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The Power Purchase Agreement

What is the relevance of a Power Purchase Agreement (“PPA”) and how does it affect the Indonesian masses? These are tricky questions to answer depending on which side of the grid is answering.

Recent regulations related to the Electricity Sectors seem to underscore the anticipated continued rise in demand. In fact, the Electricity Sectors have become one of the Indonesian government prioritized infrastructure projects. To support this push, the Ministry of Energy and Mineral Resources issued Regulation No.10/2017 concerning the Power Purchase Agreement Principles which was later amended by Regulation No.49/2017 and the second amendment on Regulation No.10/2018 (“Regulation”). Usually Agreements fall within the jurisdiction of Civil Code, however, in the case of a PPA, The Government has mandated specific Regulations, the Regulation has nonetheless regulated several key provisions in the PPA between PT PLN and the power producer such as:

(i) Terms of PPA;
(ii) Rights and Obligations of seller and buyer;
(iii) Risk allocation;
(iv) Guarantee/Security for Project Performance;
(v) Commissioning and Commercial operation date (COD);
(vi) Fuel supply;
(vii) Transaction;
(viii) Dispatcher;
(ix) Penalties on plant performance;
(x) Termination of PPA;
(xi) Transfer of right;
(xii) Requirement for price adjustment;
(xiii) Dispute resolution;
(xiv) Force majeure

In addition to controlling key provisions, the Regulation requires that the project be conducted under a Build, Own, Operate, Transfer (BOOT) scheme, which also must be regulated under the PPA. The PPA’s term of agreement is also stipulated in that it must not exceed 30 years from the Project Commercial Operation Date (COD). However, these terms are subject to the type of plant.

In addition, Regulation No.10/2017 initially classified a change of government policy or a change of Law and Regulation as Force Majeure. Therefore, in some circumstances, Force Majeure, due to those changes, actually frees the Parties from their obligations. Force Majeure, due to a change in government policy or a change of law, was referred to in the Regulation No.10/2017 and was classified under three conditions:

a. New investment or any additional costs that result from the Amendment of Law and Regulation
b. Cost reductions that result from the Amendment of Law and Regulation
c. Project termination or The Plant no longer being operational as a result from the government policy (Government Force Majeure)

However, Force Majeure due to a change in government policy or a change of law and regulation was amended by Regulation No.49/2017 and Regulation No.10/2018, which stated that such changes were no longer classified as a Risk and Force Majeure for both power producers and PT PLN.Therefore, both Parties should consider the possibility of changes in either policy and/or regulations in their business strategy and accomodate for such possibilities in their PPA accordingly.

Local Content

Besides its regulations and amendments, the Indonesian government requires the services provider to prioritize the use of domestic products and services in the Electricity Sectors. Basically, the Law No.30 Year 2009 mandated the obligation to prioritize the use of Local Content for the development as well as the construction of electricity infastructure projects. The implemented regulation can be found in the Ministry of Industry regulation No.54/2012 and amended by No.5/2017; the term and conditions of the assesment regulations regarding this matter can be found in the Ministry of Industry regulation No.4/2017. The calculation regarding the Assessment of Local Content (“TKDN”) classifies a Power Plant Project into three types as follows:

(i) Independent Spread Power Plant;
(ii) Independent Centralized Power Plant;
(iii) Connected Centralized Power Plant.

Each type of classification stipulates the variables for the calculation of the local content required. During the development or the construction of electricty infrastructure projects, import procurement can only initiated if as follows:

a. The goods cannot be produced domestically
b. The technical specifications of local goods does not meet the requirement
c. The quantity of domestic production is not sufficient (must be proven by a statement letter issued from the related association or factory)

The development of electricty infastructure projects include the following infrastructures:

a. Steam-electric Power Plant (PLTU)
b. Hydroelectric Power Plant (PLTA)
c. Geothermal Power Plant (PLTP)
d. Gas Power Plant (PLTG)
e. Steam-gas Power Plant (PLTGU)
f. Solar Power Plant (PLTS)
g. Transmission lines, substations, and electricity distribution networks

Upon the request of an applicant and along with the appropriate self-assessment report, the Ministry of Industry will appoint a surveyor to conduct an assessment of local content available to be used toward an electricity infrastructure project. The related surveyor will make a verification report regarding the local content assessment. Furthermore, the Ministry of Industry will then issue a certificate of local content based on the related verification report made by the surveyor.

In the end, there’s certainly alot more to think about in Indonesia than flipping on a power switch. Detailed provisions to regulate the PPA and safeguard local content are in full effect and must be considered.

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Jakarta, 06 March 2018

by : Erick Sanjaya Perkasa, S.H., M.Kn.