Does the new Indonesian regulation on PPAs put the bankability of IPP projects at risk?-

The Ministry of Energy and Mineral Resources (MEMR) recently issued Regulation No. 10 of 2017 on Principles of Power Purchase Agreements (Regulation 10/2017), which sets out a number of principles and key provisions that need to be reflected in power purchase agreements (PPAs) entered into between PT Perusahaan Listrik Negara (Persero) (PLN) and independent power producers (IPPs). While the new regulation largely confirms the terms and principles that have typically been reflected in past PPAs, it brings a number of changes to important principles governing the risk allocation between PLN and IPPs, some of which may hamper the bankability of future IPP projects.

Scope

Regulation 10/2017 was issued on January 19, 2017, and applies to all projects to be developed by IPPs in Indonesia with the exception of “intermittent” power projects (that is, wind and solar); mini-hydro; biogas; and waste-to-energy projects. Regulation 10/2017 is applicable from its date of enactment except to projects which have a signed PPA; projects where a developer has been issued with a letter of intent from PLN; projects where bid closing has been reached; or in the case of geothermal projects, where the auction for the award of the relevant geothermal concession has been completed.

Key changes brought by Regulation 10/2017

All projects to be developed on a build, own, operate and transfer (BOOT) basis: Regulation 10/2017 provides that all IPP projects must be developed on the basis of the BOOT scheme, where the IPP is required to transfer the ownership of the relevant project to PLN at the end of the term of the PPA. Although most Indonesian IPP projects are already effectively developed under the BOOT scheme (such as coal- and gas-fired projects), this was not necessarily so in the case of certain geothermal and hydro projects, which were developed on a build-own-operate (BOO) basis. These BOO projects allow the possibility of an IPP negotiating an extension to the PPA as the generation asset is not meant to be transferred to PLN at the end of the term of the PPA, and therefore allow the IPP sponsors to further improve their return on investment.

No deemed dispatch for force majeure affecting PLN’s offtake: Probably the single biggest concern raised by Regulation 10/2017 lies in the apparent change in risk allocation related to events of force majeure, which affect PLN’s offtake. Under the traditional PPA regime, the IPP would be deemed dispatched based on the availability of the plant if PLN is not in a position to take delivery due to events of force majeure. Regulation 10/2017 (art. 5(1)c and 6(2)c) now seems to provide that PLN will be excused from its obligations in such a case, although this is partially mitigated in the case of natural events of force majeure by the fact that the term of the PPA can be extended by a period equivalent to the period of force majeure.

If this change is confirmed and reflected in future PPAs, this would represent a major shift in the risk allocation between PLN and IPPs as it will effectively mean that the IPPs are taking force majeure risk over PLN’s network. Such a risk allocation would be inconsistent with generally accepted principles of project finance, which require risks to be allocated to the party best able to mitigate the risk, which an IPP is clearly not in the case of PLN’s grid system.

Potential changes to the concept of political force majeure: Regulation 10/2017 also seems to introduce changes to the risk allocation for political force majeure events. Political force majeure events under PLN PPAs typically consist of actions or inactions without justifiable cause of Indonesian governmental instrumentalities and changes in laws, regulations or policies. First, Regulation 10/2017 only refers to the second type of political force majeure events (changes in laws, regulations and policies) casting uncertainty on how risks stemming from the first type of events should be allocated in the future; second, it seems to provide that the risk for changes in policies needs to be shared between PLN and the IPPs and that in case such change in policy stops the development or the operation of the plant, parties will be released from their obligations.

Minimum availability payment period: Regulation 10/2017 (art. 6(3)) provides that PLN has to take delivery of and purchase power generated by IPPs for a period of time to be agreed upon between PLN and the relevant IPP “having consideration for” the repayment period of the senior debt to IPP lenders. Officials at MEMR have indicated that this should not be read to say that the period during which PLN is bound to make minimum availability payments to the IPP (which are meant to cover the IPP’s fixed costs) should necessarily match the debt service period, but only that such period should be borne in mind by PLN when agreeing on the minimum availability payment period under the PPA.

Restrictions to transfers of shareholding in the IPP company: Although PPAs typically included restrictions on transfer of ownership in the IPP company for a certain period of time (commonly up to the commercial operation date (COD) or a certain number of years after the COD), IPP sponsors were thereafter free to transfer shares in the IPP company. Regulation 10/2017 now clearly prohibits transfer of ownership in the project company prior to the COD of the relevant project, with the exception of transfers of ownership to an affiliate which is at least 90 per cent held by the sponsor wishing to transfer its shares; and  provides that post-COD, transfers of shareholding in the IPP company are only possible subject to PLN’s prior approval. These new restrictions create uncertainty for sponsors who may be contemplating a shorter-term investment strategy, involving an exit from the IPP company during the operational life of the project.

Concluding remarks

Regulation 10/2017 represents the first attempt by MEMR to legislate the commercial and legal terms of the PPAs between PLN and IPPs. Regulation 10/2017 now prescribes certain commercial and legal terms and, arguably, removes PLN’s discretion to negotiate deviations from these.

It is difficult to take a definitive view on the key changes and potential risks for IPPs and their lenders set out above until PLN issues revised forms of PPAs. This is because the risk allocation embedded in Regulation 10/2017 ultimately needs to be reflected in the PPAs. During a socialisation meeting held at MEMR on February 10, 2017, representatives from MEMR indicated that the spirit of Regulation 10/2017 was not to change the traditional risk allocation under PPAs. It is hoped that PLN will adopt a similarly benign attitude when it comes to revising its model PPAs in recognition of the fact that the current model PPAs have proven to be generally well accepted and, subject to normal negotiation, bankable.

Daniel Ginting has over 20 years’ experience as a lawyer and is one of Indonesia’s leading banking and finance lawyers. His experience includes project development (in particular in the energy, mining and infrastructure sectors), structured financing transactions, acquisition financing, mergers and acquisitions of banks and financial institutions, and debt restructuring.

Frédéric Draps is a counsel and registered foreign legal consultant based in Jakarta. He specialises in project development and financing, commercial contracts and energy law, and has been advising on major projects in Asia, Europe, the Middle East and Africa. Since moving to Indonesia, he has been advising sponsors, lenders and PLN on more than 20 power projects of all types.