Electricity provider PLN, Indonesia’s biggest state company by asset, has refused to sign a contract with oil and gas company Pertamina even after the former declared the latter the winner in late October of a consortium to construct a 2 x 800 megawatt (MW) power plant.

Under an independent power producer (IPP) scheme, the consortium will construct a US$2 billion plant in Bekasi, West Java, and sell the electricity to PLN for distribution in Greater Jakarta and West Java areas.

The project, known as Java 1, is among the biggest in the ambitious 35,000 MW program — a signature policy of President Joko “Jokowi” Widodo.

PLN has argued that several points still needed to be met by Pertamina, among the biggest profit contributors to the state budget, before it would agree to sign a power purchase agreement (PPA) and allow Pertamina to begin construction.

While PLN has refused to detail out the points, State-Owned Enterprises (SOEs) Minister Rini Soemarmo cited the thorny issue revolved around a unilateral requirement set out by Pertamina to have PLN buy 92 percent of the plant’s electricity production capacity shortly after the company was named the bidding winner.

Rini explained that Pertamina’s request was against PLN’s bidding rule in which PLN was only willing to purchase as much as 60 percent of the plant’s capacity output. If PLN demands more than the minimum limit, a new price calculation would set in.

PLN has insisted for Pertamina to lower the purchase requirement to 60 percent from 92 percent, but Pertamina will have difficulty in doing so as its partners in the consortium will see their internal rate of return (IRR) turn unfeasible.

“Although Pertamina and PLN are 100 percent owned by the state, the problem cannot be resolved through the ‘family approach’ because this is an international bidding and our reputation will be at risk if we compromise the rule,” Rini said recently.

Pertamina should abide by the rule and should not unilaterally change its numbers along the way. It will be unfair for other bidding participants,” she said.

Pertamina, along with Japan’s Marubeni Corporation and Sojitz Corporation, won the bidding after offering the lowest price of 5.7 US cent/kilowatt hour of electricity for PLN to purchase.

In the final stage of the bidding, the consortium outbid a group consisting of local energy company PT Adaro Energy and Singapore’s Sembcorp, and another group comprising local energy firm PT Rukun Raharja and Mitsubishi Corporation.

Hence, the Pertamina consortium was obliged to sign the PPA within 45 days after the winner announcement.

“However, in December 2016, Pertamina sent us a letter informing that it needed more time before inking the PPA,” PLN’s director of procurement Supangkat Iwan Santoso told The Jakarta Post over the weekend. “So it’s not us who want to delay this project. We just want them to meet all the requirements.”

Rini said she would not interfere with the issue, and would accept any decision made by PLN based on fair and rational business calculations.

“Although Pertamina has come to me to report the problem, it will be up to PLN to decide. The decision should be based on the bidding rule,” she said.

Pertamina spokeswoman Wianda Pusponegoro said the company was still reviewing the detail requirements in the PPA contract.

“We are in the process of comprehensively reviewing the content of the PPA. There are some points that will need detailed calculations and there are several strategic issues related to the supply of LNG [liquefied natural gas],” Wianda said.

“As a consortium, we also have to be prudent. There should also be a clear responsibility between us and the organizer,” she said.

PLN has ensured the gas supply for Java 1 plant will be taken from BP Indonesia’s Tangguh field in West Papua despite speculation of Pertamina having opposed the scheme.

PLN has given Pertamina until this week to comply with the rule or risk the award being terminated.

A termination of the award is likely to cost more time and money for PLN and the private sector is already way behind schedule in organizing a new bid for when the completion of the 35,000 MW program happens.

The government and PLN have said that a minimum target of 19,700 MW or 56.3 percent would be achieved by 2019.

Firlie Ganinduto, the head of the standing comittee for institutional relations and energy, oil and gas regulations at the Indonesian Chamber of Commerce and Industry (Kadin), said the debacle had posed as another round of negative precedent for businesses.

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