fact: ppa's take a long time in indonesia

Just to shed some light on why it is taking so long to get PPA signed.....

Indonesia is on the cusp of sparking a sea change in global renewable energy development. But discussions on so-called feed-in tariffs will make or break the success of the market.

Currently the country has 1000 megawatts of geothermal energy online. But it has the potential to provide almost 27,000 megawatts. That amounts to around 40% of the global renewables extraction potential.

The expense of geothermal implementation is proving a serious impediment to the market's development, however. As a result, Indonesian authorities have stipulated the price paid for generated energy is sufficient to cover base costs via a 'feed in tariff'.

Panelists at IFLR's 2012 Indonesia Forum in Jakarta this week warned the feed in tariff was going to create more problems than it solved.

"I just can’t see how the feed-in tariff is going to work on the geothermal side," said one market participant. "It's a bit of a new animal."

The displeasure of Indonesian government-owned corporation, PLN, with the system is set to prove one major obstacle to its success. "They don't like the numbers, they'd not feel they've been properly consulted on it," he said.

PLN has a monopoly on electricity distribution in Indonesia. 30% of its annual revenue is subsidised. But the cost of what they sell is still more expensive than what they're getting.

"Geothermal takes a fair bit of expertise it also takes a pretty fat pocket book and that's not going to change," the panelist said.

The protection for geothermal is a 7% cap. He believed that those who can't make money at that level probably shouldn't be in the business.

This is a very different product from biomass, he explained. "It was not intended for utility style generation."

Others said the government needed to address the various prevailing uncertainties around the feed-in tariff. For example, said one Indonesian lawyer, if there is no increment path for the tariff over the years the exploration project becomes very frail because of the very high cost of the product.

How the PLN was going to pay higher tariffs also remained unclear, he said. "The easy solution would be for the Indonesian government to give comfort to the bankers in the form of a guarantee to address these issues," he said.

Market participants said inefficiencies within the PLN also needed to be remedied. "When you negotiate with PLN you know you are going to have your work cut out for you," said one.

PLN does not do cookie cutter PPA, they do very small hydro deals denominated in local currency that are certainly not financially viable as an export project finance, he said.

What's more, it takes PLN a month to get a letter appointing a team signed by all PLN directors. And yet foreign investors regularly allocate three or four months to finalise a PPA with the PLN, on geothermal transactions.

"Part of the problem with this market's development, is that offshore buyers don’t understand the logistics of investment in this country," he said

Gibson Dunn's Saptak Santra agreed that there remained inefficiencies in the market.

But he remained optimistic. "There has been almost a complete sea change in attitudes to Indonesian energy and infrastructure in recent years," he said. "The country is seeing almost record levels of foreign investment in both."