Finance & Projects

Jakarta

Client Alert

July 2013

Introduction of Solar Power Feed-In-Tariff and

New Solar Power Purchase Procedures In
Indonesia
The Minister of Energy and Mineral Resource ("MEMR") recently issued
Regulation of MEMR No. 17 of 2013 (Reg. 17/2013) to stipulate among other
things: (i) new procedures for purchase of power from solar photovoltaic
power projects in Indonesia which require developers to bid in capacity quota
tenders; and (ii) feed-in-tariff for solar photovoltaic power projects at the cap of
US$0.25/kWh, or US$0.30/kWh if the photovoltaic module contains 40% or
more local components.

New Procedures for Purchase of Power from Solar

Photovoltaic Power Projects
Reg. 17/2013 introduces new procedures for purchase of power from solar
photovoltaic power projects in Indonesia.

Tender is required
Before the issuance of Reg. 17/2013, PT PLN (Persero) ("PLN") - the
electricity oftaker in Indonesia - was allowed to purchase electricity from solar
power projects through a direct appointment (without a tender). Reg. 17/2013,
which only obliges PLN to purchase electricity generated from capacity quota
winning bidders, suggests that the only mechanism for PLN to purchase
power from solar photovoltaic power plants is through capacity quota tenders
using the procedures set out under Reg. 17/2013, i.e., direct appointment is
no longer allowed.

Introduction of capacity quota

Capacity quota, another new concept introduced by Reg. 17/2013, is defined
as the total maximum capacity of solar photovoltaic power plants that can be
interconnected to PLN's grids. Capacity quota will be determined annually at
the beginning of each year by the Directorate General of Renewable Energy
and Energy Conservation ("EBTKE"), based on a proposal of capacity quota
that EBTKE receives from PLN. The officials from EBTKE explained to us that
PLN will prepare the capacity quota proposal by taking into account PLN's
Electricity Supply Plan (Rencana Umum Penyediaan Tenaga Listrik or
"RUPTL").
We were informed by officials from EBTKE that the initial capacity quota will
be issued within two to three months after issuance of Reg. 17/2013. The
sizing of the projects to be offered as part of the annual quota will be
dependent, amongst other things, on the load demands in the relevant area
as well as the capacity of available transmission and distribution grids to
accept the power. If the quota establishes a long list of small scale projects
(e.g. 1-5MW), it may render them unattractive to large international solar
developers.

Finance & Projects

Detailed Tender Procedures

Reg. 17/2013 provides detailed procedures and requirements for the capacity
quota tenders.
Capacity quota tenders will be conducted by EBTKE, not by PLN, but a
representative from PLN will be a member in the tender committee. This
development where PLN will be involved in the tender should be a good one
both for PLN and developers as it means that PLN and developers will be very
much "on the same page" from even the capacity quota bid stage.
The tender method adopts a two-envelope mechanism by using a threshold
scoring system and a lowest tariff scoring system evaluation. The first
envelope will contain administrative, technical and financial requirements, and
the second envelope will contain the bid tariff.
a)

The administrative requirements include among other things, corporate

documents and profile of the bidder, tax number (NPWP) and a
consortium agreement if the bidder is a consortium.

b)

The technical requirements include among other things, location plan,

commercial operation date schedule, projection for electricity production
for 20 years, work program and budget; detailed engineering design, and
technical specification of the plant.

c)

The financial requirements include among other things, audited financial

statements, bid guarantee in the amount of 2% of the total investment
from a state-owned bank or a prime bank in Jakarta; and an undertaking
letter to open an escrow account and deposit 20% of the total investment
within 15 working days after determination of the winning bidder.

In our discussions with officials from EBTKE, we were informed that the
tender committee will set a minimum score that a bidder must achieve in the
first envelope evaluation. The tender committee then will only open the
second envelope of the bidders who pass the first envelope evaluation.
Three bidders with the lowest bid tariff who have passed the first envelope
evaluation will be invited to the evidentiary and clarification session. A bidder
who fails to prove authenticity of documents submitted in the bid in this
session will be disqualified.
After completion of the evidentiary and clarification session, the tender
committee will submit the bidders ranking to EBTKE and the winning bidder
will be determined by EBTKE which will then further announce it in a website.
It is not clear from Reg. 17/2013 whether the determination of the winning
bidder should be solely based on the lowest bid tariff. However, the officials of
EBTKE explained to us that the bidder with the lowest bid tariff will be
appointed as a winning bidder regardless of its score from the first envelope
evaluation because only bidders who have passed the threshold score in the
first envelope evaluation will continue to the second envelope evaluation. If
however there is more than one bidder who submitted the lowest bid tariff, the
score from the first envelope evaluation will be considered to determine the
winning bidder.
There is also an objection period, which is five working days after the
announcement of the winning bidder.
The entire tender process from tender announcement up to the end of the
objection period will take around 47 days.
2

Introduction of Solar Power Feed-In-Tariff and New Solar Power Purchase Procedures In Indonesia July 2013

Finance & Projects

Can a foreign entity bid?

It is not clear whether a foreign entity can participate in the tender since
Reg. 17/2013 mandates that only an Indonesian legal entity engaging in the
electricity supply sector can be stipulated as a winning bidder. From our
reading, as bidders must submit an Indonesian tax registration number,
bidders then legally cannot be foreign entities.
However, we received several different views. Some officials of EBTKE
believe that only an Indonesian legal entity can bid but some others believe
that a foreign entity can also bid, provided it joins up with an Indonesian legal
entity and they bid as a consortium.
According to the officials of EBTKE who believe that a foreign entity can bid
as a consortium, after the consortium is determined as the winning bidder, the
consortium must form an Indonesian legal entity engaging in the electricity
supply sector before the signing of the Power Purchase Agreement ("PPA")
and this new entity will sign the PPA with PLN. But, the officials explained, it is
not necessary for the Indonesian legal entity to be established before
issuance of the the MEMR Assignment Letter (explained below).
Whether in fact EBTKE will allow a foreign entity to bid or whether the MEMR
will allow the Indonesian legal entity engaging in the electricity supply sector
to be established only when the PPA is about to be signed can only be tested
when a capacity quota tender is actually held, and the detailed bid documents
issued.

New Feed-in-tariff
In addition to introducing new procedures for purchase of electricity from solar
power projects, Reg. 17/2013 also introduces a ceiling feed-in-tariff for solar
photovoltaic power projects in Indonesia at US$0.25/kWh, or US$0.30/kWh if
the photovoltaic module uses local components of 40% or more.
Reg. 17/2013 does not provide details of how to determine the lower tariff
where a bidder who meets the minimum 40% local content requirement bids a
higher tariff compared to bid tariff than another bidder who does not fulfill the
minimum 40% local content requirement.
From our discussion with officials at EBTKE, in determining which bid tariff is
lower, EBTKE will impose a US$0.05/kWh tariff adjustment on the tariff
submitted by the bidder who meets the minimum local content requirement.
Please see the illustration table below:

Bidder

Minimum 40%
Local content
requirements (for
the photovoltaic
module)

Bid tariff

Adjusted tariff
considering the
US$0.05/kWh
tariff adjustment
policy

Bidders
Rank
based on
bid tariff

Bidder A

fulfilled

US$0.27/kWh

US$0.22/kWh

Bidder B

not fulfilled

US$0.22/kWh

US$0.22/kWh

Bidder C

not fulfilled

US$0.21/kWh

US$0.21/kWh

Bidder D

fulfilled

US$0.28/kWh

US$0.23/kWh

Introduction of Solar Power Feed-In-Tariff and New Solar Power Purchase Procedures In Indonesia July 2013

Finance & Projects

Final tariff
The tariff from the tender will be stipulated in an assignment letter from the
MEMR and this tariff will be used in the PPA without any further negotiation
with PLN. Reg. 17/2013 mentions that the initial term of the PPA is 20 years
but it can be extended.

No Indexation?
What is not clear is whether Reg. 17/2013 gives PLN the flexibility to agree
tariff indexation as part of the detailed PPA wording (i.e. the tariff from the
tender is simply the base tariff which can be escalated over time). As a
comparison, the feed-in-tariff regulation for geothermal power projects also
does not expressly provide for the tariff to be indexed over time, but PLN has
in past executed PPAs which provided for the base tariff from a tender to
escalate over time. The officials from EBTKE, however, advised us that the
tariff from the tender will not be escalated and therefore in submitting a bid
tariff bidders must also assume that the bid tariff includes any escalation
required for a 20-year period. If later the tender documents are silent on this,
developers should clarify this with the tender committee during the tender
explanation session which will be conducted after announcement of the tender
documents.

Other Requirements
Apart from the two important developments introduced by Reg. 17/2013 as
elaborated above, Reg. 17/2013 also imposes additional requirements for
solar power project developers which seems to be intended to secure real
commitment from developers to developing the projects.

Developers must deposit in advance 20% of the total investment

Reg. 17/2013 requires a winning bidder to deposit 20% of the total investment
in an escrow account at a state-owned bank or a prime bank in Jakarta within
15 days after EBTKE determines the bidder as the winning bidder. The
deposited money can be used by the developer for the project development
but only after a financial close is achieved. Reg. 17/2013 is however silent on
whether or not the developer can withdraw the money if the developer fails to
achieve the financial close by the deadline set in the PPA.
EBTKE will submit the winning bidder determination to the MEMR for the
MEMR to issue the assignment to PLN for purchasing the power ("MEMR
Assignment Letter") only after the winning bidder deposit the above amount.

Reg. 17/2013 sets mandatory milestones

PPA's milestones are usually a negotiation matter as the schedules for power
plant development should match with the actual situation by considering
among other things, total area required for the project, the expected timeline
for land acquisition, lenders' requirements on due diligence, total installed
capacity of the plant and design engineering of the plant. Reg. 17/2013
introduces for the first time some non-negotiable mandatory milestones.

a)

Reg. 17/2013 requires the PPA to be signed within 60 days after the date
of MEMR Assignment Letter. There is no express legal consequence
under Reg. 17/2013 if this 60-day deadline is not achieved.

b)

The financial close must be achieved within three months after signing
the PPA and the developer must start construction activities at the latest
three months after the financial close. The MEMR Assignment Letter and

Introduction of Solar Power Feed-In-Tariff and New Solar Power Purchase Procedures In Indonesia July 2013

Finance & Projects

the PPA will terminate if the developer fails to achieve any of the above
milestones before the deadline and fails to remedy it after obtaining three
warning letters from EBTKE.

www.hhp.co.id

For further information please

contact
Luke Devine
Foreign Legal Consultant
+62 21 2960 8600
luke.devine@bakernet.com
Kirana D Sastrawijaya
Senior Associate
+62 21 2960 8541
kirana.d.sastrawijaya@bakernet.com
Fanny Kurniawan
Senior Associate
+62 21 2960 8527
fanny.kurniawan@bakernet.com
Mesianti Tobing
Associate
+62 21 2960 8551
mesianti.tobing@bakernet.com

Hadiputranto, Hadinoto & Partners

The Indonesia Stock Exchange
st
Building, Tower II, 21 Floor
Sudirman Central Business District
Jl. Jenderal Sudirman Kav. 52-53
Jakarta 12190
Indonesia
Tel: +62 21 2960 8888
Fax: +62 21 2960 8999

c)

The commercial operation date must occur at least 18 months after

signing the PPA. An extension of up to 12 months is allowed but a
penalty in the form of progressive tariff reduction up to 8% of the tariff will
be imposed.

Closing
As elaborated above, the meaning of some provisions in Reg. 17/2013 is not
very clear from the express wording of the clauses. Therefore their
implementation will much depend on the policy of EBTKE. Whether EBTKE
will in fact implement the policy consistently remains to be seen.
The issuance of a feed-in-tariff regulation for solar power projects however
does show the seriousness of the Government in realizing untapped solar
power potential in Indonesia by involving the private sector. The Government
has set very aggressive renewable energy targets through to 2025 and if this
regulation is intended as part of the way to seeing those targets achieved, this
regulation must be further followed up with at least immediate: (i)
determination of capacity quota; (ii) realization of the tenders for capacity
quota; and (iii) publication of a bankable standard PPA.
Further, if a bankable standard PPA can be published before commencement
of the tender, developers will have a greater understanding of what their
exposure will be under the PPA if they are successful in the tender and
therefore it will assist developers when they must set their acceptable bid
tariff. Without having any visibility on what exposures they would be taking on
vis--vis PLN under the PPAs that would be negotiated and signed with PLN
post-bid, developers would have difficulties to set an acceptable bid tariff.

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Introduction of Solar Power Feed-In-Tariff and New Solar Power Purchase Procedures In Indonesia July 2013