The Minister of Energy and Mineral Resources recently issued Regulation No. 10 of 2017 on the Principles Governing Power Purchase Agreements (“MEMR 10“) as part of its efforts to overcome persistent delays in the closing of Power Purchase Agreements (“PPA“) between Independent Power Producers (“IPP“), the sellers of electricity, and state power utility Perusahaan Listrik Negara (“PLN“), as the buyer. From the Government’s perspective, MEMR 10 is intended to provide greater certainty and thus help reduce the time needed for negotiating PPAs. The ultimate question, however, is whether MEMR 10 will actually expedite the signing of the PPAs or is it skewed to the benefit of PLN, thus potentially lessening the appetite of IPPs and their lenders to invest in projects promoted by PLN?
MEMR 10 requires a PPA, at a minimum, to incorporate terms governing its duration; the rights and obligations of the parties; risk allocation as between the parties; performance guarantees; commissioning and Commercial Operation Date (“COD“); fuel supply; operation management system; penalties related to electricity generation performance; termination; assignment; price adjustment; dispute resolution; and force majeure.
The following aspects of MEMR 10 merit particular attention:
Based on confirmation by the Ministry of Energy and Mineral Resources’ Director General of Electricity, a failure on the part of PLN to supply fuel will provide the IPP with a deemed dispatch advantage. Nevertheless, there are a number of other risks facing the IPP with regard to fuel supply, such as a situation where the fuel supplied by PLN fails to satisfy the specifications required by the power plant.
MEMR 10 provides that in an event of government force majeure that results in the termination of the project or would otherwise halt power generation operations, then both PLN and the IPP will be discharged from their respective obligations. Although MEMR 10 does not specify the consequences or recourses available in such circumstances, beyond discharging the parties from their obligations, the current PPA scheme requires PLN to purchase the project from the IPP based on a predetermined price formula. In addition, Law No. 25 of 2007 on Investment (the “Investment Law“) protects the IPP if the project is terminated due to expropriation, in which cases the State is required to compensate the IPP based on a market value assessment conducted in accordance with generally accepted international practice by an independent appraiser appointed by the parties.
MEMR 10 further provides that government force majeure may result in a price adjustment, as further discussed in paragraph c) below.
Although a change in the technical details is subject to the Parties’ mutual agreement, a change in the cost structure is essentially defined as a change in the legislation/regulations related to the following aspects:
This provision is consistent with the provision on government force majeure where the IPP is entitled to a price adjustment if a change in the law requires the IPP to incur additional costs or increase its investment. Conversely, PLN is entitled to a price reduction in the event that a change in the law results in a reduction in costs.
Although MEMR 10 allows the Parties to further define the mechanics and consequences of a termination, there remain concerns with respect to the lack of clarity in the definition of “significant unexpected costs”.
It is also not clear from MEMR 10 as to whether the right to terminate a PPA also applies in a situation where the IPP has diligently adhered to the permit application process in compliance with the law but the Government has unreasonably withheld the required permit.
MEMR 10 seems to also suggest that PLN’s obligation to take up electricity is limited to a certain period that is agreed on by the Parties, having regard to the loan repayment period to the IPP’s lenders. This provision is somewhat ambiguous as it is open to the interpretation that PLN’s liability to pay a penalty for its failure to take up generated electricity comes to an end with the full repayment of the IPP’s loans.
prior to the issuance of MEMR 10.
Significantly, based on confirmation by the Ministry of Energy and Mineral Resources’ Director General of Electricity, existing PPAs are will be subject to MEMR 10 in the event that an amendment of their PPA relates to the provisions or issues that are governed by MEMR 10.
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