From Power Purchase Agreements to Equity Agreements: New Localization 2.0 Ideas for Indonesia's Energy Storage Projects

The billion-level market for Indonesia's village-level photovoltaic program is accelerating its realization—cooperatives in 80,000 villages will dominate the management rights of energy storage assets totaling 320GWh. Over an operational period of 25 years or even longer, these assets will generate stable cash flows of hundreds of millions of dollars each year.

In the face of the Indonesian government's increasing emphasis on TKDN localization requirements and the principle of community benefit sharing, a more fundamental "Localization 2.0" strategy is emerging: rather than merely allowing local partners to earn construction phase profits, it is better to design a new financial structure that enables local capital to share the project's entire lifecycle cash flow as shareholders.

This model upgrades from a simple "Power Purchase Agreement (PPA)" to a deep "Shareholding Agreement," essentially transforming local stakeholders in Indonesia from service providers in the supply chain to co-owners of asset destiny.

Under the current model, the Indonesian government mandates through the TKDN policy that a certain proportion of local content must be included in equipment procurement or services. This has indeed created jobs, but it has not addressed deeper issues. Local enterprises often play the role of "subcontractors" or "suppliers," and their interests are not entirely aligned with the long-term success of the projects.

A typical comparison is that after Chinese contractors complete the EPC project, the main risks and obligations are transferred, while local operation and maintenance companies in Indonesia may face challenges such as insufficient funding in the later stages and difficulties in technological upgrades, as their revenue is limited to a fixed annual service fee.

The research by IESR has pointed out that village-level cooperatives, as project owners, generally lack the capacity and financial reserves for the long-term operation of large-scale solar storage systems.

More critically, the power purchase agreement is essentially an extension of "debt thinking." The cooperative or the state electricity company (PLN), as the purchaser, considers paying for electricity as a fixed expenditure. When electricity prices are affected by subsidies or market fluctuations, the sustainability of this model will be challenged.

Pushing localization towards "equity cooperation" is precisely to address this fundamental contradiction—linking the returns of local stakeholders directly to the long-term healthy operation and power generation performance of the assets, thereby forming a true community of shared interests.

In terms of specific operations, a special purpose vehicle (SPV) can be established around a single village-level microgrid project or a regional project package. The equity structure of this company will undergo fundamental changes.

A typical "Localization 2.0" equity structure may be as follows:

Development banks, sovereign funds focused on infrastructure, and even provincial investment platforms. They provide critical local credibility, partial funding, and assist in navigating complex local permits and relationships.

The primary challenge is the shift in mindset and capacity building. For Chinese enterprises, there is a need to transition from the "general contracting" mindset to the "long-term asset operation" mindset, and to accept more complex corporate governance. For Indonesian local partners, especially village-level cooperatives, a significant amount of financial and legal knowledge dissemination is required to help them understand equity value and responsibilities.

Secondly, innovative financing tools are needed for support. It is possible to explore the introduction of a hybrid financing structure: international capital provides preferred shares through low-cost debt, while domestic capital enters in the form of equity. International financial institutions such as the Asian Development Bank may offer preferential loans or guarantees for this equity model that promotes community development and sustainable development.

Furthermore, the contract and legal framework need to be tailored. This requires close cooperation between the legal teams of both China and Indonesia to design a shareholder agreement, articles of association, and exit mechanism that are clear in rights and responsibilities and operationally feasible under the frameworks of the "Investment Law," "Company Law," and energy regulations. Clarifying details such as decision-making processes, dividend policies, and technology upgrade budgets is crucial.

From the perspective of commercial sustainability, it addresses the issues of funding and technical sources for long-term operation and maintenance, ensuring that assets have a "guardian" throughout their entire lifecycle.

From the perspective of policy adaptability, it deeply aligns with the Indonesian government's emphasis on inclusive growth and community empowerment goals, and is very likely to receive additional policy support and a green light, such as more favorable tax rates or faster approval processes.

From the perspective of risk mitigation, it deeply binds external investors with the local community, significantly reducing the social license risks arising from tense community relations and inadequate local cooperation.

This is not just a financing innovation, but also a governance innovation. It addresses the core challenge of large infrastructure projects in emerging markets: how to create a stable, incentive-compatible long-term alliance between global capital, advanced technology, and local communities.