Opinion: Indonesian Geothermal Tariffs Revised? Again

Background
The Ministry of Energy and Mineral Resources has issued a long-awaited revision to the geothermal tariff pricing regime.

Regulation of Minister of Energy and Mineral Resources No 17/2014 ("Regulation 17") issued on 3 June 2014 represents the fourth time the Government has revised the way in which tariffs are determined for geothermal power projects. With the three previous revisions, the Government has moved from a regime that applied different tariffs depending on voltage or capacity, to one that applied different rates depending on location, to one based on the geothermal tariff on PLN's cost of electricity procurement, to a single tariff ceiling applicable for all projects. Regulation 17 reverts to a geographically based tariff regime; however this time enhanced with an added dimension of the timing of achieving Commercial Operation Date - i.e., the tariff ceiling will increase for projects having a more distant planned Commercial Operation Date (to cater for the effects of inflation).

New Tariff Ceilings
The new tariff ceilings set by Regulation 17 are:

Commercial Operation Date	Ceiling Price (US$cents/kWh)
	Region I	Region II	Region III
2015	11.8	17.0	25.4
2016	12.2	17.6	25.8
2017	12.6	18.2	26.2
2018	13.0	18.8	26.6
2019	13.4	19.4	27.0
2020	13.8	20.0	27.4
2021	14.2	20.6	27.8
2022	14.6	21.3	28.3
2023	15.0	21.9	28.7
2024	15.5	22.6	29.2
2025	15.9	23.3	29.6

The relevant Regions are:
Region I: Sumatra, Java and Bali
Region II: Sulawesi, Nusa Tenggara Barat, Nusa Tenggara Timur, Halmahera, Maluku, Irian Jaya and Kalimantan
Region III: Remote areas within Region I and Region II where the majority of the electrical power is generated from fuel-oil plants

The ceiling price is applied during the tender process for the Geothermal Business License (IUP). During this process (typically run by the Regional Government where the IUP concession is located), bidders will be obliged to bid an electricity tariff. Regulation 17 provides that the tariff bid must not exceed the applicable ceiling price under Regulation 17.

Impact of Commercial Operation Date
One of the major criticisms of the previous geothermal tariff regime was that it did not deal with the issue of tariff escalation. PLN's traditional position on tariff escalation (as adopted in the vast majority of its Power Purchase Agreements) is that tariff escalation should only apply from the Commercial Operation Date, and any inflation risk prior to the Commercial Operation Date is taken by the IPP developer, and therefore must be taken into account when the IPP developer makes its geothermal tariff bid at the time of the award of the IUP.

However, the disconnect in the past has been that as the previous geothermal tariff regulations did not expressly deal with the issue of escalation, some Regional Governments conducted tender processes for IUPs on the basis that the bidders were allowed to escalate their tariffs from the time of the bid, whereas when the successful bidder came to PLN to finalize the PPA, PLN adopted its long-standing position of not allowing escalation prior to the Commercial Operation Date.

Regulation 17 now expressly deals with the issue, and makes clear to PLN, Regional Governments and investors that no escalation of the tariff is permitted until the Commercial Operation Date of the first unit of the project. In order to compensate for this, the new tariff structure increases the ceiling price depending on the planned Commercial Operation Date. Although it is not explicitly made clear in the regulation how this planned Commercial Operation Date is to be ascertained, it appears that the date (and therefore the applicable tariff ceiling) will be determined based on consultation between the relevant Regional Government, the Ministry of Energy and Mineral Resources and PLN). Put simply, a bidder bidding in 2014 for a project with a first unit Commercial Operation Date in 2021 is given a higher ceiling price than the same bidder bidding in 2014 for a project with a first unit Commercial Operation Date in 2020. The relevance of this ceiling price is, it appears, only relevant to the IUP tender process. Once an IUP has been awarded (based on a tariff bid below the ceiling price), if there is a subsequent delay in achieving the Commercial Operation Date due to project implementation, Regulation 17 does not provide any way for the tariff to be increased to take advantage of the higher ceiling. In this respect, Commercial Operation Date delays remain a risk that developers need to properly manage.

Regulation 17 does not, however, specify the rate of escalation. That will most likely be left to PLN's determination in its model PPA (which Regulation 17 requires to be included in the bid package issued by the Regional Government at the time of tendering out the IUP award). PLN typically allows 25% of the tariff to be escalated to the US Consumer Price Index.

Transmission responsibility
Another issue that has been addressed by Regulation 17 is the responsibility for constructing transmission lines.

Regulation 17 makes clear that PLN bears the responsibility for the construction of transmission lines. However, it is unclear whether the cost of the construction of the transmission will be borne by PLN as well. What is clear is that the tariff bid by investors as part of the IUP tender process is a tariff which need not include any costs of the transmission line. However, it is not clear whether after the bid award the winning bidder will be required to agree with PLN on an additional component of the tariff to cover the cost of transmission line construction (despite the actual work being carried out by PLN). The reason for the uncertainty is that the regulation states that the tariff ceiling "does not yet include" the transmission cost, suggesting that the cost of the transmission line might be become part of the tariff after the IUP tender has been completed. It would be odd for PLN to take on the responsibility for constructing transmission lines, yet the power plant developer remains responsible for funding the construction. Accordingly, we would expect that, despite the uncertainty in the regulation, PLN will in practice bear both the cost and the responsibility for the transmission line.

Model PPA
As with its predecessor regulation, Regulation 17 requires PLN to develop a model PPA for geothermal projects. PLN has made good progress over recent years in developing (and staying with) a model PPA for geothermal, which was based on the earlier Supreme Energy projects where (i) PLN took responsibility for the development of the transmission line (and the associated costs), and (ii) escalation commenced from the Commercial Operation Date of the project. Accordingly, there does not appear to be anything arising from Regulation 17 that would require a material amendment to PLN's existing "model" geothermal PPA.

As mentioned above, PLN's model PPA should be included in the IUP tender package.

Time limits to sign PPA
Regulation 17 requires PLN and the winning bidder for an IUP to sign the PPA within six months following the receipt by PLN of the direct appointment approval from the Minister. If the PPA is not signed within this 6-month period due to reasons attributable to the IUP holder, the IUP holder will be subject to administrative sanctions in accordance with the regulations. It is not clear what sanctions these are. In the absence of any express sanctions in the regulations, in essence there is no sanction for an IPP developer that fails to meet the 6-month deadline.

However, if the PPA remains unsigned after 12 months, the direct appointment by the Minister is deemed revoked and therefore the PPA cannot thereafter be signed.

Application of new tariff regime to existing projects
Regulation 17 allows existing geothermal projects to undergo a renegotiation of their current tariffs; however, these negotiations can only be carried out after the completion of the exploration and feasibility study activities. In order to avail themselves of this right to renegotiate, geothermal developers must ensure that the relevant Power Purchase Agreements have been signed by a prescribed date:

No	Status of the Project	Required PPA Signing Date	Consequence for failure to sign by required date
1	IUP tender winner announced, but IUP not yet granted.	31 December 2014	IUP tender winner loses the right to request tariff renegotiation.
2	IUP has been granted, but no assignment letter issued by MEMR	31 October 2014	IUP holder loses the right to request tariff renegotiation, or return s the IUP to the Government before the required date.
3	IUP has been granted and MEMR assignment letter issued but no PPA signed.	31 August 2014	IUP holder loses the right to request tariff renegotiation, or return s the IUP to the Government before the required date.
4	IUP has been granted, no PPA signed and tariff still being negotiated (i.e. projects where the IUP tender tariff was higher than the previous tariff ceilings)	30 September 2014	IUP holder loses the right to request tariff renegotiation or returns the IUP to the government before the required date.
5	IUP has been granted and PPA has been signed	No deadline	If IUP holder fails to complete exploration or the feasibility study, and fails to reach the Commercial Operation Date by the time required under the PPA, then the sanctions under the PPA will be applied (which includes a right for PLN to terminate the PPA).

With respect to projects that fall under categories 2 - 4 above, there is some confusion in the regulation as to what the consequence is if a PPA is not signed by the required date, and in particular, whether the project owner who cannot sign the PPA by the required date is nevertheless permitted to proceed with the project on the basis of its existing tariff (i.e. without negotiation). In parts of the regulation, it suggest that there are only two options (i) sign the PPA by the required date any enjoy the right to later renegotiate the tariff, or (ii) not sign the PPA by the required date and return the IUP. However in other parts of the regulation, it states that a consequence of not signing the PPA by the required date is the loss of the right to renegotiate the tariff later (suggesting that it is open for a developer who has not signed the PPA by the required date to hold onto its IUP, and proceed with its project and seek to finalise the PPA based on the existing tariff).

MEMR's position with respect to the correct interpretation is not yet clear, and what position PLN will take if a PPA has not been signed by the required date is also not clear (i.e. will PLN allow a developer to nevertheless continue to finalise the PPA based on the developer's existing tariff, or will PLN insist that no PPA (whether based on the existing tariff or otherwise) can be signed after deadline as PLN may take the view that the regulation requires the IUP to be returned in those circumstances (hence the need for a PPA becomes redundant).

It is also not clear from the regulation how the tariff renegotiation is to be carried out - i.e. does the developer become entitled to the relevant ceiling price? Or does the ceiling price set the maximum tariff that can result from the renegotiation process? We would expect that the process would simply be the developer and PLN negotiating a mutually acceptable price, and that price would not exceed the relevant ceiling. Regulation 17 explicitly stresses that exploration risk is a risk borne solely by the IPP developer, so it is not entirely clear whether, as part of this renegotiation process, PLN would accommodate requests for increased tariffs from existing projects due to worse-than-expected exploration results.

However, the new regulation does require developers to commit the substantial funds required to carry out a full exploration program before having any certainty of the final tariff that will support the project and its financing for the next 30 years.

Whether the right to renegotiate tariffs applies to Joint Operation Contract (JOC)-based projects (e.g. Sarulla, Darajat and Wayang Windu) in respect of either their existing units in operation, or even units currently under development, is not clear from the regulation. The transitional provisions that set out the treatment specified in the table above does not mention the treatment afforded to JOC-based projects. However, in other parts of Regulation 17, it is provided that geothermal authority holders, holders of geothermal development business license and contract holders that are Indonesian legal entities holding concessions existing prior to the Geothermal Law may adjust the steam or energy sale tariff based on an agreement between the parties, provided that they hold an electricity generating license (IUPTL) (in case of adjustment to electricity tariff).

Conclusion
The issuance of Regulation 17 has relieved some of the pressure on tariffs, both for new projects yet to be bid, and potentially for existing projects which have to-date been unable to proceed due to the tariffs having become uneconomic over time.

For existing projects, the tariff only provides relief where the developers are willing to take the risk of investing their own funds in exploration and development without knowing the final tariff. It remains to be seen how many of the existing developers will be willing to take this road. For future projects, the question remains whether the Parliament's proposed overhaul of the Geothermal Law is going to be a pre-requisite for the implementation of Regulation 17, or whether the Government will be willing to proceed with tenders for new IUPs based on this new Regulation 17 prior to the expected amendment to the Geothermal Law.

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