New PPA legislation in Indonesia raises concerns for geothermal developers
New regulations on power purchase agreements in the Indonesian energy market are raising concerns for geothermal developers, due to the requirement for PLN to only purchase power in accordance with proven reserves after exploration.
Indonesia’s Ministry of Energy and Mineral Resources (MEMR) issued three power-related regulations that introduced changes to the power and upstream oil and gas sectors last January 2017.
Regulation No. 10 introduces the terms and conditions of Power Purchase Agreements (PPAs); Regulation No. 11 tackles Gas and LNG pricing for Power Plants; and Regulation No. 12 imposes tariffs for renewable energy.
Industry players have raised their concerns about the regulations including weak incentives, unsuccessful previous attempts and great uncertainty over consistent future implementation of the law.
Regulation No. 10
Regulation No. 10 claims to introduce an equitable split of commercial risks between independent power producers (IPPs) and PLN. The regulation will not apply existing PPAs when it is implemented. It will also not apply to mini-hydro (less than 10 MW), wind, solar, biogas or city waste to energy power plants as they are subject to separate MEMR regulations. However, the same regulation will apply to power projects that are in a procurement process but have not yet reached bid closing.
The regulation states that PLN is only required to take and pay for electricity produced by the IPP for a certain period of time and this period should be agreed to between the parties by considering the period of repayment to the IPP’s lenders. This provision gave rise to concern among developers that the next model PPA issued by PLN may not provide for capacity payments once the IPP has repayed its senior debt.
Developers and financiers will be affected if the protections, which have been key to a bankable IPP template, will be reduced. However, it must be noted that the language of Regulation No. 10 is broad and conceptual and the government had also made a number of public statements that it has no intention of significantly changing the PPA model.
Regulation No. 12
The regulation imposes tariffs for solar, wind, hydro, biomass, biogas, city waste to energy, and geothermal power plants.
Article 11 of the regulation raises a specific concern for geothermal developers as it states that PLN may only purchase power from a geothermal IPP in accordance with proven reserves after exploration.