Under Indonesia's 2009 Electricity Law, power sector activities in Indonesia encompass four main components: generation, transmission, distribution, and sales. The government permits businesses to operate in either a bundled or unbundled model. However, in its recent Decision No. 39, the Constitutional Court of Indonesia ("MK") ruled that the unbundling model is unconstitutional. The court argued that allowing independent power producers ("IPPs") to unbundle power sector activities would weaken the state's control over electricity operations, thereby violating relevant provisions of the Indonesian Constitution. This article provides a brief analysis of the implications of MK Decision No. 39 on future power project development and public-private cooperation models, taking into account the historical context of unbundling in Indonesia's power sector.
- Historical Background
Since 2004, the MK has repeatedly opposed the unbundling of power sector activities. In December 2004, the MK annulled Law No. 20 of 2002 ("Electricity Law") in a ruling, stating that unbundling would weaken state-owned enterprises, compromise the reliability and efficiency of electricity supply, and impose a heavy burden on the state. The MK emphasized that electricity supply should remain under state control to safeguard public interests, in line with Article 33 of the Indonesian Constitution regarding state-owned enterprises.
In December 2016, the MK reiterated in another ruling that unbundling power sector activities would be unconstitutional if it aimed to undermine state control. Although the ruling did not repeal relevant legal provisions, it clarified that unbundling plans must adhere to stricter conditions under the Indonesian constitutional framework. At the same time, the Ministry of Energy and Mineral Resources ("MEMR") stated that the government would retain core control over the power sector, including electricity pricing, distribution, sales regions, and grid leasing.
Therefore, in its recent Decision No. 39, the MK reaffirmed its stance, ruling that the unbundling plan introduced under the 2023 Job Creation Law violated its 2016 decision and declaring that the unbundling plan remains legally invalid.
- Main Reasons
- Improving Operational Efficiency
Under the unbundled model, power sector activities are divided among independent companies specializing in their respective core areas, such as generation, distribution, or sales. This reduces resource and management inefficiencies across different business units. Independent companies can optimize operational processes more effectively, enhance overall efficiency, and respond flexibly to market changes and demand fluctuations, ensuring quicker adaptation to external environments.
- Attracting Foreign Investment and Technology
Unbundling power sector activities into independent segments—generation, distribution, and sales—allows each company to clearly define its business focus and compete in the market. This structure not only improves market transparency and flexibility but also creates more investment opportunities for foreign capital. Typically, foreign investors prefer sectors with higher marketization and independence. Therefore, an unbundled power sector, particularly in specialized areas such as grid construction, smart metering, and clean energy, is more likely to attract foreign investment and advanced technologies.
However, the MK views unbundling as a potential threat to state control over the power sector, which is critical for public services. A loss of state control could lead to instability in electricity supply, increased market risks, and challenges in regulating pricing and services, making it difficult for the government to ensure fairness and efficiency. While independent companies may achieve short-term advantages through market competition and resource optimization, the long-term consequences could include redundant infrastructure, inefficient management, and increased economic burdens on the state.
Moreover, in developing countries like Indonesia, a reliable and stable electricity supply is essential, particularly for low-income groups, as it directly impacts their access to affordable and secure electricity. Therefore, maintaining centralized state control over the power sector is necessary to protect public interests and ensure social stability.
- Key Issues and Development
Overall, the future of Indonesia's power sector remains uncertain following Decision No. 39. While the ruling imposes constraints on existing and future unbundled power sector activities by IPPs, the MEMR has yet to provide specific implementation guidelines, leaving many critical questions unanswered. For instance, will the ruling affect the operations of existing unbundled power projects? Will it have retroactive effects on the legality and contract enforcement of these projects? Additionally, will the ruling limit IPPs' participation in future power projects? How can public-private cooperation in unbundled models be safeguarded? According to recent updates, the MEMR has stated that it is discussing the legal implications of the ruling with stakeholders and has committed to reviewing relevant regulations to ensure that electricity supply remains under state control.
For businesses operating in Indonesia's power sector, the uncertainty brought by MK Decision No. 39 may directly impact future compliance risks and policy changes. Companies involved in public-private partnership models for power project development should consider whether adjustments to their cooperation models are necessary. For projects reliant on IPPs and unbundled models, businesses must reassess their agreements with the government on electricity pricing, distribution networks, and grid leasing to ensure their validity under the new legal framework. Furthermore, companies should strengthen communication with relevant government agencies to stay informed about policy changes and align their projects with the government's long-term development strategies and policy objectives.
