The Indonesian Government continues to act on its policy of prioritising mine-mouth power projects.
In September 2013 we wrote that the Government was discussing a draft new regulation on mine-mouth power projects. The new ministerial regulation was issued in April, focusing on the supply and pricing of coal for mine-mouth power projects.
New coal price formula
The coal price for mine-mouth power projects will be determined on a case-by-base basis by the Director-General of Minerals and Coal. The coal price will be based on the floor price, taking into account price escalation. The floor price is production cost plus a margin, calculated on the basis of 25% of the total production cost.
The production cost is determined by the Director-General. It will take into account technical aspects of the mine and other factors which impact on national average production costs, including:
- overburden removal costs;
- coal drilling costs;
- transportation costs;
- processing costs;
- environmental survey and management costs;
- reclamation and post mining costs;
- occupational health and safety costs;
- community development and employment costs;
- land compensation;
- depreciation and amortisation; and
- dead rent and/or royalties.
The previous position on the price of coal for mine-mouth power plants was as follows:
- coal with a calorific value of at least 3,000 kcal/kg GAR could be sold at below the Coal Reference Price (Harga Patokan Batubara/CRP) set by Indonesia’s Ministry of Energy and Mineral Resources (MEMR) on a monthly basis, if approved by the Director-General; and
- coal with a calorific value below 3,000 kcal/kg had to be sold at production cost plus margin.
The new regulation moves closer to the previous pricing mechanism for coal below 3,000 kcal/kg, which also required Director-General approval and allowed for a 25% margin. However, unlike the previous regulation, the new regulation makes no reference to the CRP, although it is not yet clear whether the Director-General will take into account the CRP during the floor price approval process. To a certain extent, that currently leaves unresolved the question of the ongoing relevance of the CRP for mine-mouth power projects. Our contacts at the MEMR admit there is some uncertainty in this context. The difficulty is that the new regulation does not revoke the previous regulation.
Earlier drafts of the regulation included a schedule which specified the actual US$ per metric tonne (PMT) figures for coal being sold to power plants under a mine-mouth arrangement, calculated at an increasing scale based on the stripping ratio. However, this has not been included in the final issued regulation. This leaves considerable discretion for the Director-General to decide on a case-by-case basis.
As a practical matter, the mine owners and the power company are likely to agree on the proposed pricing in advance. However, any agreement will need to be amended if approval from the Director-General is not forthcoming.
Coal basic price determination
Miners must apply to the MEMR for approval of the coal basic price. Once approved, the coal basic price will be valid for the duration of the coal sale contract or power purchase agreement.
Price escalation will be considered every 12 months, based on:
- Rupiah exchange rates;
- diesel prices;
- the consumer price index; and
- regional minimum wages.
Under the new regulation, coal will be supplied to mine-mouth power plants based on an agreement between the mine owners and mine-mouth power companies. The coal can be supplied by one or more mine owners. The previous regulation was silent on this point.
The mine owners must meet the following requirements:
- the concession must be listed on the MEMR’s so-called Clean-and-Clear List, which would require that the concession area does not overlap with other mining concession areas, and that the mine owner is not in breach of the concession conditions;
- the mine must have reserve allocation and coal quality as required by the mine-mouth power plant; and
- MEMR approval must have been issued for the floor price.
Royalties will be calculated based on the higher of:
- the coal price agreed between the miners and the mine-mouth power plants; or
- the production fees determined by the MEMR.
As the regulation is silent on the royalty percentage, we presume that the standard royalty rates of 3–7% for Mining Business Permits (Ijin Usaha Pertambangan/IUP) and 13.5% for Coal Contracts of Work (CCOW) will apply. In a controversial move, the Government has proposed increasing the current royalty rates applicable to IUPs to match the royalty rate applicable to CCOWs.
Ownership in mine-mouth power plants
The new regulation requires the mine owner to share ownership in the power plant. A mine-mouth power plant company must be formed by a consortium comprised of the mine owner and other companies. The mine owner or its affiliates must own at least 10% of the shares of the mine-mouth power plant company. The previous regulation provided only that the mine and the power plant must be held by different entities.
As is common for Indonesian regulations, their implementation by the government will determine how any vague aspects of the regulation are to apply. In this context, it may be some time before the relevance of the CRP to mine-mouth power projects is clarified.