3 May, 2019
The Minister of Energy and Mineral Resources recently issued Decree No. 55 K/20/MEM/2019 on the Amount of Cost of Generation Provision (commonly referred to by its Indonesian acronym, BPP) of PLN in 2018 ("2018 BPP Decree"), which with effect from 1 April 2019 supersedes Decree of Minister of Energy and Mineral Resources No. 1772 K/20/MEM/2018 on the Amount of BPP of PLN in 2017 ("2017 BPP Decree").
What is the BPP?
The BPP figures represent the cost to PLN of procuring power from the different systems/sub-systems listed in the 2018 BPP Decree. PLN's cost of procuring power is a combination of (i) the costs of PLN generating this power itself through PLN's own power generation plants, and (ii) the cost of PLN procuring power from third party suppliers (such as Independent Power Producers (IPPs) and power rental companies).
What is the BPP used for?
As highlighted in our previous Client Alerts, the Indonesian Government has set tariff ceilings for both coal fired projects and renewable energy projects based on the applicable BPP at the time. For example, if a developer wanted to sign a Power Purchase Agreement with PLN today for a solar project in Aceh, the maximum tariff permitted is USD 9.979 cents/kWh, being 85% of the Aceh BPP (which is USD 11.74 cents/kWh).
Under applicable regulations, the Minister of Energy and Mineral Resources is required annually to publish the annual BPP numbers for the systems and sub- systems across the country. The 2018 BPP Decree contains these figures for the 2018 calendar year. The figures are to be used to determine the tariff ceilings in the period from 1 April 2019 to 31 March 2020 (by which time a new set of annual BPP numbers for the 2019 calendar year will be published).
How do the 2017 BPP and 2018 BPP numbers compare?
In general and nationally, the 2018 BPP Decree shows an increase in the average BPP, although some areas such as Palu, Belitung, Western Flores, Ternate and and some areas in Papua have shown decreases in the BPP. Some areas have seen significant jumps in BPP, such as South Kalimantan increasing by 37% and a 13% increase in South Sulawesi.
The national average BPP increased to USD 7.86 cent /kWh or IDR 1,119/kWh (approximately a 2.6% increase on last year in USD terms and 9% in IDR terms). We have set out in Annex 1 a comparison of the 2016, 2017 and 2018 BPP numbers.
The increase in average BPP is caused by the increase of primary energy price (gas, coal and oil-based fuel) between 2017 and 2018. The significant increase of the national BPP in IDR terms is attributable to the continued IDR devaluation against USD over 2018. The cap on coal prices for PLN power plants and IPPs introduced in 2018 through MEMR Decree No. 1395 K/30/MEM/2018 did not have a marked effect on reducing the BPP in the coal- fired power plant hotspots of Java and South Sumatera. Our client alert on this regulation can be seen here.
As is the case with the 2017 BPP Decree, the 2018 BPP Decree provides that the BPP for any particular area not yet supplied with electricity by PLN, or any area that does not have an average BPP determination, will be equal to the highest average BPP provided in the 2018 BPP Decree (which is US$21.34cent /kWh or IDR 3,041/kWh).
As mentioned above, this newly published average BPP is valid until 31 March 2020. If no new average BPP is published after 31 March 2020, the average BPP in the 2018 Decree will continue to be valid until a new average BPP is published.
Conclusion
There have been very slight increase in the very coal-fired IPP heavy regions of West Java, East Java and South Sumatera. The continued low BPP numbers in these areas continue to make it economically challenging to implement renewable projects in these areas. However a number of the outer regions of Indonesia and some of the island systems continue to present significant opportunities for developers looking at developing smaller scale renewables and hybrid power systems.
The stark increases or decreases from the 2018 BPP compared to the 2017 BPP does continue to highlight the flaw in the BPP tariff ceiling system. If a developer is looking to sign a 20-year Power Purchase Agreement on a solar project in South Sulawesi on 28 March 2019 (when the 2017 BPP Decree applied), the tariff ceiling that it is required to meet would be USD 7.293 cents/kWh. The same Power Purchase Agreement on the same project signed five days later on 2 April 2019 would give rise to a tariff ceiling of USD 10.03 cents/kWh. The difference in the project's fate would be largely driven by coal and diesel price changes from year to year and whether you get lucky on the USD/IDR exchange rate from year to year. This logical conflict between determining the viability of a 20-year long term project by looking backwards 12 months at fuel prices and currency impacts will give rise to these types of anomalies, and may continue to result in a particular project being economically viable on one particular day of the year, and not economically viable on another day of the year.
Please click here for the annex.
