A hydropower project built in a
protected North Sumatran forest is set to unlock the bankability of Indonesia’s
renewable power sector.
The 45MW Wampu Hydro Electric Power
Project (Wampu) closed on July 10 and features a string of innovations, two of
which make it a pathfinder project for the country.
Firstly, it is the first project to
receive a government business viability guarantee letter (BVGL) that has
reached financial close. This proves the BVGL scheme can succeed in attracting
financing to the power sector, despite the questionable credit-standing of the country’s primary offtaker, state utility PLN.
Secondly, Wampu is the country’s first
project based in a protected forest. It shows that Indonesia’s geothermal reserves
– the world’s largest – can be
tapped despite being primarily based in protected land.
Together, these make Wampu a
breakthrough for the development of Indonesia’s renewable Independent Power
Producer (IPP) industry.
“I
think it will ease a bit of a log jam in the IPP industry. We hope there
will be a faster flow of projects now that documents and processes have been
created,” said Norton Rose’s Laurie Pearson who acted for project company PT
Wampu Electric Power.
Government guarantee
Since BGVLs were introduced in August
2011, two other projects have received the scheme’s guarantees which supports
the performance of off-taker PNL. But Wampu is the first to put the guarantee
through the rigours of a financing.
The terms and scope
of coverage of the letter required careful consideration by lenders Korea
EximBank (Kexim) and Sumitomo Mitsui Banking Corporation, said their counsel
James Murray of Milbank Tweed Hadley & McCloy.
“There was also a
process of consultation between sponsors, lenders and Ministry of Finance and
an opportunity to help in the shaping of the letter,” he said.
The fact lenders had
input into the guarantee, and that it was ultimately accepted, is a positive sign
for the country’s IPP sector, which is closely tied to BVGL scheme. “There are
plenty of lenders out there that otherwise would just not be able to finance a
power project in Indonesia,” Murray said.
Protected forest
Completion
of the first power project in a protected forest is an equally important
milestone.
Pearson said it was
not possible to build a power station in a protected forest until about two years
ago. “The difficulty, it turns out, is that a substantial amount of the
country’s geothermal and hydropower is contained inside protected forests,”
he said.
This is particularly
important given Indonesia is dominated by forest, has a critical power shortage,
and its government is pushing to use the country’s large coal reserves for
exports rather than fossil fuel.
In addition to these first-of-its-kind attributes, Wampu was the country’s first
IPP to reach financial close in more than two years, and first hydro IPP in 15
years.
PLN’s requirement for the project company connect the plant
to the utility’s existing transmission infrastructure created another deal
peculiarity. Wampu’s remote location meant 42km of transmission lines had to be
built.
“I’ve never known a
power project to have to do something so difficult - getting land rights
for a 125 tower locations. It was a phenomenally difficult project to
develop so all credit to our sponsors who had a lot of drive,” said Pearson.
Security
A project site in protected national forest presented structuring challenges in
terms of lender security interests. The relevant land rights were forestry
permits, title to which can’t be offered as security.
“Because the project
does not hold conventional land rights, we had to get the lenders
comfortable with a different security structure,” said Pearson.
As with most
Indonesian projects, potential for enforcement difficulties meant security was
taken over shares of the project company as well as its offshore holding
company. Otherwise, market-standard security was taken, including over the
power purchase agreement (PPA) and engineering procurement and construction contract.
The financing is on a limited recourse basis.
Risk allocation
The
BVGL was a condition of Kexim providing a covered tranche of the financing. In
this regard, Norton Rose’s Stephen Begley echoed Murray on the necessity of the
guarantee. “It would have been very difficult to get financing for this
project without the benefit of the business viability guarantee letter,” he
said.
As PLN’s first hydro
PPA with international sponsors in 15 years, water risk was a point of
negotiation. Under the final agreement, water flow credits are backstopped by
PLN.
Industry primer
The BVGL scheme is tied to the Ministry of Energy and Mineral Resource’s
so-called Fast Track 2 Programme. The programme’s 70 IPP and government-run
projects are being prioritised by the government for completion.
A project must be on
this list to benefit from the BVGL scheme, and Norton Rose arranged Wampu’s
application to receive BVGL support.
The project also
generates carbon credits which are sold via a long-term
off-take agreement to a carbon fund in Korea.
Tear Sheet
The $130 million financing of
Indonesia’s Wampu Hydro Electric Power Project reached financial close on July
10 2012. Korea Eximbank and Sumitomo Mitsui Banking Corporate are funding the
45M development in North Sumatra, which is sponsored by a joint venture formed
between Korea Midland Power, POSCO Engineering and PT Mega Power Mandiri.
A power purchase agreement with
national utility company PLN was signed in April 2011. The project documents
are governed by UK and Indonesian law.
Norton Rose was international counsel for the sponsors with Susandarini
& Partners providing local advice. The lenders were represented by Milbank
on international law and ABNR on Indonesia law.