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Policy Challenges of Indonesia's Local Content Requirements on Power

Generation and Turbine Production Capability

Article in International Journal of Energy Economics and Policy · January 2022

DOI: 10.32479/ijeep.12504

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 International Journal of Energy Economics and
Policy
ISSN: 2146-4553

available at http: www.econjournals.com

International Journal of Energy Economics and Policy, 2022, 12(1), 225-235.

Policy Challenges of Indonesia’s Local Content Requirements on

Power Generation and Turbine Production Capability

Rislima Febriani Sitompul1*, Endri Endri2* Sawarni Hasibuan3, Choesnul Jaqin3, Arum Indrasari4*,
Lia Putriyana5
1
National Research and Innovation Agency (BRIN), Jakarta, Indonesia, 2Universitas Mercu Buana, Jakarta, Indonesia, 3Department
of Industrial Engineering, Universitas Mercu Buana, Jakarta, Indonesia, 4Universitas Muhammadiyah Yogyakarta, Indonesia,
5
Research and Development Center for Electricity Technology, New Energy, Renewable Energy and Energy Conservation, Ministry
of Energy and Mineral Resources, Indonesia. *Email: endri@mercubuana.ac.id, ris001@lipi.go.id, arum.indrasari@umy.ac.id

Received: 11 September 2021 Accepted: 22 November 2021 DOI: https://doi.org/10.32479/ijeep.12504

ABSTRACT
The demand for electricity in Indonesia will continue to increase. Thus, the market opportunity for the power generation industry needs to be optimally
utilized by domestic business actors through the Local Content Requirements (LCR) policy. Through exploratory techniques, the primary goal of this
research is to assess the capability of Indonesia’s national turbine industries and research institutions, as well as to develop policy recommendations
for maximizing the use of local content in order to comply with the Ministry of Industry’s Domestic Component Level Regulation, also known as
Local Content Requirements (LCR). There are at least three challenges that need attention, namely technology capability and efforts, infrastructure,
and institution. Although Indonesia has good prospects and opportunities to develop large-scale turbines, the challenges ahead in developing coal-fired
turbines will be more complex due to the strengthening of the clean development paradigm. Thus, it is important to rethink the direction of developing
LCR policies for coal-fired turbines. The study recommended budget allocation for ensuring continuity of turbine prototyping, simplify the process
to obtain technology licensing, and developing industries that can support materials for turbine industries.
Keywords: Electricity Development, Local Content Requirements, Policy Challenges, Power Generation, Technological Capabilities, Turbine
Industry
JEL Classifications: O21, O38, Q48

1. INTRODUCTION minimum required level. The facts that the level of imported
components in the electricity generating system is relatively high
The role of national industries in providing turbine components indicate the weak mastery of domestic electricity technology in
has become highly strategic in the context of building the strength Indonesia, one of which is turbine technology. The government
of the power generation industry. The Indonesian government has encourage optimizing of the level of LCR in the electricity sector
regulated the minimum level of local component use in power as an effort to substitute imported products.
plants, known as the Domestic Component Level (TKDN), in
which this article termed as Local Content Requirements (LCR). In order to support the economic development on the side of
LCR is the level of use of domestic components/services compared electricity supply, a related LCR policy was stipulated. The
to imported components. The LCR level in the electricity sector strategy to boost LCR is also in line with the vision of the National
still requires more serious efforts, especially in turbine component Long-Term Development Plan (RPJP) 2005-2025, as summarized
in various electricity projects is still relatively lower than the in the National Medium-Term Development Plan (RPJMN)

This Journal is licensed under a Creative Commons Attribution 4.0 International License

International Journal of Energy Economics and Policy | Vol 12 • Issue 1 • 2022 225
 Sitompul, et al.: Policy Challenges of Indonesia’s Local Content Requirements on Power Generation and Turbine Production Capability

2015-2019. LCR regulations are mainly applied to the process of The findings of this study will be used to establish policy
procuring goods, services, or combination of goods and services recommendations for increasing turbine technology mastery
for the government. LCR is used as a means or instrument of in order to achieve the necessary level of LCR in the power
government to: (1) reducing foreign exchange expenditure by generation system to promote national electricity production
import substitution; (2) building a national industry by encouraging independence, especially the 35,000 MW power plant program.
priority sectors to create a strong and competitive industrial Findings from this study can be used as a guide in designing
structure; (3) directing R&D for mastery of science and technology government policies in developing the turbine industry so that it
following national development targets; and also (4) increasing can be produced nationally in Indonesia, and in turn increasing
in labor absorption, as a result of the increase in product quality, the nation’s competitiveness in the field of science and technology
will lead to an increase in production, and thus an increase in the mastery for sustainable electricity development.
need for labor (Hartono and Santoso, 2013).
2. LOCAL CONTENT REQUIREMENT
Indonesia still has a large market potential to develop the power
generation industry. Indonesia had one of the lowest levels of (LCR)
electricity consumption per capita in ASEAN, at about 843 kWh
per capita. Other problems are the frequently blackout hamper Local content programs have been applied as part of industrial
various parts of Indonesia the low access to electricity in remote policy. The policy usually goes hand in hand with import
areas. To overcome the problems, the Indonesian government substitution policy. Although the policy aims to enhance
established has been establishing various electricity development industrialization, in many cases the policy had caused high-cost
program, among others the 35,000 MW which was targeted to economy and contrary to the liberalized trade principles. Pursell
take place during the 2015-2019. It was expected that with this (2001) pointed out that domestic lobbies and populist arguments
acceleration program by constructing more power plants, the level have made local content schemes politically difficult to oppose,
of consumption per capita estimated to increase to 1200 kWh per and once established, even more difficult to remove. The
capita in 2019. Further, the program was expected to increase Increasing the capacity and quality of electricity infrastructure
electrification ratio from 81.5% to about 96.6% between 2014 and plays an important role in enhancing the competitiveness of
2019. Although, the 35,000 MW program stages are later being the real sector. Therefore, the fulfillment of the components
modified due to changes in some assumptions such as demand of the electric power generation system is a crucial point for
on electricity, potential of oversupply, lack of financing capacity, the operation of the electricity program. The procurement of
and community pressure to reduce coal generation, Indonesia still the power plant component technology is one of the factors
needs a lot of power plant to drive economic growth. that influence the economic feasibility of the power generation
system. As the development of the electricity sector and
The regulation mentioned that turbine is one of components that economic growth as strongly correlated, it is very important
required local content. Basically, the MOI regulation mentioned to increase the ability to achieve economic independence
two main components such as main component and services. The based on domestic resources. Burke et al. (2018) discovered
main components cover steam turbine, boiler, generator, electrical, some evidence that electricity supply reliability is essential for
instrument and control, balance of plant, civil and steel structure, economic growth and recommended that the causal effects of
while on service part, it covers feasibility study, engineering, electricity reliability, infrastructure, and access on economic
procurement, and construction, checking and testing, certification, growth be identified (Burke et al., 2018; Yoo and Kim, 2006).
and supporting services. The turbine is one of the most important Hansen et al. (2020) suggested that LCR should be used as part
components in an electric power generation system, since it converts of renewable energy auction schemes in order to promote local
potential energy into mechanical energy, which is then transformed industrial development, while Allan et al. (2020) investigated
into electrical energy by generators. The provision of turbine LCR policy scenarios that would not only stimulate economic
technology in power plants is one of the factors that influence the activity but also contribute significantly to the government’s
smooth and economic feasibility of the power generation system. net zero emission goal, especially in the future development of
offshore wind (Negara, 2016).
This article is part of a study on the technological capabilities of
power generation system in Indonesia conducted by the Ministry Product competitiveness is also an important factor in increasing
of Research, Technology and Higher Education (Sitompul, 2019) LCR. Negara (2016) examined the impact of LCR in manufacturing
and we developed it with the dynamics of policies during the sector in Indonesia and observed that the LCR policy has been
administration of President Joko Widodo. The objective is to ineffective in reducing firm’s dependency on imported inputs
observe the problems of technological capabilities development, as those inputs is crucial for product competitiveness, therefore
especially turbine technology and explore policy supports and suggested that LCR policy should consider substitution possibilities
readiness of national industries to develop turbine technology. in production. Kuntze and Moerenhout (2012) suggested that the
Industrial surveys and focus group discussions also being potential of LCR to reduce costs are associated with the knowledge
undertaken to observe the challenges and potentials at various of the current technologies and their infancy level Technology
stakeholders. Based on the findings, the study will elaborate capability or technology mastery refers to ability to use technology
the challenges and potentials to develop LCR in the context of effectively (Stephenson, 2013). This implies that new technology
formulating a set of constructive policy recommendations. can reduce average cost of production. Then technology effort

226 International Journal of Energy Economics and Policy | Vol 12 • Issue 1 • 2022
 Sitompul, et al.: Policy Challenges of Indonesia’s Local Content Requirements on Power Generation and Turbine Production Capability

refers to ability in selecting, mixed, and adjusted technology with 1. Holders of electricity supply business licenses are required
local condition, or even able to create new technology. to prioritize domestic products and potential
2. Any development of electricity infrastructure for the public
Local content requirements are set of policy measures that require interest is required to use domestically produced goods and
a certain percentage of domestic manufacturers within the goods’ or services
production process (Stephenson, 2013). LCR was described by 3. Obligation to use domestic production for the development
Ezell et al. in a number of ways, including the percentage of locally of electricity infrastructure.
developed intellectual property expressed in the development
of a product or service, or the percentage of locally developed The LCR Minimum Value Target for Electricity Generation System
components used in the assembly of a final product (Ezell et al., Infrastructure based on the type of power plant regulated under
2013). LCR are requirements (usually found in a particular law or Regulation of MOI Number 54/M-IND/PER/3/2012 is compiled
regulation) that bind foreign investors and companies to a minimum from B2TE, MEMR and in MOI as listed in Table 1.
level of products and services that must be purchased or procured
locally, according to UNCTAD (Emmanuel, 2016). Macatangay The 35,000 MW project developments was initially planned to
(2016) investigated four implications in applying LCR one of which pursue the electrification ratio and electricity consumption. Based
is providing high-powered incentives for investor compliance. Lin on the National Energy General Planning (RUEN) in 2020, the
and Weng (2020) studied the effects of LCR both on industrial ratio of electrification ratio electrification ratio needs to reach
production and industrial productivity. They observed that initial 100% and electricity consumption per capita will reach 7000 kWh
level of LCR will determine the impact of the policy, when the in 2050. The program is dominated by the construction of CFPP.
initial level is lower the LCR policy tend to increase production Based on RUEN, the primary energy supply of coal will increase
but decrease productivity, and vice versa (Saluy et al., 2021). from about 67.6 MTOE to about 255.9 MTOE between 2015 and
2050. It is estimated that the potential for absorption of domestic
Governments (both existing and developing) use a variety components is IDR 440 trillion. A study performed by Hartono
of measures to attract investment, using a “carrot and stick” et al. (2020) suggests that coal power plant usually need less
strategy. LCR are often combined with investment incentives, investment and have better employment and economic impacts.
which has gotten a lot of attention both within and outside the However, over time, problems in the licensing process and others
World Trade Organization (WTO). The Indonesian electricity hampered the 35,000 MW constructions. The realization of 35,000
sector’s institutional environments, which are marked by natural MW by 2019 has only reached around 10% of the target. Added
monopoly characteristics, often distort investment decisions and by the impact the Covid-19 pandemic have been slowing down
lead to higher costs, such that requiring different management the progress of the development throughout 2020. Electricity
with more straightforward market characteristics (Setyawan, development projects have become obstructed, which is also
2013). In this study, LCR represents the rupiah value of domestic affected by the downfall of electricity consumption in the industrial
components in a product (goods only, services, or a combination and commercial sectors (Hirsh and Koomey, 2015; Kasperowicz,
of goods and services) compared to the overall economic value. 2014; Lu, 2017). As per June 15, 2019, the status of the 35,000
The substantial rupiah value reflects the product price structure, MW program development is mostly in the construction process
which forms the cost of goods manufactured. Thus, based on the around 20,120 MW.
LCR formula, the weight of each component’s economic value
in a technology product can be taken from the product price 3. METHODOLOGY
structure determined through industrial surveys to obtain the
entire product price structure factually and accurately. Based The methodology in this study uses an exploration approach
on this, the government then determines the percentage of LCR. based on in-depth observations of primary data and secondary
Domestic components are all types of goods and services that data. Primary data sources obtained are varied based on policy,
are made or produced domestically, among others (Pahala et al., documents, and media analysis as well as input from stakeholders
2021): taken during focus group discussions (FGD), several field surveys,
1. Goods consisting of finished goods, semi-finished goods, etc and interviews. This study adopted the use of exploratory research
2. Services consisting, direct and indirect services, such as tools to examine variety of stakeholder perspectives collected
construction services, consultancy services, or analysis and from the FGD, industrial surveys and interviews that are used
evaluation of projects construction to broaden the context and viewpoints nuances and become the
3. Design and engineering services (design and engineering) basis to formulate the policy recommendation. Questionnaires in a
4. Research services semi-structured research interview format was prepared and used
5. Transportation services, insurance services, and other services. during discussion in the surveys and FGD.

Specifically, for electricity infrastructure, the government The data collection methods in this study are divided into:
has defined rules for LCR covering aspects of generation, 1. Institutional surveys: by collecting data from surveys to
transmission, and distribution in the Regulation of MOI No. 54- selected agencies and through national level discussions
IND/PER/3/2012. Several policies in the sector of electricity in a number of FGD sessions with the Ministry of Industry
infrastructure development that are supportive and relevant to (Kemenperin), Ministry of Finance (Kemenkeu), state
increase LCR: electricity company (PT PLN), and the Directorate General of

International Journal of Energy Economics and Policy | Vol 12 • Issue 1 • 2022 227
 Sitompul, et al.: Policy Challenges of Indonesia’s Local Content Requirements on Power Generation and Turbine Production Capability

Table 1: The minimum LCR of electricity generation system infrastructure by type of power plant
Type of power plants Capacity per unit power plant LCR of goods (%) LCR of services (%) LCR of combination of goods
and services (%)
Coal‑fired Power Plant (CFPP) <15 MW 67,95 96,31 70,79
>15‑25 MW 45,36 91,99 49,09
>25‑100 MW 40,85 88,07 44,14
>100‑600 MW 38 71,33 40
>600 MW 36,1 71,33 38,21
Hydro PP <15 MW 64,2 86,06 70,76
>15‑50 MW 49,84 55,54 51,6
>50‑150 MW 48,11 51,1 49
Geothermal PP <5 MW 31,3 89,18 42
>5‑10 MW 21 82,3 40,45
>10‑60 MW 15,7 74,1 33,24
>60‑110 MW 16,3 60,1 29,21
>110 MW 16 58,4 28,95
Gas PP <100 MW 43,69 96,31 48,96
>150 MW 47,82 46,98 47,6
Combined Cycle Gas PP <50 MW 40 71,53 47,88
50‑100 MW 35,71 71,53 40
100‑300 MW 30,67 71,53 34,76
Solar PP PLTS SHS (Solar Home 30,14 100 53,07
Systems) all capacities
PLTS Centralized (all 25,63 100 43,85
capacities)
>300 MW 25,63 71,53 30,22
Source: Regulation of MOI No. 54‑IND/PER/3/2012

Electricity, Ministry of Energy and Mineral Resources (DJK- depicts the power generation industrial tree indicates that steam
KESDM), the Agency for the Assessment and Application turbine needs three supporting components such as rotor axle,
of Technology (BPPT), and the Ministry of Research, stator, and rotating blade. Then for each component is supported
Technology and Higher Education (Kemenristekdikti) by various industries. The industrial tree shows value creation,
2. Industrial purposive surveys: by surveying turbine industrial resource, and capability for each stage. Form the industrial policy
data covering producers/manufacturers of main and small perspective, policy makers interested in looking at how each
components and exporters/importers also integrators and industry can support each other from up-stream to down-stream.
power plant contractors. The field survey was conducted to
PT. Siemens Cilegon Factory, PT Siemens Industrial Power, In general, Indonesia’s turbine manufacturing industry includes
PT Nusantara Turbin dan Propulsi (NTP), PT. Cihanjuang Inti the basic material industry, namely the iron and steel industry, the
Teknik, and PT Sucofindo machinery industry, and electrical equipment industry. However,
3. FGDs and in-depth interviews: conducted with various the raw material needs in the form of steel required for certain
stakeholders of turbine industries to gain knowledge and input types of turbines cannot be produced domestically, which hamper
for the implementation of targeted and systematic activities to completely produced turbines of the Gas Power Plant and
4. Literature study: through research and activity reports and CFPP fully domestically. Various factors are the cause, one of
websites of related agencies such as of PT PLN, Directorate which is the inadequate manufacturing ability to produce quality
General of Electricity and Energy Utilization, Regional turbines to compete with foreign manufacturers, both in material
Government, Regional Statistics Office, Central Bureau of quality and in quality of workmanship. By far, several national
Statistics (BPS), related organizations/associations, and others. companies have carried out small various turbine manufacturing.
Some information regarding the small various capacity turbine
The data were collected predominately in the framework of manufacturing in Indonesia are:
the launching of the 35,000 MW program during 2014-2015, 1. The cooperation between PT Nusantara Turbin dan
which then became the basis of the government’s strong efforts Propulsi (PT NTP) and the Agency for the Assessment and
to promote the use of domestic products. Several developments Application of Technology (BPPT) has supported by the
in the current situation were taken to observe the progress of the Ministry of Industry since 2005. They have been successful
domestic electricity system especially on the of LCR after 5 years in the manufacturing and developing of steam turbines with
of the 35,000 MW program running. capacities from 0,335 MW to 4MW. Nowadays NTP has been
constantly manufacturing turbines with 7 MW capacities [30]
4. RESULTS AND DISCUSSION 2. PT Siemens Industrial Power (SIP) and PT NTP in 2011
worked together to build a steam turbine factory with 20 MW
4.1. Turbine Industries Capabilities in Indonesia capacity, employing a German experts and 20 Indonesian
The turbine is one component of a power generation. Furthermore, engineers, and 180 employees with various educational
the turbine can be broken down in several sub-components. Figure 1 backgrounds. Such a workforce provides opportunities for

228 International Journal of Energy Economics and Policy | Vol 12 • Issue 1 • 2022
 Sitompul, et al.: Policy Challenges of Indonesia’s Local Content Requirements on Power Generation and Turbine Production Capability

the transfer of knowledge between foreign and local parties PP. This innovation is carried out by maximizing the use of
and provides added value to Indonesian workers. However, domestic components [33]. Besides, BPPT is also developing a
the absence of market certainty has prevented the company turbine for a 5 MW CFPP in collaboration with NTP, which is
from surviving, and as a result, PT Siemens Industrial Power currently in the concept of refinement phase.
experienced asset liquidation
3. PT Barata Indonesia has also been able to manufacture mini The Technology Center for Machining Industry of BPPT, together
turbines of 1.5 MW size and has collaborated with Russia with its industrial partner’s PT NTP, has developed design standards
to develop turbines with capacities below 100 MW [32]. PT and several prototypes of steam turbines using reverse engineering
Barata and PT Pindad with Hang Zhou China licensing can methods, ranging from steam turbines prototypes of 0,335 MW
produce steam turbines with 7-10 MW and 15 MW capacities, backpressure and 2 MW backpressure steam turbines. The 3 MW
respectively. condensing steam turbine has been implemented at Geothermal PP
Kamojang. This steam turbine development program is not only
The experiences from the three cases resulted in three major a collaboration between BPPT and PT NTP, it leads to forming
findings. First, the turbine development has involved the role of a national steam turbine industrial cluster involving several
stated owned research institute and private sector. Second, the educational institutions, and industries such as PT Barata Indonesia,
level of capacity is relatively small capacity less than 100 MW. By PT PINDAD, and several other supporting industries.
referring to LCR, it needs about 40% of LCR. Third, the limited
ability to build large generating capacity, while the need leads to 4.3. Achievement of LCR in the Electricity System
large-scale generation, making the market of the existing industry LCR is measured in 3 (three) different components, i.e., the
limited. Thus, there is a mismatch between capacity and demand. LCR component in goods, services or a combination of goods
Further, the PLN’s RUPTL 2015-2024 (State Own Electricity and services. Electricity development projects generally involve
Company – Electricity Business Plan), indicated that in case of goods and services, so that the LCR measured is the combination
Java-Bali system, PLN plans to developed steam coal power plant of goods and services.
with 1000 MW super critical technology. This strategy aims to
reach economies of scale, and measure land scarcity issue. This 4.3.1. LCR in goods
implies that local content policy may not effective due to economic An essential requirement for turbine manufacturing to compete
feasibility consideration. with imported products is the stable quality of both the material
and the workmanship. However, other obstacles surfacing is
4.2. Research and Development Capability in the unavailability of local content raw materials and the limited
Indonesia mastery of turbine technology. Although several national
Instead of developing large scale turbine, existing resource companies have carried out small-scale turbine manufacturing,
and capability focus to develop small turbine. As seen from however, large scale turbines as part of the CFPP (and the
Table 1, geothermal power plant develops with lower capacity Gas PP system) still cannot be made domestically. The level
than coal power plant. However, it is surprising that with higher of LCR in goods that can be produced by several domestic
capacity LCR tends to decline. For example, in the case of manufacturers can be seen in Table 2. The table indicates two
steam coal power plant, with capacity about 100 MW, the LCR main points. First, due to joint venture PT. PAL has a high
is about 40%, then for geothermal with the similar capacity, degree of LCR for high-capacity turbine. One of the industrial
the LCR is about 16%. Then it seems that for small-scale business field PT. PAL is turbine industry and other generating
renewable energy generating capacity, where Indonesia has equipment. The steam turbine assembly is up to 600 MW,
the advantage, the local content level is smaller, compared to balance of plant and boiler components up to 600 MW, 40 MW
coal. The following case shows Indonesia’s ability to develop compressor module, and 30 MW barge mounted power plant.
geothermal power plants. PT.PAL develops this capacity under its subsidiary namely
PT. General Electric Power Solution Indonesia (GEPSI) and
BPPT, acts as government’s representative in the field of ownership status is joint venture. GEPSI has capacity in the
innovation and technology application, seeks to increase the area of EPCI, project management, repair and maintenance
capacity and participation of the domestic manufacturing for boiler, turbines, power stations, power plant facilities, and
industry in its effort to increase LCR of products and industrial environmental pollution control. The shareholders of GEPSI are
competitiveness through technological engineering. BPPT has Alstom N.V. Netherlands (78.8% shares); PT. PAL Indonesia
conducted several developments-research on turbines, for instance, (20.1% shares); and PT. Barata (1.1% shares). Similary, one
the design of Geothermal PP Binary Cycle with a capacity of of PT. PAL subsidiary is PT. Power System Service Indonesia
2 kW with hydrocarbon working fluid and the development of (POSSI). The company does gas turbine maintenance and
a small-scale Geothermal PP and the development of a 2-5 MW repair. This is a joint venture among PT. PAL (45% shares),
condensing turbine Geothermal PP during 2011-2013. Currently, Mitsubishi Hitachi Power System (45% shares), and Mitsubishi
BPPT has succeeded in building a 3 MW Condensing Turbine type Corporation (10% shares). Second, for water turbine, some
of Geothermal PP pilot plant in the Kamojang geothermal field, Indonesian companies such as PT. Barata Indonesia, and PT.
Garut, and the 50 Kilo Watt (KW) Geothermal PP of the Binary Heksa Prakarsa Teknik, have relatively high degree of LCR.
Cycle type and in the Lahendong field, North Sulawesi, which This implies that for water turbine, many Indonesian companies
functions as an experiment and pilot for Small Scale Geothermal have relatively better capability than fossil-based turbine.

International Journal of Energy Economics and Policy | Vol 12 • Issue 1 • 2022 229
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4.3.2. LCR in Services of capability in electricity projects, several EPCs in Indonesia

According to Regulation of MOI No. 54/M-IND/PER/3/2012, have demonstrated their ability to carry out service work on a
LCR services in electricity development include consulting scale of power generation capacity up to 600 MW. The following
services, contractor services, Engineering, Procurement, and table is a more detailed description of the LCR achievements
Construction (EPC), testing and certification services, training of the Combined Goods and Services of several power plants
suits and or supporting services. An EPC company’s work up to 2015 (detailed data available until 2015). The available
weight consists of engineering 5-10%, 70% procurement, LCR realization data out of 36 power plants until 2015 shows
while 20-30% construction which indicates that the key to the LCR achievement of CFPP (at all scales), and Geothermal PP
success of an EPC company depends on procurement. There is at a scale of less than 5 MW and 10-60 MW. Based on Table 3,
no specific data regarding the achievement of LCR in services in general, the higher the capacity scale, the lower the LCR
specifically in the electricity sector yet. However, based on achieved. However, this is not the case for CFPPs on a scale
Table 3, for CFPP alone, the range of LCR target is 86.06- below 100 MW, which shows the achievement is getting closer
96.31% accordingly with the scale of the power plants. In terms to the set target.

Table 2: LCR capability in the supply of various electricity goods in Indonesia

Company Category Capability LCR
PT PAL Indonesia* Balance of Plant (BOP) Condenser, Vessel, Penstock, Turbine Casing up to 600 >60%
MW
PT Barata Indonesia* Balance of Plant (BOP) Heat Exchanger, Pressure Vessel, Water Turbine up to 60%
5 MW
Alstom Power** Boiler 100 MW Cfb Boiler (c erection) 42,86%
Alstom Power** Boiler 101 MW Cfb Boiler (includes erection) 32,60%
Alstom Power** Generator PLTGU 100‑300 MW 37,15%
Pindad** Generator < 9 MW NA
PT Nusantara Turbin dan Propulsi Turbine and Power Plant Gas Turbine, Steam Turbine, C. Pump, C. Comp 45%
(NTP)* Components
PT Heksa Prakarsa Teknik* Power Plant Components Water Turbine, Electronic Load Controller 90%
PT Boma Bisma Indra (PT BBI)* Power Plant Components Condenser, LP Heater, HP Heater, De‑aerator >60%
PT PLN (Persero) Service and Power Plant Components, Generations components NA
Production Unit* Repairing Service
LEN Industri** Solar Power Plants SHS (Solar Home System) 50 Wp 24,63%
Siemens Industrial Power (SIP) Turbine 3‑20 MW 28,56%
PT Nusantara Turbin dan Propulsi Turbine <7 MW 20,57%
(NTP) [30]
Taka Masineri** Turbine Parts (coupling) Interstage sleeve 60,47%
Taka Masineri** Turbine Parts (coupling) Coupling 62,18%
Source: *Industries‑survey results. **S. E. Enterprise. (2015)

Table 3: LCR target of electricity infrastructure and its achievements

Type of power plants Unit capacity Number inspected LCR combination Realization of LCR
target (%) combination (%)
CFPP s.d. 15 MW 8 70,79 61,8
>15 s.d 25 MW 6 49,09 49
>25 s.d 100 MW 8 44,14 38,74
>100 s.d 600 MW 9 40 25,91
>600 MW 3 38,21 10.69
Hydro power plant s.d. 15 MW ‑ 70,76 NA
>15 s.d 50 MW ‑ 51,6 NA
>50 s.d 150 MW ‑ 49 NA
Geothermal power plant s.d 5 MW 1 42 9,52
>5 s.d 10 MW ‑ 40,45 NA
>10 s.d 60 MW 1 33,24 29,42
>60 s.d 110 MW ‑ 29,21 NA
>110 MW ‑ 28,95 NA
Gas power plant s.d 100 MW ‑ 48,96 NA
>150 MW ‑ 47,6 NA
Combined gas steam power plant s.d. 50 MW ‑ 47,88 NA
50 s.d. 100 MW ‑ 40 NA
100 MW s.d. 300 MW ‑ 34,76 NA
>300 MW ‑ 30,22 29,91
Solar power generation PLTS SHS all capacity ‑ 53,07 NA
PLTS Centralized – all capacities ‑ 43,85 NA
Data collected from B2TE (2015), and PLN (Persero), (2015)

230 International Journal of Energy Economics and Policy | Vol 12 • Issue 1 • 2022
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Along with meeting the electricity acceleration program’s target, that reflects the domestic economic value of each component
it is necessary to develop the EPC’s ability to handle power of the boiler, turbine and generator, civil works, electrical,
generation projects for the medium and upper scale. This requires instrumentation and control, balance of plant and costs for EPC.
not only regulations that favor the national EPC and the national Despite the government efforts to increase the local content,
industry, but also changing business strategy. Zhao et al. (2018) especially for 35,000 MW program, however, it has not yet reached
pointed out that there are three reasons for dependency on foreign the target set. A number of different factors influence the capability
supplier. First is mastery of technology by foreign companies to reach the required level of LCR, which is dominated by the
with patent right. Second, the foreign supplier with technology ability to develop domestic turbines.
mastery can provide certainty of spare part supply. Finally, long
terms contract that provide exclusive rights to foreign company Generally speaking, the challenge is not only in terms of fulfilling
for delivering maintenance. For strategic projects, the government the LCR for generator turbines, but also other supporting
must support EPC and national industry involvement, especially components. Ministry of Industry (2020) indicated that 213
considering the high target of LCR in services. The clear and strong companies in electricity sector submitted certification for LCR.
policy direction is needed to create a healthy and competitive Table 5 indicates that there is a large capacity gap between
investment climate. All forms of facilities and policies should companies providing goods and services in the electricity sector.
aim at strengthening industrial structures, increasing the use of This of course can be an obstacle in efforts to fulfill the availability
technology and the capacity of domestic market. of electricity both in terms of quantity and quality of domestic
industries.
4.3. LCR in Combination of Goods and Services
Considering that development projects’ composition of an 4.4. Turbine Industry Challenges to Meet LCR
electricity system includes goods and services, therefore LCR Series of surveys and focus group discussions were conducted
measurement in a project development is a combination of with several participants from domestic industrial players and
goods and services. For instance, the components of the cost of government research and development (R&D) agencies in order
goods and services in the CFPP system represents the LCR of
CFPP development, as depicted in Figure 2. The component cost Table 4: LCR value capability with a 35,000 MW scenario
structure depicts that Boilers, Turbines and Generators (BTG) Parameter LCR value achievement in 35,000
are the most significant and main cost components [38], most of MW programs
which are still imported. The picture below interprets that if all CFPP
components are locally sourced, the LCR value of CFPP reaches Weight 100–600 MW >600 MW
100%. Boiler 26% 12% 10%
Gas engine/turbine, generators 21% 0% 0%
Based on another source the fulfillment LCR of PLTMG and CFPP Electrical 12% 4% 4%
BOP and auxiliary 16% 5% 5%
systems in the structure of the utilization of goods and services Instrumentation and control 5% 1% 1%
components’ combination in the 35,000 MW program until 2018 Engineering services 6% 2% 2%
is shown in Table 4. There is no domestic use of steam turbines Civil Works 14% 14% 14%
for the CFPP system both yet both on a scale of 100-600 MW and Total 100% 40% 38%
>600 MW. The table also shows the cost component structure Source: PLN (Persero), (2015) [40]

Figure 1: Power generation industrial tree

Source: Authors

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 Sitompul, et al.: Policy Challenges of Indonesia’s Local Content Requirements on Power Generation and Turbine Production Capability

to obtain information about the obstacles that occurred in the Table 5: Performance of LCR for supporting electricity
field. The FGDs were conducted with turbine industries and an industry
R&D institution, namely: (1) PT Siemens Industrial Power, (2) Component LCR (%)
PT Siemens Cilegon Factory; (3) PT Cihanjuang Inti Teknik; and Boiler and components 32‑52
(4) PT NTP and (5) BPPT. Generally speaking, turbine production Circuit breaker 14‑45
line covers both upstream to downstream business chain which is Isolator 4‑75
Tower transmission 49‑58
depicted on the following figure regarding the turbine industry’s
Transformer 15‑73
problem (Figure 3). These problems also apply to other type of Pipe 20‑73
turbines. Pressure vessel 17‑37
Tank 20‑80
After conducting discussion with experts, we found three major Deaerator 15‑20
obstacles of LCR for turbine, namely technology capability Fan and blower 19‑45
Condenser 25‑35
and efforts, infrastructures, and institution (norms/standard). Minimum requirements based <15 MW (70,79%); 15‑25 MW
Technology capability and efforts can be developed if it is on government regulation (for (49,09%); 25‑100 MW (44,14%);
supported by domestic science and technology, finance and good and services) 100‑600 MW (40%); >600 MW
access to foreign technology. The annual activity-based budgeting (38,21%)
mechanism also hampers the continuity of cooperation for Source: Ministry of Industry, (2020)

Figure 2: Detailed cost structure and material origin - Steam power plant

Source: Electricity State Enterprise (PLN (Perseo), 2015) [38]

Figure 3: Identification of problems at each stage of turbine production

Source: Authors

232 International Journal of Energy Economics and Policy | Vol 12 • Issue 1 • 2022
 Sitompul, et al.: Policy Challenges of Indonesia’s Local Content Requirements on Power Generation and Turbine Production Capability

long-term development. For instance, since 2005-2013, there have need commercial guarantees from the government to ensure that
been 5 prototypes of turbines (plant and sugar industry) produced the goods are consumed, and this policy relating to obtaining
by the co-operation of BPPT (Agency for the Assessment and licenses for manufacturing turbines in Indonesia should be
Application of Technology) and PT NTP. However, there has enforced by appointing state-owned companies to assist in the
been no continuation due to budget mechanism constraint. The process (Sitompul, 2019).
problems endured by the local turbine manufacturing industries
converge on the challenges to cut the chain of dependence Indonesia also needs to be prepared with a clean development
on imported turbine products. With appropriate policy paradigm that requires restrictions on the construction of coal
recommendations and the supports of relevant stakeholders, it plants. In fact, many parties see the coal generation industry as
is expected that the challenges will become a motivation for the a sunset industry. Responding to the development of this new
development of the local turbine. Likewise, efforts to improve norm, of course, efforts to encourage LCR will become less
reverse engineering capabilities are still open as an effort to relevant in the future, unless the government shifts to the paradigm
improve LCR. However, policy support is still needed such as in of strengthening the renewable energy generation industry.
preparing the road map and the speed to do this is determined by Thus, pursuing targets of LCR in coal plants needs to be more
the ability of each party, both the government, the private sector, focused where Indonesia already has a competitive advantage.
and research and development institutions to be more actively The existing companies are expected to be able to replace the
involved in a turbine generator consortium. components that have been imported so far. Thus, in the threat
of an increasingly unpopular coal plant condition, Indonesia is
Rapid development on CFPP technology has led high level of still able to take advantage of the remaining opportunities (Endri
capacity. Currently, ultra-super-critical CFPP technology reach et al., 2021).
larger capacity up to 1000 MW. This will affect the operating
conditions such as temperature and pressure. This implies
5. CONCLUSIONS AND POLICY
demand on special materials to produce the turbine will increase.
In designing a turbine, efficiency is the main goal. Many IMPLICATIONS
considerations require a good understanding in turbine technology,
especially from mechanical aspect and material aspect. However, LCR is an integral part of industrial policy. The Indonesian
only few Indonesian companies have not ability to produce the government has adopted this policy as the basis for strengthening
high technology of turbine. the national industry, particularly in the electricity sector. The
development of a 35,000 MW electricity mega project provides
Then, infrastructure refer to support of laboratories testing in a great opportunity for local entrepreneurs to get the maximum
the country. Basically, Indonesia has three Indonesia national benefit from this policy. Coal is still the backbone of electricity
Standard (Standar Nasional Indonesia/SNI) – International supply in Indonesia and will continue to increase in the future.
Electrical Commission (IEC) for steam turbine thermal and it is Thus, the LCR-CFPP policy has a strategic dimension in terms of
still applied (SNI IEC 60953-1:2009; SNI IEC 60953-2: 2009; economy, technology, and policy. However, LCR policy actually
and SNI IEC 7389-3: 2009). There are three experts handling SNI needs to be implemented carefully because this policy can be
for electricity turbine. However, business actors do not seem to be exploited by rent-seekers, and also has the potential to interfere
satisfied with the existing infrastructure, especially in terms of the with fair trade principles. The LCR policy will work well if it is
long time for testing, and the limited space for conducting tests. balanced by efforts to strengthen capabilities and technological
In addition, efforts to encourage the achievement of SNI need efforts. This of course requires a long time and a consistent policy
to be encouraged to existing industries. Surveyor Indonesia and of science and technology.
Sucofindo are the two agencies that verify LCR achievements.
The evaluation results show that the average LCR for coal-fired The Indonesian government implements a different LCR policy for
power plants in 2020 is 22.77%, while the expected target is each generation source. However, the pattern that can be observed
42.07%. is that the greater the generating capacity, the more LCR that must
be met. In the generation sector, of course, the higher the capacity,
Finally, institution covers issues related to processes, rules, and the easier it is to achieve economies of scale. However, building
norms. Several highlighted problems have been hampering turbine large-scale generating capacity is much more difficult. Thus, if
industries, among others are national standardization, market domestic actors are more involved in small-scale generators, of
guarantee and product development through license purchase, also course, the potential economic benefits created will also be limited.
the annual activity-based budgeting mechanism. For instance, if a This study is able to map the value chain of the coal generation
manufacturer buys a turbine license with proven technology at 1 industry, especially for turbine components.
million Euros, which is valid for 1 year (1-time fee for 1 turbine
type) and the industry can only produce 1 unit a year, the license LCR policy can be seen from two sides, namely goods and
fee will be fully charged into 1 unit of the turbine produced, hence services. If we look at the coal turbine generating capacity,
turbine price will be very high. On the other hands, if the turbine Indonesia can build a capacity of 600 MW. This production is
industry can produce more than 1 turbine per year, for instance, carried out by joint venture companies which are still dominated
10 units, the license price can be divided evenly, and the product by foreign ownership. Meanwhile, for power plants on a smaller
price would be more affordable. As a result, the industry would scale and for hydropower and geothermal bases, Indonesia’s

International Journal of Energy Economics and Policy | Vol 12 • Issue 1 • 2022 233
 Sitompul, et al.: Policy Challenges of Indonesia’s Local Content Requirements on Power Generation and Turbine Production Capability

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7(1), 46-57.
The author would like to thank the Research Center for Science, Kuntze, J.C., Moerenhout, T. (2012), Local Content Requirements and the
Technology and Innovation Policy and Management, Indonesian Renewable Energy Industry-a Good Match? Geneva, Switzerland:
Institute of Sciences (P2KMI-LIPI) for supporting this research. International Centre for Trade and Sustainable Development.
The authors gratefully acknowledge the financial support of the Available from: http://www.ictsd.org
Directorate General of Innovation Strengthening of the Ministry Lin, H.H., Weng, Y. (2020), Can strengthening the local content. Journal
of Research, Technology and Higher Education (now, Ministry of Applied Economics, 23, 316-328.
of Research and Technology/National Research and Innovation Lu, W.C. (2017), Electricity consumption and economic growth: Evidence
Agency) for conducting this research in 2015. The author would from 17 Taiwanese industries. Sustainability, 9(1), 50.
Macatangay, R.E. (2016), Optimal Local Content Requirement Policies
like to thank a number of resource persons from the Ministry of
for Extractive Industries. Dundee DD1 4HN, Scotland, UK: Centre
Mineral and Resources (MEMR), the Agency for the Assessment for Energy, Petroleum and Mineral Law and Policy, School of Social
and Application of Technology (BPPT), Ministry of Finance Sciences, University of Dundee.
(MOF), Ministry of Industry (MOI), PT PLN (Persero) who Negara, S.D. (2016), The Impact of Local Content Requirements on the
contributed through their comments and suggestions in several Indonesian Manufacturing Industry. ISEAS Economics Working
Focus Group Discussions (FGDs) performed throughout the Paper No. 2016-4 October 2016, ISEAS. Singapore: Yusof Ishak
study. The author also thanks some respondents from selected Institute.
manufacturing industries for contributing their time to complete Pahala, Y., Widodo, S., Kadarwati, S., Azhari, M., Muliyati, M., Lestari,
the questionnaires during the surveys as well as for their valuable N.I., Madjid, S.A., Sidjabat, S., Limakrisna, N., Endri, E. (2021),
comments and inputs. Last but not least, the author wishes to The effects of service operation engineering and green marketing
thank the research team who have been a great source of support on consumer buying interest. Uncertain Supply Chain Management,
especially in collecting relevant data and information that have 9(3), 603-608.
PT PLN (Persero). (2015), Kajian Strategis Program Pengembangan
been used in this study.
Ketenagalistrikan Nasional Dalam Rangka Pemberdayaan Industri
Lokal. Jakarta: PT PLN (Persero).
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