As the world’s largest archipelagic state and a major emerging economy, Indonesia presents a legal environment characterized by a distinctive feature of “unity in diversity.” This characteristic stems not only from its complex historical evolution, ethnic and religious composition, and decentralized governance structure, but is also reflected in the top-level design and implementation pathways of its national climate change strategy. According to information retrieved by the Energy Practice Group, East-concond. from Indonesia’s official government portal (https://indonesia.go.id/), Indonesia has in recent years set a target of achieving net-zero emissions by 2060. To this end, the government is advancing a comprehensive set of legal and policy reforms aimed at deep restructuring of the energy mix, accelerating the development of a domestic carbon market, and creating new institutional space for renewable energy projects such as wind power.

Indonesia’s legal system is itself a hybrid. At the national level, it is anchored in the 1945 Constitution and supplemented by codified statutes, while also recognizing the normative force of customary law (Adat Law) in specific areas. This pluralistic structure extends into the fields of environmental and energy governance, manifesting in the coexistence of central legislation and local regulations, the interaction between international commitments and domestic legal implementation, and overlapping mandates among regulatory authorities.

Notwithstanding this diversity, Indonesia has demonstrated a high degree of unity of state intent in addressing climate change, forming a coherent and centralized strategic orientation. Through ratification of the Paris Agreement, periodic updates to its Nationally Determined Contribution (NDC), and the incorporation of emissions reduction targets into national development planning, Indonesia has articulated a clear climate action roadmap. This top-level consensus serves as the core driving force for integrating diverse legal resources and advancing systemic institutional reform.

Against this backdrop, the legal environment governing the energy sector is undergoing profound transformation. Traditionally reliant on coal and other fossil fuels, Indonesia is now steering its energy structure toward cleaner and lower-carbon sources through a series of regulatory and policy instruments. In addition to setting quantitative targets for renewable energy development, the government has taken steps to improve the legal framework for investment by streamlining project approval processes and enhancing regulatory certainty, with the objective of attracting domestic and foreign capital into geothermal, hydropower, solar, wind, and other green energy sectors.

Among these, wind power—while still at an early stage of deployment—has begun to receive increased policy attention due to its significant long-term potential. Although installed capacity remains limited, the government has identified wind-rich regions such as Sulawesi and the Nusa Tenggara Islands and has encouraged preliminary resource assessments and pilot projects to lay the groundwork for future large-scale development.

For investors in wind power projects in Indonesia, legal compliance requires particular attention to several key areas.

First, land and maritime use rights. Indonesia applies a system of private land ownership under which foreign individuals and foreign-invested enterprises are generally prohibited from owning land outright. Instead, they may obtain time-limited development rights, such as the Right to Build (Hak Guna Bangunan, HGB) or the Right of Use (Hak Guna Usaha, HGU). Offshore wind projects further implicate marine spatial planning and coordination with fisheries rights, and typically require concurrent approvals from multiple authorities, including energy regulators, maritime agencies, and the Investment Coordinating Board (BKPM).

Second, environmental permitting (AMDAL). Although wind power qualifies as a clean energy source, projects remain subject to comprehensive environmental impact assessment requirements. Particular attention must be paid to potential impacts on bird migration routes, marine ecosystems, and local livelihoods. Given the legally mandated public participation component, the AMDAL process may be time-consuming and procedurally complex.

Third, local content requirements (TKDN). The Indonesian government has adopted a policy of progressively increasing local procurement ratios for renewable energy equipment and services. Project developers must therefore plan their supply chains at an early stage or, where legally permissible, seek temporary exemptions.

Fourth, grid connection and power purchase agreements (PPAs). The state-owned utility PLN acts as the sole offtaker. Its PPA templates are relatively standardized, with pricing mechanisms, force majeure provisions, and termination compensation clauses frequently becoming focal points of negotiation.

To address these challenges, a systematic compliance strategy is advisable. At an early stage, enterprises are encouraged to engage Energy Practice Group, East-concond as advisors, who can assist Chinese companies expanding into Indonesia in identifying and engaging qualified local institutions familiar with administrative procedures, completing land tenure verification, and conducting community consultations. Environmental impact assessments and social impact studies should be advanced in parallel, with proactive disclosure to mitigate downstream resistance. Project structuring should account for TKDN compliance costs or technology transfer arrangements, and engagement with regulators on PPA standardization issues should be maintained through industry associations or bilateral mechanisms.

In the broader context of Indonesia’s energy transition and net-zero ambition, the phase-out of coal-fired power is not merely a technical or policy matter, but a highly contractual and legally complex process. For decades, coal-fired power projects in Indonesia have relied on long-term PPAs to secure stable cash flows, with legal structures centered on capacity payments and long-term fixed pricing to support project financing. As Indonesia now moves to curtail coal power, restrict new capacity, and accelerate the retirement of existing assets, this traditional contractual architecture is facing systemic challenges.

The primary legal issue in coal phase-out lies in the relationship between the stability of existing PPAs and evolving national climate policies. Most coal PPAs were executed before energy transition objectives were clearly articulated, and their terms often did not anticipate stricter emissions policies, the introduction of carbon pricing, or mandatory early retirement. Administrative measures requiring early shutdowns or output restrictions may give rise to disputes concerning government breach, indirect expropriation, or frustration of contract. Striking an appropriate balance between honoring international climate commitments and respecting vested contractual rights will thus be a central concern for enterprises investing in Indonesia’s energy sector.

Coal phase-out does not necessarily entail outright contract termination; rather, it may take the form of contractual restructuring. Through policy guidance, fiscal support, or international cooperation mechanisms such as energy transition financing tools, the Indonesian government has sought to facilitate renegotiation of coal PPAs. This may include adjustments to contract duration, capacity payment structures, or tariff mechanisms, and—drawing on approaches similar to China’s own energy transition experience—conversion of certain assets into flexible peaking or reserve capacity. Such restructuring, however, places heightened demands on Chinese enterprises’ ability to negotiate contract interpretation, risk allocation, and dispute resolution arrangements.

From a dispute perspective, force majeure and government action clauses in PPAs have emerged as potential flashpoints. Whether energy transition policies constitute force majeure events or foreseeable regulatory changes depends on the precise contractual language and the policy context at the time of execution. Where changes in law or policy are expressly excluded from force majeure, project sponsors’ ability to claim relief will be significantly constrained. Conversely, broadly drafted clauses may trigger disputes over whether transition-related risks were contractually assumed by the state or by PLN.

Termination compensation mechanisms also present uncertainty in the coal phase-out context. While some PPAs provide relatively clear formulas for early termination compensation, these are typically premised on the assumption of normal operation through the end of the contract term. In cases of state-led early retirement, whether compensation adequately covers unrecovered capital expenditure, financing costs, and reasonable returns often becomes a focal point of negotiation or dispute resolution. For foreign investors, such issues may further escalate into claims under investment treaty protection regimes.

Publicly available information indicates that Indonesia currently favors negotiated, policy-driven approaches to coal phase-out rather than direct compulsory legislative measures. While this reduces the visibility of short-term legal conflict, it also introduces a degree of policy uncertainty and variability. For new entrants in the renewable energy market, this experience offers an important lesson: even in green energy projects such as wind power, the stability of PPA terms, allocation of policy change risk, and selection of dispute resolution mechanisms must be addressed proactively at the contractual level.

From a compliance and risk management perspective, investors participating in Indonesian energy projects should focus on several key considerations: first, clearly defining the legal characterization and risk allocation of energy transition–related policy changes in PPAs; second, carefully structuring early termination and compensation provisions to avoid overreliance on abstract policy assurances; third, selecting appropriate dispute resolution mechanisms and assessing the availability of domestic judicial remedies versus international arbitration; and fourth, where feasible, embedding projects within broader transition financing or international cooperation frameworks to enhance bargaining leverage during contractual restructuring.

Overall, the coal phase-out process highlights the core tension in Indonesia’s energy transition: on the one hand, an irreversible national commitment to climate policy objectives; on the other, existing legal relationships grounded in contracts and investment protection. Achieving a dynamic balance through institutional design and contractual tools will not only determine the orderly exit of coal assets, but will also significantly influence the long-term bankability and legal predictability of renewable energy investments by Chinese enterprises in Indonesia, particularly in emerging sectors such as wind power.

The development of a carbon market constitutes a key institutional instrument for Indonesia to achieve its climate objectives, and its legal framework is rapidly taking shape. Based on research conducted by East-conconrd’s Southeast Asia–based lawyers, Indonesia has officially launched a domestic carbon trading mechanism, with IDXCarbon, operated by the Indonesia Stock Exchange (IDX), designated as the official trading platform. Around this platform, a series of specialized regulations have been introduced, forming an initial end-to-end system covering carbon unit registration, trading, settlement, and supervision. Regulatory rules clarify the definition and sources of carbon units, establish price fluctuation limits and minimum trading units to safeguard market order, and set participation criteria that currently focus on domestic compliance entities and voluntary participants, while reserving institutional space for potential international linkage. Notably, regulators place strong emphasis on market integrity, expressly prohibiting market manipulation and fictitious transactions, and granting the exchange authority to monitor trading activity and implement automatic order rejections. This emerging regulatory framework reflects Indonesia’s cautious approach to balancing market-based mechanisms with transparency, standardization, and risk control.

Underpinning Indonesia’s climate and energy governance architecture is a set of evolving foundational legal arrangements. Through high-level instruments such as presidential regulations, Indonesia has affirmed the legal recognition of the economic value of carbon and has begun establishing a unified carbon unit registry system (SRUK) to replace previously fragmented platforms, thereby enhancing data authority and transaction efficiency. For foreign investors, understanding this “unity in diversity” legal environment is essential. On the one hand, respect for local diversity and cultural practices, coupled with careful attention to community engagement and procedural compliance, is critical to successful project implementation. On the other hand, investors must grasp the strategic coherence at the national level and closely track central government policy developments in energy transition, carbon pricing, and green finance. Although international carbon trading has not yet been opened, the institutional design clearly signals an intention to align with international standards, pointing to future cooperation opportunities.

In conclusion, Chinese enterprises are encouraged, through the work of east-concord.’s Energy Practice Group, to recognize that Indonesia is translating ambitious climate visions into concrete industrial policies and market rules through systematic legal reform. Its “unity in diversity” legal environment preserves distinctive domestic governance characteristics while demonstrating a strong commitment to integration into global low-carbon development trends. For Chinese enterprises engaged in Indonesia’s energy and green transition sectors, a deep understanding of this evolving legal landscape is not only a prerequisite for risk mitigation, but also a key to seizing opportunities and achieving sustainable growth. As regulatory frameworks continue to mature and market mechanisms become more robust, Indonesia is well positioned to play an increasingly proactive role in climate governance across Southeast Asia and beyond.

Source: East & Concord Pariners

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