Finance & Projects Jakarta | Singapore Client Alert August 2015 Government improves Indonesian Mini Hydro Tariff regime On 29 June 2015, the Ministry of Energy and Mineral Resources ("MEMR") issued a new Feed-in-Tariff ("FIT") regulation for hydropower projects with a capacity up to 10 MW ("Mini Hydro") power projects. Regulation No. 19 of 2015 on Power Purchase from Hydro Power Plants with a Capacity up to 10 MW by PT Perusahaan Listrik Negara (Persero) ("PLN") ("Reg. 19") replaces MEMR Regulation No. 12 of 2014 as amended by MEMR Regulation No. 22 of 2014 ("Reg. 12"). Reg. 19 suggests that the intention of the new FIT regulation is to accelerate development of Mini Hydro power projects to attract more investment by local and foreign investors in Mini Hydro power projects. The previous Reg. 12, featuring Rupiah-based tariffs, has been criticized by the industry as having been set too low, particularly considering the continued depreciation of the Rupiah against the US Dollar, and the Mini Hydro projects are only possible with US Dollar denominated imported equipment. So the recent move by Government to set the tariffs in US Dollar terms, and generally increase the tariff levels, will hopefully spur the stalled investment in the sector. What's new? Reg. 19 features these key changes: (1) New FIT tariffs for Mini Hydro projects are in US$ (US$ cent/kWh) Voltage/ Capacity FIT Tariffs (US$ cent/kWh) F Factor - Depending on the Location of the Plant Mini Hydro Projects from River Water Source Mini Hydro Projects Utilizing Multipurpose Dams and/or Irrigation Medium voltage (Up to 10 MW) Year 1 - 8: 12.00 x F Year 1 - 8: 10.80 x F • Java, Bali and Madura: 1.00 • Sumatera: 1.10 • Kalimantan and Sulawesi: 1.20 • West Nusa Tenggara and East Nusa Tenggara: 1.25 • Maluku and North Maluku: 1.30 • Papua and West Papua: 1.60 Year 9-20: 7.50 x F Year 9 - 20: 6.75 x F Low voltage (Up to 250 kW) Year 1 - 8: 14.40 x F Year 1 - 8: 13.00 x F Year 9 - 20: 9.00 x F Year 9 - 20: 8.10 x F Finance & Projects 2 Government improves Indonesian Mini Hydro Tariff regime August 2015 The above tariffs: • include costs of transmission and interconnection to PLN's network; • require no further negotiation with PLN; • are without escalation; • require no tariff approval from the MEMR; and • apply when the plant has achieved Commercial Operation Date according to the milestone schedules agreed in the Power Purchase Agreement ("PPA"). (2) Currency indexation All tariffs for Mini Hydro projects are set out in US$ (US$ cent/kWh) but the payment of the invoice by PLN will be made in Indonesian Rupiah based on Bank Indonesia middle exchange rate at 11.00 West Indonesia Time one day prior to the invoice date. This appears to suggest that despite the US$ FIT, PLN will pay the invoice in Rupiah, in line with the recent Bank Indonesia regulation and circular letter that require the use of Rupiah for payments in Indonesia. Please see our previous alerts on the Mandatory Use of Rupiah in Indonesia under Bank Indonesia Regulation No. 17/3/PBI/2015 and Mandatory Use of Rupiah under Circular Letter of Bank Indonesia No. 17/11/DKSP. As Reg. 19 suggests that the invoice amounts will be indexed to the US$ - Rupiah exchange rate one day before the date of the invoice, instead of on the date of the payment of the invoice by PLN, the developer is taking the risk on further currency depreciation over the invoice period. (3) Existing Mini Hydro projects are entitled to adjustment to the new FIT tariffs The transitional provisions of Reg. 19 appear to suggest that adjustment to the new FIT tariffs is applicable to: (a) Existing Mini Hydro power projects that obtained stipulation from the Directorate General of New and Renewable Energy and Energy Conservation ("EBTKE") as hydro power developers prior to Reg. 19 and whose previous FIT tariff was as provided in Attachment 1A or Attachment 1B of Reg. 12). These existing Mini Hydro power projects are entitled to adjust their tariffs to the new FIT tariffs as mentioned in item (1) above. (b) Existing Mini Hydro power projects that: • are already in operation; • have a PPA; • have a PLN appointment as a hydro power plant developer; • have obtained an EBTKE stipulation as a hydro power plant developer based on the weighted average tariff provided in Attachment III of Reg. 12. Finance & Projects 3 Government improves Indonesian Mini Hydro Tariff regime August 2015 These projects are entitled to adjustment to the new FIT tariffs as referred to in Attachment IV of Reg. 19, as follows: Voltage/ Capacity Weighted Average Tariff (US$ cent/kWh) F Factor - Depending on the location Medium Voltage (Up to 10 MW) 9.30 x F • Java, Bali and Madura: 1.00 • Sumatera: 1.10 • Kalimantan and Sulawesi: 1.20 • West Nusa Tenggara and East Nusa Tenggara: 1.25 • Maluku and North Maluku: 1.30 • Papua and West Papua: 1.60 Lower Voltage (Up to 250 kW) 11.00 x F The above adjustment tariffs: • require no further negotiation with PLN; • are without escalation; • are not retroactive; • require no tariff approval from the MEMR; and • apply to the PPA until the term of the PPA expires. In addition, the new Reg. 19 appears to have similar provisions to the previous Reg. 12 in respect of the following matters: • Tariffs vary depending on the transmission voltage or capacity of PLN's power grid and location of the plant (F Factor). • Reg. 19 covers Mini Hydro power plant projects utilizing multipurpose dams and/or irrigation channel water resources as well, and a lower feedin-tariff is applied for those projects. • All tariffs are non-negotiable (i.e. PLN and developer must accept) and no escalation tariffs. • The tariffs are effective on the commercial operation date of the plant. • Procedures for obtaining EBTKE's stipulation as a Mini Hydro power developer, a Temporary IUPTL, a Permanent IUPTL and the signing of a PPA. • Mandatory milestones and the relevant consequences in respect of : (a) achieving financial close within 15 months after signing of a PPA and (b) physically constructing a Mini Hydro power plant within 3 months after the issuance of a Permanent IUPTL. Please refer to our previous Client Alert on Reg. 12. Finance & Projects 4 Government improves Indonesian Mini Hydro Tariff regime August 2015 Procedures for Purchase of Power by PLN Set out below are the procedures for purchase of power by PLN from Mini Hydro power plants under Reg. 19: • A business entity that is interested in developing a Mini Hydro power plant must submit a written application using the format in Attachment III of Reg. 19 to the MEMR with a copy of the application to EBTKE to obtain a stipulation as a Mini Hydro power project developer. • The application must include, among other things: (a) a pre-feasibility study which has been technically verified by PLN; (b) an estimation of the total investment of the project; (c) construction schedule until the commercial operation date; and (d) a statement letter regarding the availability of the land. Similar to the provision of Reg. 12, Reg. 19 requires the developer to submit a statement letter confirming the understanding and the ability of the developer to perform a PPA as published by PLN. It seems Reg. 19 does not provide room for negotiation of any of the terms of the PPA, as this is in line with the spirit of Reg. 19 - no negotiation. • EBTKE on behalf of the MEMR will stipulate whether the EBTKE will approve or reject the developer's application within 30 working days after a complete application is received. The EBTKE stipulation will be copied to the Director General of Electricity and PLN's board of directors. • Within 30 working days after the issuance of the EBTKE's stipulation, the developer must submit a deposit certificate with an amount of 5% of the total investment amount required for the construction of the Mini Hydro power project. • After submitting a deposit certificate, the developer must apply for a temporary Electricity Supply Business License ("Temporary IUPTL"). A copy of the temporary IUPTL must be submitted to the EBTKE within 3 days after obtaining the Temporary IUPTL. • Within 90 working days after the issuance of the Temporary IUPTL, the developer must submit a feasibility study and documents required for the PPA signing to PLN. • The PPA must be signed within 30 working days after all the documents have been submitted, or otherwise: (a) the EBTKE's stipulation as a Mini Hydro power project developer will be revoked; (b) the developer is prohibited to apply for the EBTKE's stipulation and participate in Mini Hydro power projects for the following two years; and (c) 25% of the deposit amount will be retained by the State. • Within 15 months after the PPA signing, the developer must achieve a financial close for the physical construction of the Mini Hydro power plant. Finance & Projects 5 Government improves Indonesian Mini Hydro Tariff regime August 2015 • A developer that has signed a PPA and has achieved the financial close must apply for a permanent IUPTL. Within three working days after obtaining the permanent IUPTL, the developer must submit a copy of the permanent IUPTL to the EBTKE. Transitional Provisions - Tariffs Adjustment Procedures As mentioned above, the transitional provisions of Reg. 19 appear to suggest that adjustment to the new FIT tariffs is applicable to: (1) existing Mini Hydro power projects that have obtained an EBTKE stipulation as a hydro power developer before Reg. 19 and whose FIT is provided in Attachments 1A and IB of Reg. 12; and. (2) existing Mini Hydro power projects that satisfy one or more of the following criteria: (a) are already in operation; (b) have a PPA; (c) have a PLN appointment as a hydro power plant developer; and/or (d) have obtained an EBTKE stipulation as a hydro power plant developer based on the weighted average tariff provided in Attachment III of Reg. 12. The above criteria seem to suggest that all existing Mini Hydro power projects prior to Reg. 19 are entitled to obtain a tariff adjustment, provided that they can satisfy the requirements for obtaining a tariff adjustment - as briefly explained below. The adjustment procedures for existing Mini Hydro power projects meeting the criteria specified in item (1) above is by way of applying the new FIT tariff to the PPA to be executed with PLN. The adjustment procedure for existing Mini Hydro power projects meeting the criteria specified item (2)(a) to (2)(c) above is by applying for a stipulation from the EBTKE as a developer of Mini Hydro power projects using the form set out in Attachment V(A) and (B) of Reg. 19 and submitting the required documents, among others, business profile, licenses and permits, minutes of financial close, minutes of commercial operation date and operation worthiness certificate. Once the application is approved, the existing PPA will be amended and the tariffs will be applied accordingly. Existing Mini Hydro power projects meeting the criteria specified in item (2)(d) above do not appear to be required to apply for another stipulation as a Mini Hydro power project developer, and it seems to suggest that the tariff adjustment will be applied accordingly in the amendment to the PPA (or the existing PPA as the case may be). Finance & Projects 6 Government improves Indonesian Mini Hydro Tariff regime August 2015 After the tariff is adjusted, the relevant existing Mini Hydro power projects that: • have not started physical construction of a Mini Hydro power plant must achieve financial close and start physically constructing the Mini Hydro power plant within 6 months after the signing of the PPA; and • have started, but not completed, physical construction of a Mini Hydro power plant, must continue to conduct physical construction of the mini hydro power plant within 3 months after the signing of the PPA (i.e. now that the tariff issue has been resolved, stalled construction activities must be re-started). Failure to do so may cause its stipulation as a developer of a Mini Hydro power project to be revoked and suspension of the developer's participation in other Mini Hydro power projects for two consecutive years. Closing - Remaining Issues The new FIT regulation is a very positive signal to the market – the Government has heard the concerns of Mini Hydro investors, and has taken steps to address them. In return, developers are being asked to speed up development. So this recent regulatory change is consistent with the broader regulatory reforms being made across the power sector – all aimed at getting new power generation projects up and into operation as soon as possible, to enable Government to meet its aggressive electrification and infrastructure development goals. However, to complete the picture on Mini Hydro project reforms, focus will now shift to the revised model PPA to be soon issued by PLN. The project risk allocation laid out under previous iterations of the Mini Hydro PPA have been criticized as not being appropriate for non-recourse project financing, in stark contrast to the PPA used by PLN for the larger hydropower projects which by and large have been bankable PPA used to raise non-recourse debt financing. In particular, particular focus will be on the strength of PLN's dispatch commitment under the Mini Hydro PPAs, and circumstances in which PLN is entitled to curtail delivery of energy from the plant without PLN having a payment obligation. If the new model PPA does represent a bankable document, there is high expectation that we will see significant levels of new investment in the Mini Hydro sector. www.bakermckenzie.com For further information please contact Luke Devine Foreign Legal Consultant +62 21 2960 8600 firstname.lastname@example.org Kirana D. 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