to promote market-based climate policy instruments. The assistance provided to Indonesia by the GTZ within the National Strategy Studies Program involves the National Strategy Study program on energy sector that took place in 2001 (see section 3.4).

In addition, GTZ supported the CDM Institution-Building Program, the purpose of which is to facilitate the development of clean development mechanism (CDM) project activities in Indonesia. The main objective of the project was to establish the designated national authority (DNA) for CDM implementation in Indonesia. This objective was achieved through the following activities:

• to design the working mechanism of DNA; • to define DNA’s tasks and rules; • to increase the working capacity of the DNA and of potential project proponents in

Indonesia; and • to introduce DNA and CDM Approval Guidelines to potential project proponents,

operational entities, local authorities, and the public.

On June 28, 2004, GTZ supported the National Dialogue titled “What is next after the Ratification of Kyoto Protocol”. The event was co-organized by KLH, Deplu and Pelangi with support from GTZ, NEDO and the World Bank (further details in section 3.14).

2.4.4 Japanese Ministry of Economy, Trade and Industry (METI) Japanese Ministry of Economy, Trade and Industry (METI), in cooperation with Japanese

1 http://www.gtz.de/en/aktuell/608.htm, visited on February 21, 2005


65

Ministry of Environment and Ministry of Foreign Affairs, launched the Japan CDM/JI Acceleration Program in November 2004. It aims at supporting host country governments and private entities to accelerate the realization of potential CDM/JI projects.

Collaborating with fifteen host countries in Asia, Central and South America, and CIS/Eastern Europe, this program identifies the kind of support needed to realize potential CDM/JI projects in these countries, to provide them with various support measures, and to promote investment by Japanese private entities. It will identify 100 potential projects and develop PIN 50 of them.

In addition, the program will provide assistance to relevant stakeholders and organize interviews and roundtables with relevant government officials and major companies, as well as provide assistance in drafting PDDs through short-term dispatches of CDM/JI experts. The assistance may be in the form of capacity building as well as financial assistance to feasibility studies, subsidies to project implementation, soft loans, yen loans and trade insurance.

Together with other Japanese organizations, i.e. Ministry of Foreign Affairs (MOFA), Ministry of the Environment (MoE), Global Environment Center Foundation (GEC), Institute for Global Environmental Strategies (IGES), Japan Bank for International Cooperation (JBIC), Japan External Trade Organization (JETRO), Japan International Cooperation Agency (JICA), New Energy and Industrial Technology Development Organization (NEDO), Overseas Environmental Cooperation Center (OECC) and Japan Carbon Finance, Ltd. (JCF), METI has launched the so-called Japan Kyoto Mechanisms Acceleration Program (JKAP) 20051. Figure 2.16 presents various schemes implemented in JKAP framework.

Figure 2.16 Japan Kyoto Mechanisms Acceleration Programme (JKAP) Note: *) SAPROF: Special Assistance for Project Formation

1 The Government of Japan, Japan Kyoto Mechanisms Acceleration Program 2005, 2005

JBIC Financing

GEC/NEDO CDM/JI

Project F/S

MOE/NEDO Upfront Payment Programme for CDM/JI Projects

NEXI Export

Insurance

JCF Development

of CDM/JI Procurement

of Credits

Upcoming scheme: Kyoto Credits Purchasing Scheme

MOFA, METI, MOE

JETRO Business Matching

Support

JBIC SAPROF*), PDD Assistance, etc.


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As of January 2005, CDM/JI Acceleration Program experimentally introduced an Upfront Payment Scheme under the administration of METI, NEDO and Japan’s Ministry of Environment (MOE). The program provides financial assistance for project development through an up-front payment of up to 50 percent of necessary costs, including preliminary costs (validation, registration cost, etc.), equipment and construction costs, post project costs (monitoring, verification, certification costs, etc).

In the near future, Japan through METI and MOE will launch a new carbon fund to purchase emission reduction certificates through CDM and JI project. The new carbon fund will be administered by NEDO, who will soon announce the launch of the scheme and afterward accept project proposals.

2.4.5 The New Energy and Industrial Technology Development Organization (NEDO)

The New Energy and Industrial Technology Development Organization (NEDO) was established by the Japanese government in 1980 to develop new energy technologies as alternatives to oil. Eight years later, in 1988, NEDO's activities were expanded to include industrial technology research and development, and in 1990, environmental technology research and development. Activities to promote new energy and energy conservation technology were subsequently added in 1993.1

Within the previously described JKAP framework, NEDO plays important roles especially within the following schemes:

CDM/JI Feasibility Studies

The scheme aims to realize private sector projects that are expected to be eligible for CDM or JI in the near future. NEDO and GEC administer this scheme by providing financial assistance to cover the cost of feasibility study and PDD development. Private sector from non-annex 1 countries as well as countries with economies in transition are eligible to apply. Following requirements apply to the projects seeking support from this scheme:

• The project reduces GHG emissions by using advanced technologies to increase the efficient use of energy.

• It contributes to sustainable economic development in the host country. • It is planned by Japanese private sector firms.

Upfront Payment Programme for CDM/JI Projects

The objective of this scheme is to promote GHG emission reduction projects under the Kyoto Mechanism and to obtain emission reductions (CERs, ERUs, AAUs) valid for Kyoto compliance. The scheme is illustrated in figure 2.17.

1 http://www.nedo.go.jp/english/introducing/what.html, visited on May 3, 2006


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Figure 2.17 Scheme of Upfront Payment Programme for CDM/JI Projects Note: 1) Foreign entities can also apply for this program. A Japanese partner, however, is required.

2) Payment is made after project participants complete equipment installation.

Furthermore, NEDO has held several CDM related capacity building events in Indonesia:

• Workshop on CDM - Prospect and Commitment, in September 2003 as a joint cooperation of the Ministry of Environment Republic of Indonesia, UNDP, and NEDO (further details in section 3.10)

• The 4th CTI (Climate Technology Initiative), a series of seminars in ASEAN, cooperation between NEDO, the UNFCCC, and the Government of Indonesia. Seminars dealt with issues concerning climate change with a focus on clean energy technology and energy efficiency (further details in section 3.12).

• The National Dialogue – What’s next after Ratification of the Kyoto Protocol in September 2004 co-organized by NEDO, GTZ, and World Bank (further details in section 3.14).

• Roundtable Discussion on “Financing CDM Projects: A Way to Support Sustainable Development”, Jakarta, February 2005 (further details in section 3.15).

• The landfill gas utilization and CDM workshop which was carried out in Bali, September 2005. The workshop was organized by World Bank, NEDO, Danish Embassy and KLH (further details in section 3.22).

• Executive Workshop – Training on CDM held in Jakarta, January 2006, by the World Bank, KLH, NEDO and the Danish Embassy (further details in section 3.23).

CDM/JI Project Activity

Project Participants 1)

NEDO

Necessary Costs:

Validation, Equipment Installation,

Certification, Verification, etc.Financial assistance:

Maximum 50% of “Necessary Costs”

Eligibility: Non-Annex I & Annex I Countries

Ministry of Economy, Trade and Industry (METI)

Subsidy 2)

Partial ERs Transfer


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Table 2.2 List of the recent CDM projects supported by NEDO Commissio

ned Company

Counterpart Project Summary Expected Emission

Reduction/year

Duration (year)

Tomen Corporation Sumatra

At the palm oil mill, current operations necessitate discharge of waste fluid into lagoons for treatment; a process that produces 2000 t of methane per year. This study assesses the feasibility of recovering the methane for use as fuel to supply plant’s power needs which are currently met through diesel consumption, and accordingly bring about significant reductions in carbon emissions from the mill.

110,000 10

Sumitomo Corp

PT BUDI ACID JAYA, native Tapioca starch plants

This study intends to improve the waste treatment system at native Tapioca starch fabrication plants of PT BUDI ACID JAYA and to reduce methane emissions from waste.

82,000 10

The Tokyo Electric Power Co., Inc

PTPN13 Palm Oil Plantation

This study intends to feed electricity from a palm oil factory in West Kalimantan to the national grid. This project utilizes process residues such as EFB, fibers, shells, and methane from wastewater as fuel for new generating system.

235,268 21

Mitsui & Co., Ltd.

Bulan Pig Farm run by PT. Indotirta Suaka

This study aims to capture methane in a swine farm. Captured methane will be flared and/or be used for power generation to supply electricity for local consumption.

65,000 21

2.4.6 Japan Bank for International Cooperation (JBIC) Japan Bank for International Cooperation (JBIC) was established as an Official Financial Institution of Japan in October 1999 by the Merger of the Export-Import Bank of Japan (JEXIM) and Overseas Economic Cooperation Fund, Japan (OECF). It aims at promoting Japan’s international trade and other international economic activities to achieve stabilization of the international financial order, economic and social development as well as stability of developing countries.1

JBIC is supporting emission reductions by financing projects on renewable energy, natural gas, energy saving and forest conservation through Japan Carbon Finance (JCF). In addition, JBIC contributes to the Prototype Carbon Fund (PCF) and has a cooperation agreement with IETA (International Emissions Trading Association), Mexican DNA and BCIE (Banco Centroamericano de Integración Económica), a multilateral financial institution for Central American countries.

2.4.7 Japan Carbon Finance (JCF)2 Japan Carbon Finance, Ltd. (JCF) was established in 2004 together with Japan GHG Reduction Fund (JGRF), the first carbon fund in Japan. The size of the fund is USD141.5 million, invested by 33 Japanese entities (31 major private companies and 2 governmental banks, the Japan Bank for International Cooperation (JBIC) and the Development Bank of Japan (DBJ). It purchases CDM and JI credits as well as AAUs (Assigned Amount Units).

1 Ito, JBIC’s Engagement to Kyoto Mechanisms and Japan Carbon Fund (JCF), a presentation at CDM Investor Forum (September 22 – 24, 2004), held in Jerba, Tunisia. 2 Personal communication with Yoichiro Matsushita, received on April 26, 2006


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(see Figure 2.18)

JCF does not limit its activities solely to purchasing credits. It gets involved in the development stage of CDM and JI projects, offering financial support to bear costs of procedures, such as PDD (Project Design Document) and validation, and providing advice and suggestions on both development and implementation of the projects.

Besides, in close collaboration with JBIC, JCF can provide CDM/JI project developers underlying finance, such as loans through local financial intermediaries. (see Figure 2.19). Through these operations, JCF will contribute to not only curb of global warming but also sustainable development of the world.

Figure 2.18 ERs Purchase Structure

Figure 2.19 Example model for underlying finance provided for CDM/JI projects in collaboration with JBIC

CDM/JI Project Entity

(ERs Seller)

JCFJapan

Carbon

Finance, Ltd.

(ERs Buyer)

JGRF Japan GHG Reduction

Fund

(Fund Pool)

US$140M

Emission Reduction Purchase

Agreement

(ERPA)

Emission Reduction

Resale Agreement

Development Cost

ERs

Payment Payment

ERs

CDM/JI Projects

UnderlyingFinance

Purchase of CER

Underlying Equity, etc. Finance

(Japanese) Companies in Power / Energy Sector, etc.

Intermediary Financial Institution

Cash Inflow during Construction Period

JBIC JCF Direct Loan

Cash Inflow during Crediting Period

Fund Provision


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2.4.8 The Institute for Global Environmental Strategies (IGES) 1 The Institute for Global Environmental Strategies (IGES) was established under the Ministry of Environment of Japan in 1998. It conducts pragmatic and innovative strategic policy research to support sustainable development in the Asia-Pacific, a region that is experiencing rapid population growth and expanding economic activity.

The Integrated Capacity Strengthening for the CDM (ICS-CDM) was launched in October 2003 as one of the several CDM promotion initiatives by the Ministry of the Environment in Japan (MOE-J). MOE-J appoints IGES as the implementing body for the program.

As part of the ICS-CDM program, IGES conducted the first phase of capacity building programs for Indonesian local stakeholders on development of GHG emission reduction projects in 2003 – 2004 (see sections 3.7 and 3.8). The second phase of the project in 2004 – 2005 focused on identifying potential waste to energy CDM projects (see section 3.18). A series of meeting was conducted in cooperation with Ministry of Environment (KLH). In addition, a number of PINs has been produced during this second phase.

Under the ICS-CDM program, IGES also supported the development of CDM Country Guide for six Asian countries including Indonesia. The CDM Country Guide for each country includes the country profile, CDM project cycle, CDM project approval procedures, related laws/regulations and fiscal/financing issues, and applicable government incentives.

2.4.9 Japan International Cooperation Agency (JICA) Japan International Cooperation Agency (JICA), formerly OTCA (Overseas Technical Cooperation Agency), was established in 1974. It is responsible for the technical cooperation aspect of Japan's ODA programs. That technical cooperation is aimed at the transfer of technology and knowledge that can serve the socioeconomic development of the developing countries. JICA carries out a variety of programs to support the nation building of developing countries through such technical cooperation. 2

In Indonesia, JICA has implemented a Technical Cooperation Project (TCP) on Global Environment Conservation (Global Warming) from February to May 2004. The main purpose of the project was to disseminate information on the global warming issue. As a part of the project, a team conducted seminars in five regions (N. Sulawesi, N. Sumatra, S. Kalimantan, Riau and Bangka - Belitung).3 In addition, JICA Indonesia Office has conducted the Carbon Fixing Forest Management Project and also has started to conduct a series of Environmental Education focusing on primary and junior high school students.4

2.4.10 KfW Carbon Fund KfW is a promotional bank of the Federal Republic of Germany founded in 1948. Its shareholders are the Federal Republic of Germany (80 percent) and German federal states

1 http://www.iges.or.jp/en/cdm/index.html, visited on February 7, 2005 2 http://www.jica.go.jp/english/about/02.html, visited on May 3, 2006 3 http://www.jica.or.id/global_warming.html, visited on May 3, 2006 4 Personal communication to Katsuhiko Ohara of JICA Indonesia Office, received on May 3, 2006


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(20 percent). KfW has foreign offices in Brussels and 28 offices in developing and emerging countries including Indonesia.1,2

On June 29, 2004 KfW Bankengruppe launched the KfW Carbon Fund. It has published its first announcement and started to purchase emission certificates. KfW provides a service instrument for German and European enterprises wanting to use project-based certificates for compliance purposes. It will provide funds of up to EUR 10 million to kick-start the program.3

The fund uses three purchase methods:

• Purchase program (“Buyers’ Pool”) for project-based certificates o Purchase of compliance tools for the ETS (CERs, ERUs, project-based EU-

Allowances) o commercial orientation

• KfW purchases as a trustee for participants o in its own name, for the account of participants o on the basis of individual Agency Contracts between KfW

and each participant • Long term off-take contracts with suppliers of certificates (“ERPA”)

o fixed volume, fixed price o until 2012 with option to extend o payment on delivery; pre-financing by KfW on a case by case basis

Figure 2.20 Contractual structure of the KfW Carbon Fund 4 1 M. Lerch, The KfW Carbon Fund, a presentation at Workshop „Financing Clean Development Mechanism Projects: A Way to Support Sustainable Development“ (Jakarta: 2005) 2 http://www.kfw.de/EN/Die%20Bank/Inhalt.jsp, visited on March 15, 2005 3 KfW (June 29th, 2004). Starting Shot for KfW Carbon Fund. Press Release. http://www.kfw-foerderbank.de/EN_Home/Carbon_Fund/PE_29_06_04.pdf, accessed May 3 2006. 4 M. Lerch, The KfW Carbon Fund, a presentation at Workshop „Financing Clean Development Mechanism Projects: A Way to Support Sustainable Development“ (Jakarta: 2005)

Participant 1

KfW

Project Portfolio

(“KfW Carbon

Project n

Project 3

Project 2

Project 1

Participant 2

Participant 3

Participant x

ERPA

At

t


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As of May 2006, KfW has received more than 120 CDM project proposals and about 20 projects have been short-listed for a possible inclusion into the portfolio. Majority of projects that are currently reviewed are carried out in Asia, mainly clustered in India and China. There are no Indonesian CDM project proposals in the pipeline yet. However, the acquisition phase has not ended yet and KfW welcomes Indonesian CDM projects to participate.1

2.4.11 The Canadian International Development Agency (CIDA) The Canadian International Development Agency (CIDA) plans and implements most of Canada's development cooperation programs. It was established in 1968 and has supported projects in more than 150 countries. CIDA works in partnership with developing countries, Canadian organizations, institutions and businesses, as well as international organizations and agencies.2

CIDA has supported several CDM activities in Asian countries. It has financed a project on analyzing market-based, fiscal and regulatory approaches to promote energy efficiency and conservation. The project was carried out as a collaboration of several organizations in Canada, India, China and Indonesia.3 In 2002 - 2005, CIDA funded two projects related to climate change. The first project was Climate Change, Forest and Peat Lands in Indonesia (CCFPI) which was implemented by Wildlife Habitat Canada and Wetland International-Indonesia. The overall goal of this project was sustainable management of Indonesia's peat swamps in order to improve livelihoods, maintain and increase carbon storage, and conserve biodiversity. The second project was Forest Resource Management for Carbon Sequestration (FORMACS) which was executed by CARE-Canada and its local partner. The three-year project provided a replicable model for community-based forest resource management systems that will promote improved livelihoods, conservation of existing forests and reduction in the rates of forest conversion and GHG emissions thereof.4

2.4.12 The United Nations Development Programme (UNDP) The United Nations Development Programme (UNDP) is the UN’s global development network, an organization advocating for change and connecting countries to knowledge, experience and resources. In Indonesia, UNDP has supported climate change/CDM activities such as:

• The First National Communication (1998-1999); • Workshop on CDM: Prospect and Commitment, held in September 2003 in

cooperation with KLH, Bappenas and NEDO, and was aimed at expediting information

1 Personal communication with Subin Nijhawan of KfW Bankengruppe, received on April 28, 2006. Further information is available at http://www.kfw.de/carbonfund 2 http://www.acdi-cida.gc.ca/faq-e, visited on April 28, 2006 3 http://www.iisd.org/climate/global/cdm.asp, visited on April 28, 2006 4 http://www.acdi-cida.gc.ca/cidaweb/webcountry.nsf/VLUDocEn/Indonesia-Projects#9, visited on April 28, 2006


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on the Kyoto Protocol ratification process in Indonesia and enhancing Indonesia’s preparation in developing CDM projects (further details in section 3.10).

At the moment, UNDP is facilitating KLH to perform stock taking exercise as part of preparing the Indonesian Second National Communication. The Second National Communication will be launched at the end of 20061.

2.4.13 Dutch Government According to the Kyoto Protocol, the Netherlands has a 6 percent emission reduction target for GHG emissions. The Dutch government wants to cover a substantial part of this reduction through Kyoto mechanisms. The Netherlands was one of the first countries having earmarked public funding for buying CDM credits. The Ministry of Housing, Spatial Planning and the Environment (VROM) is responsible for the implementation of CDM. VROM has also been assigned as Designated National Authority (DNA) for CDM in the Netherlands. 2,3

The Nederlands has a target of 100 Mt CO2 in 2008-2012 through the following mechanisms:

• JI: purchase ERUs through ERUPT (ERU Procurement Tender) • CDM: purchase CERs through CERUPT • purchase ERUs and CERs through PCF • make a contract with WB/EBRD/IFC and one commercial Bank • International Emission Trading (IET) and EU Emission Trading between companies4.

By exploring different tracks to purchase Certified Emission Reductions (CERs), to the Dutch hope to find out the most efficient and effective ways to use CDM, and get an idea of the role of CDM. The Netherlands, through SenterNovem, an agency of the Ministry of Economic Affairs, launched carboncredits.nl in 2000. The country has been active in Indonesia through CERUPT and BCPA schemes. The CERUPT scheme has already been terminated while the World Bank now manages the BCPA scheme.

CERUPT

CERUPT (Certified Emission Reduction Unit Procurement Tender) was launched in 2002, to acquire CERs in developing countries in Asia, Africa and Latin America.5,6

In Indonesia, there were five projects that had submitted a proposal to the CERUPT tender. Only one of them was selected. Wayang Windu Unit 2, a 110 MW geothermal project in Java, has a potential emission reduction of 750,000 tCO

2e for a crediting period of 7 years with a

1 Personal communication with Lukas Laksono Adhyakso - UNDP Programme Officer, received on April 17, 2006 2 http://www2.vrom.nl/pagina.html?id=7477, visited on February 25, 2005 3 Bothends, Clean Development Mechanism - Lessons from the Dutch approach?, discussion paper prepared for COP10, UNFCCC, December 2004 4 M. Henkenmans, Dutch Climate Policy a GHG Buyer (Prague: 2004) 5 http://www.gm-unccd.org/FIELD/Private/Eco/FR_CER.htm, visited on March 2, 2005 6 http://www.senter.nl/asp/page.asp?id=i001236&alias=erupt, visited on March 3, 2005


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price of 5.2 Euro per ton.1 However, the project proponent decided to withdraw from the contract due to difficulties in fulfilling the timeframe and obtaining the credits.

BCPA

VROM and the Indonesian Ministry of Environment (KLH), organized a public workshop on the Netherlands’ Bilateral CER Purchase Agreement (BCPA) mechanism.

On February 23, 2005 the Dutch government signed a bilateral Memorandum of Understanding (MoU) with the Indonesian government. By signing the MoU, the Indonesian government committed itself to facilitate transaction of at least 2 million tCO2e emission reductions to the Dutch by the end of 2012.2 The price offered was to be around 3.5-5.5 Euro per tCO2e.

The World Bank is appointed to coordinate implementation of the BCPA. The World Bank will facilitate tenders to select consultants to develop potential CDM projects.3

The Dutch government is acting not only as a buyer but also as a financial supporter for CDM activities. In the course of the process of ratification of Kyoto Protocol in Indonesia, the Dutch Government supported a capacity building process which issued an academic paper as the final outcome. The Academic Paper was prepared by the KLH, as one of the documents required for the ratification process.4

2.4.14 Danish Government According to the EU burden-sharing agreement, Denmark has a statutory obligation to cut GHG emissions by 21% from 1990 levels in the first commitment period 2008 – 2012.5

In February 2002, the Danish Government published its National Climate Strategy, which outlines how to manage the commitments under the Kyoto Protocol most appropriately and cost-effectively. According to the Danish climate strategy, the main part of CO2 reductions will be accomplished through cooperation with developing countries, most importantly Thailand, Malaysia, South Africa, China, and Indonesia.6

The Danish Carbon Facility is one of several activities of the Danish Government to meet its obligations under the Kyoto Protocol and to assist Danish industry in complying with greenhouse gas emission targets. It was launched in 2004. The Danish government has invested €7.9 million (US$9.5 million) to acquire 1.2-1.7 Mt of carbon credits.7 The facility focuses on the acquisition of emission reduction credits from energy efficiency, fuel switching, methane capture, or reduction of industrial emissions.

1 http://www.mesdm.net/berita_mesdm.php?news_id=51, visited on March 3, 2005 2 http://www.pointcarbon.com/article.php?articleID=6785&categoryID=470, visited on April 25, 2006 3 Personal Communication with Haneda Sri Mulyanto of KLH, received on April 28, 2006 4 Pelangi, Spektrum October 2002 edition, (Jakarta:2002) 5 NEDO, CDM Development in Malaysia (Kuala Lumpur: 2004) 6http://www.ambbangkok.um.dk/en/menu/DevelopmentCooperation/ProgrammeComponents/CleanDevelopmentMechanism/, visited on February 25, 2005 7 http://www.ecosecurities.com/200about_us/223press_releases/223press_17_May_2004.html, visited on March 16, 2005


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An MoU between Denmark and Indonesia was in July 2005, marking the launch of Danish CDM Project Development Facility (hereinafter referred to as “CDM PDF” or “Danish CDM PDF”). Danish CDM PDF through the Danish Embassy in Jakarta identifies projects and screens PINs and supports development of relevant projects. The CDM PDF covers the costs of developing selected projects from initial ideas to approved CDM projects. The facility gives the project developers technical and financial assistance, starting from the process of developing Project Design Document (PDD), validation, host country approval and registration; however the project’s implementation cost is not covered. The first call for proposals closed on 26 October 2005 and the results were announced in January 2006. The second call will be closed in end of June 2006. 1

The Danish CDM program also includes capacity building for establishing the Project Development Facility as well as preparation of projects in the pipeline. See section 3.21 for details. It concentrates its project development and capacity building activities in four sectors, namely landfill gas, palm oil, oil and gas and cement. Preferences are given to the project which methodology has been approved or in the process of granted approval.

2.4.15 Austrian Government Austria’s Kyoto target is -13%. In order to fulfill its emission reduction target, the Austrian government provides a budget of EUR 11 million for 2004, EUR 24 million for 2005 and EUR 36 million annually from 2006 to 2012 for implementation of JI and CDM projects.2 It issued a call for expressions of interest (EoI) for CDM credits through the Austrian JI/CDM Program, and Kommunalkredit Public Consulting (KPC) GmbH was put in charge of the Program Management.

The purpose of the Austrian JI/CDM Program is purchasing emission reductions generated by JI/CDM projects and financing certain project-related intangible investments and services (e.g. baseline studies), if necessary for the success of projects.

It has recently published the 4th call for CDM projects and therefore invites Indonesian companies/project developers to participate in the tender. The Austrian JI/CDM Program offers flexibility within the purchase procedure, including possibility of advance payment under the ERPA as well as up-front funding for preparation of a project3. The program focuses on the following areas: renewable energies, retrofitting industrial boilers, construction of new power plants, landfill gas, waste management and energy efficiency.

In addition, the Memorandum of Understanding (MoU) signed between the governments of Austria and Indonesia on December 7, 2005 provides a credible base and higher investment security for Austria to finance CDM projects in Indonesia4.

1 Danish CDM-PDF, http://danish.cdm.or.id, visited on April 12, 2006 2 Kommunalkredit Public Consulting, Call for Expression of Interest for Emission Reductions generated by CDM projects under the Austrian JI/CDM Program (Vienna: 2004) 3 http://www.austriantrade.org/indonesia/our-office-in-jakarta/news/article/4828/4537/hash/3ab9379a8a/en/, visited on April 11, 2006 4 Ibid


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2.4.16 Canadian Government Canada’s reduction target under the Kyoto Protocol is 6 percent below 1990 levels - a reduction of 240 Mt from its projected “business-as-usual” emissions in 2010.1

The Climate Change Action Fund (CCAF) was established in 1998 by the federal government to help Canada meet its commitments under the Kyoto Protocol to reduce greenhouse gas emissions. 2 Through the CCAF, the Government of Canada took steps to engage governments, businesses, communities and individual Canadians to address climate change.

In 2000, Canada established the Canada Climate Change Development Fund (CCCDF), which is administered by the Canadian International Development Agency (CIDA), to help people in developing countries address climate change in four key ways:

• introducing policies and technologies that will reduce harmful greenhouse emissions • promoting forestry and agriculture practices that will protect and enhance carbon sinks • reducing the vulnerability of people in developing countries to climate change and

helping them adapt to its negative effects • raising awareness and helping to develop tools and technologies to combat climate

change.3

Canada’s CDM and JI Office – established in 1998 – serves as the country’s designated national authority. The office is also the federal government’s focal point for CDM and JI activities. In addition, the office aims to strengthen relations with project host countries and gives analytical and policy support to negotiations. 4

The office assists financially preparation of Carbon Finance Assessments, Project Design Documents (PDD) including development of methodologies, baselines and monitoring plans as well as registration and verification of projects5.

During COP 11 in December 2005, Canada and Indonesia signed a Letter of Intent (LoI) to cooperate in CDM. The LoI facilitates private sector participation in CDM between the two countries. Prior to the LoI, the CDM & JI office has supported participation of Indonesian industry representatives in a CDM Matchmaking Session in Montreal in December 2005. In addition, the office has started the Canadian CDM Project Development Facility (Canadian CDM PDF) in Indonesia to identify potential CDM projects. 6

The CDM & JI Office Canada has mandated Econoler International – a Canadian CDM consultant to develop a portfolio of PINs and PDDs in Indonesia. The consultant has selected ten CDM projects for support in preparation of PIN. (see table 2.3). The projects are subject to further screening for assistance in PDD preparation. The Canadian CDM PDF gives

1 http://climatechange.gc.ca/plan_for_canada/plan/chap_2_2.html, visited on March 16, 2005 2 http://climatechange.gc.ca/english/ccaf/historical.asp, visited on March 16, 2005 3 http://www.acdi-cida.gc.ca/climatechange, visited on March 16, 2005 4 Canada’s CDM & JI Office, http://www.international.gc.ca/cdm-ji/menu-en.asp visited on February 13, 2006 5 Canada’s CDM & JI Office presentation during Executive Workshop/Training on CDM, Jakarta on January 24-26, 2006 6 Ibid


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preference to projects from sectors that are believed to be suitable for CDM implementation in Indonesia such as power generation, energy efficiency in industries palm oil, waste management and landfill gas.

Table 2.3 Potential CDM Projects under the support of CDM & JI Office Canada 1

Project Name Annual GHG Emission Reduction (tCO2e/year)

Estimated delivery time of emission reduction

Dieng and Patuha 300MW Geothermal Project by Geo Dipa Energi 1,000,000

2 units in 2009 2 units in 2010

Waste-to-energy through incineration by Dinas Kebersihan, Duri Kosambi, Jakarta 263,000 2009

Waste to energy through incineration (9 MW) in Malang 132,000 2008

Energy Efficiency and Energy Conservation Projects in Large Scale Integrated Textile Industry

71,000 2008

10 MWe (net) Palm Oil Mill Residue Power Plant, Rantauprapat, Northern Sumatra, Indonesia.

65,000 2009

Methane Capture of Palm Oil Mill Effluent for Power Generation in Sei Daun and Dolok Sinumbah (Total capacity: 1 MW)

33,000 2008

Boiler Installation with Palm Oil Biomass Waste Fuel and Coal in Kayu Aro Tea Manufacturing

41,000 2009

Mechanical Composting and Manual Sorting by Wira Gulfindo Sarana 32,000 2008

Hydro power project of 8 MW in Kerinci District, Sumatra 39,000 2009

3 MW, Rice Husk Power Plant, Perbaungan, Deli Serdang, North Sumatra, Indonesia *)

25,000 2008

*) PDD completed with the support of Econoler/CDM Office Canada

However, the new conservative government has stated that it will not use trading to comply with Canada’s Kyoto target, making the future of Canadian CDM funding uncertain 2 . Furthermore, other statements by ministers and revelations of funding cuts suggest that the new government is reducing and delaying efforts to cut GHG emissions. On April 5 it was reported that federal funding for climate change programs in the new fiscal year had been

1 Personal Communication with Vincent Dufresne – Econoler, March 10, 2006 2 Reuters (April 26, 2006). Canada Backs Breakaway Six-Nation Climate Group. See http://www.planetark.com/dailynewsstory.cfm/newsid/36128/story.htm, accessed on May 3, 2006.


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reduced by 40%. Several existing federal climate change programs expired on March 31, at the end of the last fiscal year. It appears that some of these have been kept going on an interim basis using “Governor General Special Warrants.” But funding for other programs has not, as of April 2006, been renewed. 1

2.5 NGOs, Research Organizations and Professional Associations

2.5.1 Yayasan Pelangi Indonesia (Pelangi) Yayasan Pelangi Indonesia was founded in response to challenging global environmental and sustainable development issues, following the Earth Summit in 1992. Since 1999, Pelangi has focused its policy research and other activities on climate change and forestry; energy; air quality and transportation. Pelangi general objective is to find solutions to climate change through mitigation and adaptation.

Pelangi was one of the four organizations from four developing countries collaborating in developing CDM pilot projects under the first phase of the SouthSouthNorth project (2001–2005). SouthSouthNorth (SSN) is a network of non-profit NGOs and research institutions that helps public and private stakeholders benefit from CDM. The first phase was carried out in Brazil, South Africa, Bangladesh and Indonesia. Second phase of the project, SSN 2, started in 2005 and is planned to go on for 4 years with focus on the use a broader selection of funding sources to support project activities that combat poverty and at the same time support mitigation of or adaptation to climate change. SSN has the scope of its activities to 5 programs: Mitigation, Adaptation, Technology Receptivity and Transfer, Policy Intervention and Capacity Building. It also has expanded into Sub Saharan Africa (Mozambique and Tanzania).2 SSN and its activities are further elaborated in chapter 3.20.

From mid-2003 until the establishment of Indonesian DNA in 2005, Pelangi assisted the Ministry of Environment (KLH) in carrying out a stakeholder consultation process and in creating the national sustainable development criteria and indicators for CDM projects used by the DNA.

The Danish embassy has appointed Pelangi together with an international consulting firm to assist its Danish CDM PDF from project identification, Project Design Document (PDD) development and facilitation of validation. The scope of work also includes capacity building for stakeholders in particular project developers.

Pelangi has expanded its activities into climate change issues in the forestry sector related to climate change and forest management. This includes research on forestry in CDM to understand the local aspects of CDM projects in the forestry sector.

Having been involved in the international negotiations and national climate policy, Pelangi undertakes research on Kyoto mechanisms and post-2012, e.g. under the Asia-Pacific

1 The Pembina Institute: Climate Change, Kyoto and the New Federal Government: Concerns and Expectations, http://www.pembina.org/pdf/publications/BG_Canet_Apr1206_MB.pdf on April 12, 2006 2 http://www.southsouthnorth.org, visited on April 18,2006


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Network for Global Change Research (APN). In 2004, Pelangi took part in the South-North Dialogue, a research collaboration on further commitments of the North and future role of the South after 2012.

Pelangi is also engaged in several air quality, transport and energy projects. Supported by The Asia Foundation (TAF) and US-Asia Environment Partnership (US-AEP), Pelangi has undertaken a preparatory project to prepare a policy paper on a Clean Air Law for Indonesia. Funded by the EU, Pelangi and ECN (Energy Center Netherlands) are involved in the Curb Air project, an initiative for air quality improvement with co-benefit to the global atmosphere in five cities in Asia. Global Environment Fund (GEF) has granted Pelangi and its partner a multi-year funding to work on the Bus Rapid Transit and Pedestrian Improvement in Jakarta and other cities. Pelangi also actively promotes energy efficiency through a number of collaborative trainings and workshops including those for hotels in Jakarta.

2.5.2 Yayasan Bina Usaha Lingkungan (YBUL) Yayasan Bina Usaha Lingkungan (YBUL) is committed to support the development of environmental business. Formed in 1993 as an NGO working on environmental issues, it focuses on increasing private sector participation in the development of environmental business in Indonesia. YBUL is active in six sectors: renewable energy, energy efficiency, sustainable agriculture and forestry, eco-tourism, reducing pollution, and recycling.

CDM related activities of YBUL include CDM participation in the discussion on evaluating sustainability of CDM projects; a program increasing the capacity of private sector to carry out CDM projects; and facilitating a network connecting the key players in CDM. YBUL also provides technical assistance in monitoring the SouthSouthNorth Project.

YBUL and International Emission Trading Association (IETA) co-organized the South East Asia Forum on GHG Market Mechanisms and Sustainable Development in Manila in September 2003, together with other organizations in a partnership chaired by IETA (International Emissions Trading Association). The forum provided an opportunity to learn about existing regulations and programs related to emission reduction projects, and gave an update on the progress of countries and sectors in entering the carbon market. It serves as a platform for project developers to meet with potential investors as well as for the development of new partnerships. YBUL facilitates communication between project developers in Indonesia and the international players, including buyers. 23 project concepts from Indonesia were presented at this forum.

2.5.3 WWF Indonesia

World Wide Fund for Nature (WWF) Indonesia was established in 1960 as a country program of WWF International. In 1998, the legal status was changed into a foundation. WWF Indonesia is divided into 3 bioregion offices, i.e. Sundaland, Wallace and Sahul. Its activities span 23 locations in 16 provinces of Indonesia.

Programs of WWF Indonesia were developed based on strategic themes, which include forest, marine, water, species, climate change and hazardous waste, out of which forest,


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marine and species are the strongest. Climate and Energy Program is a relatively young program among the others. It focuses its research, campaign and advocacy in four main areas:

- Energy efficiency PowerSwitch! is a public campaign and policy advocacy program on energy efficiency and renewable energy. It uses interactive campaigning in public places, such as shopping malls, and media work to educate people about saving energy in daily life. The program also includes policy advocacy and encouraging public participation in energy policy.1

- Renewable energy In addition to policy advocacy, WWF Indonesia is doing an assessment on developing small-scale renewable energy projects in WWF’s locations of activity.2 The first project is planned in Kalimantan.

- Law and policy WWF International and WWF Indonesia have been very active in climate negotiations, including the post-2012 debate. WWF Indonesia was also involved in lobbying Indonesia’s ratification of the Kyoto Protocol.

- Adaptation WWF is currently working on adaptation all over the world, from tropical coral reefs to Arctic ecosystems. WWF documents impacts of climate change, identifies solutions and develops an adaptation strategy for the affected ecosystems and communities.

WWF International has developed a CDM Gold Standard that lays out additional sustainability criteria for CDM projects to ensure that they support sustainable development and don’t cause negative local impacts (http://www.cdmgoldstandard.org/). WWF Indonesia encourages CDM project participants to use the Gold Standard for energy projects. It was also involved in the consultation process related to establishing the DNA and the discussion on the national sustainable development criteria and indicators. Climate and Energy Program Director of WWF Indonesia is the current NGO representative in the KN-MPB Technical Team (as of April 2006).

2.5.4 Center for International Forestry Research (CIFOR) Center for International Forestry Research (CIFOR) is an international research and global knowledge institution committed to conserving forests and improving the livelihoods of people in the tropics. It was established in 1993 by the Consultative Group on International Agricultural Research, an association of governments and private foundations. CIFOR employs over 150 staff at its headquarters in Bogor, Indonesia and at its regional offices in Brazil, Cameroon and Zimbabwe.

CIFOR is actively involved in CDM forestry issues in Indonesia. In 2003, CIFOR was assigned under the technical assistance project "Carbon Sequestration through CDM in Indonesia” funded by the ADB to help the Government of Indonesia (GOI) work with local

1 Personal communication with Armely Meiviana and Serena of WWF-Indonesia, April 18, 2006 2 Personal communication with Armely Meiviana of WWF-Indonesia, April 18, 2006


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stakeholders to prepare CDM projects that promote sustainable forest development.

With the support from the Canadian International Development Agency (CIDA), CIFOR facilitated a series of workshops and roundtable discussions on adaptation strategies and measures in tropical peatlands under its Carbon Sequestration and Sustainable Livelihoods Project. The main purpose of the project is to bring together all stakeholders to share knowledge, experiences, and ideas on best practices gained during projects. 1 Two publications based on the outcomes of the workshops were released in 2005.

2.5.5 Energy Research and Development Group of ITB (KPP Energi ITB) Bandung Institute of Technology (Institut Teknologi Bandung or ITB) is one of Indonesia’s leading public universities. Established in 1920, it conducts research and community empowerment through Institute for Research and Community Empowerment (LPPM-ITB).

Energy Research and Development Group of ITB or Kelompok Penelitian dan Pengembangan Energi (KPP Energi) ITB - formerly known as Center for Research on Energy ITB (PPE-ITB) - is a working unit under the LPPM-ITB. 2 The activities of KPP Energi ITB include energy technology assessment; studies on energy and energy related environmental problems; dissemination of new energy technologies; and analysis of environmental and energy policy.

This Center has carried out several studies on CDM, including CDM opportunities in Indonesia (2001), in collaboration with the Energy Research Institute (TERI) in India and The Global Climate Change Institute at Tsinghua University (China). The study was funded by CIDA.

From 2003 to 2005, KPP Energi, Inter-University Research Center for Sustainable Development (CIRPS) of La Sapienza University, Rome, Italy and Instituto Superior Tecnico, Lisbon, Portugal did a study on renewable energy technologies, CDM and formulating energy and environmental policies under the University Partnership on Sustainable Development (UNIPASUD). The purpose of UNIPASUD is to foster university relations between Europe and Asia and to improve knowledge and capacity on contemporary scientific studies including those related to sustainable development, renewable energy and climate change.3

KPP Energi also cooperates with private sector in developing CDM energy projects.4

2.5.6 Centre for Research on Engineering of Agriculture (CREATA-IPB) Centre for Research on Engineering Applications in Tropical Agriculture, affiliated to Bogor Agricultural University (CREATA-IPB) was formally founded in 1994 as a research center under the Institute for Research and Community Empowerment of IPB (LPPM-IPB). It was established to continue programs under a technical cooperation project carried out by the graduate program of Agriculture Technology Faculty with support from JICA (1998-1993).

1 http://www.cifor.cgiar.org/carbofor, visited on April 12, 2006 2 As a result of reform of ITB’s research activities in 2005 3 www.cirps-continuum.it/unipasud, visited on April 12, 2006 4 Personal communication with Akhmad Taufik Mukhith on April 12, 2006


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CREATA-IPB aims to create breakthroughs and innovations related to rural development, infrastructure and innovative production technology with technical and system analysis approaches.

CREATA-IPB’s main areas include:

• Optimum Agriculture Production System • Agriculture and Rural Infrastructure • Innovative Technology • Information Technology for Agriculture

To achieve its goal, CREATA-IPB conducts research, training and short courses, seminars, workshops and conferences as well as publications and consulting.

One noteworthy research area of CREATA-IPB is renewable energy applications in agriculture and agro-related areas such as food processing. CREATA-IPB is financed by various research grants, for instance from Japan International Cooperation Agency (JICA) and the Agency for Technology Research and Application (BPPT), as well as from projects and patented technologies.

The SouthSouthNorth Project decided to pilot several small processing units developed by CREATA-IPB as a CDM. The project is a bundled small-scale project scattered in Java, Bali and Sumbawa islands:

• Fish and fish chips drying Unit in Puger Kulon Village, Jember; • Coffee Processing Unit in Batudulang Village, Sumbawa; • Seeds dryer in Punten Village, Jember; • Seeds dryer in Brawijaya University Farm, Jember; • Natural fiber dryer Magelang, Central Java.

2.5.7 Indonesian Renewable Energy Society (METI) Indonesian Renewable Energy Society (Masyarakat Energi Terbarukan Indonesia or METI) is a forum for communications, consultation and partnership between renewable energy actors. It was established in 1999 to promote renewable energy.

Currently METI has around 70 members from various organizations dealing with renewable energy, e.g. geothermal, solar PV, biomass and micro-hydro. Furthermore, METI has long promoted of CDM projects to boost renewable energy in Indonesia, organizing seminars and discussions on CDM. METI also cooperates with consultants and investors as well as facilitates and develops pilot projects.

2.5.8 Indonesian Chamber of Commerce and Industry (KADIN) Indonesian Chamber of Commerce and Industry (Kamar Dagang dan Industri or KADIN) was established in 1967 as a private non-profit organization to strengthen the voice of the emerging local/ national business community.


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KADIN supported the ratification of KP in Indonesia and was involved in the consultation process related to establishing the DNA. KADIN has stated its support to CDM in Indonesia, noting that it should inform its members about CDM. Furthermore, it has a Permanent Committee on Environmental Conservation that promotes and encourages use of CDM1. KADIN also plays a role in promoting CDM promotion:

• Capacity Building & Information Exchange Forum especially for companies engaged to agricultural and industrial sectors

• Exchanging information and contacts with overseas carbon buyers, investors, project hosts, technology providers, project developers, finance corporations and government

• Lobbying PLN to be more cooperative. • Advocating to Parliament, local and regional governments • Linking to the Indonesian ministries.

1 I. Elias, Opportunities for CDM projects in the Private Sectors in Indonesia, presentation at Japan Carbon Investor Forum 2005, 24 March http://www.meti.go.jp/policy/global_environment/kyomecha/investorsforum/indonesia(private).pdf, visited on April 20, 2005


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Figure 2.21 Organizational chart of KADIN1,2

1Redrawn from http://www.kadin-indonesia.or.id/id/profil_struktur2.php, visited on May 3, 2006 2 Hadi Widianto (from KADIN), personal communication on May 13, 2005


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2.5.9 Indonesian Geothermal Association (API) The Indonesian Geothermal Association or INAGA (API, Asosiasi Panasbumi Indonesia) was established in 1991 by Indonesian geothermal professionals as a trade association for geothermal technology in Indonesia. API holds an Annual Scientific Conference & Exhibition every year since November 1996 to encourage the development of geothermal energy.

API’s objectives are:

• to support the policy of the Government to expand the development of geothermal energy in the framework of increasing the state’s revenues;

• to assist the Government in the expansion of geothermal industry in general and geothermal technology in its broadest sense;

• to promote activities of geothermal industry in Indonesia; • to unite entrepreneurs in the geothermal sector with experts who have the potentials

related to geothermal industry to improve the views, capabilities, and proficiency of its members, and to foster tighter relations among its members; and

• to establish and develop cooperation that is mutually beneficial in attempting the expansion of the geothermal industry by means of taking collective advantage of information, infrastructure, and means, or other methods that support the achievement of the objectives within the country and abroad.

API has been facilitating discussions on CDM between private companies and decision makers. It also participated in the consultation process related to the establishment of Indonesia’s DNA.

2.5.10 Association of Indonesian Municipalities (APEKSI) and Association of Indonesian Regencies (APKASI) Association of Indonesian Municipalities (Asosiasi Pemerintah Kota Seluruh Indonesia or APEKSI) and Association of Indonesian Regencies (Asosiasi Pemerintah Kabupaten Seluruh Indonesia or APKASI) were established in 2000 to support local (city and regency) governments in the decentralization process. These organizations were involved in creating the DNA.

Government of municipalities and regencies can undertake CDM projects in their area of authority, which can deliver also local benefits in the area. One example of potential CDM projects is processing municipal solid waste (MSW) to avoid methane emissions and produce biogas and waste derived fuels.

2.5.11 Association of Indonesian Forest Concessionaires (APHI) The Association of Indonesian Forest Concessionaires (Asosiasi Pengusaha Hutan Indonesia or APHI) was established in 1983 in Jakarta as a non-profit organization. It aims at developing forestry concession in Indonesia as well as supporting its members and conserving forests. Currently 314 individual and 83 industrial forest concession holders belong to APHI.


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During its fourth National Conference in 1998, APHI established some policies on its support and services to the members. APHI motivates them to increase quality of forest usage from ecologic, social and economic points of view. It also tries to develop cooperation among its members and governments and other stakeholders.

APHI is involved in climate change since 1999 by studying the feasibility of financing forest conservation via international fund as well as carbon sequestration. It held some discussions with GEF and World Bank in Washington and International Finance Corporation (IFC), EA Capital, New York. Furthermore, in 1999 APHI attended international workshop on “Conserving Forest through Carbon Sequestration” in Venezuela. Other activities include:

• three roundtable discussions in 2000 prior to COP 6 to gather input for the Indonesian delegation,

• represented in the Indonesian delegation in COP 6, COP 7 and COP 8 (2000 – 2002) • contributed to National Strategy Study (NSS) on CDM in Forestry Sector in Indonesia;

and • attending some international and national CDM capacity building activities

In order to utilize CDM potential, APHI planned a preparatory project called “Promotion of CDM in the Framework of Sustainable Forest Management with Local Communities Involvement”. It was carried out by one of APHI members, PT Wira Karya from Jambi and funded by ITTO. This project resulted in a CDM project proposal which has not been implemented yet (as of May 2006). APHI is looking for funding for another project on empowering civil society towards decentralized sustainable forest management.

APHI is an effective media for disseminating information on CDM to potential forestry project proponents.

2.5.12 Indonesian Electrical Power Society (MKI)1 Indonesian Electrical Power Society (Masyarakat Ketenagalistrikan Indonesia or MKI) is an organization founded in 1998 as a communication forum for power business stakeholders in Indonesia. Members of MKI include power companies, NGOs and professional associations, as well as electricity consumer organizations. MKI advocates its members’ suggestions on reforming the power sector and gives recommendations to the government on regulation of the sector.

Another important roles of MKI are information sharing among its members and developing their capacity in technology, business management and regulation related to the sector e.g. through workshops and seminars. MKI published a guide book titled “Indonesian Electrical Power Business Directory” which seeks to present all business aspects of the electrical power sector, including regulation; business prospects and opportunities; relevant government authorities; related associations and businesses. The directory specifically addresses the green energy policy and CDM.

1 http://www.mki-online.com/, visited on May 8, 2006


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2.5.13 Forum Biodiesel Indonesia Forum Biodiesel Indonesia (FBI) is an organization aimed on promoting biodiesel development and application in Indonesia. Formed on April 24th 2002, FBI has involved various stakeholders from government agencies, research institutes and private sectors. Members of FBI from government agencies include Deptan, ESDM, KLH, BPPT, BATAN, Dephut, Dephub, and Lemigas. Stakeholders from private sector are ranging from biodiesel producers, diesel machine/vehicle producers, blending fuel company, and associations of vehicle industries. Research institutes at universities such as ITB and IPB and environmental NGO are also part of the forum.

FBI strives to achieve their aims through several activities. In February 2003, FBI presented biodiesel development plan to the House of Representatives as part of their effort in advocating Biodiesel application. FBI in cooperation with KPP-Energi ITB has formulated the roadmap of biodiesel commercialization as a guidance for policy maker, investors and research institutions in developing biodiesel. Furthermore, the partnership has originated the biodiesel specification which is then established by National Standard Agency (BSN) as the biodiesel quality standard.


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3 Research and capacity building on CDM In this chapter, various activities related to research and capacity building on CDM are detailed. The activities are described following the sequences, starting from the initial activity to the most recent one.

3.1 The Asia Least Cost Greenhouse Gas Abatement Strategy (ALGAS)

The ALGAS (Asia Least Cost Greenhouse Gas Abatement Strategy) project was the first climate related trust fund that the Asian Development Bank (ADB) administered.1 A total fund of US$10 million was provided to develop regional technical assistance for greenhouse gas abatement implemented from 1995 to 1999. The project was co-financed by the Global Environmental Facility (GEF) through United Nations Development Program (UNDP), Asian Development Bank (ADB), Norway and the 12 participating Asian countries2.

The final report of the ALGAS project in Indonesia was completed in 1997. The project was implemented by KLH, assisted by the national technical expert team, comprising of teams from the Center for Environmental Studies of IPB, the Center for Research on Energy of ITB, the Indonesian association of agricultural meteorology (PERHIMPI), and Pelangi. The project was aimed at developing a national GHG inventory and evaluating and supporting technology options for abatement of greenhouse gas emissions in all major economical sectors including energy, agriculture, forestry and land use.

The main objective of the project was to strengthen national capacity in the following activities3:

a. to develop necessary and reliable information on sources and sinks of GHGs; b. to assess, analyze and verify information gained and report the results to the

UNFCCC Secretariat; c. to identify, formulate, and evaluate viable greenhouse gas abatement strategies and

associated costs; and d. to assist in obtaining resources to implement the most cost-effective or least costly

greenhouse gases abatement options.

3.2 The First National Communication under the UNFCCC Indonesia’s First National Communication under the UNFCCC was published in 1999 as one of first studies on Indonesia’s GHG emissions and abatement costs by KLH. The purpose of the study was to prepare Indonesia to meet its commitment as a Party to the UNFCCC. Scope of the study included estimation of GHG emissions from energy, transportation,

1 A.Sarkar, Initiatives in Renewable Energy, Energy Efficiency and Climate Change, http://www.resourcesaver.com/file/toolmanager/O105UF1144.pdf, visited on April 21, 2006 2 ADB, ALGAS, http://www.adb.org/reach/algas.asp , site visited on April 21, 2006 3 Ministry of Environment, Indonesia Country Study: Economics of Greenhouse Gas Limitations, (Denmark: UNEP,1999)


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forestry, agriculture, public health, coastal resources, and waste sectors1. The preparation of the Initial Communication started in July 1998 and was funded by the Global Environmental Facility (GEF) through the United Nations Development Program (UNDP) as the implementing agency. There are three main items described and summarized in the national communication: (a) 1994’s emission inventory of greenhouse gases, (b) general description of measures to be taken, and (c) other important information related to climate change2.

3.3 Workshop of DJLPE and ECN The Netherlands Energy Research Foundation (ECN) and DJLPE co-hosted two workshops in the framework of Indonesia-Netherlands Energy Working Group3. The first workshop on Climate Change and the Clean Development Mechanism was held on 20 September 2001 in Jakarta for policy makers and experts from DJLPE and other relevant stakeholders.4 The workshop was divided into two sessions; one discussing the impact of climate change, energy CDM, role of Indonesia in international negotiations, and the concept of CDM, while the other one focusing on the technical issues, elaborating a CDM case study as well as identifying the key questions concerning CDM in Indonesia. As a continuation of this workshop, the second workshop took place in 2002.

3.4 The National Strategy Study (NSS) on CDM in Energy Sector The National Strategy Study (NSS) on CDM in Indonesia has been conducted in two components: NSS Energy and NSS Forestry. The NSS Forestry is elaborated in next subchapter.

The NSS Energy was financed by GTZ and was integrated in the World Bank NSS Program. The study was conducted by independent researchers under the auspices of KLH and was completed in late 20015. It evaluated the potential of CDM in the energy sector, indicating well identified and analyzed opportunities for CDM projects, which may reduce emissions in Indonesia, compared to a business as usual development path.

The NSS Energy emphasizes the following issues6: • technical potential for and cost of GHG emission reduction projects, using a narrower

project-based approach to assess economical viability of potential projects from the investors’ point of view and an economy-wide, MARKAL based model to quantify national costs and benefits of potential projects;

• estimation of the size of CDM market and the factors that will affect Indonesia’s share; • international and national institutional settings for CDM; and • development of a project pipeline.

1 Ministry of Environment, National Strategy Study on CDM in Indonesia, (Jakarta: 2001) 2 KLH, Indonesia: The First National Communication under the UNFCCC, (Jakarta:1999) 3 Mark van Wees, personal communication on March 7, 2005 4 ECN, Draft Program: CDM Workshop, (the Netherlands: 2001) 5 Ministry of Environment, National Strategy Study on CDM in Forestry Sector, (Jakarta:2003) 6 Ministry of Environment, National Strategy Study on CDM in Indonesia, (Jakarta:2001)


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3.5 The National Strategy Study (NSS) on CDM in Forestry Sector The National Strategy Study on CDM in Forestry Sector of Indonesia was funded by AusAID, with an attempt to explore the issues and challenges in sink or land-use, land-use change and forestry (LULUCF) sector. The report, completed in 2003, consists of a general introduction of the NSS program, the international framework for the implementation of CDM in forestry sector, international technical issues, risks that remain to be resolved, and the carbon market of LULUCF projects. It also covers CDM carbon trade in national perspective, including policies and regulations, barriers of implementations, Indonesian market share, implications and strategies, and strategic recommendations including identification of potential lands for CDM, policies and regulations.

3.6 CDM ASEAN (ACE-EAEF) Several member countries of the Association of Southeast Asian Nations (ASEAN) have experience in developing CDM policies, setting up institutional arrangements, and implementing CDM procedures. However, some other ASEAN countries have limited local capacity and experience in CDM. CDM ASEAN project was launched to facilitate exchanges of experience and improve co-ordination within the region.1 The project period is from 2003 to 2005.

Several workshops have been held on CDM development in ASEAN, with the support from the European Community (EC) through the EC-ASEAN Energy Facility (EAEF), administered by ASEAN Center for Energy (ACE):

• CDM ASEAN Skill share workshop in Indonesia, Jakarta, March 2004 (Pelangi, GTZ, IGES, KLH and EAEF)

• Side event at the 10th Conference of Parties to the UNFCCC, entitled “Lessons Learnt from CDM Implementation in the ASEAN Energy Sector” Buenos Aires, December 2004.

• 2nd Regional Workshop, entitled “Exploring Cooperation in CDM Implementation in ASEAN”, Malaysia, February 2005.

The ASEAN Working Group on Multilateral Environmental Agreement has been working to discuss relevant and appropriate cooperation within the ASEAN member countries on CDM development in the Southeast Asian region. In addition, the ASEAN Center for Energy (ACE) has also initiated activities in the development of CDM in energy sector. CDM ASEAN project aims at supporting the implementation of CDM in the energy sector through capacity building for regional institutions and by improving the competitive stance of ASEAN among CDM host countries.

3.7 Capacity building by Pelangi in cooperation with IGES A project called Capacity Building for Indonesian Local Stakeholders on Development of GHG Emission Reduction Projects (2003-2004) was conducted by Pelangi in collaboration with and sponsored by the International Global Environmental Studies (IGES) of Japan. IGES

1 http://cdmasean.pelangi.or.id/, visited on April 13, 2006


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also organized several workshops and training with YBUL, which is elaborated in the next section. The activities under Pelangi-IGES collaboration are described as follows1:

Table 3.1 Capacity building activities by Pelangi in cooperation with IGES

Project Date Location Activity/ Purpose Participants Capacity Building Workshop for Local Authorities and Local Communities

March 4, 2004

Jakarta

Strengthening project developers' capacity to develop a project in the field of biomass, renewable energy, waste management and small scale CDM.

Project developers (including local authorities)

Capacity Building Workshop for Local Authorities and Communities

March 9, 2004

Malang

Strengthening project developers' capacity to develop a project in the field of biomass, renewable energy, waste management and small scale CDM.

Project developers

Capacity Building for Local Authorities and Communities/CDM Training

March 10-12, 2004

Malang

Strengthening local government's institutional and human capacity to evaluate and promote CDM projects.

Local government officials, representatives from local community, etc.


March 15-17, 2004

Jakarta


Local government officials, representatives from local community, etc


March 23, 2004

Kupang

Strengthening capacity to develop projects in the field of biomass, renewable energy, waste management and small scale CDM.



March 24-26, 2004

Kupang


Local government officials, representatives from local community, etc


March 29, 2004

Lampung

Strengthening project developers' capacity to develop projects in the field of biomass, renewable energy, waste management and small scale CDM.


The above workshops and training seminars were focused on improving the ability of project developers to prepare CDM project documents.

3.8 Capacity building by YBUL Yayasan Bina Usaha Lingkungan (YBUL) organized four capacity building workshop from October 2003 to March 2004 supported by International Global Environmental Studies (IGES) of Japan with funding from Japan’s Ministry of Environment. These kinds of activities were

1 http://www.iges.or.jp/en/cdm/indonesia.html, site visited on April 13, 2006


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also conducted in four other Southeast Asian countries.1 The workshops in Indonesia are listed in Table 3.2. 2

YBUL also co-hosted a series of capacity building activities with Ministry of Environment (KLH) under IGES Integrated Capacity Strengthening Program. 3

Table 3.2 Capacity building activities by YBUL in cooperation with IGES (October 2003 – March 2004)

Project Date Location Activity/ Purpose Participants Local level Workshop in order to increase awareness

October 15, 2003

Surabaya, capital of East Java

Awareness-raising workshop

Multi-stakeholders of local government officials, private companies, academics and NGOs

Supporting Renewable Energy and CDM Projects to Enhance Sustainable Development

March 1-2, 2004

Surabaya


Project developers


March 17-18, 2004

Medan


Project developers


March 31, 2004

Jakarta


Project developers

YBUL also obtained support funding from United States Agency for International Development (USAID) to carry out a series of activities aiming at improving the understanding and technical capacity of project developer candidates in the industrial sector in emission trade issues. This project also had an objective to set up cooperation network among project developers. Another goal was to make Indonesia more attractive for foreign investment in climate friendly projects. Two workshops were organized in July 2002 and January 2003, focusing on technical capacity building in preparing a project concept.

3.9 ADB Technical Assistance on CDM forestry Since 1991 Asian Development Bank (ADB) has been providing technical assistance (TA) to its developing member countries in climate change issues. ADB established a CDM facility to bridge the gap between buyers and sellers of CERs, and to ensure a fair return to developing

1 YBUL, Capacity Building Projects, http://www.ybul.or.id/Capbuildingprojects.htm, site visited on February 21, 2005 2 http://www.iges.or.jp/en/cdm/indonesia.html, site visited on April 13, 2006 3 Further details are in section 3.18


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member countries for their GHG abatement initiatives.

In July 2003, ADB started Carbon Sequestration through CDM in Indonesia, the first TA in this sector. This project is financed by the Canadian Cooperation Fund for Climate Change and administered by ADB.1 The long-term goal is to assist the government to sell certified emission reduction (CER) units and promote sustainable forest development. It also aims at developing government’s capacity for piloting a carbon sequestration project and helping Indonesian stakeholders to better understand the processes, implications, and potential applications of CDM.2

The expected outputs of this TA are:

• A review of the previous studies and a synthesis of lessons learned on carbon sequestration as applicable under CDM

• A position paper on CDM-carbon sequestration projects for Indonesia for discussion at the Tenth Conference of the Parties (COP10) of the United Nations Framework Convention on Climate Change (UNFCCC)

• Evaluation and simulation of land use, land use change, and forestry (LULUCF), with and without CDM participation, in at least two pilot areas

• Demonstration of the processes involved in earning CERs through carbon sequestration

• Documentation and dissemination of the processes for earning CERs • Preparation of sustainable forest development strategies for at least two pilot districts

The TA is executed by the Ministry of Environment (KLH) with Winrock International Institute for Agricultural Development (USA) as a consultant, in association with Land Management Grant College (LMGC) of the Bogor Agricultural Institute (Indonesia). In addition, CIFOR and ICRAF were directly selected under a separate contractual agreement for undertaking the land use inventory and LULUCF modeling. This TA lasted 18 months, starting from 2003 until 2005.

3.10 UNDP Workshop on CDM In September 2003, United Nations Development Program (UNDP) held a workshop on CDM – Prospect and Commitment in cooperation with Ministry of Environment (KLH), National Development Planning Agency (Bappenas) and the New Energy and Industrial Technology Development Organization (NEDO) of Japan. The forum was aimed at expediting ratification of the Kyoto Protocol and enhancing Indonesia’s preparedness to join CDM.3

In addition, its specific objectives were:

• to inform policy makers and key stakeholders about Indonesia’s current status under the UNFCCC and the KP as well as about the current international negotiations on CDM;

1 http://www.adb.org/Documents/TARs/INO/tar_ino_36675.pdf, visited on March 3, 2005 2 http://www.adb.org/reach/ino-ta4137.asp, visited on March 3, 2005 3 Ministry of Environment, Executive Summary of Workshop on CDM: Prospect and Commitment (Jakarta: 2003)


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• to facilitate exchange of information on various key aspects under the UNFCC and the KP and on CDM; and

• to provide a forum for gathering nationwide support for ratifying the KP and of establishing the DNA for CDM.

The workshop was attended by participants from the government, academic and research institutes, professional organizations, non-governmental organizations, private companies, international agencies, and the media. The speakers at this workshop were representatives from government agencies (KLH, ESDM, DPR, and Bappenas) as well as from international organizations, private sector and NGOs (UNDP, NEDO, YBUL). At the end of the workshop, the participants issued a declaration, which underlined the importance of ratifying the Kyoto Protocol, establishing a DNA, and the urgency of politicians, bureaucrats, businesses, academics and civil society working together to support the implementation of the provisions of the Protocol.

3.11 CDM Institution Building Project supported by GTZ Deutsche Gesellschaft fuer Technische Zusammenarbeit (GTZ) has been involved in supporting Indonesian government in CDM. The development of KN-MPB was part of a capacity building project on CDM supported by GTZ. Several activities were carried out in order to assist the process in a participatory way and to involve stakeholders of CDM.

The project, which was conducted by Pelangi, was organized in a way that directly enhanced the knowledge of stakeholders on CDM. A Steering Committee for the project was established and consisted of representatives from the KLH, the five other ministries listed above, Deplu, Bappenas, YBUL (representing the NGO community), the academic community, and GTZ. The decisions concerning the DNA and the national approval procedures were made during Steering Committee Meetings. Wider audiences of stakeholders were consulted during Consultation Meetings. The participants of a Consultation Meeting provided inputs and suggestion to improve the concept of DNA and national approval procedure.

There were other types of meetings: in the initial phase of the project, Pelangi approached the representatives from the five ministries one by one in Sectoral Consultation Meetings. In Small Technical Meetings, KLH and Pelangi invited only five ministries and during the meetings, the DNA and national procedures were discussed more intensively.

Moreover, several outreach and exercise activities were carried out, such as building a website for the DNA, DNA Try-out (July 13-14, 2004), ASEAN Skillshare Workshop on March 18-19, 2004, CDM Seminar (July 15, 2004) and CDM Training for consultants (July 20-22, 2004). Other activities include the establishment of CDM National Approval Guidelines and disseminating leaflets during COP 9 in Milan, Italy on December 2003. The DNA website (www.dna.cdm.menlh.go.id) has already been available to the public since the end of October 2004.

The DNA Try-out or Simulation of National Approval Procedure was held on July 13–14 2004 at Hotel Santika, Jakarta. The objective of the simulation is to try out: a) National Approval Procedure, b) functions and tasks of DNA and its organs, and c) the sustainability criteria and indicators as tools in assessing project proposals.


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The ASEAN Skillshare Workshop was followed by a roundtable meeting and training of representatives of national DNAs or CDM focal points of the ASEAN member countries on the following day. The aim of this workshop was to facilitate the exchange experiences on developing CDM projects, institutional mechanisms, and policy instruments; and to explore possible modes for regional cooperation. This seminar and training were aimed to increase the capacity of potential consultants in helping the project proponents to implement CDM projects, and to provide knowledge and information about CDM to the financial institutions.

CDM Training for consultants, as reflected by its name, has targeted consultants as its participants. The first day of training talked about climate change and CDM, basic concept of CDM, and CDM methodologies. On the second day, the training was focused on how to develop a PDD, and how to go through the national criteria and indicators for CDM project for the national approval from DNA. On the last day, there were lots of discussions about small scale CDM as well as financing, validating, registering and verifying CDM projects.

3.12 Climate Technology Initiative - CTI/Industry Joint Seminar 1 The CTI/Industry Joint Seminar on Technology Diffusion in ASEAN and Small Island States of the Pacific Region was held in February 2004 in cooperation among the Climate Technology Initiative (CTI), NEDO as the secretariat for CTI Jakarta, and the Government of Indonesia. CTI is a body under the International Energy Agency (IEA), aiming at accelerating development and diffusion of climate-friendly and environmentally sound technologies and practices.

The objectives of the seminar were to:

• increase participants’ awareness of climate change issues with a focus on clean energy technology and energy efficiency,

• share understanding about current situation and challenges, • promote eco-friendly projects, and • exchange information and share experiences on projects.

The seminar was attended by several presenters from Indonesian ministries and international organizations, and by 150 participants from all over the world as well as from Indonesia, representing national governments in the region, industrial sector, financial institutions and relevant international organizations.

A variety of issues concerning climate change with a focus on clean energy technology and energy efficiency were addressed. In addition, the seminar reviewed the potential and challenges of sustainable energy based on domestic and local resources. The discussion focused on the existing financial, institutional, and legal barriers, as well as experiences and possible measures to overcome those barriers.2

1 Report of CTI/Industry Joint Seminar on Technology Diffusion in ASEAN and Small Island Estates of the Pacific Region, 4 – 5 February 2004, Jakarta 2 http://www.cdm.or.id/en/news/?nid=14, visited on March 4, 2005


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3.13 World Bank CDM Workshop On May 11–12, 2004, the World Bank, in collaboration with KLH and YBUL, held a workshop on “Introduction to CDM – Lessons Learned from World Bank Carbon Funds and other Carbon Buyers”. It was attended by project developers, government officials, industry representatives, academics and NGO activists. The workshop provided basic knowledge on CDM as well as shared experiences from carbon buyers and project developers. CDM activities in Indonesia and CDM prospects, progress and capacity building programs were also discussed.1

3.14 The National Dialogue – What’s Next After Ratification of the Kyoto Protocol

As a follow-on activity after DPR approved Kyoto Protocol on June 28, 2004, the Ministries of Environment (KLH) and Foreign Affairs (Deplu), and Pelangi, organized a national dialogue on September 16, 2004 in Jakarta. The National Dialogue was intended to trigger development of policy and policy instruments relevant to the KP, while providing information on its implementation at the domestic level. Supported by NEDO, GTZ and the World Bank, this event reviewed the international negotiations on climate change, impacts of climate change, adaptation, sustainable development and technology transfer.2

It was attended by more than 100 participants from the government, project developers, industries, academics and NGOs. This dialogue concluded that there are still many things to do that require collaboration of all stakeholders. Indonesia needs to be more actively involved in international negotiations. Indonesia also needs to establish an information system on climate data in order to cope with the impacts. The participants agreed that the Kyoto Protocol ratification was not the ultimate goal, but rather the first step to full participation in the global efforts on dealing with climate change.

3.15 Roundtable Discussion on Financing CDM A roundtable discussion Financing CDM: A way to support sustainable development was held on February 28, 2005 in Jakarta to

• introduce CDM and the current situation • learn what we can expect from the financial sector both for the short term and for the

long term • learn what barriers there are • find out how every side including the financial sector may benefit from CDM.

Being co-organized by NEDO and Pelangi, the discussion was carried out as a half day event, consisting of presentations from several CDM players and followed by open discussion. This discussion was attended by 25 representatives from the financial sector, i.e.

1 Materials of Workshop on Introduction to CDM – Lesson learned from World Bank Carbon Funds and other Carbon Buyers (Jakarta: 2004) 2 Summary Report of National Dialogue – What’s Next After Ratification of the Kyoto Protocol (Jakarta: 2004)


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banks and investors, as well as government officials and NGOs.

The topics covered in the discussion were:

1. Overview of CDM development in Indonesia: what CDM is, its benefits for Indonesia, the legal framework of CDM and potential CDM projects in Indonesia

2. International market: size of the market and opportunities for Indonesia 3. Financing CDM projects: risks, advantages and disadvantages of financing CDM

projects 4. Lessons learned from financing CDM projects in Indonesia: sharing experiences of

CDM project financing

During this event, key international players in CDM, including the World Bank, the Japan Bank for International Cooperation (JBIC), the Danish Carbon Fund, and the German Development Bank (KfW), in addition to Indonesian Government officials and representatives from the private sector, presented their views. There conducted a lively exchange of ideas and lessons learned regarding initiating, facilitating and developing CDM projects.

3.16 ADB Technical Assistance on Gas Generation from Waste in Palm Oil Industry

Asian Development Bank provided technical assistance (TA) to Indonesia on gas generation from waste in the palm oil industry. The TA was approved in May 2004 but it had a late start and commenced in 20051. Acting as the implementing agency is Southeast Asia Department/ Infrastructure Department (Serd/ Seid). The TA is co-financed by the Canadian Cooperation Fund on Climate Change. DGEEU/ DJLPE is the government counterpart. The TA consultants have contacted several private sector POM owners. As of June 2006, the draft final report is under preparation. It is expected to end by August 2006. 2

The actions developed under the TA are expected to encourage public-private partnerships and provide simultaneous global and local environmental benefits, including less contamination of soil and groundwater, enhanced land productivity, and reduced greenhouse gas emissions3.

The purpose of the TA was to improve integrated waste management practices in the palm oil industry and evaluate the potential of palm oil mill (POM) waste as a renewable and commercially viable source of clean energy. Outcomes of the TA include:

• waste management framework for the industry • technical and economic assessment of different alternatives for energy generation

from POM waste, including those for collection and use of methane gas from wastewater

• evaluation of the potential of methane generation CDM projects in POMs • plan for effective waste management and energy capture for a cluster of public and

1 Personal communication with Ms. Sujata Gupta of ADB on June 4, 2006 2 Ibid 3 www.pointcarbon.com, visited on June 1, 2006


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private sector POMs • evaluation of the social and environmental benefits of improved waste management

practices

3.17 The Global Gas Flaring Reduction Partnership The Global Gas Flaring Reduction Partnership (GGFR) was established in August 2002 during the World Summit on Sustainable Development (WSSD) under the auspices of the World Bank. This public-private partnership currently includes BP, ChevronTexaco, ENI, ExxonMobil, Norsk Hydro, Statoil, Shell, TOTAL, Sonatrach, and the governments of Angola, Cameroon, Canada, Chad, Ecuador, Equatorial Guinea, Indonesia, Nigeria, Norway, and the United States. This scheme is still open for other countries and private companies to join.

The objective of GGFR is to support national governments and the petroleum industries in their efforts to reduce flaring and venting of gas associated with the extraction of crude oil. The program focuses on four areas of activity to reduce gas flaring and venting in partner countries:

• commercialization of associated gas, • regulations for associated gas, • establishing a flaring and venting reduction standard, and • capacity building related to carbon credits for flaring and venting reduction projects.1

In Indonesia, the GGFR aims at reducing key barriers to use of flared gas: lack of comprehensive flaring regulations, remote and scattered fields, gas ownership, and lacking or absent local markets.

The partnership held a workshop on regulation and CDM capacity building workshop on March 15 – 16, 2004 in Bandung, Indonesia.2 The workshop was attended by stakeholders from government, industry and NGOs. The meeting addressed various issues regarding gas flaring reduction e.g. practices in Indonesia, regulatory issues, and technical issues. Furthermore, the opportunities and barriers for CDM projects in this sector were discussed.

The workshop was followed by another meeting on December 14-15, 2005, in Jakarta on “Securing Value from Carbon in Flaring Reduction Projects”. 3 The workshop was co-sponsored by SOFRECO, Natsource and CER Indonesia. The meeting highlighted the latest progress on CDM projects for flare reduction in Indonesia and included a capacity building session to develop and screen PINs. During the workshop, the industry presented three PINs and made an assessment of the current legal and regulatory shortcomings for gas flaring project to become eligible. Those three PINs were screened by a consultant and one PIN was selected. Currently, the consultant is in the progress of developing a PDD for that project. Furthermore, GGFR has commissioned a study that aims to improve the capacity of the GoI

1 http://www.worldbank.org/ogmc/global_gas.htm, visited on February 27, 2005 2 http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTOGMC/EXTGGFR/0,,contentMDK:20316600~menuPK:828161~pagePK:64168445~piPK:64168309~theSitePK:578069,00.html, visited on April 13, 2006 3 http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTOGMC/EXTGGFR/0,,contentMDK:20769890~pagePK:64168445~piPK:64168309~theSitePK:578069,00.html, visited on April 13, 2006


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and the DNA to handle gas flaring projects.1

The partnership plans to carry out a final workshop in July 2006 in Jakarta. The workshop will provide a forum that allows the project developers from the oil and gas sector and the relevant Indonesian institutions to interact and participate in the discussion in order to prepare successful CDM projects. In addition, the workshop is envisaged to:2

• Present the screening criteria of PINs and a selection process • Present the PDD prepared by the partnership as a concrete example of developing a

CDM project • Present a CDM guidebook and operational manual for the oil and gas sector

3.18 IGES Integrated Capacity Strengthening Program 3 Ministry of Environment (KLH) of Indonesia and Yayasan Bina Usaha Lingkungan (YBUL), supported by Institute for Global Environmental Strategies (IGES) Japan conducted a capacity building project consisting of a series of activities from December 2004 to February 2005. The goal of the project was to increase knowledge of

• waste management technology options • CDM and eligibility criteria • preparing the documents to EB

First two events organized by the project were trainings on PIN (Dec 2004) and PDD (Feb 2005) targeted to government officials but involving also other stakeholders. The trainings encompassed a wide level of financial and technical issues related to CDM projects.

The project organized a national meeting on CDM (22 Feb 2005) and a preparatory meeting with high level representatives from Indonesia and Japan. The discussion identified several problems and challenges for CDM as well as measures to overcome them.

The capacity building project was continued to the next fiscal year with several regional workshops in Jakarta, Medan and Balikpapan (September – November 2005). The project was concluded with a national workshop in Jakarta in February 2006. One output of the project is a published book titled “CDM Country Guide for Indonesia” compiled by a team of CER Indonesia and IGES. 4

3.19 Workshop on Financing Modalities of CDM Institute for Global Environmental Strategies (IGES), together with UNEP RISØ Centre on Energy, Climate, and Sustainable Development (URC), United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) and Japan Bank for International Cooperation (JBIC) organized the workshop on 'Financing Modalities of CDM' in Jakarta on

1 Personal communication with Franz Gerner – the World Bank representative in GGFR, received on April 13, 2006 2 Ibid 3 IGES (2005), Integrated Capacity Strengthening Programme for CDM, available at: http://www.iges.or.jp/en/cdm/pdf/indonesia/fy2004/Material/Summary%20Report.pdf 4 http://www.iges.or.jp/en/cdm/indonesia.html, visited on June 6, 2006


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27-28 June 20051. The workshop was attended by about 150 participants from international financial institutions such as Asian Development Bank (ADB) and JBIC, private financiers, governments in Asian countries, CDM project developers and consultants, KADIN member companies etc.

The workshop explored the financial feasibility of CDM projects and considered possible solutions to mitigate existing barriers. Through two days of presentations and discussions, policy solutions were suggested to the project developers and governments of host countries and the financiers' proactive actions and support on the implementation of CDM activities are expected by the project developers.

3.20 SouthSouthNorth Project SouthSouthNorth (SSN) is a network of non-profit NGOs and research institutions with considerable expertise to help public and private stakeholders and beneficiaries build capacity to reduce poverty in the context of global climate change. SSN is funded by the Dutch Government and operates in Brazil, South Africa, Tanzania, Mozambique, Bangladesh and Indonesia. SSN is now pursuing second phase of the project.

The main aim of the first phase of SSN (2001 – 2005), known as SSN1, was the development of capacity related to CDM in order to reduce of greenhouse gas emissions and to contribute to sustainable development of four developing countries (Brazil, South Africa, Bangladesh and Indonesia).

The main objectives of the project were as follows: (1) identification and development of at least two CDM projects, including the final transaction of the CERs, in each of the four countries of operation; (2) with the pilot projects as a reference, provide assistance, training, facilitation, and other related services to the four host governments in order to assist them in developing and testing the capacity of the national DNA to supervise and approve CDM projects; and (3) general capacity development in CDM at the international level, including the development of training courses and an overall comprehensive CDM guide, based on learning-by-doing.

In Indonesia, the SSN-Indonesia has conducted a capacity building process for project proponents in designing and developing CDM projects. The process includes the formation of a Project Development Team (PDT) and supporting the proponents throughout the process of approval.2 SSN contributed significantly in the establishment of KN-MPB, especially in the process of setting the criteria and indicators of sustainability for CDM projects in Indonesia.

The second phase or SSN2 (2005-2008) aims to reduce poverty through developing community based projects within the context of climate change, not only limited to emission reduction projects but also adaptation to impacts of climate change. In this phase, SSN activities cover the area of mitigation, adaptation and technology receptivity and transfer, capacity building, and policy interventions. In the mitigation area, SSN will develop five community based mitigation projects in five developing countries. These projects are

1 http://www.iges.or.jp/en/cdm/activity02.html, visited on April 18, 2006 2 http://www.southsouthnorth.org, visited on April 18, 2006


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expected to bring poverty alleviation impact to the people at their proximities. SSN plans to develop seven community based adaptation projects in six countries, to build the capacity of people and communities to adapt to the impacts of climate change.

3.21 Danish CDM Project Development Facility in Indonesia The Government of Denmark through its embassy supports the Danish CDM Project Development Facility in Indonesia with the main objective to facilitate the CDM project development. Denmark is expecting the CER gained from the projects to meet its Kyoto target. As an integrated part of the facility, the project also works on capacity building for stakeholders, in particular project developers. The facility concentrates on the following sectors: landfill gas, palm oil, oil and gas and cement. A commencement workshop and various sectoral workshops have been conducted in the past one year.

Commencement workshop of the Danish CDM Project Development Facility (PDF) in Indonesia was held in Jakarta on July 27, 2005. This workshop brought together all related stakeholders, from project developers to government officials and agencies, to introduce the initiative of the Government of Denmark in cooperation with the Government of Indonesia on CDM. The signing of MoU between Danish Ambassador and Indonesian Minister of Environment took place in the event. This event also presented the lessons learned from past Danish CDM initiatives in other countries, the potential and the business and financial aspects of CDM in Indonesia, emphasizing the role of the private sector.1

The Danish PDF held a palm oil sectoral workshop in Medan on October 10, 2005. The main objectives of this workshop were to draw together potential project proponents in developing CDM projects, particularly members of Indonesian Palm Oil Producers Association (GAPKI), to provide information on Danish CDM project development facilities and encourage the potential project participants to submit project ideas to be included in the Danish PDF’s project pipeline. The workshop was also intended to build the capacity of local authorities and communities on CDM. GAPKI actively took part in organizing the workshop.2

In addition to the palm oil sectoral workshop, in-house workshop for a major cement company was also organized to encourage development of CDM projects in cement manufacturing sector with the Danish PDF.3

The project also contributed to two World Bank workshops, namely Workshop on Landfill Gas Utilization in Bali (see 3.22) and Executive Workshop - Training on the CDM (see 3.23).

3.22 Workshop on Landfill Gas Utilization The landfill gas utilization and CDM workshop was carried out in Bali, September 6-7, 20054. The workshop was organized by KLH, World Bank, NEDO and Danish Embassy. The objective of the workshop was to provide information and training on: technical aspects of landfill gas facilities; financing and regulatory issues; and accessing carbon finance. It also

1 Personal communication with Gustya Indriani, on April 12, 2006 2 Ibid 3 Ibid 4 http://www.nedo.go.jp/english/archives/170902/170902.html, visited on April 18, 2006


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aimed to identify projects potentially eligible for carbon financing for further preparation.

Participants of the Bali workshop were mostly from local government agencies especially those working on municipal solid waste (MSW) treatment. The workshop presented an example of a project on electricity generation from MSW in Bali and included a site visit to the Suwung landfill project in Denpasar.

3.23 Executive Workshop – Training on the CDM World Bank held an executive training on CDM in Jakarta, January 25-26, 2006, in cooperation with KLH, NEDO and Danish Embassy.1 Some private companies also co-sponsored the event.

The purpose of the workshop was to update government and industry leaders on CDM and its suitability to their activities. The workshop provided an introduction to CDM, the forms of financing available and the process of project development and approval. The workshop also gave useful information on the types of projects and technologies in which the invited organizations could benefit from CDM. In addition to general information on project types, the workshop presented examples of projects and their benefits.

The workshop participants included representatives from local governments (Mayors and Bupati or district heads), relevant government agencies, high level management from private companies, and other stakeholders.

The workshop will be followed up by next capacity building activity, expected to be carried out in August-September 2006. 2

3.24 ADB Technical Assistance on Institutionalizing the CDM Project

Asian Development Bank (ADB) is supporting Indonesia through a technical assistance (TA) for ‘Institutionalizing the Clean Development Mechanism (CDM)’ project. The TA was commenced in July 2005 and will be pursued until April 2007. Bappenas through its Directorate for Environment is the executing agency for this project, while the implementing agencies are DJLPE and KLH. Three key activities involved are:3

(i) Capacity building through awareness raising and capacity building workshops and seminars, providing documentation in the local language, and providing support in incorporating CDM projects in an institution’s activities;

(ii) Development of a strategy for promoting CDM in the waste management sector as well as a manual to do CDM in the waste management sector; and

(iii) Development of three PDDs for CDM projects in the area of renewable energy, energy efficiency and waste management.

1 http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIFICEXT/INDONESIAEXTN/0,,contentMDK:20810889~menuPK:2099423~pagePK:64027988~piPK:64027986~theSitePK:226309,00.html, visited on April 18, 2006 2 Personal communication with Farida Zaituni of World Bank on June 2, 2006 3 http://www.adb.org/Documents/TARs/INO/tar-ino-36562.pdf, visited on April 24, 2006


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A commencement workshop was organized in August 1, 2005 to disseminate the TA information and get supports from the stakeholders. By April 2006, the project has accomplished an assessment of potential CDM from Municipal Solid Waste (MSW) management projects. The project has recently organized the first National Workshop on May 31, 2006 which aimed on presenting CDM to key stakeholders mainly from government institutions. On June 1, 2006, another workshop was held on requirements and procedures for DOEs and attended by several local certification companies.


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4 The Status of Energy Sector in Indonesia

4.1 Indonesia’s primary energy resources Indonesia has a large variety of abundant energy sources, including both fossil and non-fossil energy. Fossil energy includes crude oil, natural gas and coal. The most important non-fossil energy sources in Indonesia are renewable energies, including biomass, hydropower, geothermal, wind power, solar energy and tidal/wave energy.

The primary energy production mix is presently dominated by oil. However, due to very limited resources, oil should be gradually substituted by other sources of energy. On the other hand, renewable energy, which is considered to be very important to be developed especially in rural and remote areas, remains highly unexploited due to the perceived obstacles, such as high upfront costs or technology and infrastructure constraints. In 2003 the primary energy supply in Indonesia was dominated by crude oil and natural gas including their derivatives. Despite of its abundant reserves, coal supplied only 11% of the total primary energy supply. While biomass was widely used for cooking, particularly in the rural areas, the figure below shows that the share of other renewables was not significant.1

Hydro2.8%

Natural Gas, LPG & LNG

20.8%

Crude Oil & Petroleum Products42.6%

Coal11.2%

Biomass21.5%

Geothermal1.1%

Figure 4.1 Sources of Primary Energy Supply in 20032

This section focuses on the primary energy resources in Indonesia, the present state and future projections of most important fossil fuels (oil, coal and natural gas) and highlights various renewable energy potentials.

4.1.1 Non renewable energy resources

4.1.1.1 Oil Oil is the dominant primary energy used in Indonesia. By the year 2004, domestic oil refineries could only supply 80% out of the total oil consumption of 471 million barrels and the

1 ESDM, Statistik Ekonomi Energi Indonesia 2004 (Jakarta: 2004). Available at http://www.esdm.go.id/statistikenergi.php?stat=48&action=detail, visited on March 16, 2006. 2 Ibid.


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rest was imported from abroad1.

Indonesia’s petroleum industry is operated by private sector (either Pertamina or foreign companies) under two categories of agreements2. The first category refers to the bundle of rights and obligations granted to an investor in order to explore and exploit oil and gas in cooperation with the government of Indonesia. These types of contracts are Production Sharing Contract (PSC), Technical Assistance Contract (TAC), and Enhanced Oil Recovery (EOR) contract. In addition to these contracts that give the authorization to explore and exploit, the companies holding a PSC, TAC or EOR may also enter into separate agreements on their petroleum operations. These are known as Joint Operating Agreements (JOA) and Joint Operating Bodies (JOB).

The oil production peaked in 1994 (Figure 4.2), declining ever since. The key factors behind the decline were depletion of old fields combined with continued slow investment and a decrease in new exploration. In addition, old fields and bureaucratic issues are also responsible for Indonesia's declining oil production and delaying numerous development projects.

0

100

200

300

400

500

600

700

1990 1992 1994 1996 1998 2000 2002 2004

Mill

ions

Bar

rel o

f Oil

Oil Produced Oil Refineries Input

Figure 4.2 Indonesian oil productions 1990-20033

Referring to the International Energy Outlook 2004 by the Energy Information Administration (EIA), the world oil production is projected to double from 1990 to 20254. Even bearing in mind the present decline, the data shows that Indonesian production is considerably stable. However, the existing oil fields in Indonesia are aging and it is highly unlikely that new fields will fully replace them, especially as it takes several years to start production. Investments in oil recovery might slow down the inevitable decline in oil production.

1 US Embassy in Indonesia, Petroleum Report Indonesia, Suplement 2005 p.23 (Jakarta: 2005) 2 US Embassy in Indonesia, Petroleum Report Indonesia 2002-2003 p.30, (Jakarta: 2004) 3 http://www.esdm.go.id/downloads/statistik/ind/6.2.3.htm, visited on March 28, 2006 4 Energy Information Administration, International Energy Outlook (US: 2004 )


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4.1.1.2 Natural gas Indonesia has about 180 trillion cubic feet (TCF) of natural gas reserves (proven and probable), equivalent to three times Indonesia’s oil reserves and sufficient to maintain current production rate for the next 50 years 1 . In 2004, 62 percent of Indonesia’s natural gas production was exported, as LNG to various countries and by pipeline to Singapore. Domestic use accounted for 38 percent, out of which 26 percent was used by fertilizer and petrochemical plants, 26 percent as city gas, 17 percent in electricity generation and 31 percent for various other purposes2. It is estimated that up to 6 percent of extracted natural gas was flared. In 2020, gas exports are projected to reach 32 percent of the total production3.

The domestic use of gas has been increasing, driven by the rising power demands, oil fuel subsidy removals and gas incentives in the 2001 Oil and Gas Law. Industrial sector (heat and feedstock) is expected to be the largest user in the future, located mainly in Java. More than 71 percent of natural gas reserves are located offshore, with the largest reserves found at Natuna Island, East Kalimantan, Irian Jaya, Aceh and South Sumatra. However, not all of these reserves are commercially viable, due to both the quality of the gas as well as its distance to the market4.

In order to resolve problem of the limited transmission capacity, several gas pipeline projects are on the way. These projects include the South Sumatera - West Java (SSWJ) and East Kalimantan – Central Java transmission line plans by PGN with a total pipeline length of about 3,500 km. 5

4.1.1.3 Coal The mined coal reserve in Indonesia is 5.37 billion tonnes while the resources amount to 38.87 billion tonnes, comprised of 11.57 billion tonnes measured reserves and 27.30 billion tonnes probable reserves6. Measured reserves would allow the current production to be sustained for 150 years.7 The largest measured reserve is located in Kalimantan (54.57 percent), followed by Sumatra, while the rest is found in Java, Sulawesi and Papua. In 2005, approximately 40 percent of the total production is exported, but the priority of coal utilization in the future is to fulfill the domestic energy demand, especially for cement industry and electricity generation, driven by government policy on energy diversification. The government has been making some efforts to encourage coal utilization also in small industries (e.g. chicken farms, restaurants, limestone calcining) and households by promoting the coal briquette.

1 US Embassy in Indonesia, Petroleum Report Indonesia 2002-2003 p.31, (Jakarta: 2004). 2 US Embassy in Indonesia, Petroleum Report Indonesia, Supplement 2005 p.26 (Jakarta: 2005) 3 Ministry of Environment, Indonesia Country Study, (Denmark: UNEP, 1999) 29. 4 US Embassy in Indonesia, Petroleum Report Indonesia 2002-2003 p.31, (Jakarta: 2004) 5 PT Perusahaan Gas Negara (Persero), www.pgn.co.id, visited on February 07, 2006 6 Ministry of Energy and Mineral Resources, Indonesia’s Energy Outlook 2010, (Jakarta: 2002) 72. 7 National Energy Management Blueprint 2005 – 2025, ESDM (Jakarta: 2005)


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Domestic coal use grew on average by 13 percent per year between 1990 and 2003, reaching 200 TWh.1 The government promotes coal use as a way to diversify energy supply and reduce oil use. A growth rate between 4 and 10 percent is envisioned for the years 2000–2010.2

On May 22nd 2006, PLN announced a plan to build 24 coal-fired power projects as part of the previously announced "crash program" to add 10,000 megawatts (MW) of generation capacity to the national power grid over the next few years. PLN aims to build 10 power plants in Java and 14 outside Java, which together would provide an additional generation capacity of 8,200 MW – almost 90% of which is in Java. PLN is targeting all the projects for completion by 2009.3

4.1.2 Renewable energy potentials Indonesia’s installed electricity generation capacity was 37,591 MW in 2003. The share of renewable energy was 13.4 percent, consisting of hydropower (4,199 MW, 11.1 percent of national capacity), geothermal (525 MW) and biomass (303 MW). Based on their stage of development, renewable energy sources in Indonesia are categorized into three groups:

a. Renewable energy sources in commercial use: hydropower, geothermal and biomass

b. Renewable energy sources in limited commercial use: solar, wind

c. Renewable energy sources that have been successfully demonstrated: tidal

The potentials of these renewable sources are further elaborated in the next section. The main barriers for realizing all these potentials are energy subsidies and non-competitive energy market. All renewable energy sources have high initial investment costs compared to fossil fuels, even if levelized cost of energy is equal or lower.4 Removal of subsidies and distorting regulation is the best way to increase investor confidence and improve availability of capital in the energy sector, hugely benefiting renewable energy.

4.1.2.1 Hydropower Ministry of Energy and Mineral Resources (ESDM) estimates the hydropower potential in Indonesia at 75 GWe, out of which only 500 MW is small scale. The total installed capacity of hydropower plants (PLTAs) was only about 6 percent of the total potential (4.2 GW) in year 2000. PLTAs owned by PLN represent 3 GW of the total capacity. The installed capacity of small scale PLTA’s is only about 21 MW.5 Large hydropower dams have often devastating environmental and social consequences and can have very high methane emissions from decaying organic material. Therefore small scale and run-of-river hydro should be prioritized when developing hydropower.

Java has the largest electricity demand (80 percent of the total electricity demand in

1 http://www.esdm.go.id/statistikenergi.php?stat=48&action=detail, Profil Energi Ringkas Indonesia 2003, ESDM (2004). 2 Ministry of Energy and Mineral Resources, Indonesia’s Energy Outlook 2010, (Jakarta: 2002) 72. 3 http://www.usembassyjakarta.org/econ/Energy_Highlights_May_06.pdf, visited on June 6, 2006 4 US Embassy in Indonesia, Indonesia’s Geothermal Development, (Jakarta: 2004) 4. 5 Ministry of Energy and Mineral Resources, Indonesia’s Energy Outlook 2010, (Jakarta: 2002) 73.


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Indonesia), while the largest hydropower potential is located mainly outside Java (95% of the total potential). 1 This could be one of the constraints to hydropower development. Individual investors and local cooperatives are able to participate in developing small scale PLTAs, because they require smaller investments and their operation is relatively simple.

The first private small-scale renewable electricity project in Indonesia was commissioned on October 20 – 21, 2003. 20-21st October 2003. The 25 kW hydropower facility is owned and managed by Paguyuban Kali Maron (PKM), Seloliman, East Java, an informal traditional village institution. It was first built in 1993 by GTZ-MHPP (GTZ-Micro Hydro-Power Project) and in 2000, the electro-mechanical equipment was replaced as part of an upgrade carried out with support provided by GTZ-MHPP in cooperation with YBUL. The plant is connected to grid at medium voltage (20 kV) and sells to PLN at Rp.425 / kWh (approx. 5 US cents). It will generate approximately Rp 5 million/month in gross revenue via this power purchase agreement, which is made possible by the Indonesian feed-in law for small-scale distributed power generation from renewable energy. 2 3

4.1.2.2 Geothermal The volcanic belt that stretches along the islands of Sumatra, Java to Nusa Tenggara, Sulawesi and Maluku has a high geothermal potential. The Ministry of Energy and Mining Resources Republic of Indonesia (ESDM) estimates that there are in total 217 geothermal prospective sites in the country, including 71 in Sumatra, 62 in Java, 52 in Sulawesi, 15 in Nusa Tenggara, two in Papua and 1 in Maluku. The indicated resource base for geothermal energy in total is approximately 20,000 MW or equivalent to 160 TWh. It is estimated that sixteen exploration wells and 56 development wells drilled during 1989 to 2000 confirmed a total proven reserve of 2,245 MW and total probable and possible reserve of 7,165 MW4.

Current utilization of geothermal is limited, even though almost half of the potential is located near large consumers, in Java and Bali.5. The installed capacity of geothermal power plants (PLTP) is 790 MW, representing only 4 percent of the total estimated potential6.

4.1.2.3 Biomass and Biofuels Biomass sources include wood, agricultural waste, organic components of industrial and household waste, animal waste etc. In addition to being usable as such in generation of electricity and heat, biomass can be converted into high quality biofuels, such as bio-oil, biodiesel, bioethanol and biogas. These simple and effective conversion processes allow biomass to be easily transported and to be used in vehicles and other demanding applications. The recent development of biofuels has been encouraging. Biofuels are potential substitutes for petroleum i.e. diesel oil, gasoline and kerosene. Biofuels particularly biodiesel, bioethanol and bio-oil can be produced from primary crops such as oil-borne seed

1 US Embassy in Indonesia, Indonesia’s Geothermal Development, (Jakarta: 2004) 4. 2 http://www.gtz.de/de/dokumente/en-1st-mhp-indonesia.pdf, visited on May 16, 2005 3 http://www.nedo.go.jp/kankobutsu/report/948/948-02.pdf, NEDO 2005 4 US Embassy in Indonesia, Indonesia’s Geothermal Development, (Jakarta: 2004) 5 Ibid 6 Ibid


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and fruit and sugar containing crops. In addition, producing biofuels from secondary flows such as agricultural and forestry residues, municipal solid waste, sewage, industrial waste, cattle dung is environmentally benign and can have important local as well as global benefits. Growing interest in biofuels is directly related to the high petroleum fuel price and growing concern over climate change, which has increased the competitiveness of biofuels. The opportunity of biofuel CDM projects will increase their economical feasibility.

Especially for electricity generation, biomass utilization exceeds the use of other renewables, excluding geothermal and hydropower. However, only a small percentage of the full potential is used, which indicates ample opportunities for improvement. Currently, biomass-fired generation capacity is only 179 MW, which is 0.36 percent from the total potential of 49,810 MW (Table 4.1). There are several technologies available to produce electricity, including energy generation from municipal solid waste (production of biogas and/or refuse derived solid fuels or as a secondary option, mass incineration; as well as methane capture from landfills) and from agricultural and forestry waste.

4.1.2.4 Solar Energy Being a tropical country, Indonesia is endowed with abundant solar potential with average daily radiation of 4.8kWh/m2. Two types of technology are applied to utilize solar radiation, solar thermal and solar PV technology. In Indonesia, solar thermal for water heating has been developed commercially while other applications e.g. for cooking or agricultural drying are still very limited.

Solar PV application in Indonesia – especially the solar home system (SHS) – has been developed up to the semi-commercial stage. Solar PV is utilized to generate electricity for lighting, water pumping, telecommunication and refrigeration (in health centre) with installed capacity of about 5 MW 1, out of which approximately 1 MW is grid connected.2

4.1.2.5 Wind Energy Wind energy can be used to generate electricity for e.g. rural electrification, water pumping, battery charging, and mechanical purposes such as fishpond aeration and pumping. In average, wind energy potential in Indonesia is relatively small with average wind speed at 3 – 5 m/s. Small scale wind turbine could possibly be installed in the areas with low wind speed. However, several areas in eastern part of Indonesia have wind speed above 5 m/s. In these areas, bigger scale wind power generation can be developed. Current installed capacity (0.23 MW) is very small compared to the potential.

1http://www.ptm.org.my/icra/ICRA%20papers/Bangkok_Laos/icra_papers/wshop_laos/IED_Annex%20D.pdf, IED (France) 2005: Harmonization of PV Standards in ASEAN countries. ICRA Background Paper. 2 Ministry of Energy and Mineral Resources, Indonesia’s Energy Outlook 2010, (Jakarta: 2002) 72.


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Table 4.1 Renewable energy potential and capacity connected to grid Potential Energy

(TWh) (MW)1

Installed

Capacity (MW) Utilization

Solar 2 3.4 x 106 1.2 x 109 0.88 -

Tidal 2 2.0 x 103 240 x 103 - -

Others

Geothermal 160 20,000 790 4%

Wind 26.4 9,290 0.23 0.003%

Biomass 424 49,810 178 0.36%

Biogas 5.79 680 0.06 0.009% Large hydro3

410 75000 4200 6%

Small hydro 2.7 500 21 4%

Total others 1,030 120,000 3,500 3% Compiled from: ESDM 20024, ESDM 20035, own calculations to harmonize the data

4.1.2.6 Wave and Tidal Energy While wave and tidal energy has a large potential, further research and development is needed. Potential of wave energy is in the range of 20 – 70 kW/m measured from the average wave frontline, which means 1 km length of coast could produce 10 – 35 MW assuming 50% efficiency. A wave energy utilization pilot project located in Baron beach, Yogyakarta was built by BPPT (Agency for the Assessment and Application of Technology) with capacity of 1.1 MW.6 A feasibility study was carried out as a part of ADB technical assistance.7

1 Gross capacity for individual sources, net electric output in total. 2 For solar and tidal, the table lists theoretic potentials not considering any practical constraints. For other energy sources, technical potential within a reasonable price range is given. 3 The technical potential of large hydro cannot be fully realized due to environmental and social impacts. A significant portion of the potential can be exploited with run-of-river and small-scale installations. 4 Ministry of Energy and Mineral Resources, Indonesia’s Energy Outlook 2010, (Jakarta: 2002) 5 ESDM, Statistik Ekonomi Energi Indonesia 2004 (Jakarta: 2004). Available at http://www.esdm.go.id/statistikenergi.php?stat=48&action=detail, visited on March 16, 2006. 6 Republika Oct 7 2005: Gelombang Pantai Baron untuk Energi Listrik. See http://www.republika.co.id/koran_detail.asp?id=216255&kat_id=13 7 ADB 2004: TA 5972-REG: Summaries of Project Pre-Feasibility Studies See http://www.adb.org/REACH/Summaries.pdf


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4.2 Electricity Supply Securing reliable electricity supply remains the main challenge for the power sector in Indonesia. Growing demand and dynamic fuel price fluctuation forced the government to reform this sector and seek alternatives to conventional electricity generation. Providing access to electricity in the rural areas is also part of the government responsibility. The present electrification ratio in Indonesia is 65%, which means that about 62 million people in Indonesia are living without electricity.

Electricity consumption grew by 7 percent from 1999 to 2004. The electricity supply system is divided into two systems, the Java-Bali system and the Outer Islands system. Electricity consumption of Outer Islands system experienced higher growth (7.5%), though its share was only about 20% of the total. The growth is expected to increase, as the low electrification rate provides ample room for customer expansion.1

Up to the 1st quarter of 2005, the total installed capacity of PT PLN is 25,087 MW –distributed to Java-Bali system (19,514 MW), Sumatera system (3,305 MW) and the rest (2,268 MW). The following table shows the detailed composition of Java-Bali power generation system in 2005 (1st quarter). The main power producers are PT. Indonesia Power (IP), PT. Pembangkitan Jawa-Bali (PJB) and independent power producers (IPPs)

Table 4.2 Installed Capacity (in MW) of Java-Bali Power Generation System in 2005 (1st quarter)2

No. Power Plant - Fuel IP PJB Others IPP Total System % 1 Hydro 1104 1283 180 2567 13 2 Steam turbine – coal 3400 800 2450 6650 34 3 Steam turbine – natural

gas/fuel oil 1000 1000 5

4 Steam turbine – fuel oil

500 300 800 4

5 Gas/Steam turbine – natural gas/ fuel oil

1180 2088 3268 17

6 Gas/Steam turbine – fuel oil

1798 640 2438 12

7 Gas turbine – natural gas/ fuel oil

98 342 150 589 3

8 Gas turbine – fuel oil 447 40 856 1343 7 9 Diesel Generator 76 76 0.4 10 Geothermal 360 424 784 4 TOTAL 8962 6492 1036 3024 19514 100

1 http://www.pln.co.id/ruptl/RUPTL2006-2015.pdf, visited on March 16, 2006 2 ibid


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The oil price hike and the removal of subsidies had intensified the financial difficulties of PLN as a significant part of the total electricity generation comes from oil. The option to switch to natural gas in some power plants was not sufficient to solve the whole problem. Even in PLN’s dual-fuel power plants, limited allocation for domestic gas consumption in addition to unreliable gas supply through pipeline forced PLN to use oil despite of its high price.

In order to meet the growing demand, PLN has formulated a plan to increase power generation capacity as amended in the Ministry of Energy and Mineral Resources decree no. 2059 K/31/MEM/2005 on Electricity Supply Plan of PT. PLN (Persero) for the year of 2006 - 2015. PLN will add up its generation capacity from various types of power plant and fuels except fuel oil.1

Especially for Java-Bali system, until 2008 several capacity expansion projects are on-going, including combined cycle (using gas or oil) power plants in Cilegon (740 MW) and in Pemaron (50 MW) as well as coal power plants in Tanjung Jati (1320 MW) and in Cilacap (600 MW). In addition, some projects with financial commitment from JBIC will add up to the generation expansion: combined cycle power plants in Muara Tawar (225 MW), in Muara Karang (720 MW), in Priok (720 MW) and expansions of existing power plants. IPPs will contribute also to the capacity expansion with some geothermal and combined cycle power plant projects.

During the period 2006 – 2015, the transmission system will be further developed by building 500 kV and 150 kV transmission lines for the Java-Bali system and 275 kV, 150 kV and 70 kV lines outside the Java-Bali system. The main target of transmission system development is to better connect the generation capacity and customer demand and improve the quality of electric power.

4.3 National Energy Challenges By 2020, the national energy consumption is projected to triple from the current level. Indonesia nearly becomes a net importer of oil, and the national oil production has been gradually decreasing. The growth in consumption of domestic refinery products, estimated at 6 percent per year, is considered to be immense waste. The vast consumption is due to the price of domestic oil fuel being low compared to the international market price – as a result of the fuel oil subsidy adopted by the government the price is even lower than the national economic value of oil.

From the supply side, energy supply could not meet the vast growing demand. Poor investment climate has been perceived as the main barrier to the growth of energy supply. In addition, lack of infrastructure and low energy price (due to subsidies) has been contributing to the impaired supply growth.

In this section, present national energy situation will be addressed by highlighting the challenges. The first issue addressed is the institutional background, followed by analysis of energy policy and regulatory framework as well as development of energy price. The challenges in the oil and gas, coal, renewable energy and power sectors are also discussed.

1 http://www.pln.co.id/ruptl/RUPTL2006-2015.pdf, visited on March 16, 2006


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4.3.1 Institutional analysis in Indonesia The Ministry of Energy and Mineral Resources (ESDM) takes care of the responsibilities of the government in electricity and energy utilization through several directorates. The ministry is responsible for formulating government policies in energy sector and the task is carried out on a sectoral basis. The ministry has three sectoral directorates i.e. Directorate General of Oil and Gas (MIGAS), Directorate General of Electricity and Energy Utilization (DJLPE) and Directorate General of Mineral, Coal and Geothermal (DJMBP).

PLN, the state electricity company is the sole player in power sector, meaning that PLN is the only company holding the right to manage electricity production, transmission and distribution. The private sector can invest in electricity generation and therefore may supply electricity to the grid under certain rules and processes as stipulated in various government regulations on electricity (further elaborated in section 4.4.2.1).

Privatization and liberalization of electricity sector in Indonesia took an important step forward with the passing of the Law no. 20 in 2002. However, the Constitutional Court annulled the law in December 2004 after the requests of several groups to review the legal aspect and the content of the Law 20/2002. Among the justifications for the decision was that the unbundling of existing power system into separate markets and businesses (generation, transmission and distribution) will weaken the state-owned electricity company and pose a threat to the security of electricity supply.1 Therefore, the Constitutional Court decided that electricity has to be managed exclusively by the government, in this case by PLN.2

The situation in the oil and gas sector is different. The enactment of Law no. 22/2001 has significantly changed the role and position of Pertamina as state-owned oil and gas company. The law regulates the establishment of BP MIGAS (Implementing Agency for Upstream Oil and Gas Operation) which took over the role of Pertamina in managing the oil and gas PSCs. Furthermore, Pertamina’s monopoly in distribution of fuel products ended with the law.

The most important institutional challenge in the energy sector is lack of coordination among different institutions. The complexity of the energy sector and the presence of various stakeholders might cause either overlapping or negligence in managing the sector. The most obvious example of overlapping is unclear division of authority between the downstream and upstream authorities, BPH Migas (Implementing Agency for Downstream Oil and Gas Operation) and BP Migas. Even though both institutions were established years ago, there is no clear distinction between their roles and functions. Furthermore, current institutional setting cannot properly address rural electrification. PLN has the public service obligation to provide electricity to rural areas, but it is in contradiction with the company’s objective to secure its own profitability.

4.3.2 Energy Policy and Regulatory Framework Energy policies implemented by the government during the past years have not been able to resolve the problems and challenges in this sector. In some cases, the policies had even lead

1 IIEE, Surviving Energy Challenges, 2006 p.38 2 Further discussion is elaborated in section 4.4.2.1


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to substantial economical, environmental and social problems. One of the main examples is the oil price subsidy. Previously intended to support low income families, government had allocated significant part of its budget to cover the fuel subsidy. However, the tremendous hike in crude oil price further increased the financial burden of the subsidy and the government was forced to remove it. This reduced market distortions and increased competitiveness of cleaner energy sources, but the downside was a considerable increase in living costs, with low income families affected most.

The government’s reluctance to develop renewable energy is reflected by the trivial portion of renewable energy sources in power generation despite of their abundant potential in Indonesia. Though energy diversification policy is a part of the national energy policy, the goal of developing renewable energy was not supported by adequate regulations and incentives.

Segregation of sectors in the regulatory framework for energy implies the lack of coordination and synergy among different sectors. Sectoral laws, including electricity law, oil and gas law, nuclear law and geothermal law were established in the absence an overarching law on energy. An energy bill is being drafted and it is expected to fill the gap by addressing the crosscutting issues.

4.3.3 Development of Energy Price The price adjustment for fuel oil products in 2005 has raised domestic fuel prices to the international market price. This policy helped the government to trim down financial burden to the state budget due to the subsidy. Most importantly, it creates a more conducive climate to the development of renewable energy sources as they are now able to compete with the fossil fuel price.

The price increase has also lead to adverse impacts that need to be addressed – it lowered the purchasing power of the poor, increased inflation and some places in Indonesia experienced fuel scarcity due to illegal stockpiling.

There has also been a heated discussion on raising the electricity tariff, which is still heavily subsidized. The government proposes to increase the tariff about 10% to reduce the state budget burden. However, facing strong opposition from the industrial sector, the government has decided to postpone the tariff adjustment.

4.3.4 Challenges in Oil and Gas Sector As stated previously, Indonesia’s oil production shows a declining trend for the past ten years (Figure 4.1). However, growing domestic demand has driven the government to increase imports of crude oil. In 2003, about 132 million barrels of crude oil or about 37 percent of the amount used in refineries was imported.1

Development of new oil production facilities is expected to increase Indonesian oil production. However, new facilities are mostly small. The only large new one is the Cepu block with a production capacity of 170 thousand barrels per day. With the JOA (Joint Operation

1 http://www.esdm.go.id/downloads/statistik/ind/6.2.3.htm, visited on March 27, 2006


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Agreement) signed between Pertamina and ExxonMobil in March 15, 2006, the Cepu facility is projected to start its operation before 2008.1,2

The demand for petroleum products (gasoline, diesel oil, kerosene etc) is likely to increase due to the growth of population and the economy. As oil refineries have reached their maximum capacity, the government has to import more petroleum products to fulfill the domestic demand. The government plans to build a new refinery in Tuban, Eastern Java with a refining capacity of 150,000 – 200,000 barrels oil per day.3

However, crude oil production in Indonesia is limited by the national oil reserve. Currently, the proven reserve is projected to last for 18 years if no new fields are found and opened. Hence, the government has been trying to increase the foreign investment into new oil fields by applying incentives and simplifying the procedures.

The Indonesian natural gas production shows a different picture. Though the proven and probable reserves are estimated to last for 61 years at the current production rate, the government faces a dilemma regarding its utilization. Most of the existing gas fields are bound to the long-term contracts for export in the form of LNG. Hence, supply to domestic demand is often given the second priority especially on the occasion of supply disruption.

The prominent example is PLN gas demand for electricity generation. In order to reduce their diesel oil consumption, PLN requires significant amount of natural gas for several gas/oil bifuel power plants. Despite of the difficult financial situation of PLN, the government allocates only 25% of the demand of those power plants, forcing PLN to purchase diesel fuel instead and suffer from elevated generating cost.

Furthermore, long-term natural gas contracts do not allow the government to benefit from the high LNG price at the spot market resulting from crude oil price increase. LNG in the spot market is much more expensive than the contracted price, so if new contracts were negotiated now, the price would be higher.

4.3.5 Challenges for Coal Utilization Indonesia is sitting on an abundant reserve of coal, therefore the government plans to significantly increase its utilization for electricity generation. However, several constraints should be taken into consideration – among which is the geographical situation of the sources. Most of the reserves are outside Java, while the major electricity demand which actually can be fulfilled by coal is in Java-Madura-Bali system.

Another problem is that most of the reserves are low grade coal, which is now being promoted as briquette to replace kerosene for cooking purposes. The government also promotes the use of coal liquefaction technology in order to optimally utilize the low grade coal.

Coal-fired power generation can have severe environmental and heath implications, which must be carefully taken into account. Out of all commercial energy sources, coal produces

1 http://www.kompas.com/utama/news/0603/15/113048_.htm, visited on March 27, 2006 2 The JOA was signed after a lengthy negotiation which took more than 4 years. 3 http://members.bumn-ri.com/rungkut/news.html?news_id=12718, visited on March 27, 2006


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typically the highest emissions of sulfur dioxide, nitrogen oxides and other constituents of acid deposition and acid rain, as well as emissions of particulates and toxics such as heavy metals and persistent organic pollutants (POP). The high carbon content of coal increases greenhouse gas emissions even compared to other fossil fuels.1

PLN plans to build several coal power plants through the “crash program”.2 Regarding the plan, the carrying capacity of the environment has to be carefully considered when selecting sites and technology for coal use in power plants and directly in industry. The utilization of high efficiency, low emission coal technology as well as appropriate measures to remove particles and sulfuric and nitric acids from flue gases, should be a precondition for constructing coal fired power plants and other facilities.3

4.3.6 Renewable Energy Development As previously explained in section 4.2.1, Indonesia is endowed with abundant renewable energy sources but their utilization is far below achievable levels. The government has contributed to the condition by focusing on fossil fuel utilization. Since the recently launched national energy policy has emphasized the importance of renewable energy, it is expected that share of renewable energy in the primary energy supply will increase in the near future. Supporting regulatory framework and financial incentives are required to encourage development of renewable energy. In the Green Energy Policy (see section 4.4.1.1), the government plans to apply several incentives for renewables including fiscal incentives i.e. exclusion from taxes, including the Value Added Tax (VAT) and import tax. Investment will also be promoted by providing cheap loans and implementing various investment promotion programs4. However, the government needs to ensure and control the implementation of all these instruments with appropriate regulation.

4.3.7 Limited Access to Electricity Low electrification ratio in Indonesia indicates the limited access to electricity for a significant part of Indonesian population mainly in rural areas. PLN as a profit-maximizing monopoly is not willing to adequately fulfill its public service obligation (PSO) in rural electrification in the absence of competitive pricing of electricity and sufficient incentives from the government. Therefore, the ambitious target of the government to provide electricity to 93% of Indonesians by 2025 will not be achieved if there is no clear institutional framework to address this issue.

1 Ministry of Energy and Mineral Resources, Indonesia’s Energy Outlook 2010, (Jakarta: 2002) 72. 2 elaborated in section 4.1.1.3 3 Ministry of Energy and Mineral Resources, Indonesia’s Energy Outlook 2010, (Jakarta: 2002) 72. 4 Ministry of Energy and Mineral Resources, Policy on Renewable Energy Development and Energy Conservation (Green Energy), (Jakarta: 2003)


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4.4 Energy Policy and Regulatory Framework

4.4.1 National Energy Policy Recently the Government issued Presidential Regulation no. 05/2006 concerning the National Energy Policy (NEP) as guidance on national energy management. It seeks to improve primary energy mix by 2025 by reducing the share of oil to 20 percent or less and increasing the contribution of biofuels (minimum 5 percent), geothermal energy (minimum 5 percent), and other new and renewable energy (minimum 5 percent). The main strategies to achieve the target are improving the security of energy supply, efficient use of energy, diversification, developing competitive energy pricing and environmental conservation to ensure sustainable development. Based on this regulation, the Ministry of Energy and Mineral Resources together with other related ministries shall establish the National Energy Management Blueprint.

In addition, several energy-related policies were implemented as elaborated in the following section. The green energy policy launched in 2003 and the removal of some energy related subsidies shows the effort by the government to intensify renewable energy and energy conservation measures.

4.4.1.1 Green Energy Policy Policy on development of Renewable Energy and Energy Conservation, also called the Green Energy Policy was stipulated under the Ministry of Energy and Mineral Resources (ESDM) Decree no. 02/2004. The decree provides guidance on renewable energy development and improving energy efficiency in Indonesia. The policy states that the term renewable energy in the Green Energy Policy means the energy sources that can be renewed and will not be exhausted if managed properly. The types of renewable energy include biomass, geothermal, solar energy, hydropower, wind, and ocean energy. Similarly, energy efficiency means efficient and rational utilization of energy without reducing the energy using activities. The potential to improve energy efficiency in all sectors is sizeable – in the range of 10 to 30 percent. Around 10 to 15 percent of this potential can be realized easily and with low or no initial costs. Savings of 30 percent require some investment, while still being profitable1.

The goal is to build a system of sustainable energy supply and utilization to support achieving national sustainable development through increased utilization of renewable energy, the use of energy-efficient technologies, and energy conservation. The concrete outputs of the policy include the feed-in law for small and medium scale distributed generation, free energy audits in industries and public buildings and public awareness raising projects2.

One of the biggest obstacles for the optimal development of renewable energy and energy conservation is non-competitive energy pricing and energy subsidies. Restructuring the

1 Ministry of Energy and Mineral Resources, Policy on Renewable Energy Development and Energy Conservation (Green Energy), (Jakarta: 2003) 7 2 Asian Institute of Technology, Regional Energy Database. Available at http://www.serd.ait.ac.th/red/PolicySample.htm (Bangkok)


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energy pricing policy, by eliminating subsidies is necessary to ensure a fair competition of different energy sources and to promote energy efficiency in Indonesia.

4.4.1.2 Energy subsidy removal program To reduce the burden of energy subsidies in the state budget, the government has decided to increase the price of energy, particularly for fuel oil and electricity. The planned target of energy prices increase was to achieve its market price by the year 20041. Unfortunately, until today, the target has not been met.

Oil subsidy reached 70 trillion rupiah in 2004, being by far the largest energy-related expenditure. 2 The subsidy created dependency and wasteful consumption, as well as rendered other energy sources, such as gas and renewable energy unable to compete with oil.

Recent update on the price of fuel oil is presented in the table below, highlighting the government effort to reduce the subsidy. Since October 2005, the fuel oil price for industry has been completely non-subsidized. However, the kerosene subsidy was maintained since large part of the low income population consumes kerosene for cooking in traditional stoves. The government has also started giving financial assistance to those in need, to offset the impacts of reduced subsidies.

The electricity tariff was increased in April 2000 then again raised by 6% every quarter between January to December 2003. The power charges were raised to cut subsidies and to help plug the national budget deficit. As stated previously, the government also plans to increase the electricity tariff in the near future.

The partial or total abolishment of oil subsidy is expected to open an opportunity to develop other types of energy. Alternative energy, which has been less competitive in terms of price compared to oil fuel, can now gradually grow to substitute part of the energy demand. Also, unsubsidized fuel oil price and electricity tariff encourages consumers to conserve energy.

4.4.2 Regulatory Framework on Energy Sector Regulatory framework in Indonesia follows the hierarchy below (starting from the highest rank):

a. The Constitution (Undang-Undang Dasar 1945) b. The laws (Undang-Undang) c. The Government Regulation (Peraturan Pemerintah) d. Presidential Regulation (Peraturan President) and Presidential Decree (Keputusan

Presiden) e. Implementing Regulations such as Ministerial Decree, Ministerial Regulation and

regional government regulations.

1 Ministry of Energy and Mineral Resources, Policy on Renewable Energy Development and Energy Conservation (Green Energy), (Jakarta: 2003) 45. 2 http://www.bi.go.id/web/id/Data+Statistik/, visited on March 21, 2006


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Four legal instruments were issued to restructure the energy sector, namely Law No. 22/2001 on Oil and Natural Gas, Law No. 20/2002 on Electrification, Law No. 10/1997 on Nuclear Energy and Law No. 27/2003 on Geothermal Energy. As the Indonesian Constitutional Court annulled the Law No. 20/2002 on Electricity (further explained in section 4.4.2.1) in mid December 2004, the policy for electricity sector has to be adjusted to the Law No.15/1985. Three Articles in the new Oil and Natural Gas Law faced a similar destiny.

In the next section, these laws and regulations on electricity, oil and natural gas, geothermal and renewable energy are further elaborated. Various regulations under those laws are explained to enrich the understanding of their roles and relationships.

4.4.2.1 Electricity Law and Regulations On December 15, 2004 the Constitutional Court decided that1:

1. The Electricity Law no. 20/2002 had been annulled as it was considered not in line with Article 33 of Indonesian Constitution of 1945;

2. All contracts issued based on Law no. 20/2002 are still valid until the end of the contracting period;

3. The Electricity Law no. 15/1985 has been reenacted to replace the Electricity Law no. 20/2002;

4. The Government of Indonesia has to draft a new electricity law in line with Article 33 of Indonesian Constitution of 1945.

The largest implication of the annulment of Law no. 20/2002 and the reenactment of Law no. 15/1985 is returning to monopoly and centralized system in electricity sector. The Law no. 20/2002 was enacted to facilitate the liberalization and privatization of electricity sector in Indonesia. The Law introduced a multi-sellers-multi-buyers system based on the readiness of each region in producing electricity. With Law no. 20/2002, foreign as well as domestic private investors were allowed to produce electricity and sell it to PLN which controls the transmission and distribution system.

The annulment of Law no. 20/2002 threatened the the position of investors who took advantage of liberalization. However, the Constitutional Court decided also that the existing contracts between PLN and investors, based on Law no. 20/2002, are still valid2.

In a press-conference on December 16, 2004, the Minister of Energy and Mineral Resources raised his concern that the annulment of Law no. 20/2002 has reduced the trust of investors and business sector to the electricity sector in Indonesia. The timing is not right as Indonesia still needs substantial investment to fulfill the demand for electricity 3 . Therefore, the government is now in the process of drafting a new electricity law.

After the annulment of Law no. 20/2002, the Government Regulation no. 3/2005 was enacted to fill in the disparities between the Law no. 15/1989 and the latest progress. The Government Regulation no. 3/2005 stipulates to develop the General National Electricity Plan

1 http://www.esdm.go.id/beritaumum.php?, site visited on May 25, 2005 2 Jakarta Post, Court says 2001 electricity law is unconstitutional, (Jakarta: December 2004). 3 http://www.esdm.go.id/beritaumum.php?, site visited on May 25, 2005


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(RUKN) as the framework for electricity supply and utilization. The regulation also specifies participation of the private sector in electricity supply and emphasizes the role of provincial and municipal governments in the development of regional electricity planning and provision of funds to develop the infrastructure.

Following several regulations issued by ESDM concerning power generation are important for CDM projects, especially for projects feeding electricity and to the grid:

1. Ministry of ESDM Regulation no. 001/2006 (a revision of Ministry Regulation no. 09/2005) on Procedures for Electric Power Purchasing and/or Transmission Line Leasing for Public Electricity Supply.

2. Ministry of ESDM Regulation no. 002/2006 on Medium-scale Power Generation from Renewable Energy Sources.

3. Ministry of ESDM Regulation no. 010/2005 on Procedures for Electric Power Business Licenses for Inter-Provinces, Regions, or for National Grid Connections

4. Ministry of ESDM Decree no. 1122K/30/MEM/2002 on Scattered – Small scale Power Generation using Renewable Energy.

5. Ministry of ESDM Decree no. 1213 K/31/MEM/2005 on National Electricity General Plan (RUKN)

6. Ministry of ESDM Decree no. 2059 K/31/MEM/2005 on Establishment of PLN’s Power Supply Plan for 2006-2015

Several key points summarized from these regulations:

- (Regulation 001/2006) PLN as the authority of electricity business (PKUK) may purchase electricity from Independent Power Producers (IPPs) either via a call for tenders or by direct agreement.

- (Decree 1122/2002) PLN will buy all offered electricity from small scale distributed power plants based on renewable energy can by direct agreement at a set price. The eligible power plants shall be with capacity or excess power of maximum 1 MW. Interested parties should be small business/small scale private companies or joint ventures.

- (Regulation 001/2006 and 002/2006) Renewable energy based power plants with capacity or excess power of minimum 1 MW up to maximum 10 MW can sell electricity to PLN at a set price by direct agreement. Interested parties can be joint ventures, privates, provincial/municipal-owned companies, or individuals. Minimum term of contract is 10 years.

- (Regulation 002/2006 and Decree 1122/2002) Interested parties may submit proposals (administrative and technical) to PLN with copies to DGEEU, Governor or Mayor of the area.

4.4.2.2 Oil and Gas Law To response to the challenge of open market in oil and gas, the government of Indonesia has enacted the Oil and Gas Law No.22/2001. The government of Indonesia has moved slowly but surely to promote greater capacity and efficiency in the downstream sector in the beginning of 1997. By allowing private refineries to market their products in Indonesia through


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Pertamina, the government has loosened Pertamina’s hold on refining (Presidential Decree (PD) No. 31/1997) 1 . Oil and Gas Law No. 22/2001 has marked another step toward liberalizing the downstream sector. The Law stipulates that the downstream oil and gas operations, including processing, transportation, storage and marketing of oil fuel products, shall proceed in a transparent manner, and that transparent pricing mechanism based on the market price shall be established. It also ensures investors and other actors equal regulatory and legal treatment.

Meanwhile, for the upstream sector, oil and gas exploration and exploitation, according to this Oil and Gas Law, are managed by an Executive Agency with Parliament2 approval. Since oil and gas upstream activities will be conducted also in open and transparent manner, the companies owned by the state or regional government, cooperatives, or private enterprises could participate in oil and gas exploration and exploitation activities and Pertamina as a state enterprise will have the same role as other oil and gas upstream activity operators.

Since the petroleum product prices remain a great concern in Indonesia, the government has decided to gradually let the market determine the prices of gasoline, diesel and kerosene. As part of an overall strategy stipulated in the Indonesian Presidential Decree No.9/2002, the government aims to minimize the subsidies to oil in the future.

4.4.2.3 Geothermal Law The Geothermal Law was developed after the Oil and Gas Law No.22/2001 had removed geothermal from the scope of oil and gas regulation.3 The objective of Law No.27/2003 on Geothermal is to control the use of geothermal energy in order to support sustainable development and provide overall added value4. Moreover, it aims to increase government revenue and to push the economic development of Indonesia. At the same time, the government ended Pertamina’s monopoly in oil and gas sector in the end of 2003 and allowed other Independent Power Producers (IPPs) to participate in geothermal development.

As required by the Geothermal Law, ESDM has completed a report entitled “Draft Guidance and Pattern of Geothermal Development and Utilization, 2004-2020” by the end of 2003.5 The blueprint, drafted by ESDM in collaboration with oil and gas stakeholders, e.g. ESDM, Pertamina, Indonesian Electricity Society or Masyarakat Kelistrikan Indonesia (MKI) and oil and gas companies (Unocal, ChevronTexaco Indonesia), would be used as policy guidance for geothermal development.

At the moment, the government is drafting regulation on geothermal business activities and direct utilization of geothermal. The ministry of ESDM is also working in preparation of ministerial decrees which cover various issues regarding use of geothermal.

1 US Embassy in Indonesia, Petroleum Report Indonesia 2002-2003, (Jakarta: 2004)28. 2 Ministry of Energy and Mineral Resources, Indonesia’s Energy Outlook 2010, (Jakarta: 2002) 46. 3 US Embassy in Indonesia, Indonesia’s Geothermal Development, (Jakarta: 2004) 7. 4 Sjafra, D. (2004). Current State of Geothermal Development in Indonesia. Directorate General of Geology and Mineral Resources, Indonesia. Available at http://geothermal.kigam.re.kr/bbs/gbdownload.php?bo_table=study4&wr_id=27&index=1 5 http://www.esdm.go.id/newsgeothermal.php?news_id=301, visited on April 1, 2005.


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4.4.2.4 Energy Bill The government is working on finalizing an amendment of the energy law. The bill has been drafted based on an academic paper which presents the analysis of current status of the energy sector. While the energy issues are currently managed on a sectoral basis, concerns exist whether the current practices ensure national energy security and sustainability in the future. The energy bill is expected to address the problem with a comprehensive legal framework for the national energy management. The bill shall regulate energy management, supply and utilization. It aims to promote sustainable use of natural resources and ensuring optimal, efficient, affordable and environmentally friendly energy supply.

4.4.2.5 Regulations on Biofuels One important step forward to support renewable energy was the Presidential Instruction no. 01/2006 about supply and utilization of biofuel. In the instruction, the president gives directives to the ministers, governors, and heads of municipalities and districts to take required steps in order to speed up supply and utilization of biofuel. Coordinating Ministry of Economic Affairs (Menko Perekonomian) coordinates the initiatives.1

Following the instructions, ESDM has developed biodiesel quality standards in cooperation with relevant stakeholders. The biodiesel specification has been established by the National Standard Agency (BSN) in February 2006. ESDM will then issue regulation on implementation of the standard.2

1 Presidential Instruction no. 1/2006 on biofuels as alternative fuels 2 http://portal.djlpe.esdm.go.id/modules.php?_act=detail&sub=news_article&news_id=290, visited on March 21, 2006


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5 Development in energy sector for CDM Projects in Indonesia

5.1 CDM projects under development Indonesia has the potential to host 2 percent of the global CDM project volume. Emission reductions from energy sector could be 125 Mt and those from forestry sector could reach 110 Mt. For energy sector, the price for emission reduction per tonne CO2 was estimated at US$1.5-5 in 2001 1 . Potential national income is approximately US$60 million annually. Realizing this potential is a challenge for the Indonesian market.

As described in Chapter 1, by May 2006 six projects had been submitted to and approved by KN-MPB.

As of March 2006, more than 80 CDM projects, out of which over 90 percent in the energy sector, were under different stages of development, with the potential to create about 15 Mt of CERs annually. Biomass and biogas to electricity projects are most numerous (28%), followed by biofuel projects (21%). In terms of annual CERs, geothermal projects contribute most (39%), followed by biofuel projects (16%), hydro-power projects (15%), and biomass/biogas to electricity projects (14%). Figures 5.1 and 5.2 show the shares of various CDM project types in terms of number of projects and annual CERs.

28%

21%13%

11%

8%

8%

6%5%

Biomass/biogas to electricity

Biofuels

Municipal solid waste treatment

Geothermal

Agricultural methane capture

Hydropower

Energy Efficiency and IndustrialProcessOthers

Figure 5.1 Number of Potential CDM Projects by category

1 Ministry of Environment, National Strategy Study on CDM in Indonesia, (Jakarta:2001) xxxi.


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39%

16%15%

14%

6%

5%

3% 2%

Geothermal

Biofuels

Hydropower

Biomass/biogas to electricity

Energy Efficiency and IndustrialProcessMunicipal solid waste treatment

Agricultural methane capture

Others

Figure 5.2 Potential annual CERs created by CDM project category

5.2 Potentials of future CDM projects in Indonesia Indonesia’s energy mix relies substantially on oil. The need to diversify energy sources, rising environmental concern and declining non-renewable energy resources have slowly led to increased interest in renewable energy, especially geothermal, biomass and hydropower. The National Committee on Climate Change has recommended a shift from coal and oil to renewable energy to reduce GHG emissions1. In addition, diversification has been clearly advocated by government’s general policy.

As discussed earlier, use of renewable energy is currently limited to hydropower, geothermal, and biomass. There is a significant potential for investors to gain benefit from CDM incentives in this sector.

However, attracting investment remains a huge challenge as “many investors view renewable energy and GHG projects as compounding risk – combining risky sectors with risky markets with a risky commodity”. 2 The current electricity regulation that guarantees grid access to small renewable energy producers (<10 MW) is an important first step to increase confidence and promote CDM eligible RE projects, even though the procedure still seems to be heavy and unreliable, with too much discretion left to PLN. However, position of larger producers is still uncertain. In the future, it is of utmost importance to3

• provide project developers certainty on the price and grid access by clarifying and strengthening the procedures related to power purchase agreements

1 US Embassy, Indonesia’s Geothermal Development, site created on February 15, 2002 http://www.usembassyjakarta.org/econ/energy-news.html,2. 2 ‘Report on the UNFCCC workshop on innovative options for financing the development and transfer of technologies’, FCCC/SBSTA/2004/11, 3 November, 2004. 3 US Embassy, Indonesia’s Geothermal Development, site created on February 15, 2002 http://www.usembassyjakarta.org/econ/energy-news.html,2.


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• ensure that PLN does not seek to revise contracts that have already been made and is able to pay for electricity in time

• take national external benefits of renewable energy fully into account in pricing. These include reduced environmental impacts of energy production, increased security and diversity of supply as well as reduced burden on grid in the case of distributed production

• substantially increase capacity of PLN to understand and manage decentralized energy production

Other ways to reduce risks to investors include liberalization of energy sector in general, removal of subsidies, having clear rules for CDM and integrating it to the National Energy Policy.

5.2.1 Biomass, biogas and biofuels Over 40 biomass, biogas and biofuel CDM projects are planned, making up about 30 percent of expected volume. About half of the volume comes from biofuel projects. The largest biomass to electricity project produces about 260,000 tonnes of CERs per year and the largest biofuel project about 480,000 tonnes, while the smallest ones expect about 5,000 tonnes.

Majority of the 19 biomass to electricity projects and all five biogas to electricity projects use agricultural wastes, such as palm oil, rice husk and cassava residues. Biofuels projects are mostly biodiesel production from palm oil and jatropha curcas.

The National Strategy Study on CDM estimates an emissions reduction potential of 23 Mt from 43 TWh/year of biomass-fired electricity generation. Marginal costs are however assumed to be fairly high, e.g. a third higher than those for geothermal. 1

The volume of biomass projects based on agricultural by-products is unlikely to be limited in the near future by suitable project locations or availability of raw material given the vast amount of agricultural activities in Indonesia. A significant proportion of the project opportunities are small-scale, so streamlining procedures of small-scale projects and developing pooling of small projects is essential.

Development of biofuels project especially biodiesel has been encouraging, with about 20 potential CDM projects account for 16% of potential annual CERs. Government support through Presidential Instruction no. 1/2006 and regulations on Biodiesel standard provides more certainty for investment in this field. Recently, the government has also formulated the blueprint of biofuel development aimed on empowering local economics and developing small and medium enterprises. Hence, it is expected that more CDM biofuel projects are coming.

1 Ministry of Environment, National Strategy Study on CDM in Indonesia.


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5.2.2 Geothermal At least 9 geothermal CDM projects with a total of capacity of 1200 MW are already online or under preparation in Indonesia. Expected annual emission reductions are over 5 Mt, making up 37 percent of the CDM volume in Indonesia. Geothermal projects are on average the largest of all projects in terms of CERs. Project developers are PERTAMINA, Indonesia Power, PLN, ChevronTexaco Indonesia, Magma Nusantara Limited/Star Energy, and PT. Bukaka Teknik Utama.

CDM is becoming a powerful financial incentive, increasing competitiveness of geothermal compared to the traditionally cheaper fossil-fuel (oil, coal and natural gas) fired systems. The additional cost of geothermal is estimated to be as low as US$1/tCO2-eq compared to coal-fired systems.1

A proven reserve of 2600 MW is estimated to be available in Java, with the biggest reserves found in Gunung Salak and Wayang Windhu. Deploying this potential would deliver 15 Mt of reductions in CO2 emissions.2

To attract more investments in this area, the government has to deal with big challenges. Making participation of private companies, both foreign and domestic, in exploration and development of geothermal as easy as possible is indispensable.

In addition to the challenge in financing the project, other problems may also occur such as environmental problem and local people acceptance. Much of Indonesia's geothermal potential is found in environmentally or culturally sensitive areas including protected mountain forests, so the environmental damage caused by the construction of the power plant, roads and power transmission lines, as well as impacts on downstream water users must be taken into account and minimised. These concerns are illustrated by Bedugul geothermal power plant project in Bali.3 While a geothermal power plant is cleaner and certainly emits less GHGs than a coal-fired power station, full environmental and social risk assessment and the approval of local communities is still crucial.

Geothermal projects have high initial costs even though the final cost of electricity is competitive due to low operation and maintenance costs. Therefore, what was said about reducing risks to producers in the beginning of this section is also essential with regard to geothermal.

1 US Embassy in Indonesia, Indonesia’s Geothermal Development, site created on February 15, 2002 http://www.usembassyjakarta.org/download/geo2002.pdf 2 Assuming the average capacity factor of current plants and that geothermal replaces average electricity production. Figures from ESDM 2004: Statistik Ekonomi Energi Indonesia 2004, http://www.esdm.go.id/statistikenergi.php?stat=48&action=detail 3 The proposed site is in forest with high conservation value. Three adjacent lakes are of great scientific, economic and religious significance. Local communities and NGOs have voiced concerns about the project, which they say is proceeding without a full environmental impact assessment or the proper permits. Source: The Jakarta Post Aug 14, 2005: Bedugul geothermal project raises controversy. http://www.thejakartapost.com/yesterdaydetail.asp?fileid=20050811.Q01 and Kompas Nov 4 2004: Eksplorasi PLTPB Bedugul Tunggu Amdal. http://www.kompas.com/kompas-cetak/0411/04/daerah/1364394.htm


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More robust procedures are also clearly needed within the government. Earlier, the Wayang Windu Geothermal Power Unit II (110MW) and Sarulla Geothermal Power Project (200MW) projects faced large problems and delays. The first was held back by an unclear decision by the government. The second was delayed by a change of ownership, from the Unocal North Sumatra Geothermal Ltd (UNSG) to PLN. Both sites are now being considered to be developed as CDM projects by the new owners.

Table 5.1 Indonesia’s proven geothermal reserves (MW) 1

Area 1995 2000 2005 Est Jawa/Bali Kamojang 200 230 260 G.Salak 485 485 600 Darajat 140 280 350 Dieng 280 280 350 Wayang Windhu 280 280 400 Patuha - 250 250 Karaha - 110 250 Cibuni - 120 60 Bedugul - 30 150 Sub Total 1,105 1,785 2,630 Sumatra Sibayak 44 40 40 Sarulla 80 290 500 Ulubelu - - 200 Kerinci 40 40 40 Sub Total 160 370 780 Others Lahendong 65 80 80 Ulumbu - 10 30 Sub Total 65 90 110 Total 1,330 2,245 3,520

5.2.3 Hydropower At least 7 hydropower projects plan to develop 610 MW of capacity, producing 15 percent of expected annual CERs. All projects use run-of-river technology that is much more benign than building new large scale hydro-power with dams.

Indonesia’s technical hydropower potential is estimated at 410 TWh (75 GW), which compares to the current electricity consumption of around 90 TWh (2002). The National Strategy Study on CDM in Energy Sector identified a GHG reduction potential of 15-26 Mt from 3300 MW of hydropower with negative costs. However, the study assumed that only 720 MW of this potential would be realized by 2025.2 As current projects already come close to

1 US Embassy in Indonesia, Indonesia’s Geothermal Development, site created on February 15, 2002 http://www.usembassyjakarta.org/download/geo2002.pdf 2 Ministry of Environment, National Strategy Study on CDM in Indonesia.


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that estimate, there is probably room for more expansion. Additionality of projects might be hard to demonstrate as cost estimates are negative.

Another environmentally favorable CDM opportunity could be rehabilitating and upgrading existing plants. For example, a PIN by PT Entec Indonesia identifies a potential capacity increase from 85 kW to 1.15 MW in a small scale hydropower plant in West Kalimantan.1 Indonesia currently produces about 17 TWh/year of hydroelectricity, offsetting about 12 Mt of emissions compared to average production baseline. 2 This means that even small improvements in overall efficiency of hydropower production would result in significant GHG reductions. Out of the current existing capacity of 4400 MW, more than half is over 15 years old, which points to ample room for upgrading. E.g. in the US, according to Voith Siemens Hydro Power, squeezing about 30 percent more electricity out of existing dams would be feasible.3 Hydropower plants are among the most capital-intensive energy projects, requiring high confidence in future revenue. This can be best addressed by the recommendations in the beginning of this section and in chapter VI.

5.2.4 Agricultural methane capture In addition to the previously mentioned biogas to electricity projects, seven agriculture methane capture projects are being planned, with a total annual emissions reduction of 435,000 tonnes. These projects either recover methane or apply technologies to avoid methane emissions from swine manure, palm oil waste and residues of tapioca.

Table 5.2 presents the estimates of GHG reduction potential from agricultural gas capture as well as electricity generation from agricultural residues and captured gas. Estimates have been calculated by taking agricultural production and waste data from various sources, selecting an existing CDM project and assuming a similar project can be carried out in all similar production units.

1 Davos Climate Alliance 2005: Project Idea Note. Salido Kecil Mini Hydro Power Plant. http://www.davosclimatealliance.org/downloads/projectdescr_2006.pdf 2 Assuming that current hydropower production would be replaced by proportionally scaling up other sources. Data from Ministry of Energy and Mineral Resources (ESDM), Indonesia. Profil Energi Ringkas Indonesia 2003. http://www.esdm.go.id/statistikenergi.php?stat=48&action=detail. 3 Planet Ark, Oct 30 2002: Upgrading dams could light 30 million US homes. http://www.planetark.org/dailynewsstory.cfm/newsid/18369/story.htm


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Table 5.2 Estimates of technical potential for agricultural gas capture and bio-energy projects 1

GHG reduction from CH4

capture, MtCO2

Primary energy,

TWh

Net electric output, MW

GHG reduction from electricity production, Mt

Total reduction,

Mt

Swine farms 4.1 3.1 360 2.2 6.3

Dairy farms 1.0 1.1 80 0.5 1.5

Large chicken farms 5.9 4.5 510 3.2 9.0

Rice husk 0 43 4900 30 30

Palm oil 2.5 1.8 80 0.5 3.0

5.2.5 MSW and landfills Eleven municipal solid waste treatment and landfill projects are being planned with a total volume of 720,000 tonnes of CERs (5 percent), consisting of six landfill gas projects, three MSW to energy through incineration projects and two MSW composting projects. The landfill gas is flared in Balikpapan and Bekasi while the projects in Bali, Malang and Surabaya, as well as another project in Bekasi (Bantar Gebang) use the gas to produce electricity.

Methane emissions from landfills in Indonesia were about 8,4 MtCO2-eq in 1994 and growing almost 2 percent/year.2 Using 50 percent of this in power production would produce 1.2 TWh of electricity and reduce GHG emissions by 5.4 Mt, implying potential CDM revenue of around $30 million.3

5.2.6 Gas Flaring Indonesian oil companies flare an estimated 5 billion m3 of gas annually, which corresponds to 3.7% of global flared gas volume. Avoiding that flaring would result in an emissions reduction of about 7.5 to 10 MtCO2 and can be achieved at a cost of US$1.1-1.9/tCO2 when transaction costs are not taken into account.1 Indonesia accounts for around 3 percent of the global GHG emissions from flaring4 – and more than 70 percent of those in Asia. The rest

1 Data from BPS-Statistics Indonesia: Agriculture Statistics. http://www.bps.go.id/sector/agri/; Harris, P.: Biogas Production. University of Adelaide, Australia. http://www.ees.adelaide.edu.au/pharris/biogas/Biogas%20Production.pdf; Det Norske Veritas 2005: Methane Capture and Combustion from Swine Manure Treatment Project at PT Indotirta Suaka Bulan Farm in Indonesia. PDD. http://www.dnv.com/certification/climatechange/Upload/PDD_Swine%20manure%20Indonesia_v0.16_2005-10-24.pdf; Angkor Bio Cogen Rice Husk Power Project. PDD (2005). http://cdm.unfccc.int/Projects/DNV-CUK1144657688.42/view.html; FELDA Lepar Hilir Palm Oil MillBiogas Project. PDD (2003). http://www.env.go.jp/earth/report/h15-05/mat_05.pdf; ESDM 2004: Statistik Ekonomi Energi Indonesia 2004, http://www.esdm.go.id/statistikenergi.php?stat=48&action=detail 2 KLH 2003: National Strategy Study on CDM in Forestry Sector. Final report. Jakarta. 3 Coal baseline, CER price $5. 4 Global flaring volume from World Bank 2006: Reducing the Gas Burning. http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:20966487~pagePK:64257043~p


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occur in India (12 percent), Vietnam (6 percent), Philippines (5 percent), and Burma (2 percent).

Figure 5.3 Gas flaring in Indonesia, 1990-2003 Source: BPMIGAS

Several technologies are available to reduce emissions from gas flaring, such as gas re-injection and improvement of the flare efficiency. As most of the oil fields in Indonesia are large in scale, large projects in gas flaring reduction could be expected.

Oil companies in Indonesia are eager to venture into this business, but there are also policy barriers. The production sharing contracts, which form the basis of oil companies operations in Indonesia, only govern oil and gas products. There is no policy yet on sharing of by-products such as sulphur and CERs. There are also no clear rules on sharing transaction costs. Under the existing Private Sharing Contract (PSC), all expenses should be paid for by Indonesia. In addition, the implementation of a new fiscal decentralization law in January 2001 has allocated 15 percent of the Indonesian Government’s net oil revenues and 30 percent of its net natural gas revenues to provincial and district governments.

Clear guidelines for CDM procedures in oil and gas sector in Indonesia are urgently needed to reduce the risks and uncertainties of CDM in the oil and gas sector. Furthermore, financial matters should be clearly settled in term of who should borne the implementation cost and who will benefit from the carbon revenue. The initiatives by GGFR in cooperation with BP Migas are expected to address the problems and promote CDM projects in the sector.

The New Energy and Industrial Technology Development Organization (NEDO) Japan, in cooperation with Directorate General of Oil and Gas (MIGAS) established a model project for flare gas and hydrogen recovery systems in an oil refinery by installing flare gas and hydrogen recovery in Balikpapan refinery in 2005, cutting GHG emissions annually by 360.000 tCO2 and saving 1.3 TWh of primary energy every year.1

iPK:437376~theSitePK:4607,00.html 1 NEDO 2006: Model Project for Flare Gas and Hydrogen Recovery Systems. http://www.nedojakarta.org/nedo/html/modules.php?op=modload&name=News&file=article&sid=12&mode=thread&order=0&thold=0


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5.3 Current investment conditions relevant to CDM projects Transparency and accountability, essential elements of democracy, have been gradually improving in Indonesia. This was reflected in the parliamentary and presidential elections of April, June and September 2004. There is high expectation that the political situation will be stable in the coming years and will be conducive for foreign and domestic investment in the energy sector.

Indonesia declared 2005 as “Invest in Indonesia Year”, which saw development of several new regulations to ease the entry of foreign firms and foreign capital into Indonesia. One key player in promoting foreign investment and approving project proposals is the Investment Coordination Board (BKPM), but regional governments also play a great role in making investment decisions. Specific information on investment procedures is presented in Appendix 3.

Recently introduced or expected measures relevant to CDM projects include1:

1. Several permits are no more needed. The whole process of approving investments is carried out by BKPM, which aims to function as a one-stop investor service. BKPM now approves master list of capital goods and basic material imports for both foreign and domestic investments and that the investor which gained the approval from BKPM will no longer need Principal Approval from a provincial governor or local chief before commencing a project.

2. Gradual removal of oil and electricity subsidies is expected (see Chapter IV) 3. Power Purchase obligation for small scale renewable energy generating electricity

under 1 MW and to medium scale up to 10 MW is in force (but in practice lots of discretion is still left to PLN).

4. Incentives and support to level the playing field between fossil-fuelled and renewable-powered energy

5. Private investment is restricted in 25 sectors by the Negative List of Investment, stipulated in Presidential Decree No.96/1998, (9 sectors are closed from foreign investment and 16 are closed from both foreign and domestic investment). Many of these categories are relevant for CDM projects, such as logging and forestry (See Appendix 3: Investment in Indonesia)

Currently, the Department of Finance is not clearly committed on CDM2. This situation may change in the future if the national CDM market proves itself important and profitable. Moreover, BKPM does not specify any financial channels for the development of CDM projects in Indonesia, but BKPM has recognized the importance of development in the energy sector, which indicates support to CDM in the future. NGOs working on CDM issue, such as Pelangi, have been and will be facilitating meetings between project proponents and potential financiers, including international institutions such as the World Bank and Japan Carbon Fund (JCF), as well as the national bank that has already shown interest in this issue.

1 Ministry of Environment, National Strategy Study on CDM in Indonesia, (Jakarta: 2001) 86. 2 Unofficial minutes of the meeting between the Head of Bureau for Public Relations, Depkeu and NEDO-Pelangi CDM Study Team, (Jakarta: 2005).


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6 Recommendations Indonesia is striving to capitalize on the clean development mechanism (CDM). There is a theoretical potential of about 125 million tons of carbon dioxide equivalent (tCO2-eq) in the energy sector in the first commitment period of the Kyoto Protocol (2008–2012)1, providing a potential of $625 million financial additionality to Indonesia (assuming $5 per ton). However, to date, only a small fraction of which has been developed into project ideas. From the small number of project ideas, even smaller fraction is coming to fruition in the form of project designs due to high barriers, including policy barriers. And from the designed projects, only a part of them still will be really viable due to lack of financing, both for the CDM part of it and for the underlying investments.

This chapter analyzes what drives the high barriers to CDM in Indonesia, how to work within the institutions, and what can be improved to lower the barriers, thus increase the pipeline of project ideas, designs, financing, and execution. This chapter is expected to enlighten potential project developers, investors, buyers, and the public sector, especially the government, alike with lessons learned from the years of CDM market development in Indonesia.

Today, there are six CDM projects that have been granted the support and approval from KN-MPB. From those six, only two projects, namely CDM Solar Cooker Project in Aceh and MSS Biomass 9.7 MWe Condensing Steam Turbine Project, have been registered to the CDM-EB until mid June 2006. The other projects are at different stages of development. One project is now under reviewed by the CDM-EB, while the others are still in the process of finalizing their validation process.

6.1 The problem with awareness and capacity In spite of its potential, not many potential projects have come to the project idea stage in Indonesia. All of the six projects approved by KN-MPB were initiated by either subsidiary of multinational companies or with support from international institutions. A number of the first project ideas for CDM, even though they are not developed yet, also came from similar type of project proponents. Two geothermal projects were proposed as CDM projects in 2001-2002. The project proponent for both projects was a consortium of PT PLN, Pertamina and Unocal Geothermal Indonesia. Another early project idea was a small scale project to replace diesel with biodiesel supported by a Japanese institution. However, the three of them haven’t been really developed yet.

Up to date, a number of ideas for CDM project proposed by ‘indigenous’ Indonesian companies and institutions are already on the table. Some of them even came from the government institutions. This shows progress that finally happened in CDM in Indonesia.

6.1.1 Awareness raising and capacity building Even with the progress that has been there, capacity building in terms of information

1 Ministry of Environment, National Strategy Study on CDM in Indonesia, (Jakarta:2001)


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dissemination and awareness raising are still key in CDM development in Indonesia. The number of “capacity building” projects and programs supported by different institutions both in bilateral and multilateral schemes have been initiated and implemented in Indonesia. However, in most of them, not many stakeholders-to-be are well posted on CDM. During the last one year, broader range of potential stakeholders have been targeted, including local government institutions; with this, it is expected that the basic understanding of CDM can be owned and further steps can be done including capacity building in terms of developing skills and institutions.

Another barrier in conducting the awareness raising is the language. Most of the information available in the public domain is in English, which might have kept stakeholders-to-be at a distance. Based on a number of cases, since English is not commonly used in Indonesia, a number of recent awareness raising and capacity building activities are conducted in Bahasa Indonesia by Indonesian partners.

Learning from the past experiences, those stakeholders-to-be needs massive awareness raising and information dissemination activities. It is already shown during the last one year that such efforts brought out a good result in successful development of a mature CDM market in Indonesia.

6.1.2 The institutional factor KN-MPB has been officially launched in mid 2005. During the first semester, KN-MPB has shown its performance in evaluating five CDM projects. However, for whatever reasons, only limited number of CDM projects has been submitted to KN-MPB since beginning of 2006.

Aside of the number of project submitted, there are a number of issues related to capacity have been faced by KN-MPB. The following is a tentative proposal for discussion that might deserve consideration for the future improvement of the effectiveness of the DNA in Indonesia:

Further Simplification and Simplified Procedure for Small-Scale Projects. The current procedure is sufficiently simple, but can be made even simpler still. First, the establishment of “White” and “Black” List of projects may simplify what the KN-MPB can automatically approve (White List) or reject (Black List).

Second, small-scale projects may also be approved with much simplified procedures, for example only through quick decision by the members of DNA in one meeting rather than having to go through the whole cycle of review and evaluation by the Technical Team.

Self-Financing for KN-MPB. The consultation process during the process of KN-MPB establishment concludes that the administrative aspects of the fee may prove to be cumbersome (under the Indonesian Law, for such government institutions, the money needs to go through the Ministry of Finance) and may actually hinder efficient and prompt operation of KN-MPB. It was concluded that, at least for the first few years, the Secretariat would be hosted by the Ministry of Environment, whereas the financing for the activities will be covered through the Ministry’s budget.

But since CDM actually generates revenues, it may be beneficial in the future to explore


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possibilities for KN-MPB to generate its own financial resources and pay for its own expenses without having to be dependent on the government’s budget.

Further capacity building for the members of KN-MPB, the members of Technical Team and the staff of the Secretariat. Further capacity building will be needed for KN-MPB to properly perform its tasks. Technical assistance and a seconded staff serving as Technical Advisor in KN-MPB are greatly advised to assist the Secretariat to perform its day-to-day tasks. More importantly, a project cycle-based assistance may also be beneficial, allowing all Parties to try-out the system, to point out the weaknesses along the way, and to provide targeted assistance. Specific related capacity building and periodical update on the international progress of CDM are also key to ensure the effectiveness of KN-MPB, especially the Technical Team.

6.1.3 Capacity building for ministries and other government institutions The frequent changing of government officials, especially that of the upper echelons as well as the limited number of experienced full-time staff may hamper the progress of CDM in Indonesia. It is also expected that related ministries and government institutions, especially those closely related and have significant potential CDM, to enhance its team’s capacity in terms of both quality and quantity. Related government institutions and ministries will play significant role in facilitating and supporting potential CDM projects to be developed further. It might be helpful to have a CDM team within the ministries and institution with most potential sector like the one within the Ministry of Forestry and Ministry of Energy and Mineral Resources.

6.1.4 Collaboration, coordination and partnership Good collaboration between the public and the private sector in investing or buying countries will also of great help. While willingness — and patience — from potential investors (and potential buyers), sizable awareness-raising efforts can be supported by the public sector of the investing countries in Indonesia. These efforts will provide ways to the private sector to capitalize the developed market. These efforts have been undertaken by a number of bilateral agencies.

Notably, the Royal Denmark Embassy in Jakarta, Indonesia, spends about 40 percent of its CDM budget on outreach and capacity building. Similarly, the German GTZ provides a “public-private partnership” to allow CDM market development efforts in Indonesia be undertaken by private sector with public funds, aiming at market development that in turn allowing projects to emerge. This kind of large-scale awareness raising efforts can be a good thrust, compared with other small-scale awareness raising efforts and through conventional capacity building projects.

Coordination among different institutions of the same country that are involved in CDM is an urgent task for each, since it will allow increased efficiency. So far, the situation in general is not satisfactory, though some countries do make efforts in achieving it. Also concerted efforts for coordination in terms of information exchange and possible collaboration among donor institutions and Indonesian stakeholders is expected in the near future.


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6.1.5 Capacity building for private sector and intermediaries In light of its original concept, CDM project activities should be developed and implemented first and foremost by the private sector, especially private companies and commercial banks that are naturally business-oriented. Accordingly, CDM should be attractive in their eyes, and it will be a key to successful capacity building in terms of information dissemination and awareness raising. Unfortunately, this has not been fully understood by CDM advanced people and institutions and hence has not been incorporated into the past capacity building projects/programs.

Awareness raising activities need to be strategically targeted. An effective alternative to reach the target audience might be utilizing intermediaries, i.e. outsourcing. Considering the situation that each project proponent could develop on its own only a few CDM project in its lifetime, the idea to focus the awareness raising and capacity building activities only toward them may not be effective. Such companies and institutions do not find a value for developing its project development capacity with its own resources. Accordingly, it facilitates such companies’ interest if consultants are available to develop projects for them. Targeting awareness campaign to companies that may own CDM projects makes no economic sense unless the outcomes are super-large projects. For smaller projects — that are more numerous than large ones — this door-to-door approach is no longer justifiable.

This then creates a demand for strong consulting services. Consulting companies or developmental non-governmental organizations — among the so-called intermediaries – can provide consulting services and serve as CDM information disseminator to potential host companies. For intermediaries, it is worth increasing their capability and capacity to develop projects so that they will be able to go out and offer more effective and efficient services to as many companies as possible.

Commercial banks and other financiers are expected to support CDM projects as another type of intermediaries. So if they have got interested and come to be aware of the mechanisms and benefits, they can either pass on this information to their clients or allow companies and project developers to submit proposals for financing CDM project development. More on the financial sector will be discussed later in the financial barriers.

Assistance in terms of legal counsel for contractual arrangements as well as insights on market development may also be appreciated. To make it effective, a business-oriented information center that can be a one-stop shop for CDM in Indonesia has long been awaited. The idea has been there since Clearing House proposed in NSS. The center is disparately called for by the private sector, both Indonesian and non-Indonesian. Ideally the center can provide information, conduct a light survey and/or information dissemination activities on behalf of clients, etc. One, or even more than one of the active organizations in CDM is/are expected to establish such an institution in the near future.

6.1.6 Regional cooperation In the Asian CDM market, Indonesia is greatly overshadowed by China and India. Many countries in Asia suffer insecurity issues when it comes to frontal competition against China and India. However, sub-regionally, if and when countries in Southeast Asia can join forces, it


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may demonstrate to be such a thriving region that is comparable to China and India. When treated separately, the regional “sentiment” in Southeast Asia can be used to motivate Southeast Asian unity to be competitive in the Asian market against China and India.

Southeast Asia, under the auspices of the Association of Southeast Asian Countries (ASEAN), stands at the center of the most dynamic economic region of the world. As a whole, ASEAN countries possess gross national income (GNI) per capita at approximately $1,250. This is high compared with $960 and $470 in China and India, respectively. The size of the population, about 750 million people, is comparable with the two giants. Moreover, the region shows even more dynamic economic fundamentals and relatively modern governments.

Regional cooperation among governments in Southeast Asia on CDM may benefit the countries in the region as a whole by increasing competitiveness. Future agenda has been identified for the future donor funded CDM capacity building program to aim at increasing the effectiveness of capacity building within the regional ASEAN perspective1. The main objective for this effort is to exchange experience concerning CDM implementation in an effective way, given the fact that each individual countries has to face similar tasks related to the issue of CDM2. Another agenda has been identified for the future donor funded CDM capacity building program to aim at increasing the effectiveness of capacity building within the regional ASEAN perspective3.

The best solution on how to facilitate capacity building at regional level still needs to be formulated, including on the issue of how to secure necessary resources to support it. An existing regional body or cooperation, such as ASEAN Secretariat, could play a role in CDM capacity building corresponding to the activities at the national level.4 In the near future it is expected that an institution such as ASEAN Climate Change Initiative, could facilitate the transfer of best practice and the exchange of lessons learned among ASEAN member countries, as has been proposed by KLH at the ASEAN Ministerial Meeting of Environment in Myanmar on December 2003.5 Additionally, regional projects such as those supported by the European Union – ASEAN Energy Facility (EAEF) can be further developed to foster cooperation in the region.6

6.2 The policy barriers There are two policy aspects of CDM that warrants further development: policy towards CDM and the underlying policy environment of the projects. In Indonesia, the general policy on CDM appears to be supportive, but the underlying policy environment may not be that conducive to CDM just as to any kind of investment. The problem with CDM regulation is not

1 CDM-ASEAN Project, Proceedings Skillshare Workshop: Regional Capacity Building in the implementation of the CDM in ASEAN member countries, (Jakarta:2004) 2 However, the issues such as how to coordinate and mediate if any conflict of interests arises among ASEAN countries is not yet to be concluded. 3 CDM-ASEAN Project, Proceedings Skillshare Workshop: Regional Capacity Building in the implementation of the CDM in ASEAN member countries, (Jakarta:2004) 4 Ibid, 52 5 Ibid, 52 6 CDM-ASEAN, Country Paper for CDM ASEAN: CDM Development in Indonesia, 7


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as much about regulating CDM projects as it is about providing regulatory climate that is investment-friendly. The following are some examples to indicate it.

The first example is the oil and gas sector. A conservative estimate shows a 10 million tons of CO2-equivalent potential CDM project in gas-flaring reduction. A regulatory adjustment on the production contract sharing to fairly treat and distribute the costs and benefits arising from CDM — as opposed to only from oil and gas production — would allow the sector to develop lucrative CDM projects. Effort toward this direction has been started with support from the Global Gas Flaring Reduction Initiative, and it is expected to hear supportive outcome in the coming months.

Another example is the small-scale renewable energy. The current policy that states its target without any substantial incentives1 is not enough to facilitate the development of small-scale and distributed renewable energy. With relatively low purchasing price by the state-controlled electricity company, few producers can make decent profit even with the additional revenues from CDM. Moreover, the existing terms in the power purchasing agreements add to the difficulties for private producers to produce electricity from small-scale and distributed sources.

Viewing the above, it will be an urgent task for the relevant authorities to review some policies, law and regulations that obviously need revision and adjustment. The important thing that should be emphasized is that these revision and adjustment should be made without undermining the original purpose of the said policies, laws and regulations in ensuring effective governance in the sector, while they will greatly benefit CDM development.

For the electricity sector, more transparency from PLN is required in determining the purchasing price of electricity produced by IPP. Such transparency also includes the basis of price calculation and the methods employed in determining the price. This will give more certainty for project developer especially when it comes to evaluation of economic feasibility. In addition, certainty is also needed in term of contract period and possibility of gradual contract revision. A clear procedures and guidance for IPPs to be granted permits and approvals is also a key to contribute in fulfilling the electricity demand in Indonesia.

In order to ensure the maximum benefit of CDM in supporting the electricity sector in Indonesia, the initiative to establish emission factor for grid systems outside JAMALI should be taken by the government. The relevant authority, in this case DJLPE, can lead the process with complete data provided by PLN. The availability of such emission factor will accelerate the development of CDM projects, especially those based on renewable resources, which in turn will increase the electricity supply in Indonesia.

Talking about renewable energy in Indonesia, the Government already set a target to increase the share of renewable energy in the national energy mix. However, such target should be supported with appropriate policies to guide actions in achieving the target. Those policies should also include incentives for renewable energy business as well as simplified procedures. Roadmap for each renewable energy type has been established. However, there

1 There is a move from Ministry of Industry to study the ideal energy policy and its instrument from industry side to facilitate alternative energy use in Indonesian industries, private communication, March 2005


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is no clear indication on the government strategy to achieve each milestone set in the roadmap.

In the course of the above efforts, it is advisable to learn from successful cases and lessons-learned from ASEAN countries. For renewable energy facilitation in terms of policy instruments, Malaysia, Philippines and Thailand are the forerunners from whom Indonesia might learn a lot.

Those incentives could be done in line with the Green Energy Policy that deals with renewable energy development and energy conservation in Indonesia.1

6.3 The financial barriers The financial barriers to CDM range from the lack of funding to finance CDM, the lack of funding to finance the underlying projects on which the CDM will be added, and the lack of information among the players in the financial sector, which leads to overestimation of the “risks”. Another barrier is a possible misunderstanding that mixes investment and transaction — investors and buyers.

As many put it, CDM is an “icing” on an investment “cake”. For example, CDM will be an add-on to a geothermal power plant project. Investment in CDM project development is a challenge in itself, but mostly due to the fact that the financial sector has large problems in understanding CDM, and a misconception of the level of risks. While the investment to develop the CDM project may be low, the investment climate to construct the geothermal power plant also remains problematic. Indonesia is both economically and socially in transition, in which the investment climate is not too conducive. This investment climate provides disincentives for project developers to invest in Indonesia, for CDM or otherwise.

Another awareness raising needs to be done to make potential project proponents understand that CDM is only the “icing”. Based on a number of discussions, quite a number of CDM project ideas turn out to have been with the understanding that CDM will pay for the whole project, both the underlying as well as the CDM part of it. Some project proponents even decided to withdraw their idea when finally they realize the right concept of CDM. This misunderstanding has been found out to be the biggest barrier that makes CDM in Indonesia developed relatively very slow compare to India for example.

The barriers can be overcome through a cocktail of ways. First, rather than treating investments in CDM separately from its underlying investment, they can all be executed in a “package deal”. This has notable been carried out by Japanese investors such as the Japan Bank for International Cooperation (JBIC), or the Export-Import Bank of Japan. Second, instead of offering CDM projects directly to project owners, CDM investors can offer CDM to investment banks, adding it on to existing projects. Obviously, the additionality principle (that the project will not take place without the CDM) must apply. Third, a “risk buy-down”, or an upfront investment by an enlightened financier may be effective to subsidize the risk premium in a sound CDM investment. The financier will recoup the investment through a cut in the

1 Ministry of Energy and Mineral Resources, Policy on Renewable Energy Development and Energy Conservation (Green Energy), (Jakarta:2003).


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process of the CERs from the project owner.

And last but not least, providing updated information to the Indonesian financial sector and continuous efforts in networking with them will be more and more important. In Indonesia, such efforts to tackle with “CDM divide” between the circle of CDM resource persons and organizations, and the financial sector to make CDM in Indonesia really sustainable by inviting Indonesian financial institutions to take part in CDM projects have rarely seen until recently. On February 28, 2005, soon after the entry into force of KP, NEDO Jakarta and Pelangi held a small event “Financing CDM Roundtable” that was attended not only by multi/bilateral financiers such as the World Bank, German KFW, JBIC, etc., but also Indonesian financial institutions. Originally proposed by NEDO Jakarta and small as it was, this event marked a milestone in trying to have both multi/bilateral financiers and Indonesian financial sector players in a CDM forum.

More of this initiative and in a larger scale, as well as daily networking efforts are urgent tasks for the CDM resource persons/institutions in Indonesia. Availability of financial support will be overcome by medium and large-scale project developers; it may remain a challenge for small-scale project developers.

6.4 The governance barriers Indonesia has implemented decentralization and regional autonomy in 2000 with the enactment of Law no. 22/1999 which was amended with Law no. 32/2004. The relatively new governance system still has problem in its implementation such as the some potential conflicting decision of different governance levels. For example in forestry sector, the right to issue permit for the same area can be at local level (Kabupaten), provincial and national level depends on the size and the location.

Similar case also exists for the energy sector, especially in electricity sector. The national target for electrification has given another pressure to the Ministry of Energy and Mineral Resources and PLN to build new generation plants. With the limited financial resources of PLN, private sector is encouraged to develop and to operate their plants and sell the generated electricity to PLN. A number of potential issues related to this situation are as follows:

Conflicting decision related to the plant itself. In some cases, type of plant and its location are very closely related, for example for a geothermal-based power plant. For some area, the demand for electricity has made the national government decided to build a geothermal plant – which is considered to be the most potential in the area – even if the site is within or in the vicinity of a national park. The decision would then be followed by the tendering process for building the plant. All of these will take place at national level. On the other hand, the development of most power plants has to pass AMDAL. Depending on the location and the size of the plant, AMDAL would be evaluated either by AMDAL Commission at national, provincial or local level. There is still a possibility to reject the plant if the AMDAL has proved the impact of the plant to the environment is irreversible. The two levels of authority can hinder the effort in achieving target for electrification.

Problem with power purchase agreement (PPA). Similarly, the decision and support from the


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national government to build a plant in a certain area is not automatically means that the PPA will be granted. The decision of PPA is not in the hand of MEMR or PLN central office in Jakarta. The decision is at local PLN, thus there is still another potential delay in building the plant and in producing electricity. A better and clear regulation already set for those below 10 MW however for bigger plant a process of negotiation will take place and still may cause the cancellation of the project itself.


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144

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Appendix

Appendix 1: Integration of Sectoral Criteria and Indicators into National Sustainable Development Criteria and Indicators

National C&I Energy C&I Transportation C&I Industry C&I Forestry C&I Agriculture C&I A. Environmental Sustainability

A.1. Criterion: Promotes environmental sustainability by practicing natural resource conservation or diversification

Criterion 1: encourages energy diversification or conservation Criterion 2: encourages clean energy or clean energy technology development Criterion 3: encourages preservation of environmental functions

Criterion I – promotes an integrated urban transport system Criterion III – increases traffic and urban transport safety Criterion V – supports environmental quality, air quality

Criterion 1: Promotes energy conservation Criterion 2: Promotes development of clean technology (cleaner production) Criterion 3 – Promotes conservation of ecological functions Criterion 7: Efficient and optimal natural resource use

Criterion B.1. Biodiversity maintenance Criterion B.2. Water conservation Criterion B.3. Land conservation Criterion B.4. Preserving ecosystems in protected areas

Criterion I: Ecological consistency

A.1.a. Indicator: Maintain local ecological functions

Criterion 3: encourage preservation of environmental functions (indicator: complies with environmental regulations)

Criterion I – promote an integrated urban transport system (indicators: 2. conducting traffic impact assessment)

Criterion 3 – Promote conservation of ecological functions Indicator: 1.Complying with existing local and national environmental regulations

Criterion B.2. Water conservation. Indicators: 1. water yield and availability2. seasonal variations 3. watershed functions Criterion B.3. Land conservation. Indicator: 2. soil fertility Criterion B.4. Preserving ecosystems in protected areas Indicators: 1. protect ecologically

sensitive areas 2. manage ecologically

important areas

A.1.b. Indicator: Impacts do not exceed the thresholds of existing national, as well as

Criterion V – supporting the environmental quality, especially air quality

Criterion 2: Promote development of clean technology (cleaner

Criterion I: Ecological consistency Indicator:


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National C&I Energy C&I Transportation C&I Industry C&I Forestry C&I Agriculture C&I local, environmental standards (does not cause air, water and/or soil pollution)

(indicators: 1. reducing traffic congestion2. increasing number of

vehicles using alternative fuels

3. Decreasing gaseous emissions from vehicles)

production) Indicator: 1. NOx, SOx, and GHGs emissions are lower than threshold value

1. The activity does not cause water, soil and air pollution

A.1.c. Indicator: Maintains genetic, species, and ecosystem biodiversity and does not permit any genetic pollution

Criterion 3: encourage environmental function (indicator: complies with environmental regulations)

Criterion B.1. Biodiversity maintenance Indicator: 1. Genetic variation/sp. Richness 2. Changes in habitat diversity 3. Protection of endemic species Criterion B.4. Preserve ecosystems of protected areas Indicator: 3. Intensity of wildlife disturbances

A.1.d. Indicator: Complies with existing land use planning

Criterion I – promote an integrated urban transport system (indicator: 1. appropriate development

of land use)

Criterion C.5. Comply with legal framework on forests and land Indicator: 1. Transformation concession allocation

A.2. Criterion Local community health and safety

Criterion 2: encourage development of clean energy or clean energy technology

Criterion III – increasing traffic and urban transport safety

Criterion B.2. Water conservation Criterion B.3. Land conservation

A.2.a. Indicator: Does not impose any health risk

Criterion 2: encourage development of clean energy or clean energy technology (indicator: lower emission on NOx, SOx, particles, and GHGs)

Criterion III – increasing traffic and urban transport safety (indicators: 1. decreasing number of

accidents

A.2.b. Indicator: Comply with occupational health and safety regulation

Criterion III – increasing traffic and urban transport safety (indicators:


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National C&I Energy C&I Transportation C&I Industry C&I Forestry C&I Agriculture C&I 2. improving traffic safety

culture especially in public transport

3. increasing quality of motorized vehicle inspections)

A.2.b. Indicator: There is a documented procedure of adequate actions to be taken in order to prevent and manage possible accidents

B. Economic Sustainability

B.1. Criterion: Local community welfare

Criterion 4: encourage local economic growth Criterion 5: does not increase unemployment Criterion 7: conduct community development programs

Criterion IV – increasing urban transport service quality Criterion VI – increasing public transport accessibility

Criterion 4: Promote economic growth, particularly local economic growth Criterion 5: Increase welfare of employees

Criterion A.5. Equitable distribution of economic rent

Criterion II: Economic sustainability

B.1.a. Indicator: Does not decrease local community’s income

Criterion 4: encourage local economic growth (indicator: increase local community income or local economic activity)

Criterion 4: Promote economic growth, particularly local economic growth

Indicator: increase local community income or local economic activity, locally as well as nationally

Criterion A.5. Equitable distribution of economic rent Indicator: 3. Estimate local dweller

Criterion II: Economic sustainability Indicator: 1. Sustainability of agro business products

B.1.b Indicator: There are adequate measures to overcome the possible impact of lowered income of community members

Criterion 4: encourage local economic growth (indicator: increase local community income or local economic activity)

Criterion 4: Promote economic growth, particularly local economic growth

Indicator: increase community income or economic activity, locally as well as nationally

B.1.c Indicator: Does not impair local public services

Criterion 7: conduct community development program (indicator: the project develops a good community development program)

Criterion IV – increasing urban transport service quality (indicator: 1. availability of urban mass transit with high accessibility and on-time schedule)


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National C&I Energy C&I Transportation C&I Industry C&I Forestry C&I Agriculture C&I Criterion VI – increasing public transport accessibility (indicators: 1. integrated/ multimodes

terminals 2. stopping area for door to

door service 3. increasing public

transportation services)

B.1.d. Indicator: An agreement between employer and employees is reached, conforming to existing regulation and dealing with any lay-off problems

Criterion 5: there is no increase in unemployment rate (indicator: no lay off)

Criterion 5: Increase employees’ welfare Indicator: No lay-offs, thus more benefits to the employees

C. Social Sustainability

C.1. Criterion: Local community participation in the project

Criterion C.1. Local community participation in planning

Criterion III: Justice

C.1.a. Indicator: Local community has been consulted

Criterion C.1. Local community participation in planning Indicators: 1. Number of representatives 2. Two-way communication 3. Voice heard

Criterion III: Justice Indicator: 1. Local community has an opportunity to participate in decision making

C.1.b. Indicator: Comments and complaints from local communities are taken into consideration and responded to

C.2. Criterion: Does not harm social integrity of communities

Criterion I – promote an integrated urban transport system

Criterion C.4. Recognition customary rights

Criterion IV: Humanity

C.2.a. Indicator: Does not trigger conflicts among local communities

Criterion I – promote an integrated urban transport system (indicator:

Criterion C.4. Recognition of customary rights

Criterion IV: Humanity Indicator: 1. Not causing conflict


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National C&I Energy C&I Transportation C&I Industry C&I Forestry C&I Agriculture C&I 2. conducting traffic impact assessment)

Indicator: 1. Role of informal leaders 2. Decision-making process 3. Agreements on rights and responsibility 4. Respect land and property rights 5. Secured tenure system

Criterion C.3. Recognition of locally-invented practices Indicator: 1. Rely on proven institutions

with the culture and manners of local community

D. Technological Sustainability

D.1. Criterion: Technology transfer

Criterion 6: technology transfer

Criterion II – development of human resources, and science & technology

Criterion 6: Transfer of know-how and technology

Criterion C.2. Recognition of locally-invented practices

Criterion V: Readily adaptable technology

D.1.a. Indicator: Does not cause dependencies on foreign parties in knowledge and appliance operation (transfer of know-how)

Criterion 6: technology transfer (indicator: improve use or role of domestic human resources, either increase quantity of jobs or offer more demanding assignments)

Criterion II – development of HR and S&T (indicators: 1. increasing quality and

quantity of professionals to cope with S&T development)

Criterion V: Readily adaptable technology Indicator: 1. The new technology can be accepted by the community, socially and culturally

D.1.b. Indicator: Does not use experimental or obsolete technologies

D.1.b. Indicator: Enhances technological capacity and use of local technology

Criterion 6: Transfer of know-how and technology (indicator: increase utilization of low-GHG technologies

Criterion C.2. Recognition of locally invented practices Indicator: 1. Adopt proven techniques


153

Appendix 2: Environmental Impact Assessment (AMDAL)1 1. Categories of projects and activities that require an AMDAL The government regulation no. 27/1999 provides a legal basis for the Environmental Impact Assessment or AMDAL. In order to implement the regulation, Ministry of Environment issued Environment Minister Decree No. 3/ 2000 about categories of projects and activities that require an AMDAL. Later, this decree was replaced by Minister of Environment Decree No. 17/ 2001 on Categories of Businesses and Activities that require AMDAL. The latter decree was considered necessary since several project categories were not included in the former decree. According to article 3 point 2 of Government Regulation no. 27/1999, businesses and activities having a potentially significant impact on the environment are required to carry out the AMDAL process. The criteria of “significant impact” are defined in the Head of Bapedal Decree no. 056/1994. Based on these regulations, Minister of Environment Decree No. 17/ 2001 determines categories of processes and activities that require AMDAL, listed in the table below. Table 1 Category of Businesses and/or Activities Required to Prepare AMDAL No. Category of Activity Scale

I. Defense and Security Sector

I.1 Construction of central and regional ammunition warehouse All magnitudes I.2 Construction of marine base Class A and B I.3 Construction of air force base Class A and B I.4 Construction of military training centre Area ≥ 10,000 Ha I.5 Construction of shooting range for police and military (army,

marine, air force) Area ≥ 10,000 Ha

II. Agriculture Sector

II.1 Plantation of seasonal food crop and horticulture plant with or without treatment unit

Area ≥ 2,000 Ha

II.2 Plantation of annual food crop and horticulture plant with or without treatment unit

Area ≥ 5,000 Ha

II.3 Plantation of seasonal cash crop with or without treatment unit either:

a. In non-forested area, or b. In forested area

a. Area ≥ 3,000 Ha b. All magnitudes

II.4 Plantation of annual cash crop with or without treatment unit either:

a. In non-forested area, or b. In forested area

a. Area ≥ 3,000 Ha b. All magnitudes

III. Fishery Sector

III.1 Shrimp/fish breeding with or without treatment unit Area ≥ 50 Ha III.2 Floating fish breeding (floating net or pen system) at:

a. the lake water b. the sea water

Area ≥ 2.5 Ha or ≥ 500 units Area ≥ 2.5 Ha or ≥ 500 units

III.3 Construction plan of fishery infrastructure (fishery port) outside public port and meets the following parameters:

- Dock length - Fishery industry zone

≥ 300 m or

1 Information in this sub-chapter is summarized from http://www.menlh.go.id/amdalnet


154

- Water depth surrounding the dock

Area ≥ 10 Ha or ≥ -4 m LWS

IV. Forestry Sector

IV.1 Utilization of timber forest products (Usaha Pemanfaatan Hasil Hutan Kayu – UPHHK)

All magnitudes

IV.2 Forest plantation project Area ≥ 5,000 Ha

V. Health Sector

V.1 Construction of hospital Class A and B or equivalent

VI. Transportation Sector

VI.1 Railway network Length ≥ 25 km VI.2 Train station construction Big class or Class I VI.3 Underground railway construction All magnitudes VI.4 Dredging of river fairway Volume ≥ 500,000 m3 VI.5 Construction of port that has either one of the following

facilities: - Dock with massive construction

- Breakwater - Supporting infrastructures such as terminal,

warehouse, container - Single point mooring boey

Length ≥ 200 m or area ≥ 6,000 m2 Length ≥ 200 m Area ≥ 5 Ha For ship ≥ 10,000 DWT

VI.6 Dredging: a. Capital dredging Volume ≥ 250,000 m3 b. Maintenance dredging Volume ≥ 500,000 m3 VI.7 Land reclamation Area ≥ 25 Ha or Volume ≥ 5,000,000

m3 VI.8 Dumping of dredged soil

- to the land - to the sea

Volume ≥ 250,000 m3 or area ≥ 5 Ha All magnitudes

VI.9 Construction of new airport with its facilities All magnitudes (class I – IV) with approved master plan study result

VI.10 Redevelopment of airport with its facilities Class I, II, III based on redevelopment plan (master plan, land use plan, etc)

VI.11 Extension of airport with/ or its facilities Resettlement ≥ 500 families or land acquisition ≥ 100 Ha Beach reclamation with area ≥ 25 Ha or volume ≥ 10,000 m3 Hill logging and dredging with volume 500,000 m3

VI.12 Installation of subsea cable All magnitudes

VII. Satellite Technology Sector

VII.1 Construction of Satellite Launching Facility All magnitudes

VIII. Industrial Sector

VIII.1 Cement industry (with clinker process) All magnitudes VIII.2 Pulp industry or paper industry integrated with pulp industry All magnitudes (not including pulp

from recycled paper and pulp from kertas budaya (printing paper, mass paperback) industry)

VIII.3 Upstream petrochemical industry All magnitudes VIII.4 Iron and steel industry, including: iron and steel making All magnitudes


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process in basic form such as iron ore pellet, iron sponge, pig iron, alloy, steel ingot, steel pellet, bloom steel and slab steel.

VIII.5 Primary lead (Pb) industry All magnitudes (including recycle industry)

VIII.6 Primary copper (Cu) making industry/ copper cathode All magnitudes (raw material from copper concentrate)

VIII.7 Primary aluminium (Al) making industry All magnitudes (raw material from alumina)

VIII.8 Industrial zone All magnitudes (including integrated industrial complex)

VIII.9 Shipyard industry with graving dock system ≥ 4,000 DWT VIII.10 Aircraft industry All magnitudes VIII.11 Gun, ammunition and explosive industry All magnitudes VIII.12 Dry-cell battery industry All magnitudes (raw material from

mercury/ Hg) VIII.13 Wet-cell battery industry (power accumulator) All magnitudes VIII.14 Organic and inorganic chemical industry which produces

hazardous material (Bahan Berbahaya dan Beracun B3) All magnitudes

VIII.15 Various industrial activities not included in point 1 - 14 Land use: - Urban:

Metropolitan ≥ 10 Ha Big city ≥ 20 Ha Small city ≥ 30 Ha

- Rural ≥ 50 Ha

IX. Regional Infrastructure Sector

IX.1 Construction of dam, dike, or other type of water receptacle: - height - puddle area

≥ 15 m ≥ 200 Ha

IX.2 Irrigation zone: - New construction with an area of - Extension with an extended area of - Rice field conversion with an area of

≥ 2,000 Ha ≥ 1,000 Ha ≥ 500 Ha (per group)

IX.3 Swamp development: Swamp reclamation for irrigation purpose

≥ 1,000 Ha

IX.4 Construction of beach protection and improvement of river estuary, length measured perpendicular to the beach

≥ 500 m

IX.5 River normalization and construction of flood canal at a) Big city/ metropolitan b) Middle-size city, length c) Rural area, length

Length ≥ 5 km or dredging volume ≥ 500,000 m3 (applied to all)

IX.6 a) Highway construction b) Flyover and subway construction

All magnitudes ≥ 2 km

IX.7 Road construction and/or increase of road capacity with road widening outside right of way

a) Big city/ metropolitan b) Middle-size city

c) Rural area

Length ≥ 5 km or area ≥ 5 Ha Length ≥ 10 km or area ≥ 10 Ha Length ≥ 30 km

IX.8 Waste management a) Garbage disposal with control landfill/sanitary landfill

system

Area ≥ 10 Ha or total capacity ≥ 10,000 tonnes


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b) Final Garbage Disposal (Tempat Pembuangan Akhir – TPA) located in tidal-affected area

c) Construction of Transfer Station Final Garbage Disposal with open dumping system

Area ≥ 5 Ha or total capacity ≥ 5,000 tonnes Capacity ≥ 1,000 tonnes/day All magnitudes

IX.9 Housing/settlement development d) Metropolitan city, e) Big city, f) Middle and small size city,

area ≥ 25 Ha area ≥ 50 Ha area ≥ 100 Ha

IX.10 a) Domestic sludge treatment installation including its supporting facility

b) Domestic wastewater treatment installation including its supporting facility

c) Construction of wastewater piping system,

Area ≥ 2 Ha area ≥ 3 Ha service area ≥ 500 Ha

IX.11 Settlement drainage a) Channel construction in big city/ metropolitan b) Channel construction in middle-size city

Length ≥ 5 km Length ≥ 10 km

IX.12 Clean water supply in big city/ metropolitan a) Construction of distribution network, b) Construction of transmission network,

service area ≥ 500 Ha length ≥ 10 km

IX.13 System of water withdrawal from lakes, rivers, wellspring or other sources

Debit ≥ 500 l/s

IX.14 Construction of offices, sport centre, art centre, religious centre, shopping mall which are relatively concentrated

Area ≥ 5 Ha or building area ≥ 10,000 m2

IX.15 Establishment of transmigration settlement No. of transmigrant ≥ 200 families or area ≥ 100 Ha

X. Energy and Mineral Resource Sector

X.A GENERAL MINING A.1 Area of concession

Area of open land for mining ≥ 200 ha or ≥ 50 Ha (cumulative/yr)

A.2 Exploitation/ production stage: a) Coal/ pit b) Primary ore c) Secondary ore/ alluvial sediments d) Non-metal mining substances or mining substances type C e) Radioactive mining substances, including treatment, extraction and refinement f) Lead mining substance, including treatment, extraction and refinement

1,200,000 ton/ yr (Raw of material - ROM ) 1,000,000 ton/yr (ROM) 1,200,000 ton/yr (ROM) 600,000 m3/yr all magnitudes all magnitudes

A.3 Ocean mining all magnitudes A.4 Submarine tailing disposal all magnitudes A.5 Ore treatment with cyanide leaching All magnitudes X.B POWER/ ELECTRICITY B.1 Transmission line development ≥ 150 kV B.2 Construction of Diesel power plant, gas power plant, steam

power plant, gas and steam power plant ≥ 150 MW

B.3 Exploitation and Development of Geothermal power plant ≥ 55 MW B.4 Hydropower plant construction Height of weir ≥ 15 m, or

Pond area ≥ 200 Ha, or Power capacity ≥ 50 MW

B.5 Power plant generated from other sources (solar, wind, biomass, peat)

≥ 10 MW


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X.C OIL AND GAS C.1 Oil and gas exploitation and on-shore production

development Oil field ≥ 5,000 BOPD Gas field ≥ 30 MMSCFD

C.2 Oil and gas exploitation and off-shore production development

Oil field ≥ 15,000 BOPD Gas field ≥ 90 MMSCFD

C.3 Oil and gas transmission (not including piping in oil/gas field)

On-shore: pipe length ≥ 100 km or pipe diameter ≥ 20 inch. Off-shore: all magnitudes

C.4 Construction of refinery: - LNG - LPG

Capacity ≥ 550 MMSCFD Capacity ≥ 50 MMSCFD

C.5 Construction of oil refinery Capacity ≥ 10,000 BOPD C.6 Construction of used lubricant oil refinery (including

supporting facilities) Capacity ≥ 10,000 ton/yr

X.D GEOLOGICAL ASPECT OF ENVIRONMENTAL PLANNING

D.1 Groundwater extraction (shallow well and deep well) > 50 l/s (from 1 well or from 5 wells within an area of 10 Ha for commercial purpose)

XI. Tourism Sector

XI.1 Recreation park ≥ 100 Ha XI.2 Tourism zone All magnitudes XI.3 Hotel Room ≥ 200 units or area ≥ 5 Ha XI.4 Golf course (excluding driving range) All magnitudes

XII. Nuclear Development Sector

XII.1 Construction and operation of nuclear reactor facility: a. Reactor for research purpose b. Nuclear Power Plant

Power ≥ 100 Kw All installations

XII.2 Construction and operation of non-reactor nuclear energy facility:

a. manufacturing of nuclear fuel b. uranium treatment and purification c. radioactive waste treatment facility d. construction of irradiator (category II to IV) e. Radioisotope production f. Lamp sock production

Production ≥ 50 element/yr Production ≥ 100 tonnes yellow cake/yr All installations Source activity ≥ 37,000 Tbq (100,000 Ci) All installations All installations

XIII. Toxic and Hazardous Material Management Sector

XIII.1 Collection, use, treatment and/or disposal of toxic and hazardous waste as main activity

All servicing, commercial, and permanent activities for treatment of any kind /characteristic of hazardous waste (not including small-scale activity such as collection of recovered lubricant oil, dirty oil and slop oil, use of tin and solder flux).

XIV. Genetics Engineering Sector

XIV.1 Introduction of various plants, animals, and microorganism as biotechnology products resulted from genetics engineering

All magnitudes

XIV.2 Breeding of biotechnology products resulted from genetics engineering

All magnitudes


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2. EIA (AMDAL) Procedure in Indonesia

Government’s regulation on AMDAL clearly states that AMDAL is one of the requirements for business/activity permit.

AMDAL documents include:

- Environmental Impact Assessment Plan (KA-ANDAL, Terms of Reference for Environmental Impact Statement)

- Environmental Impact Statement (ANDAL)

- Environmental Management Plan (RKL)

- Environmental Monitoring Plan (RPL)

Documents on ANDAL, RKL, RPL are assessed by AMDAL Evaluation Commission (Komisi Penilai AMDAL). The assessment judges the conformity of a proposed project or activity with environmental principles, forming the basis for recommendation of approval.

AMDAL Procedure requires applicants to undergo following processes: • AMDAL Screening

Screening or selection process determines whether a proposed activity requires an AMDAL or not. • Announcement and public consultation

Project proponent is obliged to announce its activity plan for a certain period of time, respond to all received comments and carry out public consultations before the KA-ANDAL is drafted. The procedure is regulated in BAPEDAL Head Decree No. 08/ 2000.

• KA-ANDAL preparation and assessment (scoping) KA-ANDAL is a process of defining the issues that will be included in ANDAL study. Draft KA-ANDAL will be submitted to Komisi Penilai AMDAL to be evaluated. The evaluation will take at most 75 days, not including the time required to revise the documents.

• ANDAL, RKL and RPL preparation and assessment ANDAL, RKL and RPL are drafted based on evaluation results from Komisi Penilai AMDAL. These documents are submitted to Komisi Penilai AMDAL to be evaluated. The evaluation will take at most 75 days, not including the time required to revise the documents.

AMDAL documents are prepared by the proponent of a project or activity. The proponent can be assisted by a consulting firm that has relevant expertise and is certified in AMDAL document preparation. Requirements of an AMDAL document are specified in Bapedal Head Decree No. 09/2000.

3. Parties involved in AMDAL Process

Parties involved in AMDAL process include: AMDAL Evaluation Commission (Komisi Penilai AMDAL), project proponent and concerned community.

Komisi Penilai AMDAL is the commission that evaluates AMDAL documents at each regional level. In national level Komisi Penilai AMDAL part of the Ministry of Environment, at district/province level part of the Provincial Environmental Impact Agencies (Bapedalda Propinsi) and at regency/ city level part of the community level Environmental Impact Agencies (Bapedalda Kabupaten/ Kota).

Work procedures of Komisi Penilaian AMDAL are regulated and the members are nominated in a Minister of Environment Decree. Members on district/ province and regency/city level are appointed by Governor and Regent (Bupati)/City Mayor (Walikota) respectively.

Proponent is an individual or corporation that is responsible for the proposed project or activity.

Concerned community is a community that is in any way affected by decisions in an AMDAL process, e.g.


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because of the following reasons:

- distance between community and location of project or activity

- economic impacts on the community

- social and cultural impacts on the community

- impacts on environment

- and/or conflicts with the values or norms of the community

Concerned community can be either an affected community or an observing community.

4. Environmental Management Procedure (UKL) and Environmental Monitoring Procedure (UPL)

Environmental Management Procedure (Upaya Pengelolaan Lingkungan Hidup, UKL) and Environmental Monitoring Procedure (Upaya Pemantauan Lingkungan Hidup, UPL) is basically an environmental program that will be carried out by a corporation proposing a project or activity that does not require an AMDAL. This procedure is laid down in Minister of Environment Decree No. 86/2002 on “Guidelines for Implementation of Environmental Management Program (UKL) and Environmental Monitoring Program (UPL)”.

UKL-UPL is applied to activities for which technological options to manage environmental impacts are available.1 It is an environmental management tool for decision-making process in issuing permits for projects and activities.

UKL/UPL procedure is much simpler than AMDAL. To apply for an UKL/UPL, proponent will have to provide the following information:

- Proponent’s identity - Description of project or activity - Expected environmental impacts - Environmental management and monitoring program - Signature and seal

The information is summarized in a form that is to be submitted to responsible institution at the regency/city level for activity limited to one regency/city, at the district level for activity encompassing more than one regency/city and at national level for activity encompassing more than one district or country.

5. AMDAL and Mandatory Environmental Audit

An ongoing activity that was started before present AMDAL legislation and therefore does not have environmental management documents (RKL-RPL) is not subject to AMDAL. This practice basically violates environmental regulations, but according to Minister of Environment Decree No. 30/ 2001 the activity is obliged to conduct a Mandatory Environmental Audit (Audit Lingkungan Hidup Wajib).

6. AMDAL and Voluntary Environmental Audit

An activity having AMDAL documents that expects to improve its compliance to environmental management standard may voluntarily conduct an internal environmental audit. This type of environmental audit may advert to Minister of Environment Decree No. 42/ 1994 on “General Guidelines for Environmental Audit Implementation”.

Activity that applies a voluntary environmental audit is not exempted from obligation to conduct AMDAL.

1 Minister of State for the Environment Decree Number Kep-12/Menlh/3/1994, available in English at http://law.nus.edu.sg/apcel/dbase/indonesia/regs/indemm.html


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7. Public Participation and Dissemination of Information in AMDAL Process

Public participation is an essential component of successful and lasting development. Participatory decision-making is one of the requirements for effective project, program or policy. Information dissemination especially on environmental management requires in Law No. 29/ 1997 on Environmental Management. Head of Bapedal Decree No., 08/ 2000 on “Public Participation and Information Dissemination in AMDAL Process” iterates the need of a proper public involvement in all stages of AMDAL process.

8. AMDAL-related Implementing Regulations Below is a list of implementing regulations on AMDAL in Indonesia:1

1. Bapedal Head Decree No. 56/ 1994 on “Guidelines for the Determination of Significant Impacts”

2. Minister of Environment Decree No. 12/ 1994 on “General Guidelines for UKL/UPL”

3. Minister of Environment Decree No. 14/ 1994 on “General Guidelines for Preparation of AMDAL”

4. Minister of Environment Decree No. 15/ 1994 on “Establishment of Commission of AMDAL for Integrated Activities”

5. Minister of Environment Decree No. 42/ 1994 on “General Guidelines for Environmental Audit Implementation”

6. Minister of Environment Decree No. 54/ 1995 on “Establishment of Commission of AMDAL for Multi-sectoral and Regional Activities”

7. Minister of Environment Decree No. 55/ 1995 on “Regional AMDAL”

8. Minister of Environment Decree No. 39/ 1996 on “Type of Businesses or Activities Required to Prepare AMDAL”

9. Head of Bapedal Decree No. 299/ 1996 on “Technical Guidelines for Social Assessment in Preparation of AMDAL”

10. Head of Bapedal Decree No. 105/ 1997 on “Guidelines for Monitoring of Implementation of RKL/RPL”

11. Head of Bapedal Decree No. 124/ 1997 on “Guidelines for Public Health Assessment in Preparation of AMDAL”

12. Circular of Minister of Environment No. 1234/ 1999 on “Activities Subject to UKL/UPL”

13. Minister of Environment Decree No. 30/ 1999 on “Guidelines for Preparation of AMDAL Document “

14. Government Regulation No. 27/ 1999 on “AMDAL” 15. Head of Bapedal Decree No. 8/ 2000

on “Public Participation and Information Dissemination in AMDAL Process” 16. Head of Bapedal No. 9/ 2000

on “Guidelines for AMDAL Preparation” 17. Minister of Environment Decree No. 2/ 2000

on “Guidelines for AMDAL Assessment” 18. Minister of Environment Decree No. 3/ 2000

on “Type of Businesses and/or Activities Required to Prepare AMDAL” 19. Minister of Environment Decree No. 4/ 2000

on “Guidelines for AMDAL Preparation for Integrated Construction of Settlements” 20. Minister of Environment Decree No. 5/ 2000

on “Guidelines for AMDAL Preparation for Construction Activities in Wetlands”

1 http://www.menlh.go.id/amdalnet, visited on January 19, 2006


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21. Minister of Environment Decree No. 40/ 2000 on “ Guidelines for Work Procedures of AMDAL Evaluation Commission (Komisi Penilai AMDAL)”

22. Minister of Environment Decree No. 41/ 2000 on “Guidelines for Establishment of Komisi Penilai AMDAL at Regency/ City Level”

23. Minister of Environment Decree No. 42/ 2000 on “Membership of National AMDAL Evaluation Commission and Technical Team”

24. Minister of Environment Decree No. 17/ 2001 on “Type of Businesses and/or Activities Plan Required to Prepare AMDAL”

25. Minister of Environment Decree No. 30/ 2001 on “Guidelines for Mandatory Environmental Audit”

26. Minister of Environment Decree No. 86/ 2002 on “Guidelines for Implementation of UKL/UPL”

27. Minister of Environment Decree No. 178/ 2004 on “Curriculum for Preparation, Evaluation, Guidelines and Criteria of Training on AMDAL ”

28. Minister of Environment Decree No. 45/ 2005 on “Guidelines for Report Preparation of Implementation of RKL/RPL”


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Appendix 3: Investment in Indonesia A. GENERAL GUIDELINE 1 REGULATIONS RELATED TO INVESTING IN INDONESIA

Domestic investment (Penanaman Modal Dalam Negeri or PMDN) is regulated by Law no. 12/1970, amending Law no. 6/1968, and foreign investment by Law no. 1/1967 as amended by Law no. 11/1970. Government Regulation no. 83/2001 revised Government Regulation no. 20/1994 regarding ownership of shares of companies that have foreign capital.2 Based on the regulation:

1. Foreign investments can be done in the form of: a. Joint venture between foreign capital and domestic capital owned by Indonesian citizens, and /or

Indonesian legal entities; or b. Straight investment, in the sense of that the entire capital is owned by foreign citizens and /or

foreign legal entities. 2. A company established by foreign investment shall be in the form of Limited Liability company

(Perseroan Terbatas or PT) subject to the Indonesian law and domiciled in Indonesia. 3. The business activity of the company (as mentioned above) may be located throughout the territory

of the Republic of Indonesia. In the regions that have designated Bonded Zones and Industrial Estates,3 the business activity shall preferably be located in those areas.

Other important regulation related to investment:

1. Presidential Decree No.117/1999 on amending the Presidential Decree No. 97/1993 on Procedures fInvestments

2. Presidential Decree No.118/2000 on amending the Presidential Decree No. 96/2000 on Business Fields Closed and Open to Investments on Certain Conditions

3. Presidential Decree No.127/2001 on Field/Types of Businesses Reserved for Small-Scale Businesses and Fields/Types Of Businesses Opened for Medium- or Large-Scale Businesses under Partnership Schemes

4. Decree of the Minister of Finance No.135/Kmk.05/2000 on Relief of Import Duty on Machines, Goods and Materials in the Framework of Building/Development of Industries/Service Industries

5. Decree of the Minister of Finance No.394/Kmk.05/1999 on Amendment to the Decree of the Minister of Finance No. 298/Kmk.01/1997 Concerning Provisions on the Transfer of Capital Goods for Foreign Investment (PMA), Domestic Investment (PMDN)

6. Decree of the State Minister for Environmental Affairs No.17/2001 on Business and/or Action Plans which require Environmental Impact Analysis

SECTORAL RESTRICTIONS

There are some restrictions to the business sectors in which private investment is allowed. The purposes of these restrictions include making sure that all businesses conform to the Indonesian laws and international conventions ratified by Government of Indonesia and providing opportunities for small-scale enterprises to maximize their participation in development. Before submitting application for domestic or foreign investment, prospective investors should refer to the following restrictions:

1. Negative List of Investment 2. Sectors Reserved for Small-scale Enterprises 3. Sectors Open to Medium- or Large-scale Enterprises under Partnership 4. Technical Guidance for Investment

These restrictions are reviewed from time to time to reflect the developments in the global and national economic situation.

1 Translated from Technical Guideline on Capital Investment (Petunjuk Teknis Pelaksanaan Penanaman Modal or PTPPM), http://www.bkpm.go.id/en/file/Pen-Umum2.doc, visited on May 8, 2006 2 Government Regulation No. 83/2001 on the amendment to Government Regulation No. 20/1994 on Ownership of Shares of Companies Established in the Framework of Foreign Investment. http://www.dprin.go.id/regulasi/english/2001/12/GR83.pdf 3 A building, site or an area designated for industrial activity. See http://www.bkpm.go.id/en/approval.php?mode=baca&info_id=108#1-1


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B. APPROVAL OF FOREIGN INVESTMENT 1 HOW TO APPLY

Applications for new investment under PMA arrangements can be filed by:

a. foreign citizens and/or foreign statutory bodies and/or PMA companies; b. foreign citizens and/or foreign statutory bodies and/or PMA companies along with Indonesian citizens

and/or Indonesian statutory bodies.

Applications for new investment as well as for alteration of projects under PMA arrangements shall be filed to the Head of BKPM. Applications for new investments under PMA arrangements shall be filed by using Form I/PMA. Applications for alterations of investment projects under PMDN arrangements shall be filed using other forms. APPROVAL OF APPLICATIONS Approval of applications for new investment as well as for alteration of projects under PMA arrangements shall be issued in the form of a letter of approval of foreign investments (Surat Persetujuan Penanaman Modal Asing, SP-PMA) and in the form of letter approval for alterations/extension of foreign investments (Surat Persetujuan Perubahan/Perluasan Penanaman Modal Asing, SP Perubahan/Perluasan-PMA). SP-PMA shall be issued by the Head of BKPM and shall be issued not later than 10 (ten) working days starting from the reception of correct and complete applications. Local Permits shall be issued by;

a. Governors/Heads of Provincial Regions (in this case Chairmen of local Investment Bodies) when the applications were filed to the Chairmen of local Investment Bodies for the Extension of Working Permits of foreigners working in the province.

b. Regents/City Majors or Heads of Regencies/Cities in Regions (in this case Chairmen of local Investment Bodies of regencies/cities) when the applications were filed to the Chairmen of local Investment Bodies of regencies/cities for the Sites/Locations, Land Title/Usage of Land, Building Permit and the Environmental permit.

OTHER PROVISIONS

PMA companies with SP-PMA shall apply for required investment permits. SP-PMA shall be automatically cancelled if no concrete administrative or physical activities take place during 3 years starting from the date of issuance. Obtaining the following licenses is regarded as concrete administrative activity:

a. the location license or building lease agreement (especially for PMA companies in services sector) or regional mining license or mining concession (especially for PMA companies in the field mining); and

b. bank accounts registered to PMA companies (especially for new PMA companies); and c. customs approval letter for capital goods; and/or d. limited importer's identification number; and/or e. decision on the plan for employment of foreign personnel (especially for PMA companies using

expatriates); and/or f. building construction permit; and/or g. Nuisance Act permit; and/or h. deed of the establishment of companies already validated by the Minister of Justice for capital

participation based companies).

1 http://www.bkpm.go.id/en/approval.php?mode=baca&info_id=108#1-1, visited on May 9, 2006


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Concrete physical activity in the case of

a. industries: land clearance covering at least 25 percent of the areas contained in SP-PMA; or b. services and capital participation (holding): land clearance covering at least 25 percent of the areas

contained in SP-PMA, or office/building space.

Figure 1 Procedure of Investment in Indonesia1

1 http://www.central-java.com/modules.php?name=Howtoinvest&pa=showpage&pid=70, visited on May 30,

2006


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C. NEGATIVE LIST BASED ON PRESIDENTIAL DECREE 96/2000 jo. 118/2000 1

LIST OF BUSINESS FIELDS ABSOLUTELY CLOSED FOR INVESTMENT

AGRICULTURAL SECTOR

1. Cultivation and processing of marijuana etc.

MARINE AND FISHERY SECTOR

2. Collection / utilization of sponge

INDUSTRIAL AND TRADING SECTOR

3. Industries producing chemicals harmful to the environment , such as DDT, dieldrin, chlordane, carbon tetrachloride, CFCs, methyl bromide, methyl chloroform, halons etc.

4. Industries producing chemicals listed in Schedule 1 of the Chemical Weapons Convention (sarin, soman, tabun, mustard gas, levisite, ricine and saxitoxin)

5. Industries producing weapons and related components 6. Industries producing cyclamate and saccharine 7. Industries producing alcoholic drinks (liquor, wine and drinks containing malt) 8. Casino and gambling facilities

COMMUNICATIONS SECTOR

9. Air traffic system providers (ATS providers), ship certification and classification inspections 10. Management and operation of Radio Frequency Spectrum and Satellite Orbit Monitoring Stations

MINING AND ENERGY SECTOR

11. Mining of radioactive minerals

LIST OF BUSINESS FIELDS CLOSED TO FOREIGN INVESTMENT

FORESTRY AND PLANTATION SECTOR

1. Germ plasm cultivation 2. Concession of natural forests 3. Logging

COMMUNICATION SECTOR

4. Taxi and bus transportation services 5. Small-scale shipping

1 http://www.bkpm.go.id/en/dni.php?mode=baca&t=Negative%20Investment%20List, visited on May 9,

2006


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TRADING SECTOR

6. Trading and trade supporting services Except : Large-scale retailers (malls, supermarkets, department stores, shopping centers) , wholesale trading (distributors / wholesalers, exporters and importers), exhibition / convention service providers, quality certification service providers, market research service providers, warehousing services outside seaports, and after-sale services.

INFORMATION SECTOR

7. Radio and television broadcasting services, radio and closed circuit television broadcasting services, multimedia and printed media.

8. Movie industry (production, technical services, export and import business, distrbution and movie theatres).

LIST OF BUSINESS FIELDS OPEN TO INVESTMENT IN A JOINT VENTURE BETWEEN FOREIGN AND DOMESTIC CAPITAL

1. Building and operation of seaports 2. Electricity production, transmission and distribution 3. Shipping 4. Processing and provision of potable water for public use 5. Nuclear power plants 6. Medical services, including building and operating hospitals, medical checkups, clinical laboratories,

mental rehabilitation service, public health maintenance (HMO), renting medical equipment, assistance services for health aid and evacuation of patients under emergency conditions, hospital management services and services for testing, maintenance and repair of medical equipment

7. Telecommunications 8. Commercial airliners.

LIST OF BUSINESS FIELDS OPEN TO INVESTMENT UNDER CERTAIN CONDITIONS

MARINE AND FISHERY SECTORS

1. Cultivation of fish in fresh water a. Open to foreign investments for freshwater turtles, nila gift, sidat, kodok lembu, fresh water giant shrimps and thillapya sp; b. In cooperation with small-scale fishery business

2. Fishing of bottom fish (large fish, schooling fish and other sea fish) - except ZEEI areas of the Malacca Strait and Arafura sea

INDUSTRIAL SECTOR

3. Industries producing wood pulp a. raw material obtained from imported chips or raw material guaranteed to be supplied from industrial timber estates (HTI) b. other than sulfonating and / or chlorination (C12)

4. Industries producing pulp from other cellulose fibres or other materials - other than sulfonating and chlorination (C12)

5. Industries producing chloro alkali - other that those using mercury

6. Processing of finished / semi-finished goods from mangrove wood - raw material coming from mangrove cultivation

7. Money printing industry - Operational licenses from BOTASUPAL -BAKIN and approval from Bank Indonesia required

8. Special printing industries (postal stamps, duty stamps, Bank Indonesia negotiable certificates, passports and stamped postal matter) - Operational licenses from BOTASUPAL - BAKIN required


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9. Milk processing industry (powder and sweetened condensed milk) - processing (not only repackaging)

10. Plywood and rotary veneer industries - only for The Irian Jaya Province (Papua)

11. Sawn timber industries a. only for the Irian Jaya province (Papua) b. outside the Irian Jaya province (Papua), only using logs from non natural forests

12. Ethyl alcohol industries - Technical grade, being only used as raw materials and auxiliary materials of other industries.

13. Industries producing raw materials for explosives (ammonium nitrate) - Only in cooperation with business entities which have secured a recommendation from the Ministry of Defense

14. Industries producing explosives and components for industrial (commercial) use a. Only in cooperation with business entities which have secured a recommendation from the Ministry of Defense. b. Only manufacturing activities, while storage and distribution are executed by companies appointed by the government.

15. Electricity planning and supervision consulting services a. PLTA (Hydro power plant) with a capacity above 50 MW, b. PLTU (steam power plant) with a capacity above 55 MW, c. PLTP (geothermal power plant) with a capacity above 55 MW, d. Main electrical relay station with a voltage above 500 kV, e. Transmission networks with a voltage above 500 kV

16. Construction of electrical equipment as well as maintenance, installation and development of electricity supply technology and testing of electrical installations. a. Main electrical relay stations with a voltage above 500 kV, b. Transmissions networks with a voltage above 500 kV

17. Petroleum and natural gas drilling a. only offshore drilling, b. especially in locations outside the Eastern Indonesia Region, must cooperate with national partners operating in a similar business field.

18. Power plants - outside Java, Bali and Madura

TRADING SECTOR

19. Restaurants - must be located in tourism areas / zones and / or integrated with hotels

20. Game services - must be located in tourism areas / zones and / or integrated with hotels.


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D. INVESTMENT SERVICE AGENCY 1

A. Investment Coordinating Board

Investment Coordinating Board (BKPM) is a non-departmental government agency responsible for planning and administration of investments as well as assisting investors in finding feasible projects and suitable local partners, and to overcome potential problems.

B. Related Agencies

In addition to the Investment Coordinating Board, there are several government agencies assisting investors at the regional level:

1. Indonesia Representative Office (Indonesia Embassy, Indonesia Consulate General and Indonesia Consulate) assist in approval for Foreign Direct Investment (PMA);

2. Provincial Investment Board (Instansi Penanaman Modal Propinsi, IPMP). The chairman of IPMP is responsible to the Provincial Governor.

3. Province National Land Agency (BPN Province) Offices. BPN Provinces are the provincial land affair agencies, headed by a Chairman, who is subordinate of and responsible to the Head of the National Agency for Land Affairs;

4. District-Level of National Land Agency (BPN Kabupaten/Kota) Offices. The BPN Kabupaten/Kota is the land affair agency at district-level, headed by a Chairman, who is a subordinate of and responsible to the Head of the BPN Province. The BPN Kabupaten/Kota assists investors in obtaining land for projects;

5. Settlement & Regional Infrastructure Development(Kimpraswil Kabupaten/Kota) Offices. The Office of Kimpraswil Kabupaten / Kota is the Settlement & Regional Infrastructure agency at the district-level, headed by a Chairman, who is a subordinate of and responsible to the Regent.

6. Executive Secretary of Regency.Executive Secretary assists investors in obtaining the Nuisance Act Permit (UUG/HO);

7. Regional Environment Impact Management Agency (BAPEDALDA). The agency is responsible for assessing environmental impact studies and monitoring environmental issues (AMDAL) in the regions;

8. PT Superintending Company of Indonesia (SUCOFINDO). A state owned enterprise responsible for verifying aster Lists of capital goods and raw materials.

More information is available at www.bkpm.go.id

1 http://www.bkpm.go.id/en/info.php?mode=baca&cat=7&t=&info_id=120, visited on May 9, 2006

CDM Development in Indonesia NEDO 2006-2

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