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Lack of bankable PPA hinders success of IPP model in Indonesia

Welcoming staff at the World Geothermal Congress 2010, Bali, Indonesia (thinkgeoenergy)
Alexander Richter 13 Apr 2011

The high risk of resource exploration, but mainly the lack of a bankable Power Purchase Agreement (PPA) with the electricity recipeint (PLN) are the largest obstacles for success of independent power producers (IPP) in Indonesia, so a director with the National Development Planning Agency.

In an article in the Jakarta Post, Monty Girianna, Director of the energy, mineral resources and mining division of the National Development Planning Agency (BAPPENAS), expresses his views on why the IPP model is not seeing the success yet it needs to help speed up geothermal develoopment in Indonesia.

“It is expected it will cost US$3 million per megawatt (MW) to develop geothermal fields in Java and Bali, while those on the outer islands would cost $3.5 million per megawatt.

Nearly 1,000MW, scattered from east to west Indonesia, are currently being developed to be commissioned in early 2014.

These projects are being undertaken by state-owned companies or their subsidiaries, and are thus still within the ambit of the government i.e., public investments.

The debt financing for these projects, from multi- and bilateral development finance institutions, has either been secured or the loans are currently being appraised.

In addition to this, 13 fields with a combined capacity to produce up to 1,000MW have been identified and can be commissioned by 2015.

The Geothermal Area concessions for these sites, mostly greenfields owned by local governments, have been obtained by a private company and price negotiations either for production of steam for PLN or for electricity are underway. The estimated financing required from private finance institutions is around $3.7 billion.

Depite the 2,000MW commissioned before 2015, the pace of greenfield development is not fast enough to contribute to the electricity supply portfolio.

The government has continueously made considerable efforts to accelerate the development of greenfields by working to attract more investors from the private sector — independent power producers (IPP) — to bring in new technology, efficiency and capital.

However, these efforts have not produced any measurable level of success for two reasons. The first is a perceived high risk of resource exploration because of a lack of adequate data, and the second is because of the absence of a bankable Power Purchase Agreement (PPA) with the electricity recipient (PLN). The current data on geothermal energy in Indonesia is insufficient. The power production capacity of greenfield concession areas cannot be determined, and this has a tendency to make any form of investment in such fields uncertain, unless some form of guaranteed return is assured.

Defining the electricity price at an early stage of the transaction, i.e. during the concession tender, based primarily on preliminary data, constitutes a substantial risk to developers and leads to pricing for a worst case scenarios.

“PLN might be perceived as facing financial difficulties, hampering its ability to pay for electricity purchases.”

This lack of adequacy of data stems from a structural difficulty where local governments owning geothermal resources lack sufficient funds and technical capabilities to assess them.

The absence of a bankable PPA with PLN, on the other hand, is a result of many factors. The inability of geothermal power proponents to commit to a volume and price is a major factor.

Second is a complication arising from various rules and regulations on how PLN should appropriately price its PPAs — electricity rates. Third, there are political difficulties in getting more subsidies that may be required for geothermal PPAs. Based on today’s prices, there is a cost differential between coal-fired power plants and geothermal power plants.

To address these, the government has allocated $120 million this year to assist local governments with the cost of exploration. The government plans to increase the budget for exploration and is currently improving the implementation mechanism for a geothermal resource risk-sharing fund.
An assessment is also being made to see whether this fund only fits small-to-medium-scale developments.

A new pricing regulation has recently been put in place. This is intended to impose on PLN, under certain conditions, obligations to purchase electricity for a price determined by the outcome of a concession-bidding process for geothermal fields.

Thus, for new projects the rate will be fixed at a price proposed in the bidding documents of the successful bidder, subject to a cap of 9.7 US cents per kilowatt hour (kWh) computed at the point of power transmission.

For projects awarded licenses before the new regulation, the rate will remain fixed at the price proposed in the bid documents of the successful bidder.
However, if that rate is higher than the cap, PLN and the developers must renegotiate the price with reference to PLN’s own estimated rate as contemplated in its internal bidding manual for electricity procurement.

Such negotiations might take some time and there would likely need to be strong justification for agreeing on a new rate that is substantially above PLN’s own estimated rate.

Funding that will be required to support these investments will depend on the actual cost of development of the greenfields.

Based on the projected capacities of 5.6 GW in five to 10 years, geothermal needs at least $19.1 billion.

Assuming 70 percent debt financing, the debt funding required will reach $13.4 billion. Although this is a high figure, the annual requirements seem to be manageable. With single borrowing limits of up to $600 million, the large local banks can provide the required debt financing.

While debt financing, assuming that projects are viable, might be less of a problem, the equity financing required, more than $5.7 billion, is really a challenging task.

Even if it is assumed that 50 percent of this would come from local sources, attracting $2.9 billion in foreign investment in private equity for geothermal is going to be difficult. Moreover, from the perspective of private investors or project lenders, PLN might be perceived as facing financial difficulties, hampering its ability to pay for electricity purchases.

Albeit the government guarantee of the creditworthiness of PLN, investors and project lenders typically seek additional means to mitigate this payment risk.
So that there can be more IPPs, there needs to be adequate geothermal data to support the tender process and PPA pricing must be sufficiently fulfilled.

In addition to this, PPA heads of terms have to presume off-taker payment risk mitigation, notwithstanding the availability of off-taker creditworthiness guarantees. With all these in place, we can bring geothermal private IPPs into the national (renewable) power sector. Other than a contingent liability of the government, there is no need for the government to allocate huge public funds up front.”

Source: Jakarta Post