Regulation on Electricity Pricing for Geothermal Projects

Overview
On 16 February 2011, the Minister of Energy and Mineral Resources (the MEMR) issued a new regulation on Electricity Pricing for Indonesian Geothermal Projects (MEMR Reg 2/2011). This new regulation is important because it obliges PT Perusahaan Listrik Negara (Persero) (PLN) to buy electricity from independent geothermal power producers and sets price guidelines for the purchase of the power by PLN under the applicable power purchase agreements (PPAs). This regulation will be used as a reference for all geothermal power projects in Indonesia. The procedure for establishing tariffs for Indonesian geothermal power projects has lacked clarity for some years. We expect that MEMR Reg 2/2011 will provide greater certainty to the process of settling tariffs for such projects, thereby expediting the negotiation of geothermal PPAs and helping to provide much-needed impetus to the development of this sector.

The past: How electricity tariffs have been regulated

Prior to the passing on 22 October 2003 of Law No. 27 of 2003 on Geothermal Law (the Geothermal Law), Pertamina had the exclusive authority to explore and develop geothermal projects in Indonesia. Pertamina would typically have entered into a joint operating contract with a sponsor as the contractor that would develop the project and generate electricity. The contractor would then enter into an energy sales contract with PLN for the sale and purchase of the electricity. The electricity price would be negotiated between the parties as part of the energy sales contract.

Under a MEMR Regulation issued in 2009 relating to pricing guidelines for geothermal power projects in Indonesia (MEMR Reg 32/2009), PLN was authorised to purchase electricity generated from geothermal power plants. That regulation stipulated that the electricity tariff payable by PLN could be negotiated between PLN and the relevant independent power producer but was capped at US 9.7c per kWh. Although this regulation provided for a maximum tariff, it still left open the possibility of PLN trying to negotiate the tariff downwards during, or even after, the process of awarding the licence to implement the relevant geothermal project. Delays and uncertainty were the inevitable result. MEMR Reg 32/2009 also had no application to tariffs for geothermal projects awarded prior to the issuance of that regulation. MEMR Reg 2/2011 revokes MEMR Reg 32/2009.

Present and future: Electricity tariffs for geothermal projects

Two of the key features of MEMR Reg 2/2011 are that it applies to all geothermal projects awarded licences since the enactment of the Geothermal Law in 2003 and that it applies different electricity tariff guidelines for different geothermal projects, depending on when the licence for the project is issued.

• For any projects awarded a licence after 16 February 2011 (the date MEMR Reg 2/2011 took effect), the tariff will be fixed at the price proposed in the bid documents of the successful bidder, subject to a cap of US 9.7c per kWh computed at the point of power transmission.

• For projects awarded a licence after the Geothermal Law took effect, but before 16 February 2011, the tariff will remain fixed at the price proposed in the bid documents of the successful bidder. However, if that tariff is higher than US 9.7c per kWh, PLN and the sponsor must negotiate the price down by reference to PLN's own estimated tariff as contemplated in its internal bidding manual for electricity procurement. The negotiated price will be subject to new approval by the MEMR. Any such negotiation process might take some time and there would likely need to be strong justification for agreeing a new tariff that is substantially above PLN's own estimated tariff. However we understand that only a very small number of geothermal power projects would fall into the category requiring such renegotiation.

Open issues: Risk allocation and PLN credit

While MEMR Reg 2/1011 provides some increased certainty with respect to tariffs, a number of concerns remain for investors in the Indonesian geothermal power sector. These include:

• the allocation of various risks under the PPA (PLN has taken an aggressive approach by publishing a standard form geothermal PPA); and

• PLN credit risk, particularly given PLN's increasing reliance on the purchase of electricity generated by independent power producers.

The uncertainty as to whether a Government guarantee of PLN obligations will be made available for geothermal projects remains unresolved by MEMR Reg 2/2011. The Government has previously introduced guarantee schemes (such as government guarantees under the '10,000MW fast track program'). Presidential Regulation No. 4 of 2010 dated 8 January 2010 also provides a legal basis for the Government to guarantee the obligations of PLN for renewable energy projects. However, it remains to be seen whether the Government is willing to issue guarantees for geothermal PPAs.

MEMR Reg 2/2011 took effect on 16 February 2011.

Daniel Ginting, Partner, Ginting & Reksodiputro (in association with Allen & Overy)