Part 2: Indonesia paves the way for CCUS: considerations for the future

In Part 1 of this blog series, we provided a broad overview of Indonesia's new Presidential Regulation No. 14/2024 on Carbon Capture and Storage Activities (PR 14/2024). Here, we consider the key areas in the existing framework that require further clarification, and a range of other issues that will need to be addressed in order to facilitate the growth of the country’s CCS / CCUS industry. 

Cross-border considerations

PR 14/2024 expressly contemplates the concept of cross-border CCS / CCUS activities in Indonesia, and sets out certain requirements for offshore emissions to be imported into the country. Additional clarity and guidance are required on how the relevant criteria will be assessed or certified and, specifically, on the requirement that only carbon dioxide (CO2) produced by offshore emitters “affiliated with investments in Indonesia” may be imported. It remains unclear how the scope and extent of this requirement will be assessed. 

The execution of bilateral cooperation agreements by Indonesia with other countries (setting out parameters on transportation and liability for leakage, amongst other things) will be the next key step in facilitating cross border CCS / CCUS into Indonesia. We understand that Indonesia is already in discussions with a number of countries to sign bilateral agreements for potential cross border transportation of CO2, and has already executed a letter of intent to work towards such agreement with Singapore. The question of what could be covered in such bilateral agreements was considered in an earlier blog.

Financial and economic incentives

For a sustainable and successful CCS / CCUS value chain to be implemented in Indonesia, the economics underpinning CCS / CCUS activities will need to be clarified. In view of the 30% cap on imported CO2, the drivers for resolution might be more appropriately focused on domestic actions.

• Carbon pricing: a possible route would be for the Indonesian Government to set a clear price on carbon, although there are challenges with relying solely on this option to attract investors and to kick-start the initial round of projects.  Indonesia does not currently have a comprehensive carbon price applicable to all sectors (this is currently limited to emissions from coal fired power plants).  Even if a carbon price was to be implemented, the expectation is that the cost differential between abated and unabated domestic production in Indonesia in the short to medium term would be unlikely to be sufficiently large to independently support CCS / CCUS activities in-country.  

That said, the implementation of high carbon prices in neighbouring countries (e.g. Singapore) may incentivise operators to develop a carbon import value chain in Indonesia. However, given the 30% storage cap on imported CO2 imposed by PR 14/2024, even relatively high carbon prices in countries within the region are unlikely to provide the sole sufficient economic incentive for an operator to develop a cross border carbon import business – other incentives will be required, and part of the solution may need to be domestic.

PR 14/2024 itself is unclear as to who would own any carbon credits derived from CCS and CCUS activities in Indonesia. It simply refers to the implementation of "Carbon Economic Value" (or NEK) from CCS / CCUS activities to be carried out in accordance with applicable laws and regulations. It is not clear at this stage how the regime will be implemented, although it should be noted by analogy that for renewable power projects, the relevant carbon credits are actually owned by the state utility offtaker, PLN, and not the independent power producers themselves.

• Direct incentives: without a comprehensive carbon price (and given the associated challenges with relying solely on this option to attract investors into the sector), direct government intervention will be helpful, and may be necessary, to stimulate a new CCS / CCUS industry in Indonesia. At present, PR 14/2024 only refers to possible tax and non-tax incentives that may be available to CCS / CCUS operators in accordance with “laws and regulations”. It is unclear what form these incentives might take and when (or if) details will be provided in future ministerial regulations. 

Besides direct subsidies and grants, Indonesia could also consider implementing price floors (supported by the Indonesian Government) or other regulated style arrangements to provide a base level of revenue to storage projects. However, any such direct incentives or underwriting by the Indonesian Government will naturally have to be weighed against such measures’ impact on the state budget in a country with a significant ongoing shortfall in its infrastructure funding requirements. 

• Fees in the carbon value chain: finally, while PR 14/2024 does expressly provide that CCS / CCUS operators may charge storage fees for their services, the calculation of such storage fees, and royalties on such storage fees payable to the Indonesian Government have not been addressed expressly. In a PSC context, further clarity on how revenue from storage fees, and royalty payments to the Indonesian Government would impact the revenue sharing mechanic under both gross split and cost recovery PSCs would also be helpful.  We would anticipate that these matters will be detailed in further ministerial regulations or guidance (or possibly through more ad hoc decisions taken in respect of the first projects which fall within the relevant schemes). This will influence how investors assess the economic viability of participating in CCS / CCUS projects in Indonesia. 

Trailing liability

The provisions of PR 14/2024 around the monitoring obligations of a CCS / CCUS operator largely mirror the provisions in MEMR 2/2023. As with MEMR 2/2023, it remains unclear if the CCS / CCUS operator is generally absolved of all future liability in relation to the CCS or CCUS project (including under other applicable environmental and other legislation) upon expiry of the monitoring period (and upon verification by the Minister that all CCS / CCUS closure activities have been completed). We expect this to be a key area of focus for stakeholders and it will be interesting to see if the allocation of such liability will be detailed in further ministerial regulations.

Conclusion

PR 14/2024 is not and was not intended to be a panacea that would by itself facilitate the implementation of a new industry and carbon value chain in Indonesia. It does address several areas that were not previously covered in earlier legislation. It also sets out key principles required to facilitate the implementation of a CCS / CCUS industry and represents another significant step forward in providing the right environment to encourage the effective and robust deployment of CCS and CCUS at scale in Indonesia as the sector as a whole begins to mature globally.