How will Indonesia’s new decrees impact PLN’s IPP concessions?

How will Indonesia's new decrees impact PLN's IPP concessions?

On 13 February 2017 Indonesia's President Joko Widodo signed four
presidential decrees in a bid to speed up the construction of power plants
across the country. The mandatory changes for the first time requires
provisions that should be built into power purchase agreements (PPAs),
renewable tariff schemes, and joint ventures between state-owned power
company Perusahaan Listrik Negara (PLN) and independent power producers
(IPPs).

Under the new regulation, PLN has been given a 'clearer' and 'fairer'
mandate when awarding IPP concessions, as well as greater powers to penalise
developers that do not deliver high cost power projects on time.

Here, we look at the two most influential decrees. The first decree was the
controversial MEMR reg 10 which addresses the principles of the PPA, as well
as key points on bankability and risk allocation which are usually left to
negotiation between PLN and the developers.

Now, all projects must be awarded based on build, own, operate and transfer
(BOOT) schemes for a maximum of 30 years, after which developers are
required to transfer ownership of the plants to PLN for a nominal amount.
This is usually seen in coal-fired power plants but not for geothermal and
hydro plants, which historically have been based on BOO schemes that allow
developers to negotiate a renewal of PPAs. According to Luke Devine, a
Jakarta-based lawyer at Baker & McKenzie, with the new BOOT model, all
potential upsides for developers have been "taken off the table", and all
projects will need to be transferred to PLN at the end of the term of the
PPA.

However, the value of a BOOT model is that it provides certainty of the term
and certainty of transfer of liabilities, says Adrian Wong, a
Singapore-based lawyer at CMS. He adds that sponsors interested in projects
to which reg 10 applies would need to make investment decisions on the basis
of a pre-agreed BOOT time-frame.

"In the past if the power plant was ready and PLN could not dispatch power
due to a problem affecting us, PLN would be obliged to pay the IPP," Teguh
Harsono, treasury manager at PLN, tells TXF. "Now the risk is distributed
between PLN and IPPs."

Under reg 10, where PLN is unable to receive power from a plant due to force
majeure affecting PLN, the state-owned company is not required to meet its
payment obligation. This brings about a significant bankability problem as
PPAs are largely based on an availability concept. In recent years, such a
'hard' obligation was diluted in favour of PLN with the introduction of a
grace period, a maximum of 14 days in which PLN was able to resolve the
force majeure event, and during this period it was absolved from making such
payments.

Although, conversely, if PLN fails to dispatch the power as stipulated in
the PPA due to a maintenance issue with the project, the IPP must now pay a
penalty to PLN - this is known as a deliver-or-pay scheme. The penalty will
be proportional to the costs PLN would bear to replace the power. However,
PLN is also expected to pay if it fails to absorb the agreed power amount.

"It's fairer to PLN and to the IPP," explains Harsono. "Of course, there are
some reduced benefits from the previous agreement because previously if
something happened to the power plant but it was still completed to the
level agreed - there wouldn't have been an enforced penalty."

Therefore, reg 10 is seen as putting more of an onus on the developer. While
there is an issue on force majeure, there is a greater shift in risk
allocation approaches. Furthermore, there are also controls on the transfer
of shares before the commercial operation date and PLN permission is now
needed before the share transfer takes place.

A need for clarity?: PLN's busy IPP deal pipeline

While reg 10 has been devised on a conceptual and principle basis, it is not
intended to fundamentally change the risk allocation that the market has
come to expect from PPAs with PLN. However, "The regulation changes will
affect the interest to invest in Indonesian IPPs," says Harsono. "Therefore,
there is now a need for us to clarify the new provisions stipulated in the
regulation."

While there is still clarity needed over the provisions to avoid legal
strife, the state-owned borrower's busy IPP deal pipeline in 2017 suggests
investor interest is still strong. With four IPP financings closed, and
another four expected to reach financial close by the end of the year, PLN's
awarding of IPP concessions is seemingly unaffected, at the moment at least.

In April, PLN awarded the expansion of the 275MW Riau gas-fired power plant
in east Sumatra to PT Medco Ratch Power Riau – and the consortium is now
sounding out bank appetite for a €90 million ($105 million) loan, which is
expected to close this November.

The $110 million of debt backing for the 150 MW Lombok combined-cycle power
plant in West Nusa Tenggara is expected to reach full financial close this
month, with Mizuho already signing the facility agreement. Also, the $70
million loan backing PT North Sumatra Hydro Energy's 2x100 MW Batang Toru
hydroelectric power project, and the undisclosed debt funding for PT Tanjung
Power Indonesia's 2x100 MW Kalbar coal-fired plant in east Kalimantan, are
both due to close this year.

In June, PLN's subsidiary Indonesia Power (IP) invited banks to a beauty
parade for the advisory role in the development of the revived 2,000MW Java
5 gas-fired power plant. IP is partnering with Barito Pacific for the
project, which has been renamed Java 6. DBS is understood to have been
selected as the preferred financial advisor for PLN.

Last month also saw PLN announce plans to launch the tender for the 800MW
Java 3 gas-fired power plant in the fourth quarter of this year, instead of
an early third-quarter target. The selected developer will be partnering
with PJB, a subsidiary of PLN, which will take 51% stake.

Going green: MEMR Reg 12, a controversial decree?

MEMR reg 12, the second controversial decree, lays out the tariff framework
for the following types of renewable energy projects: solar PV, wind,
hydropower, biomass, biogas, municipal waste, and geothermal.

Historically in Indonesia, renewable feed-in-tariff (FiT) schemes were set
by the government. This significantly benefited the IPP as it could fix the
price as close to the maximum threshold as possible, which in turn
compromised PLN's selling tariff.

"Why did this put PLN in trouble?" says Harsono. "Well because PLN's selling
tariff is less than that price. So who is responsible for the gap between
the price of the FiT selling tariff and what PLN need to pay to the IPP?"

The answer is the developer. Reg 12 states that if a power plant from these
sources is developed in a specific area, the price of the PPA should be 85%
of the local cost of production. In other words, the tariff that PLN will
pay is capped at 85% of the average cost of generation (known locally as
BBP) if the local grid BBP is higher than the national BPP, and up to 100%
if the local grid is cheaper.

"This is a positive for PLN but not for the developers," adds Harsono. "It
will also improve conditions for investment in the sector across the whole
of Indonesia. The objective is to promote renewable energy outside of
Jakarta, and secondly to reduce the cost of production of renewable energy."

With PLN signing up coal-fired power plants at very low tariffs the BBP will
continue to drop and ramp up pressure on renewable projects. Therefore, even
as renewable prices continue to drop, there is a worry that renewables
projects may become non-profitable. However, Indonesia still has a long way
to go to develop its renewable energy sector, in spite of a number of
renewable FiT regulations being passed over the last couple of years.

The new mandatory concept certainly hasn't quelled interest in the
development of six Sumatra solar power plants either. According to a local
report, 212 pre-qualified documents were taken by participants when PLN
closed the document collection earlier this month. Therefore, the current
volume of interest from developers across conventional and renewable power
projects in Indonesia seems to suggest the impact on developers could take a
while to come to fruition. "The concern of developers is still there,"
concludes Ali Herman, chairman of Indonesian Private Electricity Producers
Association. "And there certainly needs to be clearer standards on the new
provisions because this will be complicated and some may end up in court to
resolve the issue."

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Link to Original
Article: http://www.txfnews.com/News/Article/6176/How-will-Indonesias
-new-decrees-impact-PLNs-IPP-concessions

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John Diecker
APT Consulting Group Co., Ltd.

www.aptthailand.com