EVENT COVERAGE : AP UTILITY FORUM 2016 - JAKARTA EVENT COVERAGE: AP UTILITY FORUM 2016 - JAKARTA

Peter Wijaya, Vice President
Indonesia trips over funding issues on its mission
conducive for the development of a bond
Bond investors Meanwhile, discrepancies in gas supply
Commercial and Business Development
at Star Energy, adds that risk-sharing for
capital-intensive geothermal projects is a
key concern for developers and investors.
Funding for exploration is tough
investors have to take on the full risk, he
noted. As a result, independent power
producers like Star Energy have to keep a
tight rein on exploration costs, with more
budget spared for low-risk, established
fields rather than exploring untapped
greenfield projects.
Geothermal reservoirs are much more
complex than O&G. We simply budget
the exploration, Wijaya says, adding that
exploring a well could cost as much as
US$7 million to US$10 million per well.
Renewable energy is low on the
government agenda. If I were the
government, I would say the traffic
is attractive. If I were a developer, I
would also say so. But the problem is
implementation. In order to qualify for
the tariff, you first need to prove that you
have started exploration. Thats the law.
The risk is entirely on the developer, he
adds.
market.
There are a lot of constraints in the
PPA about financing and re-financing,
and around the rules of what developers
need to prove at the time of bid when it
comes to certainty of financing. When
you do a bond, you cant provide the
same certainty in the same way a bank
can provide support by issuing letters, he
says.
Pascual urged policymakers to seriously
consider reviving bond financing for
power projects, as it is unlikely that 35
GW worth of power projectswhich
is expected to amount to a staggering
US$70 billioncan rely on a single
funding method in coming years.
We need to expand the universe
of capital that we can tap. The bond
market is out there and very keen on
Indonesian risk. Bond is a great solution
for refinancing. So I would like the bond
market to become one of three solutions
for the financing of IPPs, he says.
Other challenges
Access to funding is not the only issue
dont care also need to be resolved if the 35 GW plan
whether there is to succeed.
is a guarantee Developers can take the risk with
or not. They the assurance that there is huge demand
dont care in Indonesia and PLN will be able to
whether there dispatch; but lenders will not be willing
is a BVGL to take this risk. There are however
or a PPP or ways to resolve this issue, with proper
government coordination between PLN, developers
support. They and lenders. Coordination in gas supply is
just look at the crucial for the success of RFPs, he says.
credit rating Another little-known issue which needs
and invest. urgent attention is extremely tight bid
preparation timelines from PLN. Pascual
says that developers and bankers cannot
prepare properly for bids because of
PLNs vague and often squeezed project
timelines.
For instance, PLN does not release a
detailed schedule of requests for proposal
(RFPs) in the pipeline, and often releases
project details at such tight schedules
that leaves developers with little option to
contact investors and lenders.
It is impossible in 45 days for an
investor to develop an EPC solution and
talk to banks. Developers are in the dark.

Where will Indonesia get US$70b for its Domestic funding key to growth
To resolve these funding issues, Pascual
which Indonesia needs to grapple
with. For instance, access to land is
also a big issue for developers, as well
They do not know what technology is
required, he notes.
To resolve this issue, Pascual says that

ambitious 35GW capacity addition plan? says that the government should work
on strengthening its domestic financing
framework, particularly because funding
Investors are keen on the market, but experts warn that the program might stumble if funding issues are not resolved. for power projects is being dominated by
as discrepancies in gas supply and
inadequate bid preparation timelines.
When the launch of the land
PLN needs to come up with specific
information about projects and provide
longer timelines for developers and
acquisition law in recent years, lawyers investors.
Despite these challenges, Pascual

I
f Indonesia wants its ambitious 35
GW power capacity addition plan to
succeed, then it needs to clean up its
act when it comes to providing funding
options for utilities and independent
power producers (IPPs). Despite high
investor interest, appropriate access to
capital and inconsistencies in government
policy post a significant stumbling
block which can hinder the success of
Indonesias steep capacity addition target.
Great potential projects are happening
under the 35 GW program, but there
are quite a few difficulties as well, says
Gilles Pascual, Partner, Infrastructure,
Ernst & Young, speaking at the recently-
concluded Asian Power Utility Forum
in Jakarta. Coordination is key to make
such a large program happen. You need
all stakeholders in the roomyou need
the government side, you need PLN
[Perusahaan Listrik Negara], you need
to have investors, and you need to have
lenders.
Funding roadblocks
One of the biggest challenges to
Indonesias 35 GW plan is access to
funding. Although both foreign and
domestic investors are extremely keen to
take part in the capacity addition plan,
they are hindered by challenges including
22 ASIAN POWER
Investors inconsistent government support for
need to get projects, lack of assurance regarding
comfortable rupiah foreign exchange rates, and the
that once they absence of alternative funding solutions
get this massive such as an active bond market.
amount of There are different forms of
rupiah, in a government support for PLN obligations.
single day they Theres the BVGL [Business Viability
can go to the Guarantee Letter], the PPP guarantee
market and letterit varies from deal to deal.
exchange it in There is no consistency. And that is
US dollar. something that the investors are still
trying to get comfortable with, Pascual
says. You have different investors for
different deals. If you have BVGL or PPP
guarantee, the entire investor universe
will be comfortable. For a deal without
a guarantee, not all investors will be
comfortable to take on the risk, he adds.
In recent tenders, PLN had taken
the view that they will pay using the
Indonesian rupiah. Although deals will
still be indexed to the US dollar, payments
will be made solely using the local
currency. As a result, projects run the risk
of losing investors who are used to closing
deals using the greenback.
Investors need to get comfortable
that once they get this massive amount
of rupiah, in a single day they can go to
the market and exchange it in US dollar
at roughly the same rate without leakage,
without losing on the exchange rate, he
says.
The rupiah is freely convertible, its
freely transferable, the FX market every
single day is in the hundreds of millions of
dollars. There is no reason in my view that
investors cant get comfortable with this.
But they are currently talking to banks
trying to understand how the FX market
works to see if that is something they can
work with, he notes.
Geothermal bears the brunt
The insufficient access to funding is
keenly felt in the countrys geothermal
energy sector. Indonesia is planning
to produce 6023 MW of geothermal
power by 2020, but experts warn that the
country may fail to meet its ambitious
targets due to regulatory challenges
coupled with extremely high exploration
costs.
Cost rises steeply the moment drilling
and construction begins. Prior to that,
costs are so low it can be funded almost
entirely by equity. A single field can
cost up to USD 50 million, excluding
other costs. Someone has to catch the
risk, whether it is the project owner or
the government, says Sugeng Triyono,
President Director of PT Tangkuban
Parahu Geothermal Power.
local banks using local currency. There reckoned that it will take two years on
are very few markets left for international average to complete a land acquisition says that there is a bright future ahead
banks to do financing. Over the last 20 deal in Indonesia. for Indonesias 35 GW power capacity
years international banks share of the pie However, PLN proved in 2015 that it addition plan.
has shrunk considerably, Pascual says. is possible to complete land acquisition Theres no magic solution, but years
Domestic currency, domestic deals in just months rather than years ago when I first came to Indonesia I
financing is the right solution and showing that the law can work if used learned this beautiful word, sama-sama.
will resolve these issues. A domestic properly and effectively. And I think together, sama-sama, we
bank doesnt need BVGL. PLN is The law is extremely powerful if it is can make it happen. Everyone is here,
the government, whether you have a used properly. The law is working, and everyone is keen, and the solutions are
guarantee or not. Risk assessment for land acquisition is becoming less of a not rocket science. If we work through the
international banks is different, but for focus particularly for investors, he says. constraints, there are solutions, he says.
a local bank, PLN is the government. So
you are resolving the level of support from
the government, you are resolving the US
dollar to rupiah conversion, he says.
Pascual also advocates a revival of
Indonesias power bond market to provide
expanded funding options for projects.
He notes that though the first IPP in
Indonesia in 1995 was financed by a
bond, only two bonds have been issued
since then.
Bond investors dont care whether
there is a guarantee or not. They dont
care whether there is a BVGL or a PPP or
government support. They just look at the
credit rating and invest. This makes it a lot
easier to finance projects for developers,
he said.
However, the power purchase
agreements (PPAs) and requests for Indonesian law is extremely powerful if used properly.
proposals (RFPs) that PLN issues are not
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