DEAL: Indonesia IPP first sets state guarantee precedent

Author: Ashley Lee | Published: 24 Feb 2014

The Banten power plant is Indonesia's first power project not to require government support for the obligations of state utility PLN under the power purchase agreement (PPA).

While many power financings have closed in the country, all have required government support for PLN's offtake. This could mean anything from a direct government guarantee to a business viability guarantee letter (BVGL), which first introduced with the Wampu Hydro Electric Power Project.

The closing of Banten, an independent power producer (IPP), is not expected to spark a flood of deals to close without government guarantees for PLN's obligations. However, this might encourage others to consider financing power projects without any support.

"The sponsor, borrower and financiers are taking PLN credit risk when it comes to payments under the PPA," said Sanja Udovicic, London-based partner at Shearman & Sterling. "That's...