6 December, 2017
The PLN’s two primary power generation subsidiaries, PT Pembangkitan Jawa-Bali (PJB) and PT Indonesia Power (IP) have announced that they are running a competitive process to select partners to develop up to 7 coal fired IPP projects with capacities of 200-600MW. A copy of the recent announcement is attached.
In an effort to try to expedite the development of new thermal power generation projects, the President has mandated PLN to implement a number of coal and gas fired projects through the direct appointment of PLN’s subsidiaries (PJB and IP). Over recent months, PJB and IP have selected partners for the development of some large thermal projects, including the Java 9&10 2,000MW coal fired IPP (where PT Barito Pacific Tbk has been reported in the press to have been selected as the partner), and PJB having reportedly partners with Nebras Power for an 800MW gas fired project in Sumatera. In order to avail itself of the ability to directly award these IPP developments without the need for a tender process, the structure has required PJB or IP to hold a 51% share in the IPP company, with the selected local partner holding the remaining 49%. The selection of partners to-date have arisen through a mix of Government-to-Government initiatives and direct discussions between PJB and IP.
This new process suggests there will be a competitive bidding process, albeit that the evaluation criteria have not yet been set. With the Government and PLN determining the relevant tariffs that will be paid for electricity to be sold by the relevant projects, the most obvious bidding criteria (apart from passing the standard technical, experience and financial creditworthiness tests) would appear to be:
- what percentage of PJB/IP’s 51% shareholding the selected partner is willing to provide carried funding for; and
- the interest rate at which the selected partner is willing to provide any such carried funding.
With the current regulated tariff ceiling framework for coal fired power projects already putting significant pressure on the equity returns of investors looking at these coal fired projects, the introduction of carried funding requirements are likely to make these projects even more challenging. Other factors that need to be taken into account in structuring project development and financing around these projects would include dealing with the inherent conflict of interest issues which would arise where the offtaker (PLN) is also the 51% ultimate owner of the IPP, and dealing with any concerns of whether the World Bank Negative Pledge (which in essence prohibits the Indonesian Government from granting security over assets owned by the Indonesian Government or any entity owned or controlled by the Indonesian Government) has any application to the typical security structure that project lenders would seek to take over the project company and from its shareholders.
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