Opinion: Introduction of Solar Power FIT and New Solar Power Purchase Procedures in Indonesia
By: Hadiputranto, Hadinoto & Partners (www.hhp.co.id)
Wednesday, July 17 2013 - 04:41 AM WIB
New Procedures for Purchase of Power from Solar Photovoltaic Power Projects
Reg. 17/2013 introduces new procedures for purchase of power from solar photovoltaic power projects in Indonesia.
Tender is required
Before the issuance of Reg. 17/2013, PT PLN (Persero) ("PLN") ? the electricity oftaker in Indonesia - was allowed to purchase electricity from solar power projects through a direct appointment (without a tender). Reg. 17/2013, which only obliges PLN to purchase electricity generated from capacity quota winning bidders, suggests that the only mechanism for PLN to purchase power from solar photovoltaic power plants is through capacity quota tenders using the procedures set out under Reg. 17/2013, i.e., direct appointment is no longer allowed.
Introduction of capacity quota
Capacity quota, another new concept introduced by Reg. 17/2013, is defined as the total maximum capacity of solar photovoltaic power plants that can be interconnected to PLN's grids. Capacity quota will be determined annually at the beginning of each year by the Directorate General of Renewable Energy and Energy Conservation ("EBTKE"), based on a proposal of capacity quota that EBTKE receives from PLN. The officials from EBTKE explained to us that PLN will prepare the capacity quota proposal by taking into account PLN's Electricity Supply Plan (Rencana Umum Penyediaan Tenaga Listrik or "RUPTL").
We were informed by officials from EBTKE that the initial capacity quota will be issued within two to three months after issuance of Reg. 17/2013. The sizing of the projects to be offered as part of the annual quota will be dependent, amongst other things, on the load demands in the relevant area as well as the capacity of available transmission and distribution grids to accept the power. If the quota establishes a long list of small scale projects (e.g. 1-5MW), it may render them unattractive to large international solar developers.
Detailed Tender Procedures
Reg. 17/2013 provides detailed procedures and requirements for the capacity quota tenders.
Capacity quota tenders will be conducted by EBTKE, not by PLN, but a representative from PLN will be a member in the tender committee. This development where PLN will be involved in the tender should be a good one both for PLN and developers as it means that PLN and developers will be very much "on the same page" from even the capacity quota bid stage.
The tender method adopts a two-envelope mechanism by using a threshold scoring system and a lowest tariff scoring system evaluation. The first envelope will contain administrative, technical and financial requirements, and the second envelope will contain the bid tariff.
a) The administrative requirements include among other things, corporate documents and profile of the bidder, tax number (NPWP) and a consortium agreement if the bidder is a consortium.
b) The technical requirements include among other things, location plan, commercial operation date schedule, projection for electricity production for 20 years, work program and budget; detailed engineering design, and technical specification of the plant.
c) The financial requirements include among other things, audited financial statements, bid guarantee in the amount of 2% of the total investment from a state-owned bank or a prime bank in Jakarta; and an undertaking letter to open an escrow account and deposit 20% of the total investment within 15 working days after determination of the winning bidder.
In our discussions with officials from EBTKE, we were informed that the tender committee will set a minimum score that a bidder must achieve in the first envelope evaluation. The tender committee then will only open the second envelope of the bidders who pass the first envelope evaluation.
Three bidders with the lowest bid tariff who have passed the first envelope evaluation will be invited to the evidentiary and clarification session. A bidder who fails to prove authenticity of documents submitted in the bid in this session will be disqualified.
After completion of the evidentiary and clarification session, the tender committee will submit the bidders ranking to EBTKE and the winning bidder will be determined by EBTKE which will then further announce it in a website.
It is not clear from Reg. 17/2013 whether the determination of the winning bidder should be solely based on the lowest bid tariff. However, the officials of EBTKE explained to us that the bidder with the lowest bid tariff will be appointed as a winning bidder regardless of its score from the first envelope evaluation because only bidders who have passed the threshold score in the first envelope evaluation will continue to the second envelope evaluation. If however there is more than one bidder who submitted the lowest bid tariff, the score from the first envelope evaluation will be considered to determine the winning bidder.
There is also an objection period, which is five working days after the announcement of the winning bidder.
The entire tender process from tender announcement up to the end of the objection period will take around 47 days.
Can a foreign entity bid?
It is not clear whether a foreign entity can participate in the tender since Reg. 17/2013 mandates that only an Indonesian legal entity engaging in the electricity supply sector can be stipulated as a winning bidder. From our reading, as bidders must submit an Indonesian tax registration number, bidders then legally cannot be foreign entities.
However, we received several different views. Some officials of EBTKE believe that only an Indonesian legal entity can bid but some others believe that a foreign entity can also bid, provided it joins up with an Indonesian legal entity and they bid as a consortium.
According to the officials of EBTKE who believe that a foreign entity can bid as a consortium, after the consortium is determined as the winning bidder, the consortium must form an Indonesian legal entity engaging in the electricity supply sector before the signing of the Power Purchase Agreement ("PPA") and this new entity will sign the PPA with PLN. But, the officials explained, it is not necessary for the Indonesian legal entity to be established before issuance of the the MEMR Assignment Letter (explained below).
Whether in fact EBTKE will allow a foreign entity to bid or whether the MEMR will allow the Indonesian legal entity engaging in the electricity supply sector to be established only when the PPA is about to be signed can only be tested when a capacity quota tender is actually held, and the detailed bid documents issued.
New Feed-in-tariff
In addition to introducing new procedures for purchase of electricity from solar power projects, Reg. 17/2013 also introduces a ceiling feed-in-tariff for solar photovoltaic power projects in Indonesia at US$0.25/kWh, or US$0.30/kWh if the photovoltaic module uses local components of 40% or more.
Reg. 17/2013 does not provide details of how to determine the lower tariff where a bidder who meets the minimum 40% local content requirement bids a higher tariff compared to bid tariff than another bidder who does not fulfill the minimum 40% local content requirement.
From our discussion with officials at EBTKE, in determining which bid tariff is lower, EBTKE will impose a US$0.05/kWh tariff adjustment on the tariff submitted by the bidder who meets the minimum local content requirement. Please see the illustration table below:
| Bidder | Minimum 40% Local content requirements (for the photovoltaic module) | Bid tariff | Adjusted tariff considering the US$0.05/kWh tariff adjustment policy | Bidders Rank based on bid tariff |
| Bidder A | fulfilled | US$0.27/kWh | US$0.22/kWh | 2 |
| Bidder B | not fulfilled | US$0.22/kWh | US$0.22/kWh | 2 |
| Bidder C | not fulfilled | US$0.21/kWh | US$0.21/kWh | 1 |
| Bidder D | fulfilled | US$0.28/kWh | US$0.23/kWh | 3 |
Final tariff
The tariff from the tender will be stipulated in an assignment letter from the MEMR and this tariff will be used in the PPA without any further negotiation with PLN. Reg. 17/2013 mentions that the initial term of the PPA is 20 years but it can be extended.
No Indexation?
What is not clear is whether Reg. 17/2013 gives PLN the flexibility to agree tariff indexation as part of the detailed PPA wording (i.e. the tariff from the tender is simply the base tariff which can be escalated over time). As a comparison, the feed-in-tariff regulation for geothermal power projects also does not expressly provide for the tariff to be indexed over time, but PLN has in past executed PPAs which provided for the base tariff from a tender to escalate over time. The officials from EBTKE, however, advised us that the tariff from the tender will not be escalated and therefore in submitting a bid tariff bidders must also assume that the bid tariff includes any escalation required for a 20-year period. If later the tender documents are silent on this, developers should clarify this with the tender committee during the tender explanation session which will be conducted after announcement of the tender documents.
Other Requirements
Apart from the two important developments introduced by Reg. 17/2013 as elaborated above, Reg. 17/2013 also imposes additional requirements for solar power project developers which seems to be intended to secure real commitment from developers to developing the projects.
Developers must deposit in advance 20% of the total investment
Reg. 17/2013 requires a winning bidder to deposit 20% of the total investment in an escrow account at a state-owned bank or a prime bank in Jakarta within 15 days after EBTKE determines the bidder as the winning bidder. The deposited money can be used by the developer for the project development but only after a financial close is achieved. Reg. 17/2013 is however silent on whether or not the developer can withdraw the money if the developer fails to achieve the financial close by the deadline set in the PPA.
EBTKE will submit the winning bidder determination to the MEMR for the MEMR to issue the assignment to PLN for purchasing the power ("MEMR Assignment Letter") only after the winning bidder deposit the above amount.
Reg. 17/2013 sets mandatory milestones
PPA's milestones are usually a negotiation matter as the schedules for power plant development should match with the actual situation by considering among other things, total area required for the project, the expected timeline for land acquisition, lenders' requirements on due diligence, total installed capacity of the plant and design engineering of the plant. Reg. 17/2013 introduces for the first time some non-negotiable mandatory milestones.
a) Reg. 17/2013 requires the PPA to be signed within 60 days after the date of MEMR Assignment Letter. There is no express legal consequence under Reg. 17/2013 if this 60-day deadline is not achieved.
b) The financial close must be achieved within three months after signing the PPA and the developer must start construction activities at the latest three months after the financial close. The MEMR Assignment Letter and the PPA will terminate if the developer fails to achieve any of the above milestones before the deadline and fails to remedy it after obtaining three warning letters from EBTKE.
c) The commercial operation date must occur at least 18 months after signing the PPA. An extension of up to 12 months is allowed but a penalty in the form of progressive tariff reduction up to 8% of the tariff will be imposed.
Closing
As elaborated above, the meaning of some provisions in Reg. 17/2013 is not very clear from the express wording of the clauses. Therefore their implementation will much depend on the policy of EBTKE. Whether EBTKE will in fact implement the policy consistently remains to be seen. The issuance of a feed-in-tariff regulation for solar power projects however does show the seriousness of the Government in realizing untapped solar power potential in Indonesia by involving the private sector. The Government has set very aggressive renewable energy targets through to 2025 and if this regulation is intended as part of the way to seeing those targets achieved, this regulation must be further followed up with at least immediate: (i) determination of capacity quota; (ii) realization of the tenders for capacity quota; and (iii) publication of a bankable standard PPA. Further, if a bankable standard PPA can be published before commencement of the tender, developers will have a greater understanding of what their exposure will be under the PPA if they are successful in the tender and therefore it will assist developers when they must set their acceptable bid tariff. Without having any visibility on what exposures they would be taking on vis-?-vis PLN under the PPAs that would be negotiated and signed with PLN post-bid, developers would have difficulties to set an acceptable bid tariff.
For further information please contact
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fanny.kurniawan@bakernet.com
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