05/10/2023

A Mahardika perspective on captive power, private Wilayah Usaha and the shift toward reliable, competitive and verifiably cleaner electricity

Power is becoming the real differentiator

Indonesia's industrial estates have played a central role in the country's downstream industrialisation. Nickel smelters in Sulawesi and North Maluku, manufacturing zones in Batam, and processing and logistics hubs across Java all depend on one essential input: reliable power.

In many locations, that need has been met through captive generation: power plants built by industrial operators primarily for their own facilities. The model addressed a genuine constraint. It allowed projects to proceed where the PLN grid was unavailable, insufficient or unable to meet the reliability equirements of energy-intensive industries.

But the conditions that made captive power attractive are changing. What was once mainly a solution to an infrastructure bottleneck is becoming a wider commercial, regulatory and financing challenge. For industrial estates competing for export-oriented tenants, the source and traceability of electricity now matter almost as much as its price and reliability.

Captive power is not the same as an industrial estate utility

Indonesian electricity regulation distinguishes between electricity supplied for an operator's own use and electricity supplied to customers. This distinction is particularly important for industrial estates. A company that generates electricity solely for its own facilities falls within the self-use framework and is subject to the applicable licensing or reporting requirements. If an estate company supplies electricity to separately incorporated tenants, however, the activity generally becomes electricity supply for the public interest. The operator would normally require an Electricity Supply Business Licence for the Public Interest, known as an IUPTLU, together with an approved business area or Wilayah Usaha, as well as the relevant generation, distribution and tariff approvals.

Captive power should therefore not be used as a general term for every privately operated electricity system inside an industrial estate. A self-use plant and a licensed private estate utility perform different regulatory and commercial functions.

Why the pressure is increasing

Coal-fired captive capacity has expanded rapidly, particularly in nickel-processing regions, and now represents a significant part of Indonesia's operating and planned power capacity. Its growth has taken place largely outside PLN's procurement programme and has created challenges for system-wide planning, emissions reporting and transition policy.

That growth now intersects with three pressures. First, Presidential Regulation No. 112/2022 generally restricts new coal-fired power plants but allows limited exceptions, including qualifying projects integrated with strategic industrial activities. Projects relying on these exceptions must meet specific conditions, including reducing greenhouse-gas emissions by at least 35 per cent within ten years of operation, measured against the 2021 average, and ending operations no later than 2050. These requirements should not be interpreted as applying automatically to every existing captive coal plant.

Second, the European Union's Carbon Border Adjustment Mechanism places a measurable cost on embedded emissions in covered products, including iron and steel, aluminium, cement and fertiliser. Its effect on a particular Indonesian export depends on whether the product falls within the relevant tariff classifications. Third, lenders and investors are becoming less willing to finance assets whose economics rely on carbon rules and customer expectations remaining unchanged for decades.

The issue is therefore broader than compliance. A coal plant may continue to provide dependable electricity, yet still weaken an estate's ability to attract capital and serve manufacturers that must account for emissions across their supply chains.

The role of a private Wilayah Usaha

A Wilayah Usaha gives one licensed electricity supplier the right and responsibility to serve customers within a defined area. It is not simply permission to build a private transmission or distribution line. A private industrial-estate utility may apply for a Wilayah Usaha, but approval is not automatic. The applicant must establish a defined service area, sufficient demand, technical and financial capability, and a credible plan for supply and network development. The proposal must also address the position of the existing business-area holder and the adequacy of electricity service in the area.

Once licensed, a private Wilayah Usaha holder can supply tenants within its territory. Depending on its approvals and commercial arrangements, it may use its own generation, purchase power from PLN or another licensed supplier, and combine several sources. This can give an industrial estate greater control over reliability, generation mix and decarbonisation. It also means assuming the obligations of a regulated electricity utility, including service quality, network investment and tariff compliance.

Working within a PLN-centred market

Indonesia is best described as having a predominantly PLN-centred single-buyer electricity model rather than an absolute nationwide single buyer. Within PLN's Wilayah Usaha, independent power producers generally sell their output to PLN under power purchase agreements, and PLN supplies the end customer. Approved private Wilayah Usaha holders form limited territorial exceptions.

This structure limits the ability of an industrial customer to buy physical electricity directly from an off-site renewable generator and have it delivered across the PLN network. Although Indonesian electricity legislation recognises network leasing, the country does not yet have a broadly operational open-access or wheeling framework comparable with liberalised electricity markets. Virtual power purchase agreements may provide a financial or emissions-accounting arrangement, but they should not be presented as established mechanisms for the physical delivery of renewable electricity in Indonesia.

For most grid-connected businesses, the practical options remain PLN supply, PLN renewable energy certificates, rooftop or onsite generation, and arrangements available within an approved private Wilayah Usaha. A connection to PLN can help an estate reduce captive coal generation where adequate capacity, voltage, reliability and redundancy are available. It does not, by itself, establish that the electricity consumed is renewable.

A portfolio of practical solutions

There is no single replacement model. The right approach depends on location, grid access, demand profile, land availability, regulatory structure and the technical requirements of each industrial cluster.

Estates close to suitable PLN infrastructure may gradually shift part of their demand to the grid, supported where appropriate by recognised renewable energy certificates. Estate developers with an approved private Wilayah Usaha may aggregate tenant demand and procure or develop cleaner generation at sufficient scale. Onsite and rooftop solar can reduce daytime grid or captive consumption, subject to the applicable technical and quota arrangements.

For land-rich mining and industrial groups, post-mining areas may provide suitable sites for solar development. In remote locations, hybrid systems combining solar and battery energy storage can reduce the amount of coal or diesel required without compromising operational reliability.

In practice, many estates will use a combination of these routes. The objective is not an abrupt shift from one system to another, but a credible pathway that improves emissions performance while protecting cost, reliability and industrial output.

From compliance to competitiveness

Industrial estates that can offer reliable, competitively priced and verifiably cleaner power will be better positioned to attract global manufacturers. As supply-chain emissions become part of procurement and investment decisions, energy strategy is becoming part of the estate's value proposition.

The transition challenge is therefore not only how to replace captive coal. It is how to create bankable electricity structures that allow cleaner generation to reach industrial customers without sacrificing reliability. Stronger PLN connections, regulated private Wilayah Usaha systems, onsite renewable generation and battery storage will each have a role.

The next phase of competition between industrial zones will be decided not only by land, location or fiscal incentives. Increasingly, it will be decided by the quality of the power behind them.

Mahardika Energy Partners advises industrial estates, developers and investors on electricity regulation, bankable power structures and practical decarbonisation pathways. To discuss captive power, private Wilayah Usaha or cleaner industrial energy solutions, contact Mahardika Energy Partners.

Sources and regulatory references

• Law No. 30/2009 on Electricity, as amended, including the distinction between electricity supply for the public interest and electricity supply for own use.
• Government Regulation No. 25/2021 on the Implementation of the Energy and Mineral Resources Sector.
• Ministry of Energy and Mineral Resources Regulation No. 11/2021 on the Implementation of Electricity Businesses.
• Presidential Regulation No. 112/2022 on the Acceleration of Renewable Energy Development for Electricity Supply.
• European Commission, Carbon Border Adjustment Mechanism implementation framework.
• CREA and Global Energy Monitor analysis of captive coal development in Indonesia.