geothermal vs coal in indonesia, page-8

It appears that the following article allows tariffs greater than previously signed off at but still has a lot of negotiating steps to go through. What I find significant with the below text is that tariff negotiations are conducted with Regional Governors as well as with PLN.
This gets back to the very same issue of why BPMigas was deemed with being too arms length with Article 33 and therefore disbanded. Such is the way when dealing with so many levels of bureaucracy where everyone involved has their own particular agenda, often of a private nature to some degree.

Long awaited Indonesian Geothermal
Feed-in Tariff Issued
The much anticipated new feed-in tariff arrangements for Indonesian
geothermal tariffs were promulgated on 23 August 2012, with the issuance
of Regulation of the Minister of Energy and MineralResource No. 22 of
2012 (Reg. 22/2012).
The full-circle approach to tariff setting
The pricing regime for Indonesia's geothermal projects have suffered from
somewhat of a see-saw development over recent years.
Back in 2008, the Ministry of Energy and Mineral Resources first
introduced a geothermal pricing regime which set a maximum geothermal
tariff at different levels, depending on electricity supply production costs in
the location of the project within Indonesia (rangingfrom approximately
US$0.045/kWh in South Sumatra to US$0.20/kWh in Papua, depending on
voltage and capacity of the power plant). However in 2009, this was
replaced with an Indonesia-wide cap on geothermal tariffs of
US$0.097/kWh. Reg. 22/2012 again reverts back to a geographical based
tariff system, with the tariffs set as follows:
Tariffs (US$ cents/kWh) Location
High Voltage Medium Voltage
Sumatera 10 11.5
Java, Madura, Bali 11 12.5
South Sulawesi, West Sulawesi,
and South East Sulawesi
12 13.5
North Sulawesi, Middle Sulawesi,
Gorontalo
13 14.5
West Nusa Tenggara, East Nusa
Tenggara
15 16.5
Maluku, Papua 17 18.5

Who does the new tariff regime apply to?
The following geothermal project developers are entitled to take advantage
of this new pricing regime:
(a) developers that are issued their geothermal business licences (IUPs)
after 23 August 2012;
Finance & Projects
2 Client Alert ?September 2012
(b) developers which hold other forms of geothermal authorizations,
permits or contracts of geothermal business activities issued before the
2003 Geothermal Law (i.e. licences other than IUPs – e.g. Joint
Operation Contracts) who wish to pursue expansion projects;
(c) developers which hold geothermal authorizations, permits or contracts
of geothermal business activities issued before the 2003Geothermal
Law who are seeking an extension of their Power Purchase
Agreements (PPA) with PLN;
(d) developers which hold geothermal authorizations, permits or contracts
of geothermal business activities issued before the 2003Geothermal
Law who have already signed PPAs with PLN (and whether or not the
plant has started producing electricity or steam), provided that the
terms of the PPA provide that the parties may agree to changes in the
price of electricity or steam; and
(e) developers that hold IUPs that will "implement" PPAs, provided that the
price amendment is agreed between the parties and thePPA makes
possible the use of the new tariffs.
Application of new tariff to existing IUP holders
It is this last category of IUP holders mentioned in paragraph (e) above that
is likely to be the most controversial. In particular,the question is whether
this paragraph allows the holders of IUPs (which were granted prior to 23
August 2012) to use the new tariffs in their PPAs either signed with, or
currently under negotiation with, PLN.
The predecessor to this new regulation was very clear in this respect: it
provided that where a developer had obtained an IUP as a result of a
tender but had not signed a PPA, then it was the tender price bid by that
developer which should be used in the PPA (i.e. the new US$0.097 tariff
introduced under that predecessor regulation could notbe used by
developers that had already received their IUPs based on tariffs they had
already committed to in their bids previously submitted to the relevant
Regional Government). The fact that such a clear and unequivocal
statement is not found in Reg. 22/2012 suggests that the Government's
intent this time around is to allow the developers toavail themselves of the
new tariffs in their PPAs.
Based on our discussions with the Directorate General of Renewable
Energy and Energy Conservation (EBTKE), the category of developer
falling within paragraph (e) above applies to the holder of an IUP issued
prior to 23 August 2012, and includes both IUP holders that have already
signed PPAs with PLN, and those that have not yet signed their PPAs.
According to EBTKE, if PLN and the IUP holder agree to use the new
tariffs (as opposed to the tariffs submitted to the Regional Government),
then the new tariffs will be applicable. We are aware that PLN, however, is
of the view that the category of developers included in paragraph (e) above
are only those developers that hold an IUP issued prior to 23 August 2012
and who have not signed the PPA. Accordingly, in PLN's view, those IUP
holders that have already signed PPAs with PLN cannot avail themselves
of the new tariffs.
Finance & Projects
3 Client Alert ?September 2012
What is different with past geothermal tariff regimes?
1. No requirement to bid a tariff as part of IUP tender?
Under the previous regimes, the process of determining the price
payable by PLN involved the relevant developers participating in a
tender for the geothermal business licence (IUP) issued by the relevant
Regional Government, and as part of that bid process, the developers
were required to bid a specific US$/kWh price to the Regional
Government. The lowest price offered (provided the relevant bidders
met the required technical, financial capability and administrative
qualifications) would win the geothermal IUP, and then sign a Power
Purchase Agreement with PLN. Provided the successful bidder's price
was below the maximum caps set under the previous regimes, PLN
was obliged to accept that price.
Under this new regime, it would seem that developers will no longer be
required, as part of their bid to the Regional Government, to bid the
tariff that they are willing to accept. The applicable tariff is set based
on the location and voltage of the project as per thetable set out
above. So it would appear that there will no longerbe any competition
between developers for new projects based on tariff alone. If this is the
case, what is not yet known is the new criteria by which Regional
Governments will determine the winners of successful tenders. It may
be that the new bid evaluation criteria will be solely based on technical
and financial capability qualifications (although the concern is that this
will involve very subjective determinations by Regional Governments).
The alternative may be to adopt an approach similar to that used in the
oil and gas sector, where bidders are asked to be a "signing bonus"
that they are willing to pay to the Government in the event they are
awarded the project, with the highest offered bonus winning the
project. A further approach may be to seek minimum expenditure
commitments from the bidders (with appropriate securityin the form of
bank guarantees or escrowed funds), and the bidder that is willing to
commit to the most aggressive exploration program will be successful.
These latter approaches (i.e. signing bonus or minimum exploration
program) are very objective criteria, and accordingly from a
transparency perspective, they are preferred over evaluation criteria
based on the technical capabilities of bidders.
The regulation does provide that PLN can pay for tariffs in excess of
the amounts specified in the regulation, based on PLN's own estimate
and after obtaining the approval of the Minister. The fact that this
flexibility is allowed does raise an interesting question: if the intent of
the new regulation is to fix the tariff for the purposes of awarding new
geothermal licences so that bidders do not need to bidthe tariff that
they are willing to accept, how is it that a developer can find itself in a
situation where it has a tariff higher than the prescribed tariff? It may
be that this provision is only intended to apply to existing IUPs where
the successful tariff is higher than that prescribed in the regulation.
Our own interpretation of the regulation in this respect is that the prices
set out in the tariff merely set a floor for the bidding of a tariff as part of
the IUP bid. Accordingly, we expect that developers will still be
required to submit tariff bids as part of the Regional Government bid
procedures, and those tariffs may be higher than whatis provided for
in Reg. 22/2012 (e.g. for small-scale geothermal projects where the
Finance & Projects
4 Client Alert ?September 2012
tariffs set out in the regulation may not be economical). We would
expect that if a number of bidders all bid the floor tariff, then the
Regional Government evaluation process would turn to matters
relating to the technical qualification of the bidders, their work program
commitments and the like.
Despite our views, only time will tell how these requirements will be
implemented in practice by the Regional Governments.
2. No indexation
The regulation does not expressly provide for the specified tariffs to be
indexed over time. This was also the case with Reg. 22/2012's
predecessor which set the maximum cap at US$0.097, however
despite that, PLN executed PPAs which provided for the base tariff to
escalate over time.
It will be interesting to see if the Ministry interprets this new regulation
as giving PLN the flexibility to agree tariff indexation as part of the
detailed PPA wording (i.e. the tariffs stated in thenew regulation are
simply the base tariffs which can be escalated over time). Specifically
for developers that have IUPs issued before 23 August 2012 and have
yet to sign the PPA with PLN, PLN has indicated thatPLN is prepared
to agree to the adjustment of the existing tariff to match the tariff
stipulated under Reg. 22/2012, but on the basis that no indexation will
apply.
It is true that a large portion of the costs involved in developing a
geothermal project are capital costs invested up front (e.g. steamfield
and power plant development) funded by equity and fixed interest rate
financing, and accordingly there is no basis for these costs being the
subject of indexation over time. However all geothermal projects do
involve varying degrees of operational expenses (which may be
particularly weighty in those projects requiring significant de-scaling
works or ongoing investment in make-up wells to maintain the
geothermal resource). Accordingly, a flat tariff structure without
indexation (over 30 year PPA terms) may expose developers (and their
lenders) to a mismatch between a flat revenue line, and an increasing
operating costs line. Developers and lenders will need to ensure their
financial models are sufficiently robust to deal withsuch increases in
operational expenses over time. Accordingly, developers need to take
care in considering whether or not to adopt the new tariff.
3. Model PPA
Like its predecessor regulation, Reg. 22/2012 callsfor PLN to prepare
a standard power purchase agreement.
PLN has in fact now developed a Model PPA for geothermal projects.
One of the long-running complaints from developers who have been
awarded IUPs to-date has been that when they were participating in
the bid process with Regional Government, and were being asked to
bid an acceptable tariff, they had no visibility on what exposures they
would be taking on vis-à-vis PLN under the PPAs that would be
negotiated and signed with PLN post-bid. Clearly itis difficult to factor
unknown PPA risk allocation exposures into a tariff proposal submitted
to Regional Government well in advance of discussingthe PPA
Finance & Projects
5 Client Alert ?September 2012
principles with PLN.
It is expected that this new approach of PLN publishing its standard
PPA will give the developers a greater understanding, at the time they
participate in the bid with the Regional Government, of what their
exposures will be under the PPA if they are successful. This
development is a good one for both PLN and developers, as it means
that all stakeholders are very much "on the same page"from even the
IUP bid stage of the project.
Conclusion
All in all, the key principles behind Reg. 22/2012 are positives step forward
in the development of Indonesian geothermal projects.Fixing the price for
geothermal projects should assist in the roll-out of future geothermal
projects in Indonesia. The Government has set very aggressive renewable
energy targets through to 2025, and this regulation does go part of the way
to seeing those targets achieved.
Most of the near-term interest of how this new regulation will be
implemented in practice is likely to come from developers who have
already received their IUPs based on tariffs they have bid to Regional
Government, but who have yet to sign PPAs with PLN, and may seek to
use the somewhat uncertain wording of the regulation to negotiate new
tariff levels with PLN. Also, companies wishing to bidfor new geothermal
IUPs will be interested to see how this new tariff regulation is fed through
to the Regional Government tender processes – and in particular, on what
basis Regional Governments will now evaluate bids.
We will continue to monitor the implementation of this regulation in practice
by the Ministry of Energy and Mineral Resources.