Indonesian Energy and Infrastructure Seminar Electricity Sector Regulatory Developments, Luke Devine Hadiputranto, Hadinoto & Partners is a member of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a partner means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an office means an office of any such law firm.
Sector Outline: Electricity The Basics Java-Madura-Bali Grid Peak load on Java-Bali is approx 14,000MW Base load approximately 10,000MW Real capacity approximately 14,500MW 2 hour peak period: 7 9pm Electricity demand increasing 8% pa Off-Java Severe shortages Urgent need for new generation capacity 2005 Hadiputranto, Hadinoto & Partners 2
Four Conceptual Model Structures MODEL 1* MODEL 2* MODEL 3* MODEL 4 Gen 1 Gen 1 IPP Gen 1 IPP Gen 1 IPP Transmitter Distributor & Retail Wholesale Purchasing Agent Transmitter Dist 1 Transmitter Dist 2 Transmitter Distributor Ret 1 Ret 2 Ret 1 Ret 2 Customer Distributor & Retail Cust 1 Cust 2 Cust 1 Cust 2 Cust 1 Cust 2 * The shaded box represents common ownership 2005 Hadiputranto, Hadinoto & Partners 3
Indonesia s Reform: What Happened? New Electricity Law 2002 Unbundling of PLN along functional lines Introduction of generation competition in 2007, where generators are free to bid price and will be dispatched in merit order Ability for HV and MV buyers to buy from suppliers other than PLN at negotiated market price Government maintained regulation of price for monopoly assets and price to LV customers New central regulator for competitive zones regulating LV retail, transmission and distribution tariffs 2005 Hadiputranto, Hadinoto & Partners 4
Indonesia s Reform: What Happened? New Electricity Law 2002 Constitutional Court: law contrary to Constitution Electricity is a public good, which under the Constitution should be managed by the State The New Electricity Law contemplated market (i.e. unregulated) price for electricity contrary to Constitution Comment in judgment all power supply should be in partnership with PLN, through the ownership of shares in a company or through a loan arrangement Government s share ownership in the power plant company could be either more or less than 50 per cent, as long as the Government maintained ultimate authority for policy/decisionmaking 2005 Hadiputranto, Hadinoto & Partners 5
Indonesia s Reform: What Happened? Old Electricity Law 1985 back in force law allowing IPPs Government passed new Government Regulation No 3/2005 to allay investor concerns However there continue to be remaining concerns The Court said that all power projects should be carried out on the basis of a partnership with PLN, involving share ownership or loans 1985 law permits 100% privately owned IPPs Concern that a challenge may again be made to 1985 law 2005 Hadiputranto, Hadinoto & Partners 6
Indonesia s Reform: What Happened? Not all bad for investors Clear signal that it will be difficult to implement a competitive power market in Indonesia IPPs can look forward to many years of long term PPA market giving revenue certainty News not so good for consumers 2005 Hadiputranto, Hadinoto & Partners 7
Government Regulation 3/2005 Not a lot of new changes form 1985 law Licence (IUKU) is issued by: the Bupati/Governor, if the power plant is not connected to PLN grid lines (national transmission line); the Minister, if the power plant is connected to PLN grid lines Private parties holding IUKU must be an Indonesian legal entity (includes foreign investment/pma companies) Must be a joint venture with local parties (maximum foreign percentage is 95%) 2005 Hadiputranto, Hadinoto & Partners 8
Government Regulation 3/2005 Sale prices are regulated No market price for electricity No mention is made of PLN s partnership involvement in generation projects PLN remains vertically integrated 2005 Hadiputranto, Hadinoto & Partners 9
Government Regulation 3/2005 Procurement methods Generally, competitive bidding for new capacity Direct selection in certain circumstances: renewable projects mine mouth marginal gas excess electricity purchase local grid crisis Certain areas remain unclear e.g. expansion projects 2005 Hadiputranto, Hadinoto & Partners 10
Where to from here? Government is intending to revise the Electricity Law Difficult to see how the Government can implement competition without changing Constitution (or Constitutional Court) Likely will remain an PPA-based market for some time 2005 Hadiputranto, Hadinoto & Partners 11
What s happening? PLN developing a number of its own plants on the back of donor loans Loans run out as donors hit country/credit limits Credit concerns remain, but have shifted from IPPs to gas/fuel suppliers Private sector companies looking at value chain projects Large gas producers looking at monetising reserves Old IPP Projects being re-packaged and re-bid 2005 Hadiputranto, Hadinoto & Partners 12
What s happening? Attempts to bring gas to West Java load centre LNG terminal Trans-java pipeline South Sumatera pipeline Government recently offers new infrastructure projects, including for power generation Indonesian model PPA generally bankable 2005 Hadiputranto, Hadinoto & Partners 13
Challenges PLN credit risk remains paramount, but some positives Retail tariff has been increased Average cost of generation is below retail tariff (average IPP cost approximately US$0.05) Skewed merit order Need for rationalisation of expensive oil fired plants Pushing otherwise base load coal plants up into peaking plants 2005 Hadiputranto, Hadinoto & Partners 14
Challenges Government Guarantees Government will provide selected cover for selected projects No more Government Letters of Support Need ECAs and multilaterals to cover debt sponsors may be more willing to risk equity 2005 Hadiputranto, Hadinoto & Partners 15