Geothermal in Indonesia: Attorneys Listed Below
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September 2010 Asia Energy Beijing Frankfurt Hong Kong London Los Angeles Munich New York São Paulo Singapore Tokyo Washington, DC If you would like copies of other Milbank Newsletters or Client Alerts, please visit www.milbank.com or contact either of the Geothermal in Indonesia: attorneys listed below. Singapore James J. Murray The Heat is On +65-6428-2422 By James Murray and Peter Norman [email protected] David H. Zemans +65-6428-2555 [email protected] Exclusively published on Infrastructure Journal (www.ijonline.com) Tokyo Mark I. Plenderleith +813-5410-2842 In late April, Indonesia’s President Susilo Bambang Yudhoyono announced [email protected] that the country had signed geothermal energy deals worth a total of US$5 billion, an auspicious start to his government’s ambitious plan to raise Gary S. Wigmore +813-5410-2840 Indonesia’s installed geothermal generating capacity to 9,000MW by 2025 and [email protected] turn the country into the world’s largest producer of geothermal power. Hong Kong Young Joon Kim +852-2971-4802 [email protected] Desiree Woo +852-2971-4821 [email protected] Beijing Ed Sun +8610-5969-2772 [email protected] This newsletter is a source of general information for clients Press reports at the time of of the country’s estimated such challenges are indicative of and friends of Milbank, Tweed, the announcement emphasised 28,000MW of geothermal a lack of political will. However, Hadley & McCloy LLP. Its the ambitiousness of these goals energy potential. Generally, the while the Indonesian legal content should not be and the challenges that Indonesia concerns that have indeed been system is regarded as overdue construed as legal advice, and readers should not act upon the (and the partners that had expressed are associated with the for reform in a number of areas, information in this newsletter signed the deals) would face in legal and regulatory hurdles that the last ten years have seen the without consulting counsel. achieving them. these large projects face. Government introduce several The challenges most analysts Little has been written about new laws and initiatives that have Attorney Advertising. Prior results do not guarantee a identify are not linked to the the nature of these legal and fundamentally restructured the similar outcome. technical problems associated regulatory challenges, which domestic geothermal industry. with harnessing a larger portion might lead one to assume that Continued on page 2 www.milbank.com Asia Energy l September 2010 2 The limited commentary is coupled with Pertamina’s new Government has retained for respect to the interpretation and more a function of the untested, Articles of Association, paved the itself the right publicly to tender implementation of the and consequentially uncertain, way for the transfer of Pertamina’s licenses for additional Working regulations. They may, for operation of the new legal existing geothermal businesses Areas and reserved the power to example, revoke a developer’s regime, especially as it relates to and assets to a dedicated revoke PGE’s existing licenses if it geothermal licence or withhold the changing role of Indonesia’s subsidiary. The transfer occurred does not develop them within an the approval of environmental state-owned oil and gas company – in 2006, when PT Pertamina agreed timeframe. impact assessments. Pertamina – in the development Geothermal Energy (PGE) was An important first step for of geothermal sites, impact of established and took charge of Decentralised Regulatory developers in assessing a new government-wide decentralisation Pertamina’s geothermal portfolio. Authority geothermal site will thus be to of regulatory power to state From Pertamina’s At the same time that determine which level of and local governments and perspective, these changes were Pertamina’s monopoly was being government has responsibility for the changes in the electricity more than cosmetic: while its unwound, responsibility for licensing and environmental market wrought by the country’s regulation for the particular Electricity Law of 2009. Working Area. Additionally, developers need to recognise that The Changing Role of the local agencies with Pertamina jurisdiction over matters affecting Historically, Pertamina has a proposed project will invariably held a monopoly over geothermal be new to the (often less than development in the archipelago. straightforward) process of In 1982, the Government issued interpreting national government regulations allowing Pertamina to regulations and so still building enter into joint venture their own capabilities. partnerships with both local and While in principle the basic regulatory framework remains the international private sector New Rules for Electricity same across Indonesia, the local government agencies have been developers to develop its Markets given considerable authority with respect to the interpretation geothermal resources. Under this and implementation of the regulations. A third and even more regime, Pertamina was granted recent change promises to special privileges to manage and subsidiary, PGE, remains by far regulating the geothermal transform the geothermal supervise the state’s mining the largest producer of industry - formerly within the industry still further. Some of the authority and to award geothermal power in Indonesia, purview of the national Ministry most protracted delays in past concession rights. Pertamina was holding licenses to develop of Mining and Energy - was also geothermal projects have arisen then permitted to appoint local geothermal sites or “Working being decentralised as part of the from negotiations between the and international contractors to Areas” with an estimated government-wide effort to developer and PLN, the national carry out these activities under potential to produce a total of devolve powers to provincial and electric utility. With its Electricity joint operation contracts. 8,480 MW, PGE will be a legally regional governments. Law of 2009, the Government This scheme began to separate entity and Pertamina’s Thus, under Geothermal ended PLN’s monopoly over the change in 2001 with the liability for PGE’s obligations Law 27 of 2003, provincial and production and distribution of enactment of Law Number 22 may be limited (a change that local (“regency”-level) officials are electricity in the country. While concerning Oil and Gas, under may prove challenging to private given the power to grant geothermal developers intending which the geothermal industry counterparties and investors geothermal mining business to supply power to the major was separated from the oil and seeking the comfort of licenses for Working Areas Java-Bali grid system will in most gas sector and geothermal activity Pertamina’s more robust credit located solely within their cases still sell directly to PLN, the was removed from Pertamina’s rating). jurisdictions. While in principle new Electricity Law does permitted lines of business. At the same time, Pertamina the basic regulatory framework contemplate that they could sell Two years later, Government has lost its powers to manage and remains the same across to so-called “captive markets” in Regulation Number 31 of 2003 oversee the mining authority and Indonesia, the local government the form of provincial and concerning the Corporatisation has ceased to have a monopoly agencies have been given regional utilities and private end of Pertamina was issued. This, over development. Moreover, the considerable authority with users. Asia Energy l September 2010 3 One of the features that is developers and investors will capital base. It remains to be seen James Murray is generally seen as a cornerstone also need to bear in mind that whether the government agencies a partner in the of the Government’s public- Indonesia’s strategy for managing that have in the past provided Singapore office private partnership scheme is PLN’s credit risk is still evolving. letters of support for power of Milbank, that private developers should PLN’s solvency was severely projects will continue to do so Tweed, Hadley & be paid a tariff sufficient for full tested in the Asian financial crisis whilst the way in which the IIGF McCloy LLP. He recovery of their costs (including during the late 1990s and led to will operate continues to develop. specialises in project finance and finance costs). However, the renegotiation of many tariff The IIGF will need to establish development involving power, notwithstanding this backdrop agreements at considerable cost a track record that demonstrates oil and gas, mining, telecoms and the potential opportunities to the suppliers. its ability to meet its guarantee and other infrastructure projects. under the new Electricity Law, Since the crisis, many liabilities. He also works in structured regulations promulgated by the developers have received (and and acquisition financings, Ministry of Energy and Mining relied on) assurances in the form Conclusion restructurings and M&A. Murray Indonesia’s regulatory is ranked as a leading project environment in relation to the finance lawyer in Chambers Asia. geothermal industry has reached a turning point. It offers private Peter Norman is developers and investors new an associate in the opportunities whilst also posing firm’s Singapore some unanswered questions. The office and a successful developers will be those member of the who, while playing an active Global Project and alert role in the negotiation Finance Group. His practice of risk allocation under the specialises