What's acceptable Project IRR for Mini Hydro in Java, Indonesia? Does it matter? or Any other things to be considered?

This question has challenged many mini hydro players in Indonesia.  With the existing feed-in-tariff (FIT) of Rp 656 per kwh (assigned by the Ministry of Energy and Mineral Resources Decree back in December 2009) for Java Island as a benchmark tariff, today is valued at only USD 5.5 cents per kwh which represents a fall by 18% since August of 2013.  At the same time, we can effectively see that all construction costs has risen by 20% in Rupiah terms.  Not to mention, the country's inflation which was 8% in 2013.

Allow us to set an example on mini hydro investment in Java Island, Indonesia.  According to our real case experience, the investment for mini hydro in Java in general is estimated to be USD 1.5 - USD 1.8 million per MW.  Of which, civil works (including transmission, project management, engineering cost, and IDC) account for USD 0.9 to USD 1.0 million per MW, and the rest is allocated for land and M&E for USD 0.6 - 0.8 million per MW.  Assuming the project is 70% financed by bank loan with capacity plant factor of 65%, the project will generate an IRR of 12 - 15% in today's interest rate of 12.0% p.a and 10 years payback period (including 2 years construction period).

In summary, we can argue that the project IRR of 12 - 15% is too low or just right. Many would say that it is just not very attractive since the rate is equal to the bank's yield. Whatever the IRR level might be, we can't escape from the 10 years payback period with 15 years power purchase agreement.  The key is to find the banks or financial institutions who are willing to support us for the next 10 years.  It is a long term partnership.  It is a perpetual game and a fixed income play.

The writer hopes that with the right structure and economical yield, the domestic infrastructure financing institutions like Sarana Multi Infrastruktur, Indonesia Infrastructure Fund, Pusat Investasi Pemerintah, syariah banks, and other large commercial banks in Indonesia can contribute more in boosting the investment of mini hydro power plant.  They have done so, but the interest rate is just too high momentarily. Increase in new FIT and breakthrough design of FIT that the writer proposes in his other previous writings may reenergize this lucrative investment.