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New Regulation For Power Purchase Agreements
On 23 January 2017, the Indonesian Minister of Energy and Mineral Resources (MEMR) has promulgated three (3) new regulations, one of them being MEMR regulation No. 10 Year 2017 concerning the Principle of Power Purchase Agreements (MEMR Regulation 10/2017). MEMR Regulation 10/2017 applies to all power projects, including geothermal, biomass and hydropower plants, except: intermittent power projects (such as wind and solar, regardless of size), mini-hydro power plants (below 10 Mega Watts), biogas power plants and waste-to-energy power plants. These categories of power plants will be subject to specific regulations issued by MEMR.
MEMR Regulation 10/2017 regulates the staple provisions of the commercial aspect that must be incorporated in all Power Purchase Agreements (PPA) between state power utilities (Perusahaan Listrik Negara PLN) and the private sector (Independent Power Producer IPP). The PPA shall contain at least provisions concerning: a. term of PPAs; b. the rights and obligations of the seller (IPP) and buyer (PLN); c. risk allocation; d. performance bond; e. commissioning and Commercial Operation Date (COD); f. fuel supply; g. transaction; h. operation control system; i. penalty regarding the performance of the power plant; j. termination of PPA; k. transfer of rights; l. price adjustment requirements; m. dispute resolution; and n. force majeure.
Besides the mandatory provisions above, MEMR Regulation 10/2017 imposes some new requirements to be incorporated in PPAs, as follows:
- the term of the PPA should be a maximum of 30 years commencing from the Commercial Operation Date (COD);
- all PPAs should be on a Build-Own-Operate-Transfer (BOOT) scheme. It means at the end of PPA, the IPP should transfer the ownership to the PLN;
- prohibition to transfer the shares or ownership in power generator until the plant achieves the COD. However, a transfer from IPP or funding sponsor to its at least ninety percent (90%) owned affiliate entity is permitted. After achieving the COD, the transfer of shares in the power generator is only permitted with the approval of the PLN and must be reported to the Government;
- The PLN will be charged a penalty from the IPP if cannot absorb the electricity due to the PLN error, the amount of penalty will be determined in proportion of investment component; and
- All dispute must be settled by arbitration. The arbitration resolution shall be final and binding.
Based on the transitional provisions of MEMR Regulation 10/2017, these new requirements above will not apply to: PLN procurement processes where bid closing has already occurred; the PLN has signed letters of intent with the IPP; the PPA has already been signed; or there is any amendment to an existing PPA. The new requirements above must be fulfilled for all relevant power projects where the bid closing has not occurred. MEMR Regulation 10/2017 came into force on the date of promulgation.