Indonesia: Corporate PPAs – Global Compliance News

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In short

Unlike other jurisdictions, simple business power purchase agreements (PPAs) are not possible in Indonesia, as only the Indonesian utility PT PLN (Persero) (PLN) and developers Private electricity companies that have the approval of the relevant business sector can sell electricity to end customers. As a result, there is a general perception among developers and businesses that it is not possible to implement corporate PPA structures in Indonesia. In fact, this is not the case, and with the Indonesian government pushing hard for rooftop solar systems, we expect to see a slight increase in structures for private developers to organize power generation. for the customers.


Contents

  1. Background
  2. Structure
  3. Conclusion

The entire territory of the Republic of Indonesia falls under the scope of activity of the national electricity company, PLN. The government has the power to carve out parts of this business zone from PLN territory and give them to other companies. In practice, these activity zones can usually be granted if the zone is an industrial zone or is in a remote area where the PLN network is not available. But it can be very difficult for investors to get a business zone stipulation if the supply of PLN is already available.

Companies considering setting up ‘captive power plant’ agreements have faced the difficulty that under Indonesian law, ‘captive’ power plants actually mean that companies will have to develop the plants themselves. electric, only to generate electricity for their own account. use.

While in the context of the Indonesian regulatory framework, the structures of corporate PPAs raise a number of issues, such structures are achievable here. We have seen a number of structures used, among others, operating leases, equipment supply / manufacture agreements that involve cooperation with an existing finance company, equipment supply / manufacture and acquisition of existing finance company agreements, supply / manufacture of equipment with loan financing and offshore leases.

However, the most frequently used “corporate PPA” program in Indonesia is a relatively straightforward operating lease, in which an electricity developer leases its power plant to a consumer, with the rental fee structured from the bottom up. same way as the conventional power purchase contract with PLN. A typical structure is shown below:

While relatively straightforward, the structure above raises a number of questions for further consideration, including the following:

1. Limitations on foreign ownership

Previously, there was ambiguity as to whether the rental of electrical equipment was open or closed to foreign ownership. Traditionally, foreign investment companies in Indonesia could not engage in outright (dry) rental business activities. The same goes for the rental of electrical equipment.

Leasing of electrical equipment is no longer listed in the new positive list (published in 2021), and is therefore theoretically 100% open to foreign ownership.

2. Rental costs

Rental charges are not subject to the approval of any government authority. In practice, developers tend to refer to the amount of energy produced from electrical equipment (in kWh) as the basis for determining monthly rental charges. However, we found that the rental fee should not be too similar to the price structure for selling electricity.

3. Main licenses and approvals

A captive power license (formerly known as an operating license or izin operasi, currently known as a commercial license to supply electricity for own use or IUPTLS) is required if the installed capacity of the plant is greater than 500 kW per power supply installation.

An SLO (Certificate of Operational Fitness) is also required for a captive power plant with a capacity greater than 500 kW. Specifically for captive solar PV projects, an SLO is required for a solar PV system with a capacity of (i) over 500 kW (with integrated panel control) and (ii) up to 500 kWh (with control independent panel). The client company (ie the tenant) will need to obtain these licenses.

The developer will need to obtain a general trading company license.

For solar PV projects, approval from the business area holder of the plant design will be required prior to construction. See our alert for more details.

4. Parallel operating costs

Industrial customers with solar photovoltaic projects that are connected to the grid of a business area holder will be subject to a capacity charge of an amount equivalent to: 5 hours × capacity of the solar photovoltaic project (at the level of the inverter) × tariff of the holder of the field of activity for the customer (in IDR / kWh).

For other types of captive energy projects (non-solar PV), the customer may be subject to higher parallel operating costs.

The implications of these charges for any future development will need to be considered by developers and customers.

5. Transfer of assets

Any transfer of assets after the lease period could be considered a financial lease, in which case the developer will be subject to the rules of the Financial Services Authority. The corporate PPA will need to be carefully drafted to mitigate this risk.

6. Local content

The omnibus law now requires that public enterprises, regional enterprises, private enterprises, cooperatives and non-governmental organizations give priority to national products and national potential in the exercise of an activity of supplying electricity in the region. public interest. Separately, the new MEMR Regulation No.26 of 2021 on solar rooftops also requires the use of solar photovoltaic equipment on rooftops to comply with laws and regulations on the use of household goods / services. It remains to be seen to what extent these requirements will apply to corporate APP programs.

7. Capacity limit for solar photovoltaic projects

For PLN customers with solar PV projects on the grid, the maximum capacity of solar PV systems (at inverter level) is equal to the capacity of the customer connected with PLN. For non-PLN customers, the holder of the relevant business area will have the discretion to determine the maximum capacity of solar photovoltaic projects.

Although the arrangements described above have been a relatively common feature in the conventional electricity sector, over the past three years we have seen the growth of these structures in the renewable energy sector, led by buyers. private non-industrial. As companies look for ways to further improve their ESG commitments, we expect these and similar structures to be used more.


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