PLN Renegotiation Guidelines: Background

With more than 29 GWe in potential capacity, Indonesia is home to one of the most abundant sources of geothermal power. Having utilized less than 5 percent of that potential capacity, the Government of Indonesia has set targets to increase utilization nearly fivefold by 2025. In June 2015, the SRUC team was approached by USAID Indonesia for assistance in bolstering the growth in geothermal utilization through support to the government-owned electric utility, Perusahaan Listrik Negara (PT PLN), in the renegotiation of eligible Independent Power Producer (IPP) geothermal projects according to parameters set out by the Ministry of Energy and Mineral Resources (MEMR). Recognizing the need to renegotiate to move geothermal projects forward, MEMR had recently established a law, Permen 17 ESDM/2014, which directs PLN to conduct negotiations with eligible IPPs on the adjustment of a given project’s established electricity price, established in its Power Purchase Agreement (PPA), after exploration. To help private geothermal developers mitigate exploration risks, Permen 17 ESDM/2014 allows certain categories of IPPs to apply for an electricity sale price adjustment after conducting exploration and directs PLN to conduct negotiations with eligible IPPs on the adjustment of a given project’s established electricity price in accordance with “appropriate mechanisms and procedures.” USAID Indonesia requested that SRUC assist in developing the framework and process for this tariff renegotiation.

PLN Renegotiation Guidelines: Design of the Guidelines

The capstone of the SRUC support to PLN was the creation of the ‘Internal Guidelines for Conducting Geothermal Electricity Price Renegotiations’, which is intended to act as a guiding framework and process for undergoing geothermal PPA renegotiations. The Guidelines establish a transparent, practical, and systematic framework and process for geothermal PPA renegotiation. Based on international best practice, the Guidelines include a renegotiation process overview, steps for collecting data and information from the IPPs, procedures and industry best practices for evaluation, and timelines and procedures to be followed. Moreover, the document acts as a framework to validate, analyze, and evaluate key PPA parameters, including tariffs (which generate the base power price) and yearly increases, project timing, resource size, expended and anticipated costs and project phasing, among other project characteristics. The 97-page document brings together the collective experience of the SRUC team, USAID Indonesia, the PLN Geothermal team, as well as additional specialists in the fields of drilling, geoscience (geology, geophysics, geochemistry), and geothermal project development – to be a practical manual for the PLN team throughout the renegotiation process.

Some sections of the document were designed to share with power sector stakeholders inside and outside PLN in order to promote a transparent process for the renegotiations. With a fully transparent renegotiation process across both the public and private sector actors, the industry can more effectively move the number of geothermal projects forward and spur further geothermal project development by reducing tariff uncertainty. Using the guidelines, PLN was able to renegotiate 440 MWe of geothermal capacity towards their goals, with another roughly 1.6 GWe left to be negotiated. 

PLN Renegotiation Guidelines: Renegotiation Support

After designing the ‘Internal Guidelines for Conducting Geothermal Electricity Price Renegotiations,’ the SRUC team helped PLN conduct their first tariff renegotiation using the Guidelines. Putting the Guidelines to work, the SRUC team traveled to Indonesia to provide international leading practice on geothermal project development, and to support PLN to conduct the financial and technical analysis for the first geothermal project renegotiation. Additionally, the SRUC team was able to gather lessons learned to enhance the Guidelines before finalization.

Using the Guidelines to frame the renegotiation. SRUC worked with PLN to build their capacity to follow the processes set out in the Guidelines. The process began with a presentation by the IPP on the historical context and recent progress of the development, providing PLN with a review of the background details of the renegotiation and allowing introductions to the IPP and the identification of specific points of contact for further inquiries. Following the one-on-one meetings with the IPP, PLN began to review the materials sent by the IPP in their Renegotiation Proposal. As strategic advisors, the SRUC team supported PLN as it reviewed the submitted IPP documentation, designed the plan for analysis, and prioritized the major renegotiation points.

Digging into the data further. After PLN conducted an initial review of the data provided by the IPP, PLN and the SRUC team traveled to the geothermal site to discuss questions and clarify the status of the project. This offsite served as a data gathering session to help PLN amass all the information required to fully evaluate the project.

With this initial understanding and on-the-ground context, the team worked with PLN to complete the technical and financial analysis. These technical and financial reviews helped PLN understand the best practices in the industry to support their evaluation and analysis of the IPP’s proposal submission. The analysis was particularly focused on reviewing the cost estimates submitted by the IPP and helping PLN to determine the cost ranges to be accepted in the tariff and other conditions to include in the modified PPA. 

Results

The SRUC team’s work helped PLN to conduct their first geothermal renegotiation that will lead to increased geothermal megawatts online and the strengthening of PLN’s capacity to continue to apply the systematic and transparent Guidelines process for future tariff renegotiations.