Govt guarantee for IPP
projects is ‘unclear’

Despite improvements, there are two flaws in a recently issued ministerial decree providing a government guarantee ensuring that state electricity utility PLN will meet its financial obligations to independent power producers (IPP), according to a legal expert.

Luke Devine, a legal consultant for Hadiputranto, Hadinoto & Partners law firm, said in Jakarta on Monday that the weaknesses were related to the period of time covered by the decree and a lack of clarity on who would be responsible if PLN breached its power purchase agreements (PPA).

“The guarantee only covers the period after the commercial operation date [COD], so events that happened before the COD, such as a delay caused by government or PLN restructuring, are not covered,” he told reporters after a discussion at his office in Jakarta on Monday.

He claimed that IPPs for geothermal energy, in particular, were not created with the expectation that the government would provide a guarantee for all upstream activities such as exploration as developers were willing to accept the risk of unsuccessful exploration.

“What they want to ensure against is when they have spent all the money and the project is ready to move forward and then there are some government delays, such as some permits not being issued. They need the government or PLN to pay compensation for that loss,” Devine said.

The second weakness was that the decree only guaranteed that PLN would pay regular invoices for electricity delivered by an IPP as stipulated by PPAs, said, adding that if PLN breached a PPA and the IPP wanted to terminate the contract, there was no guarantee that PLN would pay compensation to the IPP.

Devine said that the government had two options to fix the weaknesses. First, the decree could be amended. Second, the decree could include additional guarantees in the form of letters of guarantee that would be given to developers.

The new decree says that the government will provide a guarantee for the capability of PLN to fulfill its financial obligations in connection with the occurrence of default risk on the basis of power sales and purchase agreements with IPPs.

The guarantee only covers default risks occurring in part or during the operational period of power plant projects.

As reported earlier, several geothermal developers have been reluctant to sign PPAs with PLN due to the lack of clarity on guarantees.

Supreme Energy, for instance, rejected signing PPAs for the Gunung Rajabasa and Muara Laboh geothermal fields in Lampung and West Sumatra. PLN also has not signed a PPA with the Bakrie Group, which operates the Sukoria geothermal field in East Nusa Tenggara.

To accelerate the completion of geothermal projects, Devine suggested that PLN create standard procedures for tenders.

Currently, the tender process was conducted by regional governments under different procedures, he explained.

“[PLN] better give regional government heads fixed terms and conditions so the winners of the tender know what commitments they have to fulfill. After that, they can directly sign [PPAs] with PLN and start the project,” he said.

The New Renewable Energy and Energy Conservation Directorate General at the Energy and Mineral Resources Ministry announced in a press statement the development projects of 43 geothermal power plants with a total capacity of 2,170 megawatts would begin in the near future.

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