Study on Promotion Policies for Geothermal Power ...open_jicareport.jica.go.jp/pdf/12043451.pdfThe...

The Republic of Indonesia

The Republic of Indonesia

Study on Promotion Policies for Geothermal Power Development

by Independent Power Producers

FINAL REPORT

(SUMMARY)

May 2011

JAPAN INTERNATIONAL COOPERATION AGENCY WEST JAPAN ENGINEERING CONSULTANTS, INC.

JAPAN ECONOMIC RESEARCH INSTITUTE INC.

11-028 JR

SAP

Study on Promotion Policies for Geothermal Power Development by IPPs Final Report (Summary)

JICA i West JEC and JERI

Table of Contents Chapter 1 Introduction ............................................................................................................. 1

1.1 Background of the Study ............................................................................................... 11.2 Objectives of the Study .................................................................................................. 11.3 Contents of the Study ..................................................................................................... 11.4 Implementation Framework of the Study ...................................................................... 2

Chapter 2 Present Status and Issues of Geothermal Power Development in Indonesia ..... 32.1 Expectations for and Recent Status of Geothermal Development ................................. 32.2 Issues in the Promotion of Geothermal Development ................................................... 4

Chapter 3 Recommendations for Risk Mitigation Measures in Geothermal Resource Development ................................................................................................................................ 5

3.1 Necessity of Risk Mitigation Measures ......................................................................... 53.2 Basic Scheme of Governmental Exploration ................................................................. 53.3 Basic Scheme of the Fund ........................................................................................... 103.4 Socio-economic Effects of the Fund ............................................................................ 233.5 Candidate Fields for Fund Support .............................................................................. 253.6 Fund management structure ......................................................................................... 263.7 Selection of Contractors for Governmental Exploration ............................................. 293.8 Selection Criteria of Sites for Governmental Exploration ........................................... 303.9 Required Studies for Governmental Exploration ......................................................... 313.10 Socio-Environmental Study for Governmental Exploration ........................................ 32

Chapter 4 Issues Related to the Current Regulatory Framework for Geothermal Development and Suggested Options for Policy Reform ....................................................... 35

4.1 Legal Frameworks ....................................................................................................... 354.2 Major Issues and Suggested Reforms .......................................................................... 364.3 Concluding Remarks .................................................................................................... 40

Chapter 5 A Proposal for a Yen Loan to the Fund ............................................................... 415.1 Formulation of a Project for a Yen Loan to the Fund .................................................. 41

Chapter 6 Proposals for Further Acceleration of Geothermal Development in Indonesia ................................................................................................................................. 46Chapter 7 Concluding Summary ........................................................................................... 48 Acknowledgement References Annex-I Characteristics of each Financial Scheme Annex-II Recommendations concerning the Standard PPA (Draft)


JICA ii West JEC and JERI

List of Figures Fig.-3.1-1 The significance of Governmental Exploration as Risk Mitigation Measure ......... 6Fig.-3.1-2 Basic scheme of the Fund and the mechanism for recovery of the Governmental

Exploration costs ................................................................................................. 6Fig.-3.3-4 Cumulative cash flow of Debt (15yrs) scheme (net present value) ....................... 12Fig.-3.3-16 Total repayment amount in sensitivity analysis of Debt (15yrs) ......................... 13Fig.-3.3-19 Cumulative cash flow of Equity (Div) scheme (net present value) ..................... 14Fig.-3.3-22 Total dividend amount over 30 years in sensitivity analysis of Equity (Div)

scheme ............................................................................................................... 16Fig.-3.3-23 Changes of the balance of the Fund in the Debt (15yrs) case (net present value)

........................................................................................................................... 18Fig.-3.3-25 Changes of the balance of the Fund in the Equity (Div) case (net present value)

........................................................................................................................... 19Fig.-3.3-26 Changes of the balance of the Fund in the case of a mixture of Debt (15yrs)

(50%) and Equity (Div) (50%) (net present value) ........................................ 20Fig.-3.4-2 EIRR of the Fund (For a 55 MW Geothermal Power Plant) ................................. 24Fig.-3.6-2 Option 1 of Fund management structure ............................................................... 27Fig.-3.6-3 Option 2 of Fund management structure ............................................................... 28Fig.-3.6-4 Option 3 of Fund management structure ............................................................... 29Fig.-5.1-1 Cash Flow to and from the Fund in case of Yen Loan .......................................... 43Fig.-5.2-1 Annual cash flow to and from the Fund and year-end balance of the Fund .......... 45Fig.-5.2-5 Socio-economic effects of the Fund (EIRR) ......................................................... 45


JICA iii West JEC and JERI

List of Tables Table-3.2-2 Schedule estimation for Governmental Exploration (in the case of a 55

MW-class geothermal power plant) ..................................................................... 7Table-3.2-3 Assessment on Executing Agent of Governmental Exploration ........................... 9Table-3.3-2 Specifications of a model geothermal IPP project .............................................. 10Table-3.3-3 Model development process ............................................................................... 11Table-3.3-4 Finance procument conditions ............................................................................ 11Table-3.3-5 Assumptions of Debt (15yrs) Simulation ........................................................... 12Table-3.3-6 Results of Debt (15yrs) simulation ..................................................................... 12Table-3.3-12 Assumptions of Equity (Div) Simulation ......................................................... 14Table-3.3-13 Result of Equity (Div) simulation ..................................................................... 15Table-3.3-14 Revolvability of the Fund and necessary period to recover (For USD 9.7¢/kWh

Selling Price and 20% Markup) ......................................................................... 21Table-3.4-2 Assumption of Future Energy Prices and CO2 Prices (2009 USD) .................... 23Table-3.4-5 The Socio-economic Effect of the Fund (EIRR and Savings of Fuel and CO2)

(For a 55 MW Geothermal Power Plant) ........................................................... 24Table-3.5-1 Current Situation of Geothermal Fields for IPPs in Crash Program II ............... 25Table-3.5-4 Candidate Fields for Governmental Exploration and Financial Support of the

Fund ................................................................................................................... 26Table-3.10-3 Permits and licenses for Governmental Exploration ......................................... 34Table-5.1-2 Conditions of cash flow simulation .................................................................... 43


JICA 1 West JEC and JERI

Chapter 1 Introduction

1.1 Background of the Study

The National Electricity Provision Plan 2010 (RUPTL 2010 - 2019) estimated that the peak power demand of the country would increase at an average annual rate of 9.5% and would reach 59,863 MW in 2019. In order to secure a stable energy supply, the development of power plants to meet these demands is one of the urgent issues confronting the Indonesian power sector. In 2007, the Indonesian government launched a large-scale electricity generation development plan called “Crash Program” to cope with the incessantly growing power demand. The first Crash Program was planned to develop 10,000 MW of power generation capacity mostly by coal-fired thermal power by 2013. The recently announced “Crash Program II” was also aimed at generating an additional 10,000 MW mainly with renewable energy sources. Of the target 10,000 MW of power, this Program includes the development of about 4,000 MW of geothermal power through the use of the abundant reserves of geothermal energy in Indonesia. About 3,700 MW of this total is expected to be developed by Independent Power Producers (IPPs). The geothermal resource potential of Indonesia is estimated at 27,000 MW, which is the world’s largest potential. Though there are high expectations for the future utilization of this resource, the current developed Indonesian geothermal capacity is only about 1,200 MW in total. Accelerated geothermal power development is essential in achieving the goals of Crash Program II. Geothermal energy is attractive also from the viewpoint of climate change mitigation, because the emissions of CO2 from geothermal power plants are much lower those that from coal-fired thermal power plants. There are high expectations for the promotion of geothermal development by IPPs, although some issues, such as the large amount of initial investment required, still remain unsolved. 1.2 Objectives of the Study

Following on JICA’s “Geothermal Master Plan Study“ in 2007 and its “Study on Fiscal and Non-fiscal Incentives to Accelerate Private Sector Geothermal Energy Development in the Republic of Indonesia” in 2009, the objectives of this study are to review and propose improvements in the current framework of geothermal power development by IPPs, to organize a detailed outline of potential needs for foreign financing, and to build consensus among stakeholders to implement the proposed improvements. 1.3 Contents of the Study

The Study consists of the following two main parts: (1) Study of risk mitigation measures for geothermal IPP development and recommendations. (2) Issues related to the current regulatory framework for geothermal development and



suggested options for policy reform.

(1) Study of Risk Mitigation Measures for Geothermal IPP Development and Recommendations

In this area of the Study, the risk mitigation measures are studied. In addition, the possibility of Fund formation is studied. The contents are as follows.

1. Necessity of Risk Mitigation Measures 2. Basic Scheme of Governmental Exploration 3. Basic Scheme of the Fund 4. Socio-economic Effects of the Fund 5. Candidate Fields for Fund Support 6. Fund Management Structure 7. Selection of Contractors for Governmental Exploration 8. Selection Criteria of Sites for Governmental Exploration 9. Required Studies for Governmental Exploration 10. Socio-Environmental Study for Governmental Exploration

(2) Issues Related to the Current Regulatory Framework for Geothermal Development

and Suggested Options for Policy Reform

In this area of the Study, the issues related to the current regulatory framework for geothermal development are studied and then options for policy reform are suggested. Furthermore, current Power Purchase Agreement (PPA) conditions are reviewed and improvements are proposed. The contents are as follows.

1. Legal framework for geothermal development 2. Mining Work Area (WKP; Wilayah Kerja Pertambangan) tender methods (review,

extraction of issues, and suggested reforms) 3. Major issues and suggested reforms

1.4 Implementation Framework of the Study

This Study is carried out as a joint study between the Indonesian side, collecting input from and consulting with Ministry of Energy and Mineral Resources (MEMR), National Development Planning Agency (BAPPENAS) and Ministry of Finance (MOF), and Japan International Cooperation Agency (JICA).



Chapter 2 Present Status and Issues of Geothermal Power Development in Indonesia

2.1 Expectations for and Recent Status of Geothermal Development

The Republic of Indonesia is endowed with the world largest geothermal potential, or 40% of the geothermal potential of the entire world. The development of geothermal power has a very promising role to play in coping with the increasing electric power demand by making utmost use of this indigenous energy. So far, geothermal power has been generated at seven (7) fields, namely Kamojang, Darajat, Wayang-Windu, Salak, Dieng, Sibayak, and Lahendong. The generation capacity has reached 1,196 MW as of the end of 2009. Although Indonesia is the third largest producer of geothermal power in the world, the country has not yet made effective use of its huge geothermal energy potential. Starting from the year 2000, the Government of Indonesia has set some political targets to promote geothermal development and has set forth some geothermal-related laws and regulations. In 2002, the Government formulated a “National Energy Program” that specified a target of supplying 5% of the total energy demand from renewable energy. In 2006, the “Presidential Decree on National Energy Development Policy” (PD 05/2006) was issued and superseded the preceding program. This PD specified that geothermal power alone should furnish more than 5 % of the total energy supply by 2025. In parallel, a new geothermal law (Law No. 27/2003) was enacted in 2003. This is the first law relating to geothermal energy in Indonesia. The law made the procedures for geothermal development clear and enabled not only the government-owned companies (PERTAMINA and PLN) but also IPPs to participate in geothermal power development. MEMR formulated a Geothermal Road Map in 2004 aimed at realizing geothermal development of 6,000 MW in total by 2020. This was then updated in 2005 to target the development of 9,500 MW by 2025. Meanwhile, the government agencies and state corporations relevant to geothermal development were modified or re-organized. In the MEMR re-organization, the “Directorate General of Mineral, Coal and Geothermal” was established in 2005. PERTAMINA, a special governmental corporation until then, became a state corporation in 2001 and was spun off into four companies (a holding company, and oil, gas and geothermal companies). Pertamina Geothermal Energy (PGE) was established in 2006 as a subsidiary of PERTAMINA. In 2008, PLN also established “PT PLN geothermal” as its own subsidiary to conduct geothermal development. Further geothermal development has been expected with start of the second term of President Yudhoyono’s administration. The Government officially started Crash Program II in January 2010, with MEMR Regulation No. 02/2010, and issued Presidential Decree No. 04/2010. The plan is to develop 9,516 MW of power generation capacity by 2014, with 3,967 MW (41.7 %) to be produced utilizing geothermal energy. As mentioned above, expectations are currently high



for geothermal development in Indonesia. 2.2 Issues in the Promotion of Geothermal Development

There are two main issues in the promotion of geothermal development. One is the risks in geothermal resource development and the other is the issue of the current regulatory framework for geothermal development. (1) Risks in Geothermal Resource Development

Although exploration technology has been developed and the accuracy of exploration has been enhanced, still the development risks and large initial funds required for exploration, especially for the drilling of exploration wells, remain big barriers for Independent Power Producers (IPPs) who are interested in geothermal power development. In order to accelerate participation of IPPs in geothermal power development in Indonesia, it is important to reduce the initial risk of geothermal resource development. The risk mitigation measures and scheme of the Fund are discussed in Chapter 3. (2) Issues in the Current Regulatory Framework for Geothermal Development

The Geothermal Law (27/2003) was established in 2003, and several regulations have been issued in relation to the Geothermal Law since then in order to provide detailed guidelines for the conduct of geothermal business activities. However, it has been pointed out that there are some issues with the current regulatory framework for geothermal development, for example, the issues of the WKP tender process and PPAs. This current regulatory framework is reviewed and improvements are discussed in Chapter 4.



Chapter 3 Recommendations for Risk Mitigation Measures in Geothermal Resource Development

3.1 Necessity of Risk Mitigation Measures

Geothermal energy harnesses steam and hot water stored in reservoirs 1,500 - 3,000 meters underground. Therefore geothermal development has various difficulties similar to exploration of petroleum, natural gas and minerals, in terms of high risks of failure and high initial costs of development. While oil, gas or minerals, if they are successfully explored, are tradable in the global market at market prices, geothermal energy is site-specific energy and is only tradable on site as a form of electricity at a local market price. This means that exploration risks of geothermal energy are deemed as much higher than those of oil, gas or minerals, if the reward of challenging the risks is considered. Although the exploration technology has been developed and the accuracy of exploration has been enhanced, still the development risks and large initial funds required for exploration remain big barriers to geothermal power development. In order to accelerate participation of private Independent Power Producers (IPPs) in geothermal power development in Indonesia, therefore, it is of great importance to reduce these geothermal resource development risks. In this Study, the Study Team proposed a Risk Mitigation package consisting of two components; Governmental Exploration and a special Fund to financially support the Governmental Exploration. (Fig.-3.1-1 and Fig.-3.1-2) 3.2 Basic Scheme of Governmental Exploration

(1) The Objective and the Content of Governmental Exploration

Although there is some desire of IPPs for the drilling as many wells as possible in Governmental Exploration, the Study Team is of the opinion that the number of wells drilled in Governmental Exploration should be around three (3). This is because the objective of Governmental Exploration is to provide private investors with information regarding whether the field deserves further exploration by them. Since this objective can be achieved through the drilling of three (3) wells, Governmental Exploration should comprise three (3) standard-size exploratory wells including necessary ground survey and other work. (2) Cost Estimation and the Schedule of Governmental Exploration

When Governmental Exploration includes three (3) exploratory wells, the costs are estimated to be around USD 25 million. The Exploration period is around three years including the preparation period and tender period for Geothermal Energy Business Permit (IUP ; Izin Usaha Pertambangan Panas Bumi) (Table-3.2-2).



COST RECOVERY MECHANISM

Year -7 -6 -5 -4 -3 -2 -1 1 2 3 4 5 …..

Selection of IPP (Tender)

Sales of Survey results

Expenditure for Governmental Repayment of Interest to Fund Repayment of Principal to Fund Exploration from Fund during development period after some period

Development & Construction Operation

GovernmentalSurvey

Dev'tby IPP

Const.by IPP

Geothermal Power Plant Operationby IPP

GOVERNMENT / REVOLVING FUND

・・・・・・・・・

Private IPP Repayment after some period

Fund

Exploration by Gov't

Fig.-3.1-1 The significance of Governmental Exploration as Risk Mitigation Measure

Fig.-3.1-2 Basic scheme of the Fund and the mechanism for recovery of the Governmental Exploration costs

CURRENT

PROPOSAL

PRELIMINARY SURVEY

EXPLORATION

CONSTRUCTION

STEAM SUPPLY

ELECTRICITY GENERATION

GEOTHERMALENERGY

RESOURCES

GEOTHERMALENERGY

UTILIZATION

BYCENTRAL ORREGIONALGOVERNMENT

ELECT.BIZ.PERMIT

TENDERING

BY COMPANY

(LAW NO. 27/2003)

GOV'TALEXPLORATION

TENDERING

GOVERNMENTALSURFACE SURVEY

GOVERNMENTALEXPLORATION

BY COMPANY

TENDER

Green Field

Risk MitigationMeasures is necessary

Effects of Governmental Exploration

RiskReduction

CostsReduction

TimeReduction

Risk Mitigation Measures are necessary

Cost



Governmental Exploration Schedule

Year

Development Stage

Preparation by FUNDSelection of Field by FUNDSelection of Executing Company

Preparation by Executing Company Reconnaissance

Data ReviewGeoscientific Studies

Geochemical & Geophysical Detailed GeologySelection of Drilling sites

Environmental StudyPublic ConsensusDrillings

Preparation Works (road, water) Drilling 1Drilling 2Drilling 3Well Test

Evaluation and Compiling Report

Tender ProcessPreparationAnnouncementBiddingBid EvaluationAwardIssue of IUPNegotiation of PPA Signing of PPA

Development by IUP HolderEvaluation of Exploratory ReportAdditional surveyDrilling site selectionPreparation for drillingAppraisal Drilling 1Appraisal Drilling 2Appraisal Drilling 3Development Plan FinancingFinance Close

Construction by IUP HolderDrilling of Production WellsConstruction Work (Steam Field)Construction Work (Power Plant)Commissioning

Operation by IUP HolderOperation

Governmental Exploration Drilling Tendering Development Construction Preparation

Operation

Year-1 Year-7Year-6Year-5Year-4Year-3Year-2 Year-8

Table-3.2-2 Schedule estimation for Governmental Exploration (in the case of a 55 MW-class geothermal power plant)



(3) Executing Agent of Governmental Exploration

There are three possible options regarding who executes Governmental Exploration: (a) A governmental agency (b) A private company that is allowed to continue geothermal development in the field

(Allowed to participate in tender for IUP afterwards) (c) A private company that is not allowed to continue geothermal development in the field

(Not allowed to participate in tender for IUP afterwards)

The Study Team considers that the Executing Agent of Governmental Exploration should basically be a governmental agency such as the Geological Agency or MEMR. In consideration of the actual situation of Indonesia, however, the Study Team proposes that a private company is appropriate as the Executing Agent of Governmental Exploration based on an assessment of each option as Table -3.2-3 shows. It is also appropriate for the company to be allowed to participate in tender for IUP and to continue geothermal development in the same field. The justification of this proposal is that (i) a private company is most appropriate because it already has enough technical capacity for the exploration, and (ii) such a company has an eagerness to carry out effective and enthusiastic exploration if it has a desire to continue the development. Regarding concerns as to whether this option is fair in the tender for IUP, the Study Team considers that this concern would be addressed (i) if the selection process for the Executing Agent is fair and transparent and (ii) if the exploration report is fully and widely made available to the public prior to the tender.



Table-3.2-3 Assessment on Executing Agent of Governmental Exploration

Views Governmental Agency Private Company

(Tender participation is allowed) Private Company

(Tender participation is NOT allowed)

Technical Capacity Low High Middle

Limitation in manpower and technical capacity compared with international developers

Excellent technical capacity. A highly motivated exploration can be expected

Excellent technical capacity. An effective exploration can be expected.

Quality of Exploration

Low High High

Necessity of advice from international technical experts

Necessity of third-party experts’ review and advice to satisfy governmental requirements

Necessity of third-party experts’ review and advice to satisfy governmental requirements

Relationship with Host Community

Middle High Middle

Creating short-term relations necessary for exploration period alone

Creating long-term relations necessary not only for exploration period but also for operation period

Creating short-term relations necessary for exploration period alone.

Fairness in IUP Tender

High Low Low

Fair competition Advantage of the Executing Agent in IUP Tender No guarantee of the fairness. A secretly related company’s participation cannot be excluded.

Selection Process High Middle Middle

High transparency Possibility of low transparency Possibility of low transparency

Legality Middle Middle Middle

Allowed by the Geothermal Law Allowed by the Geothermal Law (The exploration is done on behalf of the government)

Allowed by the Geothermal Law (The exploration is done on behalf of the government)



3.3 Basic Scheme of the Fund

(1) The Cost Recovery Scheme for Governmental Exploration

There are two major kinds of scheme through which the Fund can recover the costs of Governmental Exploration: (i) a Debt-type cost recovery scheme and (ii) an Equity-type cost recovery scheme. A Debt-type scheme is a scheme in which the Fund recovers the costs of Governmental Exploration on the installment plan. An Equity-type scheme is a scheme in which the Fund acquires stock in the Special Purpose Company (SPC) which continues geothermal power development in exchange for the costs of the Government Exploration results. The Fund recovers the costs in dividends from the SPC’s profits during its operation period or recovers the costs by strategic sales of the stocks at any time, such as upon inception of operations at the power plant, for example.

(2) Quantitative Simulation of the Cash Flow to the Fund

1) Conditions of the Simulation In this Study, quantitative cash flow is simulated to evaluate each sub-type of Cost Recovery Scheme. The simulation is done by using an economic evaluation simulator for geothermal power generation made by the Study Team. The main assumptions of the simulation are shown in Table-3.3-2, Table-3.3-3 and Table-3.3-4.

Table-3.3-2 Specifications of a model geothermal IPP project Items Specification Remarks

Capacity 55 MW 1 unit Construction costs USD 183 million (*) USD 192 million (**) Construction costs per kW 3,320 USD/kW (*) 3,480 USD/kW (**) Construction period 6 years Depth of production wells 2,000 meters deep Production well average output 8 MW/well Generation efficiency 7.0 t/h/MW Operation period 30 years Economic evaluation period: 30 years Steam output rate of decline 3% annual (Note) IDC: Interest during construction, (*): without IDC, (**) with IDC



Table-3.3-3 Model development process Stage Content Well-Drilling Years Costs (*)

Resource Confirmation

To confirm existence of steam by surface survey and exploration drillings.

3 wells (1 successful well)

2 yrs USD 25 million (@6 m$/well)

Reservoir Evaluation

To evaluate the reservoir capacity by drilling additional exploration wells. Feasibility Study report is compiled.

3 wells (2 successful wells）

2 yrs USD 25 million

Construction To drill production/reinjection wells, and construct steam pipelines, power plant etc. with loans.

7 production wells (5 successful wells)

2 yrs Steam Field USD 62 million Power Plant USD 71 million

Total 15wells (9 successful wells）

6 yrs USD 183 million

Operation Power plant operates for 30 years.

6 make-up wells

30 yrs O&M Make-up wells

(Note) (*): without IDC

Table-3.3-4 Finance procument conditions Stages Equity Loans Resource Confirmation 100% ― Reservoir Evaluation 100% ― Construction 30% 70%

Interest rate 6.5% (*2) Repayment period (*1) 15 yrs Grace period 3 yrs

(Note) (*1) includes Grace Period (*2) On the assumption that IPP partially utilizes officially supported export

credit, of which current interest rate was 6.43% as of October, 2008. This report used the same interest rate considering that this report might be compared with the former JICA report (JICA 2009).

2) Cash Flow in the Debt-type Long-term Repayment Scheme (Debt (15yrs)) The capital flow of the debt-type long-term repayment scheme is simulated for the example of a 15-year repayment (Debt (15yrs)). The assumptions of the simulation are as shown in Table-3.3-5. The simulation results are shown in Fig.-3.3-4 and Table-3.3-6.



Table-3.3-5 Assumptions of Debt (15yrs) Simulation Items Specification Type Debt type Plant capacity 55 MW Selling price of energy USD 9.7 ¢/kWh Purchase price of Governmental Exploration results

USD 25 million

Purchase year -4 years (4 years before operation) Repayment period (Grace period)

1 to 15 years after operation (4 years until operation)

Repayment method Equal payment of principal Interest rate during repayment 10.0% (Senior interest rate +3.5%) Discount rate for NPV 6.0% (referring to the US dollar base 10

year Indonesian Government Bond1

Base year for NPV )

Price of -4th year (purchase year) (Note) NPV: Net Present Value

Fig.-3.3-4 Cumulative cash flow of Debt (15yrs) scheme (net present value)

Fig.3.3-4 Cumulative cash flow of Debt (15yrs) scheme (net present value)

Table-3.3-6 Results of Debt (15yrs) simulation Items Simulation result Nominal Value

Total repayment in 15 years USD 52.5 million Total repayment in 30years USD 52.5 million

Net Present Value Price of -4th year (the 4th year prior to operation)

Total repayment in 15 years USD 33.8 million Total repayment in 30 years USD 33.8 million

1 The yield of US dollar base 10 year Indonesian Government Bond issued in January 2010 is 5.875%.

Debt (15yrs)

0

5

10

15

20

25

30

35

40

-4 -2 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

Year

Cas

h Fl

ow N

PV (c

umul

ativ

e) (m

$)



0

10

20

30

40

50

60

Nominal Net Present Value

Cum

ulat

ive

repa

ymen

t am

ount

(m$)

Debt (55MW, PF=90%) Debt (50MW, PF=90%)Debt (40MW, PF=90%) Debt (30MW, PF=90%)Debt (20MW, PF=90%) Debt (20MW, PF=80%)Debt (20MW, PF=70%)

In the case of Debt (15yrs), the Fund receives interest revenue during the construction period until power plant operation, and after that, it receives the revenue of principle repayments and interest during 15 years. The revenue decreases gradually as the loan balance decreases. The total amount of the repayment is USD 52.5 million in nominal value terms and is USD 33.8 million in the net present value at -4th year before operation. (The net present value in terms of the -4th year price is converted from the nominal value using a discount rate of 6.0%. Hereinafter, the same conversion is used to calculate the net present value.) 3) Characteristics of the Debt-type Scheme A sensitivity analysis of the Debt-type Scheme shows that the total repayment amount is the same regardless of project capacity (MW) or operation conditions (plant factor). This means that the Fund can expect stable revenue from the repayment when it uses a Debt-type scheme (subject to the condition that the SPC does not fall in default.) However, the repayment amount is limited to USD 33.8 million in net present value terms. Since the cost of Governmental Exploration is USD 25 million, this scheme has limited ability to recover the costs of Governmental Exploration. It is anticipated that most of the costs for failed fields (where no private companies emerge to continue development after Governmental Exploration) would not be fully recovered under this scheme. (Fig.3.3-16)

Fig.-3.3-16 Total repayment amount in sensitivity analysis of Debt (15yrs) 4) Cash Flow in Equity-type Scheme (Equity (Div)) The capital flow of the Equity-type scheme (Equity (Div)) is simulated. The assumptions of the simulation are as shown in Table-3.3-12. The simulation results are shown in Fig.-3.3-19 and Table-3.3-13.



Table-3.3-12 Assumptions of Equity (Div) Simulation Items Specification Type Equity type Plant capacity 55 MW Selling price of energy USD 9.7 ¢/kWh Purchase price of Governmental Exploration results

USD 25 million

Purchase year -4 years (4 years before operation) Repayment method Dividends from SPC Percentage of investment by Fund 27.6% (=USD 25.0m/USD 90.5m) (*) Rate of dividend 100 % Discount rate for NPV 6.0% (referring to the Indonesian 10 yr

Government Bond in USD) Base year for NPV Price of -4th year (purchase year)

(Note) NPV: Net Present Value (*) Total initial costs necessary to exploration and construction are USD 90.5

million in this model case2

.

Fig.-3.3-19 Cumulative cash flow of Equity (Div) scheme (net present value)

Fig.-3.3-19 Cumulative cash flow of Equity (Div) scheme (net present value) 2 Exploration costs between -6th year and -3rd year are USD 50.0 million, and construction costs of own expenditure between -2nd year and -1st year are USD 40.5 million (USD 62 million + USD 71 million) x 30% + interest during construction).

Equity

0

10

20

30

40

50

60

-4 -2 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

Year

Cas

h Fl

ow N

PV (c

umul

ativ

e) (m

$)



Table-3.3-13 Result of Equity (Div) simulation Items Simulation result Nominal Value

Total repayment in 15 years USD 74.8 million Total repayment in 30years USD 170.5 million

Net Present Value Price of -4th year (the 4th year prior to operation)

Total repayment in 15 years USD 42.3 million Total repayment in 30 years USD 64.0 million

In the case of an Equity (Div) scheme, there is no revenue to the Fund during the construction period. After the inception of power plant operation, the Fund receives dividend revenue from the SPC. The profit available for dividends is divided in proportion to the investment ratio between the Fund and the SPC. The Fund can take its own portion of the dividends. If the capacity of the project is 55 MW and the dividend ratio of the SPC profits remains at 100%, the total amount of the dividends is USD 170.5 million in nominal value terms and is USD 64.0 million in net present value terms at -4th year price. This is about 2.6 times the cost of Governmental Exploration (USD 25 million). That is to say that this Equity (Div) scheme has strong ability to recover costs. 5) Characteristics of the Equity-type Scheme A sensitivity analysis of the Equity-type Scheme shows that the total amount of dividends over 30 years is easily affected by many factors such as project capacity (MW) or operation conditions (plant factor). Fig.-3.3-22 shows that the capacity of the project has a large influence over the total amount of dividends, and other factors also affect the total amount as well.



0 50 100 150 200 250 300 350

Well Cost <6m$-5m$-4m$>

Well Output <6MW-8MW-10MW>

Prod. Well Success Rate <50%-70%-90%>

Steam Decline rate <5%-3%-1%>

Plant Capacity <20MW-55MW-110MW>

Selling Price <9.0-9.7-10.4 cnt/kWh>

Cash Flow in 30 years (cumulative) (m$)

0 25 50 75 100 125 150

Well Cost <6m$-5m$-4m$>

Well Output <6MW-8MW-10MW>

Prod. Well Success Rate <50%-70%-90%>

Steam Decline rate <5%-3%-1%>

Plant Capacity <20MW-55MW-110MW>

Selling Price <9.0-9.7-10.4 cnt/kWh>

Cash Flow in 30 years NPV (cumulative) (m$)

(Nominal Value) (Net Present Value)

Fig.-3.3-22 Total dividend amount over 30 years in sensitivity analysis of Equity (Div) scheme



6) Summary of the Cost Recovery Scheme The Cost Recovery Scheme is summarized as follows: i) Debt-type scheme

The Debt-type scheme is a scheme from which the Fund can expect reliable repayment revenue regardless of the capacity or the business performance of the geothermal power plant. However, the expected total repayment amount is not as large as the equity scheme.

ii) Equity type scheme The Equity-type scheme is a scheme that has strong cost recovery ability when the power-generating capacity of the geothermal power plant is large. However, the cost recovery ability is greatly influenced by the capacity of the geothermal power plant that is ultimately constructed. In addition, it is also influenced by many other factors of the SPC business performance. It is also affected by the SPC’s dividend policies. Therefore this scheme poses a greater risk for the Fund than the Debt-type scheme

iii) Portfolio of Debt-type and Equity–type schemes As above-described, the Debt-type scheme is less risky scheme for the Fund but its cost recovery ability is also less than the Equity-type scheme. On the other hand, the Equity-type scheme has larger cost recovery ability while the SPC’s business performance is satisfactory but it is more risky than the Debt-type scheme because its cost recovery ability totally depends on the SPC’s business performance. Therefore, as for a selection of either type for a project, it is desirable to choose properly between the Debt-type and the Equity-type scheme according to the economic viability of the geothermal project to be developed. In addition, as for the Fund portfolio, it is important to create a portfolio with an appropriate mixture of Debt-type and Equity-type schemes in order to maximize revenue while reducing the risks of the Equity-type scheme.

iv) Markup in the sales price of the Governmental Exploration results It is justifiable to add a certain level (around 10%-20%) of markup to the sales price of Governmental Exploration results in order to sustain the Fund because the Government carries risks of failure by using the Fund instead of private developers. Different from individual private investors, the Fund has a large financial base and therefore, can bear the costs of the Governmental Exploration in several fields simultaneously. Even though explorations in some fields of them might fail, explorations in other fields will succeed. Thus the Fund can reduce the risks of explorations from high level of being explored individually to low level of being explored collectively. This is called “the portfolio effects”. Therefore the Fund plays a role of not only providing financial supports but also reducing risks of explorations. In return of these important functions, it is justifiable for the Fund to charge some markup in the sales price of the Governmental Exploration results. From the private developers’ viewpoints, the exploration risks of the field is reduced to a certain level enough to make a management decision whether they invest in the geothermal development in the field or not. It is worthwhile purchasing the Governmental Exploration results for them even though the markup is added in prices when compared



Balance of Fund NPV (Debt type)

0

50

100

150

200

-7 -5 -3 -1 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30Year

Bal

ance o

f Fund

(m$)

Success Rate100%

Success Rate 75%

Success Rate 50%

Success Rate 25%

D ebt type20 MWR epayment =15 yr

with doing the exploration by themselves from scratch. (3) Revolvability of the Fund

1) Basic Approach The revolvability (the ability to restore the original balance) of the Fund is examined by the following method. First, a Fund with initial capital of USD 100 million is assumed. This Fund is then used to cover the costs of Governmental Exploration in four (4) fields (the cost for each field is USD 25 million.). The sales price of the Exploration results is assumed to be USD 30 million (USD 25 million + 20% markup) in order to enhance the revolvability of the Fund. Thus the Fund can recover the Exploration costs through sales of its results at a certain success probability (Success Rate). 2) The Debt (15yrs) Case In the Debt (15yrs) case where 20 MW geothermal plants are developed3

(a) If the Success Rate is 100%, the balance of the Fund returns to the original balance in five (5) years.

(Fig.-3.3-23):

(b) If the Success Rate is 75%, the balance of the Fund returns to the original balance in nine (9) years.

(c) If the Success Rate is less than 50%, the balance of the Fund does not return to the original balance even in 30 years. This means the Fund cannot recover the costs of Governmental Exploration.

Fig.-3.3-23 Changes of the balance of the Fund in the Debt (15yrs) case (net present value)

3 The capacity of the power plant has no effect on the results in the Debt-type scheme as mentioned in 3.3, (2), 3). Herein, 20 MW is taken as an example of the Debt-type case.



Balance of Fund NPV (Equity type)

0

50

100

150

200

-7 -5 -3 -1 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30Year

Bal

ance o

f Fund

(m$)

Success Rate100%

Success Rate 75%

Success Rate 50%

Success Rate 25%

E quity type55 MW

3) The Equity (Div) Case In the Equity type case, if 55 MW geothermal plants are developed4

(a) If the Success Rate is 100%, the balance of the Fund returns to the original balance in six (6) years.

:

(b) If the Success Rate is 75%, the balance of the Fund returns to the original balance in eight (8) years.

(c) If the Success Rate is 50%, the balance of the Fund returns to the original balance in 16 years.

(d) If the Success Rate is 25%, the balance of the Fund does not return to the original balance even in 30 years (Fig.-3.3-25).

Fig.-3.3-25 Changes of the balance of the Fund in the Equity (Div) case (net present value)

4) Mixture of the Debt (15yrs) and the Equity (Div) Schemes When the Fund consists of equal 50% components of the Debt (15yrs) and Equity (Div) schemes (with the capacity assumed as 55 MW), the balance of the Fund evolves as shown in Fig.-3.3-26. This figure shows that:

(a) If the Success Rate is 100%, the balance of the Fund returns to the original balance in five (5) years. (There is no benefit to the mixture.)

(b) If the Success Rate is 75%, the balance of the Fund returns to the original balance in eight (8) years.

(c) If the Success Rate is 50%, the balance of the Fund returns to the original balance in 21 years.

(d) If the Success Rate is 25%, the balance of the Fund does not return to the original balance.

4 As described in 3.3, (2), 5), an Equity-type scheme is suitable for a large-scale project. Herein, 55 MW case is taken as an example of Equity-type case.



Balance of Fund NPV (Mixture of Debt type 50% and Equity type 50%)

0

50

100

150

200

-7 -5 -3 -1 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30Year

Bal

ance o

f Fund

(m$)

Success Rate100%

Success Rate 75%

Success Rate 50%

Success Rate 25%

D ebt type20 MWR epayment =15 yr

E quity type55 MW

Fig.-3.3-26 Changes of the balance of the Fund in the case of a mixture of Debt (15yrs) (50%) and Equity (Div) (50%) (net present value)

5) The Revolvability of the Fund The revolvability of the Fund is summarized as follows (Table-3.3-14):

(a) When the Success Rate is more than 75%, it is possible for the Fund to be composed of Debt-type schemes alone. In this case, the Fund returns to the original balance in the middle term (within 9 years).

(b) When the Success Rate is 50%, it is anticipated that the balance of the Fund could not recover if it is composed of Debt-type schemes alone. However, if the Fund includes Equity-type schemes in its portfolio, the balance is expected to be restored in the long-term (about 21 years).

(c) When the Success Rate is 25%, the Fund cannot recover the original balance.



Table-3.3-14 Revolvability of the Fund and necessary period to recover

(For USD 9.7¢/kWh Selling Price and 20% Markup) Success Rate

Basic Handling Effect of splitting the Fund 50-50 between Equity-type and Debt-type

Effect of strategic sales of the Equity

Debt-type (15-year repayment)

Effect

100% Debt type (15-year repayment)

○ 5 years ○ 5 years ○ 1 year (at COD)

In case of upfront repayment

○ -2 years ○ 6 years ○ 1 year (at COD)


○ 9 years ○ 8 years ○ 1 year (at COD)


× ○ 14 years ○ 1 year (at COD)


× ○ 21 years ×


× × ×


× × ×


× × ×

(Note) 1. A 55 MW capacity project is assumed for the Equity-type scheme. 2. The price of strategic sales is assumed to be 75% of the theoretical price (Net

present value of the total dividend revenue). 3. COD: Commercial Operation Date

6) Summary of the Basic Scheme of the Fund (i) In order to attain revolvability of the Fund, it is important to raise the Success Rate as high

as possible. For this purpose, it is necessary to select proper fields for Governmental Exploration and to procure appropriate Executing Agents for successful exploration.

(ii) When the Success Rate is high (more than 75%), it is possible to compose the Fund of Debt-type schemes alone. In this case, the Fund returns to the original balance in the middle term. In addition, if Equity-types are also included in the portfolio and if they can be strategically sold, it is possible for the Fund to recover its balance in the short-term (at the time of the sales).

(iii) When the Success Rate is 50%, it is recommended to include Equity-type schemes, or



large-scale projects, in the Fund portfolio. As a result, it is expected that the Fund will recover the original balance in the long-term (21 years).

(iv) Therefore, it is recommended for the Fund to support fields where a large-scale geothermal power plant can be developed. (e.g. geothermal fields in Java or Sumatra) It is necessary to develop Equity-type projects aggressively to increase the flow of revenue to the Fund.

(v) It takes a long period of time for the Fund to recover the original balance in many cases. Such long-term Fund management is beyond the capacity of private companies since there are no short-term returns. Moreover it is necessary to use low-cost money such as ODA finance for the seed money of the Fund. From these viewpoints, a governmental agency is most appropriate for managing the Fund.

(vi) There might be much worse cases than those discussed in this report, such as where the Success Rate is less than 50%. In addition, there are cases in which Equity-type schemes do not produce the anticipated revenue because of poor performance of the project. Therefore, there may be cases that the Fund cannot recover its original balance. Even in such cases, however, the Fund has played an important role in demonstrating the real underground situation of geothermal fields that are thought as promising before exploration but are not suitable for development in fact. Thus, from a long-term perspective, the Fund can contribute to avoid wasting time and money of exploration in the future. In addition, the Fund can collect the underground information and analyses of failure cases, which might not be disclosed by private developers if the exploration is performed by each developer, to improve the preliminary exploration process and to enhance the exploration technology. Therefore, the money spent on the exploration will contribute to knowledge accumulation and management and the exploration technology development in Indonesia.

(vii) In managing the Fund, the ability of the Fund Manager is very important in trying to sustain the Fund since manager will have to determine which fields the Fund supports, who the Fund appoints as the Executing Agent of the Exploration, which type of scheme the Fund applies to each explored field, how the Fund portfolio is composed, when and whether the Fund carries out strategic sales of equity and so on.



3.4 Socio-economic Effects of the Fund

The justification of the Fund is examined by calculating the socio-economic effects of the Fund. The Fund provides financing to Governmental Exploration, of which the cost is USD 25 million per field. Private developers will continue development following Governmental Exploration and if they construct geothermal power plants in the fields, the geothermal plants will substitute for coal-fired power plants or diesel power plants that would be constructed otherwise. This means that the geothermal power plants will save coal or diesel fuel that would have been burnt in fossil fuel power plants. Moreover, geothermal plants reduce the emission of CO2, compared to coal-fired or diesel plants. This is the effect of the expenditures of the Fund. Taking into consideration the fact that not all fields can be developed successfully by private developers, it is necessary to multiply the effect by the probability of success (the Success Rate). Making certain assumptions about future energy prices and CO2 prices, the value of the socio-economic impact of the Fund can be calculated and compared with its expenditures.

Table-3.4-2 Assumption of Future Energy Prices and CO2 Prices (2009 USD) Items Unit

1st operation year of

Geothermal Plant (middle of 2010s))

20th operation year of Geothermal Plant (middle of 2030s))

Averaged Annual Growth

Crude Oil USD/bbl 100 135 1.5% Coal USD/ton 100 115 0.7% CO2 USD/ton 30 40 1.4%

The calculation results are shown in Table-3.4-5 and Fig.-3.4-2. The 55 MW geothermal plant will substitute for a coal-fired power plant and save a total of 4.8 million tons of coal over 30 years when the Success Rate is 100%. As for CO2 emissions, the geothermal plant will avoid 11.6 million tons of CO2 emissions from the coal-fired plant over 30 years when the Success Rate is 100%. If the geothermal plant substitutes for a diesel power plant, it will save 3.1 million liters of diesel fuel over 30 years when the Success Rate is 100%. As for CO2 emissions, a total amount of 8.9 million tons of CO2 emissions will be avoided. These amounts of saved fuel and avoided CO2 emissions are converted into monetary terms and are compared with the total expense of the Fund. The Economic Internal Rate of Return (EIRR) of the expenditure of the Fund is calculated in terms of the socio-economic effects of the Fund expenditure. The EIRR of the Fund expenditure is calculated to be 20.3% when substituting for a coal-fired plant and is 34.9% in the case of a diesel plant substitution. If the Success Rate falls to 50%, the amount of saved fuel and CO2 emissions also falls to 50% of the figures mentioned above. Namely, the amount of coal saved becomes 2.4 million tons and the CO2 emissions avoided is 5.8 million tons over 30 years. When substituting for a diesel



0%

5%

10%

15%

20%

25%

30%

35%

40%

100 90 80 70 60 50 40 30 20 10

Success Rate (%)

EIR

R (%

)

EIRR (v.s. Coal Power Plant) EIRR (v.s. Diesel Power Plant)

Coal saved CO2 saved DSL saved CO2 saved(%) ('000ton) ('000ton) ('000ton) ('000ton)100 20.3% 4,789 11,566 34.9% 3,117 8,85090 19.8% 4,310 10,409 34.0% 2,805 7,96580 19.1% 3,831 9,253 33.0% 2,494 7,08070 18.3% 3,353 8,096 31.9% 2,182 6,19560 17.4% 2,874 6,940 30.6% 1,870 5,31050 16.3% 2,395 5,783 28.9% 1,558 4,42540 14.9% 1,916 4,626 26.9% 1,247 3,54030 13.1% 1,437 3,470 24.3% 935 2,65520 10.6% 958 2,313 20.6% 623 1,77010 6.6% 479 1,157 14.8% 312 8850 - 0 0 - 0 0

v.s. Coal-fired Power Plant v.s. Diesel Power Plant

EIRR EIRRSuccess Rate

power plant, 1.6 million liters of diesel fuel is saved and 4.4 million tons of CO2 emissions are avoided over 30 years. The EIRR of the Fund is calculated as 16.3% when substituting for a coal-fired plant and 28.9% when substituting for a diesel plant. In general the EIRR of a certain policy is judged by the opportunity cost of capital, usually 12%5

. In this case, the Fund has a socio-economic significance until the Success Rate goes down to 30% for coal-fired plant substitution and 10% for diesel power substitution.

Table-3.4-5 The Socio-economic Effect of the Fund (EIRR and Savings of Fuel and CO2) (For a 55 MW Geothermal Power Plant)

(Note) The amount of fuel saving and CO2 saving is the cumulative amount over 30 years.

Fig.-3.4-2 EIRR of the Fund (For a 55 MW Geothermal Power Plant)

5 See “Guidelines for the Economic Analysis of Projects”, Asian Development Bank.



Table-3.5-1 Current Situation of Geothermal Fields for IPPs in Crash Program II

3.5 Candidate Fields for Fund Support

There are reportedly more than 250 promising geothermal fields in Indonesia, and the total potential of these fields is estimated to be 27 GW or more. The Indonesian government has a strong intention of developing this huge source of domestic energy and issued the Presidential Decree (PP) of Crash Program II (PP No. 04/2010) in 2010. The Regulation of Minister of Energy and Mineral Resources (No. 15/2010) issued in view of the above-mentioned PP listed a total of 3,967 MW of geothermal fields to be promoted in Crash Program II. They are 43 geothermal fields and 6 of them are to be developed by PT. PLN (including a joint project with PGE) and 37 are to be developed by private IPPs. In the 37 fields allocated for IPPs, 14 fields are the working areas of PGE. In the other fields, developers are to be decided based on the tender process specified in the Geothermal Law. The tenders have already been conducted in 15 fields, and the developers are already decided there (as of January, 2011). Besides this, tenders are in process in five (5) fields. This means that only three (3) fields remain as Pre-Tender fields in the Crash Program II list. (Table-3.5-1)

Table-3.5-1 Current Situation of Geothermal Fields for IPPs in Crash Program II Given this situation, the candidate fields for Governmental Exploration in the Crash Program II list are limited. However, there are a number of promising geothermal fields in Indonesia besides the fields listed in Crash Program II. For instance, geothermal development is expected in the fields shown in Table-3.5-4 that are listed in the latest Long-term Electric Power Development Plan (RUPTL 2010 - 2019) of PT. PLN. These fields are considered as candidates for Governmental Exploration and financial support from the Fund.

Developer Fields Capacity PGE 14 1,800 MW Post-Tender 15 1,137 MW Tender in process 5 660 MW Pre-Tender 3 30 MW

Total 37 3,627 MW



RUPTELNO POWER GENERATION PROJECT NAME PROVINCE 2010-2019

31 PLTP Bora Central Sulawesi 1 x 5 5 201432 PLTP Merana / Masaingi Central Sulawesi 2 x 10 20 201437 PLTP Songa Wayaua North Maluku 1 x 5 5 2014

Geothermal TOTAL 30

RUPTELNO POWER GENERATION PROJECT NAME PROVINCE 2010-2019

1 PLTP Danau Ranau Lampung 2 x 55 110 2018, 20192 PLTP G. Talang West Sumatera 1 x 20 20 20183 PLTP Lainea South-East Sulawesi 2 x 10 20 20154 PLTP Mangolo South-East Sulawesi 2 x 5 10 20145 PLTP Pusuk Bukit North Sumatra 2 x 55 110 2018, 20196 PLTP Sipaholon North Sumatra 1 x 55 55 20197 PLTP Suok Sekincau Lampung 2 x 55 110 2018, 20198 PLTP Ulumbu East Nusa Tenggara 2 x 3 6 2011, 20129 PLTP Wai Ratai Lampung 1 x 55 55 2019

10 PLTP Bedugul Bali 1 x 10 10 2013Bedugul Bali 3 x 55 165 2016-2018

11 PLTP Batu Kuwung (not confirmed) 1 x 55 55 2018Batu Kuwung (not confirmed) 1 x 110 110 2020

12 PLTP Endut Banten 2 x 110 220 2019-202013 PLTP Mangunan Central Java 1 x 30 30 201914 PLTP Mangunan Central Java 1 x 55 55 202015 PLTP Arjuno Welirang (not confirmed) 2 x 55 110 2018-201916 PLTP Citaman Karang Banten 2 x 10 20 2018, 201917 PLTP Gn Papandayen West Java 2 x 55 110 2018-2019

Geothermal TOTAL 1,381

Geothermal Fields in RUPTL (2010-2019) other than CR-IIESTIMATED

CAPACITY (MW)

Geothermal Fields in IPP List of Second Crash Program (CR-II)ESTIMATED

CAPACITY (MW)

Table-3.5-4 Candidate Fields for Governmental Exploration and

Financial Support of the Fund 3.6 Fund management structure

Three main options are under consideration for the management structure of the Fund. In Option (1), PIP (Pusat Investasi Permerintah, The Indonesian Government Investment Unit) will conduct the whole process, including the selection of sites, Exploration-related activities (e.g. procurement of Executing Agent) and their financing. In order to materialize this option, MEMR must entrust Governmental Exploration to MOF/PIP, compliance with PIP’s establishment law must be ensured, and PIP’s technical capability must be fostered. This option has the advantage of lower transaction costs, but raises concerns in terms of PIP’s technical capability. In addition, the agreement between MEMR and MOF/PIP will be needed regarding responsibility for Governmental Exploration, and this process may take time since it requires



the negotiation between the different Ministries and institutions. The scheme of Option (1) is illustrated as below:

Option-1FUND MANAGEMENT GOV'T EXPLORATION

　② ①

⑦ ③、④、⑤、⑥

⑧

⑨

①List of Candidate Fields for Exploration②Selection of Exploration Fields③Provide Funds for Exploration④Procurement of Executing Agent⑤Supervision of Exploration⑥Announcement of Exploration Results⑦Transfer of Exploration Results (Ownership)⑧ Sales of Exploration results (Loan or Share acquisition)⑨ Repayment or Dividend

MOF

PIP

MEMR

Dir. GeothermalTechnicalAdvisers

Technical Advisers

Executing Agent

IUP Winner

Fig.-3.6-2 Option 1 of Fund management structure

In Option (2), PLN or PT. Geo Dipa6

(Geo Dipa) will be the party that procures companies for Exploration and supervise their work and at the same time receives money for Exploration from PIP. In order to materialize this option, responsibility for Exploration must be directly assigned to PLN or Geo Dipa, and compliance must be ensured with government regulation 01/2008 in terms of the funding to PLN or Geo Dipa (i.e. the cash flow to PLN from the Fund will be interpreted by the legal department of MOF as “finance for the business activities”, but not “finance for the government’s assignments”). In addition, the procurement capability of PLN or Geo Dipa for Exploration needs to be ensured. This option has the advantage that entrustment of Governmental Exploration from MEMR to MOF/PIP is not necessary and PLN has an incentive to produce a higher quality of Exploration results. However, the procurement law in Indonesia allows the direct appointment process only if a project satisfies the certain requirements, and the chances to satisfy these requirements are rare. The scheme of Option (2) is illustrated as below:

6 Indonesian state-owned company specializing in the geothermal sector



Option-2FUND MANAGEMENT GOV'T EXPLORATION

　②

①　③

⑩

⑧ ④、⑤、⑥

⑨

①List of Candidate Fields for Exploration②Selection of Exploration Fields③Provide Funds for Exploration

④Procurement of Executing Agent⑤Supervision of Exploration⑥Announcement of Exploration Results

⑧ Sales of Exploration results (Loan or Share acquisition)⑨ Repayment or Dividend⑩ Repayment to Fund

MOF

PIP

MEMR


Technical Advisers

SOE (PLN etc.)

Executing AgentIUP Winner

Fig.-3.6-3 Option 2 of Fund management structure

In Option (3), MEMR will procure a company for Exploration and supervise its work. PIP will fund for this work and obtain the Exploration results in return. PIP will recover the costs of the Exploration work through repayment from the IUP winner. In order to materialize this option, compliance with PIP’s establishment law and compliance with government regulation 01/2008 in its interpretation of funding are necessary. This means, the transaction in Option (3) is interpreted as follows in order to comply with PP No. 01/2008, 8 of Article 1 and Article 3. PIP is permitted to provide funds to an Executing Agent first as a part of due diligence process and recover these expenses by providing finance to IUP winners for obtaining Exploration results (not “selling” the Exploration results to IUP winners). In other words, the procurement of companies for Exploration is not violating PIP’s establishment low (i.e. PP No. 01/2008). In addition, in order to comply with PP No. 01/2008, 3 of Article 1 and Article 3 (1) b, the funding for Exploration work contract will be regarded as the finance to a private company, not to public works. This option has the advantage of requiring less coordination between relevant ministries, though it causes unclear responsibility on the Exploration results. In this option, as illustrated below, MEMR is in charge of procurement/supervision of the Exploration, whereas PIP has to cover the losses even if the unreliable Exploration results lead to the losses. Therefore, the incentive mechanism to ensure the good quality of Exploration results may be hard to function in this option. However, this concern will be addressed if a company to conduct Exploration will be qualified for WKP bid. The scheme of Option (3) is illustrated as below:



Option-3

FUND MANAGEMENT GOV'T EXPLORATION

　② ①

　③ ④、⑤、⑥

⑧ ⑦

⑨ ⑦

①List of Candidate Fields for Exploration②Selection of Exploration Fields③Provide Funds for Exploration

④Procurement of Executing Agent⑤Supervision of Exploration⑥Announcement of Exploration Results⑦Transfer of Exploration Results (Ownership)

⑧ Sales of Exploration results (Loan or Share acquisition)⑨ Repayment or Dividend

MOF

PIP

MEMR


Technical Advisers

Executing AgentIUP Winner

Fig.-3.6-4 Option 3 of Fund management structure Any of the above three options have prerequisites to be satisfied and there are advantages and disadvantages. Therefore, the discussions among the relevant parties will be necessary to decide the Fund Management scheme. For this purpose, the following steps need to be mainly taken: (i) to confirm if the prerequisites are satisfied in terms of the legal interpretation, (ii) to agree on their roles and responsibilities in the scheme, such as the prerequisite mentioned in the earlier discussion and (iii) to confirm the capability of the implementing entities and necessary technical assistance. 3.7 Selection of Contractors for Governmental Exploration

As discussed in the previous section, the Study Team proposes that Governmental Exploration will be carried out by a private developer who is also able to participate in a tender for development of the geothermal area. The selection procedure for contractors will follow Presidential Regulation No. 54/2010 regarding government procurement of goods and services. The service provided by the contractor is categorized under “Consultancy Services”, and the contractor will be selected by the “General Selection” method. The evaluation will be carried out using the Quality and Cost-Based Selection (QCBS) method, considering the features of Governmental Exploration. Some criteria in this regulation are not suitable in the selection of a contractor for Governmental Exploration. They are,



• The contractor should have obtained at least one contract as a Goods or Services provider within the last 4 years.

• The short list of 5 – 7 contractors shall be prepared in General Selection method. This is because Governmental Exploration is in its initial phase, and there are not a sufficient number of private developers to satisfy these requirements. Thus the criteria is too strict. A flexible application of the regulation is required. 3.8 Selection Criteria of Sites for Governmental Exploration

The existence of the geothermal resource is absolutely imperative for the development of geothermal power plant. Therefore the site should be selected considering the potential resource of geothermal energy. The social and/or environmental issues should also be considered in the appropriate selection of the area for Governmental Exploration. Thus, the selection criteria for sites for Governmental Exploration could be divided into two main sets; criteria concerning the geothermal resource potential and those concerning environmental issues. Regarding the geothermal resource potential, the criteria can be summarized in the following order of priority: 1. Actual geothermal fluid

discharge from well There is (are) geothermal well(s) at the site, and geothermal fluid (steam and/or hot water) which can be expected to be used for power generation has been discharged from the well(s).

2. Active geothermal manifestation

Though a geothermal well has not been drilled yet at the site, active geothermal manifestations (fumaroles and hot springs) can be observed over a wide area. The presence of a high-enthalpy geothermal reservoir with a temperature higher than 200 oC can be expected.

3. Past geothermal manifestation

A geothermal well has not been drilled yet and active geothermal manifestations are not observed, but hydrothermally-altered zones and low to medium-temperature springs can be observed at the site. The preliminary survey results indicate the possibility of the presence of hot geothermal fluid.

4. Geophysical exploration data

Geophysical anomaly distributions indicating the presence of a geothermal reservoir have been detected in the preliminary geophysical exploration survey.

Regarding the environmental aspect, the criteria can be summarized as follows without any priority order. Land There are no significant issues of forest protection, land

acquisition, or other development restrictions at the site. It is also required that there should not be opposition from the local residents which will give rise to resistance to future development.

Access and topography There is sufficient space for the power plant construction at the site. Large-scale civil work to construct an access road is not necessary and the necessary civil work does not have much impact on the project cost.



Transmission line Construction of a long transmission line is not necessary, and there is no environmental issue on the route of the transmission line. Also, significant capacity expansion of the transmission line and substation is not necessary.

Demand and relation to the other power source

The demand for power is strong due to the lack of a power plant around the site, or it is necessary to decrease the cost of fueling an existing diesel power plant.

Others Availability of water for drilling, and possibility of suitable protective measures for precious flora and fauna

3.9 Required Studies for Governmental Exploration

The procedure for the determination of a geothermal Mining Work Area (WKP) is laid down in the regulation of Minister of Energy and Mineral Resources No. 11/2008 dated 21st April 2008. The “Criteria of Review and Processing of Data of Work Area Preparation”, which is attached to the regulation, has been reviewed from a technical point of view. The Study Team’s main comments are as follows. • In general, the criteria cover all the survey items necessary to define the most promising

area in the preliminary survey area, and thus it can be concluded the criteria are reasonable. • The objective of the geophysical survey mentioned in the criteria is to estimate the extent of

the geothermal reservoir and the depth of the cap rock from the analysis of resistivity data obtained by MT survey, for example. This approach is very reasonable. It would be good to also include a description of the indication of the intervals of measuring point.

• The survey area for geologic, geophysical and geochemical study is extensive, and the Work Area should be extracted within this extensive area. The requirement to prepare the map with 1:50,000 scale makes it possible because the map scale of 1:50,000 is sufficient to provide the information to mark out the promising area that is to be defined as Work Area.

• It is better that the “Temperature Survey” and “Exploration Drilling” not be “optional” but obligatory. Even a thermal gradient hole can provide underground geological data and temperature information. The understanding of the geothermal system based only on surface survey data will be much improved through consideration of these downhole data. The level of confidence concerning the existence of a geothermal reservoir will be improved.

• The estimation of the geothermal reservoir temperature depends on the geochemical information, if only surface surveys are carried out. However, temperature logging data will contribute to the level of confidence concerning the existence of a geothermal reservoir. Contrasting the resistivity information from the geophysical survey with well geology results can help with the estimation of the depth of the cap rock.

The objective of the Governmental Exploration is not to determine the Work Area but to obtain more information about geothermal resource in the Work Area and to confirm the existence of a geothermal reservoir. Governmental Exploration consists of surface surveys (MT survey, etc.) in



the Work Area, selection of drilling targets, drilling of 2 – 3 exploration wells, well logging, discharge tests, chemical analysis of discharged geothermal fluid, and so on. Since the number of exploration wells is not sufficient for detailed resource evaluation, the reliability of the resource potential evaluation will be limited at this point. In consideration of the above technical review of the procedure, the Study Team proposes the contents of Governmental Exploration as described below. Surface survey (supplemental and detailed in Work Area)

• Geology • Geophysics (MT survey) • Geochemistry (for surface manifestations)

Drilling and Testing • Selection of Drilling Target • Exploration Drilling • Well Data Analysis

- Well Geology (Cuttings analysis) - PT(S) Logging - Well Completion Test

• Discharge Test - Mass Flow Measurement - Fluid Sampling and Chemical Analysis - Well Characteristics Test - Dynamic PT(S) logging - Pressure Interference Test (Optional) - Tracer Test (Optional)

• Integrated Interpretation 3.10 Socio-Environmental Study for Governmental Exploration

(1) Environmental Protection and Management Study for Governmental Exploration

According to Article 22 of Law Number 32 of 2009 regarding Environmental Protection and Management (“Law No.32/2009”) and the State Minister of the Environment Regulation Number 11 of 2006 regarding Types of Business Required to have an AMDAL (Environment Regulation No.11/2006), when Exploration is implemented under the Government initiative, the Government (or its Executing Agent) must have an Environmental Management Effort and Environmental Monitoring Effort document (UKL-UPL) prior to undertaking Exploration for geothermal energy in a geothermal work field.



(2) Governmental Exploration in Forestry Areas

According to Article 38 of the Forestry Law (Law No.41 of 1999 as amended by Law No.19 of 2004), Government Regulation No. 24 of 2010 regarding the Use of Forest Areas (Government Regulation No. 24/2010) and the State Minister of Forestry Regulation Number 43 of 2008 regarding Guidelines for Borrow-to-Use Forest Areas (Forestry Regulation No. 43/2008), development activities, including Governmental Exploration, may be conducted in protected forest or production forest areas, by obtain a “Borrow-to-Use Permit (“Ijin Pinjam Pakai”) for a forestry area”, without changing the status, purposes or functions of the relevant forest area. A Borrow to Use Permit is required for each phase of mining activities to be conducted in the forestry area, namely the Exploration and Exploitation phases, in conjunction with the geothermal working permit (IUP) for Exploration or Exploitation to be issued by MEMR. Though, under Article 6 paragraph (2) letter c point 2 of Government Regulation No. 24/2010, neither compensation in the form of land nor compensation by payment of a non-tax government charge should be required if, in the case of exploration, no excessive sampling is conducted as part of mining tests to establish commercial feasibility, however, if Governmental Exploration is carried out under the conditions of a Fund Cost Recovery Scheme, that Governmental Exploration might possibly be regarded as part of a mining test to establish commercial feasibility and subject to compensation for the Borrow-to-Use Permit by taking the form of (i) a cash payment or (ii) exchange for another plot of land, in accordance with the conditions of the forest area. If Governmental Exploration is carried out in a WKP and no IPP developer is awarded an IUP for Exploitation, then the Government will be obliged to carry out a reclamation and replanting program in the forest area explored. (3) Summary of permits and licenses

The necessary permits and licenses to be obtained prior to the Governmental Exploration are shown in Table-3.10-3 below. The permits and licenses as described in (1) and (2) of this section are the most important and the integral factors, from the view point of, not only (i) the environmental protection management and greenhouse gas reduction, but also (ii) the long term geothermal development business. The long term geothermal development will be carried out by the geothermal power developers of the respective WKPs following to the Governmental Exploration.



Table-3.10-3 Permits and licenses for Governmental Exploration Area of

Governmental Exploration UKL-UPL

Borrow-to-Use Permit (“Ijin Pinjam Pakai”)

In Forestry Area Necessary Necessary

Not in Forestry Area Necessary Not Necessary

(4) Recommendations

When a geothermal power developer enters into a geothermal power business in a WKP for long term scheme under the Geothermal Law and PPA with PLN, the geothermal power developer shall take over the socio-environmental permits and licenses from the Government or its Executing Agent of the Governmental Exploration. The developer is also liable to maintain such permits and licenses. Normally, when the geothermal power developer is another entity than the Executing Agent of the Governmental Exploration, the geothermal power developer will conduct legal due diligence, inclusive, but not limited to, the socio-environmental permits and licenses and it takes long time with high cost to carry out such legal due diligence. However, if the Executing Agent of the Governmental Exploration will be the same entity with the geothermal power developer to be selected through IUP tender, then the geothermal power developer will not require to carry out the legal due diligence and can be confident to the long-term validation of the related socio-environmental permits and licenses to backup the eligibility of their project. Therefore, the Study Team recommends that the Executing Agent of the Governmental Exploration shall be the potential geothermal power developer who has an interest to enter into a long-term development of such respective WKP. The reason is to minimize the unnecessary procedures in relation to potential change in ownership of or transferring the socio-environmental permits and licenses in future when the geothermal power developer win the IUP tender and commence development of Exploitation.



Chapter 4 Issues Related to the Current Regulatory Framework for Geothermal Development and Suggested Options for Policy Reform

As explained in the Chapter 3, this Study recommends introducing the Governmental Exploration Scheme as the measure for the risk mitigation to accelerate the promotion of geothermal development in Indonesia by IPPs. The Study Team suggests in 3.2. (3) b) that the Executing Agent of the Governmental Exploration by the Fund will be private companies, who are also allowed to participate in the WKP tender. In order to carry out tenders for both Governmental Exploration and WKP in a transparent manner while allowing a private company to tender both bids, these two tenders are required to be managed independently and separately. This chapter describes the details of the WKP tender process. 4.1 Legal Frameworks

The Geothermal Law (Law No 27/2003) was issued in 2003 as a new geothermal registration scheme. The Law governs the upstream side of geothermal development, transfers PERTAMINA’s regulatory authority to MEMR and requires that future geothermal fields (New Work Areas or New WKPs) be defined by the Minister of the Energy and Mineral Resources based on preliminary surveys. It is also stipulated that the new WKPs are to be tendered transparently and competitively by a Tender Committee headed by the respective government authority depending on the location of the WKP. WKP tender evaluations are carried out in two phases by a Tender Committee. The first phase is the pre-qualification selection which covers administrative formalities as well as technical and financial capabilities. The candidates who meet the pre-qualification criteria will be short-listed to proceed to the second phase, which is price bidding. The winner of the WKP will be the bidder who offered the lowest electric power price. Previously, the WKP winner had to wait a long time while the feasibility study was completed before starting PPA negotiations with PLN. As the final power selling price to PLN was finally determined at that point, IPPs could only confirm the economics of the project at that later stage. This caused IPPs to hesitate to participate in tenders for geothermal projects in Indonesia. To cope with this issue, a new regulation was issued by MEMR (MEMR 02/2011) which mandates PLN to purchase power for the price quoted by the winning bidder of the WKP, if the price is below the ceiling price (9.7 USD ¢/kWh) for projects within the Crash Program II. The winning bidder of the WKP becomes the holder of the geothermal mining permit (Izin Usaha Pertambangan Panas Bumi or IUP) for the Work Area, and is entitled to conduct



geothermal business activities (i.e. exploration, feasibility studies and exploitation) within their work area, utilizing all government data and information related to their respective work area during the term of validity (maximum 35 years) of their IUP. IUP holders are entitled to enjoy certain tax and fiscal incentives, too. The WKP tender is administered by the national authority (MEMR), the provincial authority (governor), the regency or the municipal authority (local regent or mayor) by establishing a Tender Committee, depending on the location of the WKP. In case the WKP is located across provincial boundaries, the MEMR is in charge of the tender. If the WKP is located in a province or cross regency/city boundaries, a provincial authority is responsible for the tender. For the WKP located in a regency or municipality, a regency or a municipal authority (local regent or mayor) is responsible for the tender. The Tender Committee shall be comprised of odd numbers of members and consist of at least five persons, comprised of representatives of the Department of Energy and Mineral Resources, relevant agencies, Regional Government, and representatives of the relevant area. The Tender Committee may assign experts as resource agents, who may come from academia, or be geothermal professionals or practitioners. The main task of the Tender Committee is to develop a schedule, prepare tender documents, carry out the tenders including tender evaluation, and propose the prospective awardees. 4.2 Major Issues and Suggested Reforms

In order to promote geothermal development by IPPs, it is crucial for the WKP tender process to be conducted fairly and effectively. Based on the interview survey of IPPs, the Study Team has analysed the issues which make the tender process inefficient and opaque, and suggests possible reforms as follows. (1) Administrative Capacity

The WKP tenders are administered by the Tender Committee, which is set up for each WKP on an ad-hoc basis, so that the administrative capacity of the Tender Committee is solely dependent on the capacity of the local government officials. As a result, the time required for tender process varies by case. In addition, the quality and quantity of the information of the tender documents including the geothermal resource information vary by case. No standardized tender guidelines are offered by the central government, as there is no entity in the central government in charge of supervising every tender process to ensure the fairness and effectiveness of the tender. As local governments don’t have that many opportunities to build up the experience and expertise needed to conduct WKP tenders, it might be practical to assign an entity at the Central Government to undertake the tender process on behalf of and at the request of local governments, or to prepare uniform guidelines in addition to providing capacity



building opportunities for local government officials. Study Team suggests improving the tender evaluation framework by ・ Involving PLN as a member of each Tender Committee with a clear mandate to ensure

that draft PPAs will be provided as a part of the tender documents, and to speed up PPA negotiation process with access to the relevant information from the beginning of the tender process, and

・ Strengthening the function of the Geothermal Department at MEMR, which would become an apex organization for geothermal development by extending support for the tender process to local governments, through establishing and thoroughly implementing the standardized tender guidelines, and supervising tenders to ensure an effective and fair tender process.

(2) Tender Procedure

Regarding Pre-Qualification (P/Q), each Tender Committee defines its own set of P/Q items for administrative, technical and financial assessment, which includes the mandatory items as defined in MEMR 11/2009. According to investors, there were some cases in which the bidding requirements, or the requirements set for P/Q assessment, were not necessarily strict enough to exclude unqualified bidders who do not have enough geothermal experience, or who do not have a strong intention to develop the WKP and are merely placing low bids with the intention of reselling the IUP. In addition, as a part of the financial assessment, bidders are required to submit a proof of deposit of a security fund in the amount of USD 10 million at a Government Bank. For IPPs, this is one of the most significant entry barriers, since arranging that much cash imposes a huge financial burden on IPPs, even as the bidders have not yet been ensured of the terms and conditions (and thus the profitability) of the project. Some investors hesitate to deposit that money with a bank which has little business experiences with the non-Indonesian companies. In the current legal framework, bidders should place their bid without having a draft PPA, and they only start PPA negotiations with PLN after they complete the feasibility study. Given these issues, the Study Team proposes improving P/Q requirements by ・ Preparing more detailed and concrete technical requirements, to select only qualified

bidders who have sufficient technical capacity to carry out the project in an efficient and effective way.

・ Allowing the substitution of a performance bond for a cash deposit as proof of a security fund in the amount of USD 10 million, and also allowing the bond to be issued by any creditworthy banks, including foreign banks, instead of the current requirement, in order to



encourage IPP entry. The Study Team also proposes changing the PPA negotiation process by ・ Including a Conditional PPA(*) , that is to be signed between PLN and the winning bidder

right after the issuance of IUP which stipulates PLN’s basic and important commitments and obligations including power purchase price, power purchasing mechanism and the construction of a transmission line.

(*) The contents of the Conditional PPA specifies the basic and important commitments from PLN, including the power purchase price (the same as the bid price, if it is less than USD 9.7 ¢/kWh), PLN’s other obligations relating to the power purchasing mechanism (e.g. purchasing all the electricity generated from the plant to be built in the WKP under the take-or-pay clause) and the construction of a transmission line (specifying the operator’s and PLN’s obligations).

(3) Contents of Tender Documents

The tender documents are prepared by the Tender Committee for WKPs, usually in the Indonesian language. It is said that the quality of the tender documents varies depending on the capacity of the local government officials, which is generally not perceived as sufficient by investors. On top of this, the IPP must place their bid without knowing the full details of the project, as there is no draft PPA provided to the bidders. It is also said that the definitions of the provisions are not always clear, so that the WKP winner might have to engage in further discussion in order to clarify certain clauses and unclear items such as royalty stipulation before they proceed to the arrangements for IUP issuance. Given these issues, the Study Team suggests improving the tender documents through the following engagements of the Geothermal Department, i.e. Department of Geothermal Enterprise Supervision and Groundwater Management. ・ Active participation to improve the quality of tender documents. As previously explained,

the Geothermal Department is expected to play a major role by improving the quality and quantity of the tender documents and providing guidelines to maintain their quality, and by ensuring that all clauses are clearly articulated. If requested by the local government, the Geothermal Department may also help prepare the tender documents for a given WKP.

・ Preparation of an English-language version of the guidelines for the preparation of the tender documents, so that the Tender Committee can produce the documents and relevant formats in English easily. By having English tender documents, non-Indonesian investors are able to directly access the genuine tender documents, so that they are able to avoid the risk of misunderstanding of their contents.

・ Uniform inclusion of a provision for royalties in all future tender documents. Until the Government issues relevant regulations, it is suggested that the Geothermal Department specify royalties as 2.5% (or other rate clearly specified in the relevant document) of net income to avoid confusing possible tender participants.



(4) Required modifications due to the introduction of the Fund

In order to select the form of investment from the Fund and the method of cost recovery by the Fund (in the form of debt or equity / upfront, long-term or short-term repayments), the Study Team recommends that a Fund Manager participates in preparation of WKP tender documents and one of the following options is to be selected on a WKP-by-WKP basis. The first option is that the Fund Manager decides the form (debt, equity / upfront, long or short term repayment) on a WKP-by-WKP basis and stipulates it in the tender document. The second option is that the bidder proposes the repayment form (debt, equity / upfront, long or short term repayment). Following the first option, in principle, a Fund Manager will make the decision to increase the Fund’s profit. However, this Fund Manager’s decision may be against potential investors’ preference and may not be able to attract any bidders. When a Fund Manager has this concern or uncertainty, it can choose the second option. This flexibility will help to balance the impact on the profitability of the Fund with the attractiveness for the investors. (5) Issues and Proposals for Improvement in PPAs

Tariffs: - To ensure that the tariff offered by the WKP winner will be the final price in the PPA:

After MEMR 02/2011 comes into effect, PPA negotiations for projects under the Crash Program II are expected to get started. However, MEMR 02/2011 does not apply to projects not implemented under the Crash Program II. Hence, the Study Team strongly recommends that this regulation also be applied to projects which are not under the Crash Program II, unless a new tariff mechanism, such as a Feed-in-Tariff, is implemented.

- Ceiling of USD 9.7 ¢/kWh: Currently, the electricity price is restricted to a maximum of USD 9.7 ¢/kWh for all WKPs, as defined in MEMR 02/2011. However, the profitability of geothermal projects varies depending on the location. Therefore, a uniform ceiling price is not appropriate given the variable profitability of geothermal projects. Hence, the Study Team would like to suggest abolishing the ceiling price provisions for small-scale projects which are proven to be not profitable enough for IPPs to operate even with support from Governmental Exploration as suggested in this Study.

Government Guarantee for Off-Taker (PLN) Risk: For projects under the Crash Program II, Presidential Regulation 04/2010 stipulates government supports for the business viability of PLN. The details are to be provided in an MOF regulation which is in preparation, and which investors are eagerly awaiting, as this regulation is one of the critical conditions for receiving bank financing. Projects not under the Crash Program II may also be able to receive guarantees from Indonesia Infrastructure Guarantee Fund (IIGF) 7

7 A state-owned company that was established in December 2009 in order to guarantee risks for infrastructure PPP

in the case of



PLN’s failure to fulfill its payment obligations, if a project is considered as a PPP project. In this regard, it is recommended that the all geothermal projects are categorized either under the Crash Program II or as PPP projects. However, IIGF’s guarantee capacity is limited. Therefore, if IIGF’s guarantee is chosen to cover non Crash Program II, the IIGF’s guarantee capacity needs to be confirmed whether it will be sufficient to cover high potential non Crash Program II and if necessary, its capacity needs to be expanded (i.e. IIGF’s capital is increased) though this will not be a easy process. Flexibility in PPAs: Compared with coal-fired power generation projects, there is more uncertainty for geothermal power projects at the time a PPA is signed. Hence, it is preferable to allow flexibilities in PPAs, to accommodate such eventualities as expansion of power generation and/or change in the tariff when the interest cost is increased.

4.3 Concluding Remarks

As described above, the Study Team suggests improving the current WKP tender process through i) the enhancement of administrative capacity (including tender evaluation), ii) the revision of the tender procedures, iii) improvement of the contents of the tender documents and, iv) appointing a Fund Manager to be a member of the Tender Committee as a mean of risk mitigation measure. The suggestion which directly affects the current WKP tender process is to introduce Conditional PPA. Besides that, rather than changing the existing process, the Study Team suggests strengthening the existing frameworks through the enhancement of Tender Committees. In addition to that, involvement of the Fund Manager to the Tender Committee to ensure the cost recovery of the Fund is also suggested. The Study Team also suggests strengthening the function of the Geothermal Department at MEMR to provide the standardized tender guidelines to make every process done by any Tender Committees in a transparent and uniformed manner, and to monitor the progress of the tender to avoid undue processing delay. The Geothermal Department is also expected to improve the contents of the tender documents, which are to be well scrutinized, and the articles are to be well clarified by liaising with relevant government agencies, technical experts, PLN and private sector entities including IPPs. In addition to that, the Study Team also expects the Geothermal Department to extend the tender process support to the local government. As these process requires significant coordination, assigning the Geothermal Department to be an apex organization for the geothermal development is very crucial to carry out the WKP tender in efficient and effective way.

projects in Indonesia.



Chapter 5 A Proposal for a Yen Loan to the Fund

5.1 Formulation of a Project for a Yen Loan to the Fund

This chapter discusses the possibility of a project for a Yen Loan to the Fund. The example case selected for discussion is a Yen Loan project that provides a source of financing that will enable the Fund to carry out Governmental Exploration in eight (8) fields. The activities enabled will include: MT surveying of 12 fields to select eight (8) fields for Exploration, and the Exploration of the eight (8) fields selected at a cost of USD 25 million per field. The MT surveying is to be done prior to the selection of the Exploration fields, and six (6) fields are to be surveyed in one year. The estimated cost of these activities is USD 208 million (USD 200 million for Governmental Exploration of eight (8) fields and USD 8.4 million for MT surveys in 12 fields). Therefore, the viability of a Yen Loan project amounting to USD 210 million is examined in this Chapter (Fig.5.1-1). The assumptions of the simulation are: (a) the Fund performs Exploration in eight (8) fields using a Yen Loan from JICA, (b) private developers will continue geothermal development after Exploration in a certain number of fields (The ratio of the number of fields where private developers continue development to the number of fields where Exploration is performed is referred to as the Success Rate), (c) in order to continue the development, the private companies purchase the results of the Exploration at a price of USD 30 million (with 20% Markup) per field, (d) the Fund is repaid in installments over a period of 15 years and a 10% interest rate is charged, (e) private developers construct geothermal power plants, and (f) the Fund makes repayment to JICA of its Yen Loan in installments over a period of 40 years with a 0.3% rate of interest (Table-5.1-2). Based on these assumptions, cash flow to and from the Fund is simulated. When the Success Rate is 50%, the final balance of the Fund after Yen Loan repayment turns out to be USD 5.9 million (Table-5.2-2). In this case, the Financial Internal Rate of Return (FIRR) of this activity is calculated as 0.98%. The profitability of the Fund business is very low. However, it is important to note that geothermal development is stimulated even though the profitability of the Fund is very low. The annual cash flow and the year-end balance of the Fund are shown in Fig.-5.2-1. Regarding the socio-economic evaluation of the Fund, the Economic Internal Rate of Return (EIRR) is calculated. The expenditure of the Fund is USD 208 million for MT surveying, the first and the second batch of Governmental Exploration and so on. As a result of this expenditure, society obtains geothermal power plants and can save coal that would be burnt and avoid CO2 emissions that would be produced by the alternative coal-fired plant if geothermal was not developed. If diesel power plants are built instead of geothermal ones, the diesel oil



saved and CO2 emissions avoided are part of the value of the geothermal plant. These are socio-economic effects of the Fund. Fig.-5.2-5 shows the change in EIRR when the Success Rate varies from 100% to 10%. This figure shows that the EIRR is 12.2% when compared with a coal-fired plant and 13.1% when compared with a diesel plant, even when the Success Rate falls to 30%. These EIRRs are larger than the minimum acceptable 12% criterion and show that the Fund is significant from the socio-economic point of view. The financial performance of the Fund depends on how many geothermal power plants will ultimately be constructed by private developers in fields where Governmental Exploration has been carried out (the Success Rate). When the Success Rate is 48.8% or more, the final balance of the Fund is positive (in the black). This means that the Fund business can produce a surplus even after carrying out Governmental Exploration and repaying the Yen Loan, although the numbers are in nominal monetary terms. If the Success Rate is less than 48.8%, the final balance will be negative (in the red). This means the Fund will need a bridging loan to make repayments of the Yen Loan when the balance becomes negative. However, even if the Fund ends up in the red, it is important to emphasize the positive benefits of having Governmental Exploration effectively performed at a very small cost. These positive benefits are confirmed by the result that the socio-economic effect (EIRR) of the Fund is larger than 12% when the Success Rate is 30% or more. Therefore, the Fund project is justifiable as a Yen Loan project.



Yen Loan for GeoFundYen Loan

MT Year -1 Year -2Total

8.4 m$ 100 m$ 100 m$ 210 m$Repayment

r = 0.30%n = 40 (10) years MT Exploration Total

12 fields 4 fields 4 fields 8 fields

Success Success Total2-3 fields 2-3 fields 4-6 fields

Year-1 MT SurveyYear-2 GOI Exp.Year-3 GOI Exp.Year-4 GOI Exp.Year-5 IPP Dev'tYear-6 IPP Dev'tYear-7 IPP Const. Year-8 IPP Const. Year-9 IPP Operation

: :: :: :: :: :

Year-38 IPP OperationYear-39 IPP OperationYear-40 IPP Operation

JICA GeoFund

Fig.-5.1-1 Cash Flow to and from the Fund in case of Yen Loan

Table-5.1-2 Conditions of cash flow simulation Item Condition

Yen Loan amount USD 210 million Interest rate 0.30% Yen Loan Repayment years 40 years (including a 10-year grace period) Cost of Exploration per field USD 25 million Sales of Exploration results per field

USD 30 million (Mark Up 20%)

Success Rate 50% Repayment method Debt type (15 yr) Repayment schedule For 15 years after Operation (grace during

construction) Interest rate during repayment 10% Fund O&M cost USD 0.5 million (inflation rate 5%/year)



Fund Cash Flow (In case of Yen Loan)Fund Type Debt (15yrs)

Success Rate 50.0%Surveyed Fields 4 Yen Loan

Successful Fields 2.0 Interest 0.30% annualSales Price 30.0 m$ Grace period 10 years

O&M cost 0.5 m$/year Repayment Years 30 yearsDevelopment Delay 0 years Total Repayment Years 40 years

Escalation 5.0% /year (m$)

Cash Flow Budget Fund Annual Interest of Repayment Total Fund Fund MT Svy (TA Survey-1 Survey-2 Total O&M Total Yen Loanof Yen LoanRepayment Cash flow Balance

Year a b0 b1 b2 b=Σbi c d=b+c e1 e2 e=e1+e2 f=a-d-e g1 2011 210 -4.8 -4.8 -0.5 -5.3 0.6 　 0.6 204.1 204.12 2012 -3.7 -11.8 -15.5 -0.5 -16.1 0.6 　 0.6 -16.7 187.43 2013 0 -50.0 -11.8 -61.8 -0.6 -62.4 0.6 　 0.6 -63.0 124.44 2014 -38.2 -50.0 -88.1 -0.6 -88.7 0.6 　 0.6 -89.4 35.05 2015 6.0 -38.2 -32.2 -0.6 -32.8 0.6 　 0.6 -33.4 1.66 2016 6.0 6.0 12.0 -0.6 11.4 0.6 　 0.6 10.7 12.47 2017 6.0 6.0 12.0 -0.7 11.3 0.6 　 0.6 10.7 23.18 2018 6.0 6.0 12.0 -0.7 11.3 0.6 　 0.6 10.7 33.79 2019 9.6 6.0 15.6 -0.7 14.9 0.6 　 0.6 14.2 48.0

10 2020 9.2 9.6 18.8 -0.8 18.0 0.6 　 0.6 17.4 65.411 2021 8.8 9.2 18.0 -0.8 17.2 0.6 7.0 7.6 9.6 74.912 2022 8.4 8.8 17.2 -0.9 16.3 0.6 7.0 7.6 8.8 83.713 2023 8.0 8.4 16.4 -0.9 15.5 0.6 7.0 7.6 7.9 91.614 2024 7.6 8.0 15.6 -0.9 14.7 0.5 7.0 7.5 7.1 98.715 2025 7.2 7.6 14.8 -1.0 13.8 0.5 7.0 7.5 6.3 105.016 2026 6.8 7.2 14.0 -1.0 13.0 0.5 7.0 7.5 5.5 110.517 2027 6.4 6.8 13.2 -1.1 12.1 0.5 7.0 7.5 4.6 115.118 2028 6.0 6.4 12.4 -1.1 11.3 0.5 7.0 7.5 3.8 118.919 2029 5.6 6.0 11.6 -1.2 10.4 0.4 7.0 7.4 3.0 121.920 2030 5.2 5.6 10.8 -1.3 9.5 0.4 7.0 7.4 2.1 124.021 2031 4.8 5.2 10.0 -1.3 8.7 0.4 7.0 7.4 1.3 125.222 2032 4.4 4.8 9.2 -1.4 7.8 0.4 7.0 7.4 0.4 125.723 2033 4.0 4.4 8.4 -1.5 6.9 0.4 7.0 7.4 -0.4 125.324 2034 　 4.0 4.0 -1.5 2.5 0.3 7.0 7.3 -4.9 120.425 2035 　　 0.0 0.0 0.0 0.3 7.0 7.3 -7.3 113.126 2036 　　　　　 0.3 7.0 7.3 -7.3 105.827 2037 　　　　　 0.3 7.0 7.3 -7.3 98.528 2038 　　　　　 0.3 7.0 7.3 -7.3 91.329 2039 　　　　　 0.2 7.0 7.2 -7.2 84.030 2040 　 0.2 7.0 7.2 -7.2 76.831 2041 　 0.2 7.0 7.2 -7.2 69.632 2042 　 0.2 7.0 7.2 -7.2 62.533 2043 　 0.1 7.0 7.1 -7.1 55.334 2044 　 0.1 7.0 7.1 -7.1 48.235 2045 　 0.1 7.0 7.1 -7.1 41.136 2046 　 0.1 7.0 7.1 -7.1 34.037 2047 　 0.1 7.0 7.1 -7.1 26.938 2048 　 0.0 7.0 7.0 -7.0 19.939 2049 0.0 7.0 7.0 -7.0 12.940 2050 0.0 7.0 7.0 -7.0 5.9

Total 26.03 26.03 43.6 -22.3 21.3 15.4 210.0 225.4 5.9IRR Final Balance

0.98% 5.9

Expenditure for Survey & Income from Survey

Table-5.2-2 Cash flow to and from the Fund for Debt-type (15yr) scheme



0%

5%

10%

15%

20%

25%

100% 90% 80% 70% 60% 50% 40% 30% 20% 10%

Success Rate (%)

EIR

R (%

)

EIRR (v.s. Coal power Plant) EIRR (v.s. Diesel power Plant)

-100

-75

-50

-25

0

25

50

75

100

125

150

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

2037

2039

2041

2043

2045

2047

2049

Year

Annual

Cas

h F

low

(m

$)

-600

-500

-400

-300

-200

-100

0

100

200

300

Fund

Year

-end

Bal

ance (

m$)

Annual Cash Flow

Fund Year-end Balance

Fig.-5.2-1 Annual cash flow to and from the Fund and year-end balance of the Fund

Fig.-5.2-5 Socio-economic effects of the Fund (EIRR)



Chapter 6 Proposals for Further Acceleration of Geothermal Development in Indonesia

This Study proposes a plan to attract private developers to participate in geothermal development in Indonesia through mitigation of their resource risks on a short-term basis. This chapter proposes further recommendations to accelerate geothermal development on a middle and long-term basis. In this Study, the Study Team has conducted a series of interviews with private companies that are thought to have an interest in geothermal development in Indonesia. Among the many useful opinions from the interviewees, we frequently heard that they are positively interested in participating in the energy conversion of geothermal steam into electric power, if other developers could supply geothermal steam to them, rather than developing geothermal steam in a Green Field from scratch by themselves. This attitude follows naturally from the fact that the risks of the energy conversion business are small enough for many private companies to take, unlike the large risks of geothermal steam development in a Green Field. In the 1990s, the Philippines had adopted a system where a government-run geothermal development company (PNOC-EDC) developed geothermal steam and private companies undertook the business of converting the geothermal steam into electric power. As a result, geothermal development advanced rapidly in the Philippines in the 1990s. The system of "energy conversion by private companies of the geothermal steam supplied by a state-run development company" has attracted wide attention among private companies and drew a large amount of private capital into the geothermal development market in the Philippines. Nowadays, Kenya is keen to introduce this system to accelerate geothermal development there. There are two advantages to this system: one is in controlling costs and the other is in controlling risk. On the cost side, government-run companies can mobilize low-cost capital that can lower geothermal energy costs. On the risk side, government-run companies can afford to develop several fields in parallel using their strong financial base and large technological capacity. This development of multiple fields reduces development risks through the portfolio effect. The policy of enabling a government-run developer to undertake development in many fields will also lead to an accumulation of experience, knowledge and technology in the developer. The result will be the operation of a positive “learning effect” in the development of geothermal, and a consequent reduction in development costs can be expected. Therefore, the fostering of a government-run geothermal company to undertake steam development in various fields in Indonesia is highly desirable. It is also preferable to use this government-run geothermal company to perform Governmental Exploration.



Currently, an appropriate government-run geothermal development company does not exist in Indonesia. However, many private companies are awaiting geothermal steam supply from a reliable geothermal company. For this purpose, the promotion and establishment of a government-run geothermal company is necessary. It is hoped to establish a government-run geothermal company that performs geothermal steam development across the country. This company can be fostered as a center of geothermal development in Indonesia. It is also hoped to utilize this company to undertake initial Governmental Exploration in the fields where private companies are hesitant to start development.



Chapter 7 Concluding Summary

In the current framework of geothermal power development by IPPs, JICA proposes the following with a view to organizing a detailed structure of potential needs for foreign financing and building consensus among stakeholders to implement the suggested improvements, which have been obtained from the JICA Study including “Risk Mitigation Measures for Geothermal IPP Development” and “Issues related to the Current Regulatory Framework for Geothermal Development”. As “Risk Mitigation Measures for Geothermal IPP Development”:

1. In Green Fields (Pre-tender Fields), Governmental Exploration including the drilling of three (3) exploratory wells with “Fund scheme” financing in the amount of USD 25 million shall be required to mitigate resource development risks before the IUP tender process.

2. Expenditures from the Fund shall be recovered by means of a Debt-type scheme that is mainly suitable for small capacity projects (e.g. those in Eastern Indonesia) and by means of an Equity-type scheme that is mainly suitable for large capacity projects (e.g. those in Java-Sumatra).

3. The Fund shall revolve in proportion to the Success Rate of Governmental Exploration. When the Success Rate is high (more than 75%), it is possible to compose the Fund of Debt–type schemes alone. In this case, the Fund is expected to return to the original balance in several years.

4. When the Success Rate is 50%, the Fund is not expected to return to the original balance in 30 years. Even in this case, however, if the Fund includes Equity-type schemes by 50% in the Fund portfolio, it is expected that the Fund will recover the original balance in the long-term (around 21 years).

5. If the Success Rate is low (25%), the Fund does not return to the original balance. 6. Therefore, it is recommendable that the Fund support not only fields where small-scale

geothermal power plants, which are suitable for Debt-type, can be developed but also fields where large-scale geothermal plants, which are suitable for Equity-type, can be developed. It is also recommendable that the Fund makes an appropriate portfolio of Debt-type and Equity-type taking the characteristics of each project into consideration.

7. Several forms of Fund management by both MOF and MEMR are proposed, of which one shall be chosen as suitable in terms of practical operation according to government regulations.

8. The Executing Agent as a contractor for Governmental Exploration should be selected through a consideration of QCBS (technical and cost) evaluation criteria.

9. Candidate fields for Governmental Exploration shall be selected on the basis of geothermal resource potential criteria with less emphasis on social and environmental issues. Detailed selection criteria are proposed in this report, and required studies for



Governmental Exploration are proposed in some detail. As “Issues related to the Current Regulatory Framework for Geothermal Development”:

1. A private company, who are assigned as the Executing Agent of the Governmental Exploration, is also allowed to participate in the WKP tender. In order to ensure the transparency, the tender for the Governmental Exploration and WKP tender should be managed independently.

2. As for the WKP tender process, the Study Team suggests improving the current WKP bidding process through the enhancement of the administrative capacity, the revision of the tender procedures, and the improvements of the contents of the tender documents.

3. Regarding the enhancement of the administrative capacity, the involvement of PLN as a member of the Tender Committee, and strengthening the function of the Geothermal Department at MEMR to be an apex organization for geothermal development by establishing tender guidelines for local governments, and by supervising the tender to ensure an effective and fair tender process, are suggested.

4. For the revision of the tender procedures, clarification of the P/Q requirements and introduction of the Conditional PPA between the IUP holder (WKP winner) and the PLN are suggested. The clarification of the P/Q requirements aims to select only qualified bidders to carry out the geothermal development by specifying the technical requirements, and encouraging IPPs’ participation for the bids by removing the entry barriers in relation to the financial requirements. The introduction of the Conditional PPA intends to provide comfort to an IUP holder with providing the PLN’s basic obligations for purchasing the power with conditions (power price, power selling mechanisms and obligations of the transmission lines) when an entity obtains an IUP. The contents agreed in the Conditional PPA are obliged to be transcribed to the relevant clauses in PPA when the IUP holder and the PLN finally sign the PPA.

5. Regarding the improvements of the contents of the tender documents, the Geothermal Department is expected to play a large role, by providing guidelines to ensure and maintain the quality of those documents. The guidelines are suggested to include an English version to accelerate the participation of international IPPs, and also clearly stipulate the issues which directly affect the economics of the project such as provision of the royalty.

6. In relation to the introduction of the Fund for the Governmental Exploration, the cost recovery of the Fund will be made from the payment of the WKP winner, by the method decided by the Fund Manager or proposed by a bidder on a WKP-by-WKP basis. The Fund Manager is suggested to participate in the tender document preparation to stipulate the relevant items (the repayment method decided by the Fund Manager or to be proposed by a bidder) in the tender document.

7. In terms of PPA, the Team suggested the tariff proposed in the bid by the WKP winner,



to be reflected in PPA for not only the projects under Crash Program II as stipulated in MEMR regulation 02/2011, but all geothermal projects. In addition, the Team suggested abolishing the ceiling price provisions for small-scaled projects which are proven to be not economically viable for IPPs. The Team also suggested the Government to provide the government guarantee for off-taker (PLN) risk for the projects besides the projects under Crash Programs II which are expected to be covered under Presidential Regulation 04/2010, or the projects recognized as PPP projects which may receive the guarantee from IIGF. Furthermore, in the standard PPA, the transmission lines connecting to the power plants operated by IPPs are expected to be constructed by IPPs according to MEMR Regulation 15/2010. The Team suggests that PLN will be the principal responsible party for it while an IPP constructs the transmission lines on a case-by-case basis depending on the characteristic of a project.

8. Among the suggestions above, the suggestion which directly affects the current WKP bidding process is the introduction of the Conditional PPA. Other than that, the suggestions do not have any influence on the current procedure. Some suggestions may require change of prevailing interpretation, however, all suggestions do not also interfere in existing legal framework, too.

In addition, the Feasibility of a Project for a Yen Loan to the Fund is studied, and the final balance of the Fund is found to be positive (in the black) when the Success Rate is 48.8% or more. The socio-economic effect (EIRR) of the Fund is larger than 12% when the Success Rate is 30% or more. Additional recommendations are made for further acceleration of geothermal development in Indonesia; (i) to promote a development system that combines a government-run geothermal steam developer and private energy conversion companies, and (ii) to work out a governmental support that enables developers to procure new geothermal drilling rigs. These two additional supports will further encourage geothermal developers in Indonesia.



Acknowledgments JICA and the Study Team would like to express our sincere thanks to the National Development Planning Agency (BAPPENAS), the Ministry of Finance, the Ministry of Energy and Mineral Resources, PT. PLN, the Embassy of Japan in Indonesia, and companies engaged in geothermal business both in Indonesia and Japan for their cooperation and kind understanding of the Study.



References

Asia Development Bank, “Guidelines for the Economic Analysis of Projects”, Feb. 1997.


JICA A1-1 West JEC and JERI

Annex-I Characteristics of each Financial Scheme In this Annex, the assumptions of financial schemes mentioned in the section 3.3 and the issues to note for each financial scheme are discussed. Throughout the discussions, the investors are assumed to be the international IPPs. This is because the number of purely domestic IPPs, who is capable for geothermal development without international investors, is limited in Indonesia; therefore, to attract international investors to the geothermal sector in the country is essential in order to promote geothermal development in the short term. The established international investors prefer to procure the construction cost of the project by non (or limited)-recourse finance basis for the following reasons: (i) When the project is financed on recourse basis, the debt will be shown on the balance sheet (B/S) of the investor. This could lead to the weaker financial structure of the investor; therefore, the investor prefers to borrow on non-(or limited) recourse basis to avoid the impact on B/S. (ii) When the project is financed on non-recourse basis, this finance is mainly based on the project’s profitability and repayment capacity and will not be restricted only to the creditworthiness of the investor; therefore, the investor could raise more finance in the case of non-recourse basis than the case of recourse basis. Based on the above-mentioned investment environment, the Study Team assumed that most of the SPC’s initial project costs (especially construction costs) are procured by non-recourse project finance from financial institutions (“main loan” hereinafter) and based on this assumption, the characteristics of each financial scheme is discussed below. As described in the section 3.3, the four main investment recovery options (i.e. financial scheme) for the Fund are as follows;

Option (1) Equity (Sales): Sell equity in a short time, Option (2) Equity (Div): Hold equity for a long time, Option (3) Debt (Upfront): Bullet payment upon COD or financial closure; and Option (4) Debt (15yrs): Amortized long-term scheduled repayment.

Both Equity (Sales) and Equity (Div) are recovery through equity options. In these options, the amount invested by the Fund (the costs of Governmental Exploration and some markup) are converted into a share of the SPC’s equity. The following characteristics of equity options can be noted: (i) there is a high volatility of returns, (ii) they are relatively more likely to receive non-recourse project finance compared with the debt since equity does not increase the project’s debt liability which could put the pressure on the repayment capacity for the main loan on non-recourse project finance basis, (iii) some of the main loan lenders positively evaluate Fund (ultimately, government’s) ownership of SPC’s equity while the others do not. In case that the lenders do not positively evaluate, they may require additional conditions to provide the finance. Option (1) and Option (2) differ in timing of equity sales; as a result, their possible impact on



revolvability and returns to the Fund differ. This means, Equity (Sales) is likely to increase the revolvability of the Fund compared with Equity (Div) (the substantial cash inflow can be expected in the early stage of the Fund in case of Equity (Sales)), whereas the return to the Fund from Equity (Sales) may be limited compared with Equity (Div). Both Debt (Upfront) and Debt (15 yrs) are recovery through debt options. The following characteristics of debt options can be noted: there is a lower volatility of returns than equity, and the Fund can have a right of recourse to the SPC’s parent companies if the financial scheme is designed to allow a right of recourse to the SPC’s parent companies for the debt to the Fund8

. Debt (Upfront) and Debt (15 yrs) differ in the timing of repayment to the Fund; as a result, their possible impact on revolvability and returns to the Fund differ. This means, Debt (Upfront) is likely to increase the revolvability of the Fund compared with Debt (15yrs) (the substantial cash inflow can be expected in the early stage of the Fund in case of Debt (Upfront)), whereas the return to the Fund from Debt (Upfront) may be limited compared with Debt (15yrs)). In addition, this debt will be repaid by the SPC in parallel with the main loan from the lenders. Therefore, various measures to coordinate with the main loan and those coordinated results to be reflected in loan documentation, will be required and this process is the heavy burden for SPC. On the other hand, Debt (15 yrs) could incorporate the flexible debt structure depending on the investor’s preference, such as the subordination of repayment to the Fund and accommodation of accrual repayment (i.e. the debt will not be defaulted even if the repayment is accrued to the extent stipulated in the loan agreement).

8 Theoretically, “debt” option can have a right to recourse to the SPC’s parents company, but for the reasons explained in the 1st paragraph of this Annex, international IPPs are likely not to appreciate this structure.



Annex-II Recommendations concerning the Standard PPA (Draft)

The Team has reviewed the draft standard PPA posted on the website of PLN in December 2010, and makes following recommendations: ・ Overall: As a whole, the more clauses need to be added to specify the conditions in more

detail and more clearly to attract international IPPs to geothermal power generation. One example is political force majeure, such as a change in the law and/or the denial of or delay in the granting of any governmental authorization upon due application or diligent effort by an applicant. Measures to deal with these events are missing in the standard PPA. Furthermore, the definitions of many terms are necessary, such as what is included in “Force Majeure”.

・ Language: According to Law 24/2009 (UU 24/2009), “in case of non-Indonesian party is involved, both of Indonesian language and other language are allowed and both are equally genuine”. The number of purely domestic IPPs, who is capable for geothermal development without international investors, is limited in Indonesia; therefore, to attract international investors in geothermal sector in the country is essential in order for geothermal development to be promoted in the short term. For this purpose, preference of international investors is also worth considering. International IPPs prefer the English language to prevail in contractual documentation in case of any discrepancy in documentations in the domestic language and English, like the cases in Thailand and Middle-Eastern countries, to be consistent with the conventional practice and to avoid the risk of misunderstandings

・ Transmission Lines: According to MEMR Regulation 15/2010 for the Crash Program II, the transmission lines connecting to the power plants operated by IPPs are expected to be constructed by IPPs. As a result, the standard PPA stipulates that the transmission lines are to be constructed by IPPs and the ownership transferred to PLN, with PLN making installment payments in return. However, some geothermal power plants require the construction of long transmission lines, which makes the IPPs hesitant about entering the business, as they have to bear heavy financial and procedural burdens. In this regard, it would be ideal if PLN could be the principal responsible party for construction of the transmission lines, while an IPP constructs the transmission lines on a case-by-case basis depending on the characteristics of a project.

・ Arbitration rule: the current version of the draft expects the rules of BANI (Indonesia National Board of Arbitration) to apply. For the same reason as described in the language part, it is worth considering the preference of international investors. In this context, international investors are more familiar with the standard international rules, such as the rules of the International Chamber of Commerce than with BANI’s rules; therefore it is easier for international IPPs to accept the international arbitration rules (like the coal-fired projects in Indonesia) other than those of BANI. For Indonesian parties also, it can be



considered less risky, for the same reason that the standardized rules reduce uncertainty in interpretation.

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