Indonesian Government Improves PPA Risk Allocation Regulation
In response to mounting pressure from industry to simplify the regulatory landscape for Indonesian power generation projects, the Ministry of Energy and Mineral Resources has recently issued Regulation No. 10/2018, which amends the earlier Regulation No. 10/2017 on Basic Provisions in Electricity Sale and Purchase Agreements. Our previous Client Alert on the 2017 regulation can be found here.
Roll Back on Government Force Majeure
One of the major issues thrown up by the 2017 regulation was its treatment of changes in policies and regulations of Government (commonly referred to as “government force majeure”). The 2017 regulation when first issued provided that:
- the risk of government force majeure was to borne by both PLN and the Independent Power Producers (IPPs);
- both parties will be released from their obligations in the event of force majeure (including changes in laws and changes in Government policies);
- where a change in law increased (or decreased) the costs to the IPP, there would be a corresponding tariff adjustment (designed to keep the IPP in the same position);
- where a change in Government policy resulted in the termination or inoperability of the power project, both PLN and the IPP were released from their obligations.
This allocation of political risk to the private sector in the manner originally provided for in the 2017 resulted in a non-bankable Power Purchase Agreement (PPA).
In late 2017, the Ministry of Energy and Mineral Resources amended the regulation to delete the provisions referred to in paragraph (a) and (d) above. This went part of the way of alleviating the concerns of the IPPs and their lenders, however concern remained over (i) the ongoing references in paragraph (b) above to PLN being relieved its obligations where there were changes in laws and policies, and (ii) apart from changes in law, the other form of “government force majeure”, namely the unjustified action or inaction of Government (eg, delays in issuing consents, revoking licences without cause etc) were not mentioned at all in the regulation, and PLN was taking the view that because this risk was not mentioned in the 2017 regulation, PLN could not take responsibility for that risk under the PPA.
The recent changes introduced under Regulation 10/2018 have now removed the remaining references to government force majeure and changes in laws and regulations from Regulation 10/2017 as mentioned in paragraphs (b) and (c) above (although interestingly, paragraph (c) is a provision beneficial for the IPPs).
On its face, the removal of all references relating to governmental force majeure and changes in laws and regulations should be viewed as a positive move (as it no longer places any regulatory constraints on how this risk is dealt with). In our view, this means that (as was the case before the advent of the 2017 regulation), the force majeure event that triggers relieve of the parties’ obligation is now limited to natural force majeure (ie, natural disaster) and thus, PLN and the IPP are free to negotiate an appropriate allocation of risk for both changes in law as well as unjustified government actions/inactions on a business-to-business basis. The key however is to see whether PLN takes the same view, or whether (as has been the case with the unjustified action/inaction point to-date), PLN takes the view that as the regulation does not impose any obligation on PLN in relation to government force majeure or changes in laws, PLN has no ability to take responsibility for those items under the PPA.
Other Bankability Issues Remain
Despite the apparent fix in respect of government force majeure, a number of bankability issues (and Sponsor issues) still remain in respect of Regulation 10:
- The treatment of PLN grid force majeure risk is still problematic. The regulation continues to provide that PLN is relieved of all of its deemed dispatch payment obligations where it is unable to evacuate power due to grid force majeure issues, and the only remedy for the IPP is an extension to the term of the PPA;
- The requirement for tariffs to be paid in Rupiah using the JISDOR conversion rate continues to be interpreted by PLN as meaning that PLN is unable to guarantee the convertibility by IPPs of the Rupiah payments into US dollars (ie, PLN’s payment responsibility stops when Rupiah is paid to the IPP); and
- For Sponsors, the regulation continues to provide that all projects covered by the regulation must be on a Build-Own-Operate-Transfer basis (as opposed to Build-Own-Operate).
For Sponsors, the regulation continues to provide that all projects covered by the regulation must be on a Build-Own-Operate-Transfer basis (as opposed to Build-Own-Operate).