Indonesia

Lubis Ganie logo

Menara Imperium, 30th Fl. Jl. H.R. Rasuna Said Kav. 1 Jakarta 12980, Indonesia
Tel: (62-21) 831-5005, 831-5025   Fax: (62-21) 831-5015, 831-5018
E: [email protected][email protected]     W: www.lgslaw.co.id

v14i8_Jur_indonesiaOn January 23, 2017, Indonesia’s Minister of Energy and Mineral Resources introduced a regulation that limits room for negotiation and risk allocation in power purchase agreements (PPAs).

Regulation No. 10 of 2017 on the Basic Provisions of Electricity Sales Purchase Agreement (Regulation 10/2017) contains a number of provisions that are articulated in expansive terms and, bar some mandatory provisions, are subject to detailed provisions in the individual power purchase agreement.

Scope of applicability
The regulation applies to independent power purchase between Indonesia’s state-owned Perusahaan Listrik Negara (PLN), as the buyer, and electricity producers, as the seller for all types of power plants, including geothermal, biomass and hydro, that have not entered bid-closing stage. Regulation 10/2017 does not retroactively apply to existing IPP agreements.

Electricity purchase project structure
Under Regulation 10/2017, IPP project structure must now use the Build Own Operate Transfer structure. The mandatory asset transfer at the end of the project life seems to depart from previous generations of power purchase agreements, wherein PLN and the power producer were free to negotiate alternative structures that could enable the latter to retain project assets after the project ends.

Government force majeure and its effects on the project
Under Art. 8 Regulation 10/2017, PLN and the power producer seem to bear risks of government force majeure events, defined as changes in policies or regulations. However, the Indonesian government’s regulatory authority is expansive and could affect a broad spectrum of the project’s financial model components, such as labour costs, land acquisition, construction materials and fuel prices. Where changes in government policy leads to project termination or the plant becoming inoperable, both PLN and the power producer are discharged/released (dibebaskan) of their respective obligations (Art. 28 (7)). The release under Regulation 10/2017 seems to cover all of PLN’s obligations and does not seem open for contractual modification. This might be contrary to current practices, where in certain qualifying projects under the Fast Track Programme II (FTP II) or public-private partnership (PPP) in the electricity sector, political risks are absorbed by the government through a government guarantee scheme, either in the form of business viability guarantee or PPP guarantee (as applicable).

Performance security
While previously the performance security scheme varied from one project to another, Regulation 10/2017 now explicitly stipulates three stages of performance security where the first stage will cover the seller’s performance from the signing of the PPA to financial closing; the second stage will cover the seller’s performance from the signing of the PPA to commissioning; and, lastly, the third stage will cover the seller’s performance from the signing of the PPA to the commercial operation date.

PLN’s failure to absorb produced power
Art. 6 (2) of Regulation 10/2017 implies that PLN is not obligated to pay for electricity when a force majeure disrupts its grid, and as a result becomes unable to absorb the power made available by a plant. The implication is that power producers will have to share risks that they are unable to manage. Regulation 10/2017, however, allows for PLN and power producers to agree on the details of this under the PPA, therefore allowing some flexibility.

Penalty
The regulation provides that a PPA may provide for penalties. Under Indonesian law, penalty payments are expressly allowed (Art. 1304 through 1312 Civil Code) and, depending on the contract, penalty payments may apply in addition to or instead of other obligations. Penalties may be imposed for (Art. 22 Regulation 10/2017):

  1. Delays in reaching commercial operations date, paid as liquidated damages;
  2. Power unavailability, paid as availability factor or outage factor;
  3. Shortfall between agreed and actual heat rate;
  4. Failure to maintain frequency or reactive power requirements; or
  5. Failure to meet the ramp rate.

Restrictions on transfer of shares
Article 24 of Regulation 10/2017 restricts share transfer in the power producer company prior to the commercial operation date, except transfer between a project sponsor and its affiliates (which must be 90 percent owned). The regulation does not expressly contemplate for share transfer between co-sponsors (eg, transfer between consortium of sponsors). Any transfer of shares after commercial operation date must be approved by PLN and reported to the Minister of Energy and Mineral Resources.

Related Articles by Firm
Recent changes to Indonesia’s coal and mineral resources regulations
On January 11, 2017, the Government of Indonesia enacted Government Regulation No. 1 of 2017 on Fourth Amendment of Government Regulation No. 23 of 2010 on Implementation of Mineral and Coal Mining Business Activity ...
Indonesia’s new construction bill
In December 2016, Indonesia’s Parliament passed the Construction Services Bill to replace existing legislation on construction services, Law No. 18 of 1999 on Construction Services ...
Reformulation of coal prices for mine-mouth power plants
The Minister of Energy and Mineral Resources (MoEMR) has amended a number of key provisions that regulate the price for coal used in mine-mouth power plants. ...
The thing about … Dr Mohamed Idwan Ganie
In the third of a quarterly feature, ASIAN-MENA COUNSEL's Patrick Dransfield talked to Dr Mohamed Idwan (Kiki) Ganie, Managing Partner, Lubis Ganie Surowidjojo (LGS) Indonesia, and put to him a series of questions on ...
The thing about … Dr Mohamed Idwan Ganie
In the third of a quarterly feature, ASIAN-MENA COUNSEL's Patrick Dransfield talked to Dr Mohamed Idwan (Kiki) Ganie, Managing Partner, Lubis Ganie Surowidjojo (LGS) Indonesia, and put to him a series of questions on behalf of ...
Related Articles
India update from Clasis Law
Including briefings on the national food processing policy, projects and energy, and intellectual property.
Apple sues Qualcomm over abuse of dominant market position
In January 2017, Apple sued Qualcomm in Beijing Intellectual Property Court over the abuse of its dominant market position. Apple alleged that Qualcomm abused its market dominance when licensing telecommunication standard-essential patents (SEPs) and selling baseband chipsets. ...
Dollar-denominated securities in relation to Corporation Code’s provisions on capital
The Philippines Stock Exchange (PSE) issued rules on December 2, 2016 governing the listing, trading and settlement of US dollar-denominated securities (DDS)....
Related Articles by Jurisdiction
Foreign investment restrictions in Indonesia
Restrictions on foreign shareholders in Indonesia are set out in the most recent Negative Investment List, contained in Presidential ...
New regulations bring big changes to the Indonesian manpower sector
Two recently released regulations have introduced important changes to the Indonesian manpower sector. While the changes should generally be welcomed by the business ...
Latest Articles
India update from Clasis Law
Including briefings on the national food processing policy, projects and energy, and intellectual property.
Linklaters to join Shanghai FTZ crowd
A 'best friends' deal with newly created firm Zhao Sheng will make it the latest international firm with a presence in the free-trade zone.