Wampu deal unleashes Indonesian renewables

Author: Danielle Myles | Published: 31 Jul 2012
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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.

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.