MEMR Regulation 10/2018: A Game Changer for PPAs Bankability?

The Minister of Energy and Mineral Resources (“MEMR”), for the second time, amended MEMR Regulation No. 10 of 2017 on Principles of Power Purchase Agreements (“PPA”) through MEMR Regulation No. 10 of 2018 (“Reg. 10/2018”), removing the controversial provisions related to government force majeure (“GFM”).

Background

In the beginning of 2017, the MEMR issued Regulation No. 10 of 2017 (“Reg. 10/2017”) which imposed inclusion of certain mandatory requirements for PPAs. These new requirements raised some serious concerns from power developers and their lenders, particularly the ones that had material impact on key bankability provisions of the previous generation of PPAs model, namely the allocation of risk relating to GFM and natural force majeure (“NFM”) affecting PLN grid among the relevant parties of PPAs.

Responding to the initial market reaction, in August 2017, the MEMR amended Reg. 10/2017 through MEMR Regulation No. 49 of 2017, where it removed several provisions related to GFM risk allocation. Unfortunately, the amendment was considered insufficient since such regulation maintained the risk allocation for NFM affecting PLN grid and certain part of GFM (to be discussed in more details below) which are not fully in line with lenders’ standard bankability requirements.

Implication on GFM Events

Related to government risks, PPA models used in Indonesia before issuance of Reg. 10/2017 largely divided GFM events into: (i) unjustified government action or inaction (e.g., revocation of permits without valid or legal cause); and (ii) changes in laws & regulations.

Traditionally under major PPAs, government risks are passed on to PLN which is considered as the party best able to mitigate and manage such risks. This is done through among other things: (i) deemed dispatch payments to cover any revenue loss if the plant must stop its operation due to GFM events; (ii) tariff adjustment to compensate cost impacts due to GFM events; and (iii) payments by PLN of termination amount which equals to outstanding project debt plus lost future equity returns if the PPA is terminated due to a prolonged GFM events.

There were concerns that Reg. 10/2017 would restrict PPAs to allocate government risks to PLN since the regulation previously stated that if there is a force majeure event, which include change in laws (but silent on unjustified government action or inaction), parties to the PPA will be relieved from the performance of their obligations under the PPA. Thus, it could be interpreted that in such condition, the usual PPA risk allocation terms for GFM as discussed above will become unenforceable.

Unjustified Government Action or Inaction

As noted above, Reg. 10/2017 is silent on the consequences of unjustified government action or inaction. Similar to Reg. 10/2017, Reg. 10/2018 does not rule any consequences for unjustified government action or inaction events, and therefore it could be interpreted that parties to the PPA would have the freedom to negotiate terms related to these events including their risk allocation. Such freedom of contract is recognized under the basic concept of contract law in Indonesia, where Article 1338 of the Indonesian Civil Codes stipulates that parties are free to agree anything in their contracts to the extent such agreements do not violate any rules or mandatory provisions under Indonesian law.

Changes in Laws & Regulations

Reg. 10/2018 imposes the following changes:

• changes in laws & regulations events are no longer mentioned as force majeure events which will relieve the affected party for performing its obligations under PPAs; and
• removal of consequences for changes in laws & regulations events (previously under the first amendment of Reg. 10/2017, consequences for changes in laws events are limited to tariff adjustment in case such events cause additional investment or cost increase).

Given the above changes, similar to unjustified government action or inaction events, it could also be interpreted that parties are now free to agree on risk allocation and consequences for changes in laws & regulations events in PPAs.

Implication on Natural Force Majeure Events in PLN Grid

Reg. 10/2018, however, still maintains the provisions in Reg. 10/2017 which may be interpreted to restrict PLN to pay deemed dispatch if PLN is unable to dispatch the plant due to disruption in PLN’s grid caused by NFM events. This issue therefore is remained to be resolved by the parties in the PPA.

Conclusions

Reg. 10/2018 seems to be intended to answer concerns raised by developers and lenders with respect to key risk allocation on GFM events under PPAs. This amendment is expected to bring good news for developers and lenders as it addresses one of the key bankability issues under the previous Reg. 10/2017.  Since many developers and lenders are taking a “wait and see” approach pending clarity on bankability clauses under the PPAs, it is also expected that changes made by Reg. 10/2018 will expedite existing PPAs negotiations.

A question remains however as to the treatment for consequences on NFM events affecting PLN grid. Assuming that the current NFM provisions in Reg. 10/2017 remain the same for the time being, parties to the PPA would need to devise creative solutions which will provide greater flexibilities for them in negotiating the risk allocations relating to NFM events, including the possibility of having PPAs to introduce certain different mechanisms or clauses to deal with this risk (e.g., to replace deemed dispatch concept with alternative concepts that are acceptable to lenders from bankability perspective but at the same time are in compliance with provisions of Reg. 10/2017).

For further information, please contact: Kirana Sastrawijaya, Pramudya A. Oktavinanda, Reggy Firmansyah, or Liyanto Wijaya.

 

 

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