Summary of the New Ministrial Decree no. 12 issued by The Indonesian Ministry of Energy & Mineral Resources on the Purchase of Electricity from Hydro Power Plant by the state electricity co PLN

The summary of the Ministrial Decree (issued on 2 May 2014) is as follows:

1. The Minister authorizes PLN that PLN must buy the electricity from Hydro Power Plant with less than 10 MW (MHPP) through direct purchase and agreed feed in tariff (FIT) which is governed in the Purchasing Power Agreement (PPA)
2. In the PPA, The FIT is stated at:
• The first eight years: Rp 1,075 per kwh x Regional Factor (F); The F is 1x for Java, Bali, & Madura; 1,1xfor Sumatra; 1.2x for Kalimantan & Sulawesi; 1.25x for NTT & NTB; 1.3x for Maluku and North Maluku; 1.6x for Papua and West Papua
•  Year 9 until year 20: Rp 750 per kwh x Regional Factor as similar to above F
• No negotiation & no escalation on FIT in PPA
3. New Player (New MHPP) must start the business via:
• Proposal to the Directorate General for Renewable Energy (DGRE) to be appointed as MHPP company with all requirements ie:
• Company profile
• iPermits from Regional Government (all permits necessary) & Permits from Government (SIPPA & SIKON)
• Pre Feasibility Study which has been technically verified by PLN; PLN must complete the verfication works max 30 days after once all documents related to pre Feasibility Study is well received by PLN.
• Estimated Project Cost/Investment Cost
• Project schedule up to COD
• Statement of availability of land
• Statement of Willingness & Capability to provide 5% of total project cost in the form of certificate deposit to the DGRE within 30 days after the New Player is appointed legally to be the MHPP company
• Statement of Understanding & Willingness & Capability from the New MHPP to develop and operate the power plant which eventually will be announced by PLN
• Statement of Awareness & Responsible to accept and perform sanction which is governed in this Ministrial Decree
• The proposal to the DGRE has a template attached to the Ministrial Decree no. 12
4. The DGRE shall approve or disapprove the MHPP proposal maximum 30 days after once all the requirements within the proposal is well received by the DGRE with cc to the Directorate General Electricity and PLN Board of Directors.
5. The New MHPP shall report the progress of construction of the project every 6 months to DGRE up to COD and cc to Directorate General Electricity and PLN Board of Directors.
6. Up to 30 days after the approval of the DGRE, the New MHPP must submit the certificate of deposit (5% of total project cost) to the DGRE. If not performed then the DGRE shall revoke the approval and 2 years sanction to the New MHPP not being able to resubmit a similar proposal.
7. The New MHPP, after submitting the certificate deposit, must apply for “temporary permit for producing electricity” (Temporary IUPTL).
8. Once the New MHPP receives the permit of Temporary IUPTL then the New MHPP must submit the copy of the approval of permit to the DGRE.
9. Within 90 days after the issuance of permit of Temporary IUPTL then the New MHPP must submit the Feasibility Study (not the pre-FS) and other required documents to PLN for the signing of PPA. PLN is then obliged to sign the PPA (cc to the DGRE) within 30 days after all documents are well received by PLN.
10.  PLN shall publish the model of PPA (60 days after the issuance of this Ministrial Decree or 1 July 2014).
11. If PPA is not signed within that 30 days period, then the New MHPP approval from the DGRE shall be terminated, 2 years sanction to the New MHPP not being able to resubmit a similar proposal, and 25% penalty off the certificate deposits.
12. PLN must state in the PPA the limitation of financial closing of 15 months after the signing of PPA. If the financial closing is not fulfilled, then the New MHPP approval from the DGRE shall be terminated, 2 years sanction to the New MHPP not being able to resubmit a similar proposal, and 50% penalty off the certificate deposits.
13. Once the New MHPP has reached the financial closing then the New MHPP must apply for the Permanent IUPTL;
14. Within 3 days after the issuance of the Permanent IUPTL, the New MHPP must convey:
• the copy of the Permanent IUPTL,
• prove of financial closing, and
• the plan to use the fund in the project to the DGRE. Certificate deposits then can be released to finance the project.
15. Up to maximum 3 months after the issuance of the Permanent IUPTL, the New MHPP must start the project.
16. If the New MHPP fail to start the project then PLN must revise the first 8 year FIT with certain penalties (unless caused by force majores governed in the PPA) such as:
    
    • 3 months delay – 1% penalty to FIT
    • More than 3 up to 6 months delay – 2% penalty to FIT
    • More than 6 months delay – 3% penalty to FIT
    • 15 months delay and more then approval from the DGRE shall be terminated, 2 years sanction to the New MHPP not being able to resubmit a similar proposal, and 100% penalty off the certificate deposits (if not yet used)
17. Those MHPP, which are now in operation under the Ministrial Decree no. 4 2012, shall not be benefitted to the new revised FIT
18. Those MHPP under the Ministrial Decree no. 4 2012, which already have PPA and are not in the commissioning stage, can negotiate the FIT with the PLN with a maximum adjusted FIT not more than Rp 880 per Kwh x F. The negotation must be approved by the DGRE, and the Minister of Energy & Natural Resources on the final stage must approve the final negotiated price. Sanctions are also applied to those MHPP when the negotiated price has been approved by the Minister and the projects are not carried through

My comment:

When reviewing the MD-12, I was full of excitement because the clarity and fairness of the decree was seen througout every article. The Government of Indonesia (GOI) via the Ministry when the decree was written must be clouded by the good spirit and enthusiasm to promote the business of hydro power plant particularly the MHPP to be prosperous and supportive to the need of the country's electricity demand.

As an Indonesian, I strongly believe that the mission of the GOI to decide the FIT for MHPP quoted in Rupiah (different than any other large power plant producers who receive US Dollar revenue) is to balance or somewhat reduce the risk of the state owned electricity company PLN on its foreign exchange exposure risk. I could say that the MHPP players have not only supported the country to electrify the nation (like any other power players), but also appreciated the problem that PLN is currently facing. This is one thing the GOI must understand and should incentify the players in MHPP. It would be great if in the MD-12, the Ministry could have thought the importance of price escalation. Escalation serves two main purpose which are to combat inflation and to give MHPP players maintaining the facility well.

The GOI realizes that the old tariff (Rp 656 per kwh) was no longer attractive, then the GOI should incentify the existing operating MHPP players so that they can reinvest the benefit for new projects. The GOI must also remember that these running MHPP developers have sweet and sour experiences in building the facility; Thus, in their next projects, that past learning curve shall support them. It would have been rewarding if the MD-12 took that concerns into account.

The last article no. 18 was a mind blowing, and out of fairness, I could say that this chapter has ruined the good spirit of the MD-12. The chapter incentifies those MHPP players, who have the PPA and are not yet in operation. These players, the chapter said, can negotiate the FIT to a certain level (maximum Rp 880 x F per kwh) which would be considered acceptable by PLN and approved by the Minister. It is very good, so that these players can right away step up its investment activities. However, the chapter discriminates the existing players who are already in operation. They can not get the benefit out of this MD-12. The GOI forgot that the existing running MHPP is now suffering with higher interest rates from the bank loans and rising costs from maintenance. Escalation clause is important especially to combat the inflation because inflation kills this business, and the negotiated FIT for MHPP article should be open for everyone, new comers or existing players.

Overall it is a step forward, and I just hope that the GOI and the community of MHPP have the similar spirit and energy for the betterment of this business to electrify the nation.