We are delighted to inform you that our Senior Partner, Aditya Kesha Wijayanto, was present as a speaker at the Petromindo Conference on 24 May 2023. On that occasion, he spoke about Legal Insight with the theme “Project Finance in the Power Plant Industry”. The following are the main points of the discussion:
A. General Overview of Power Plant Business in Indonesia
- The Central Government has assigned PT PLN to accelerate the development of power plants that use renewable energy through PR 4/2010.
- In the power plant business, power purchase through a public tender or direct appointment can be carried out through the power sale and purchase scheme by an Independent Power Producer (“IPP”).
- Permits are required in carrying out power plant business activities i.e., the Power Supply Business License (Izin Usaha Penyediaan Tenaga Listrik or (“IUPTL”) and the Power Purchase Agreement (“PPA”) through a tender at PLN.
B. Financial Requirements Under the PPA
- One of the conditions for the PPA’s effectiveness is the completion of the financial close, that is, when funding is obtained by the IPP company from a bank/financial institution required for the construction of a power plant.
- The IPP and lenders can negotiate the terms and conditions in the Indicative Offering Letter. This stage is important to consider because it will be difficult to deviate from the term sheet when negotiating the Loan Agreement.
C. Security Granted by the IPP and Sponsors
- In common practice, lenders in Indonesia will ask for securities from Sponsors in the form of Pledge over Shares, Letter of Undertaking (“LoU”), and Corporate Guarantee.
- The IUPTL that has been granted to the IPP is non-transferable. Thus, the pledge of sponsors’ shares in the IPP becomes important for lenders.
D. Cash Waterfall Mechanism
- Cash Account Management Agreement (“CAMA”): The management of all IPP’s escrow accounts to optimize loan facilities provided by lenders and for the timely repayment of the IPP’s debt, in accordance with the provision set out in the loan agreement.
- In common practice, lenders can also include several provisions related to the cash waterfall mechanism that will be implemented in the CAMA, such as:
- The IPP’s obligation to prioritize the placement of a Debt Service Account (“DSA”) and Debt Service Reserve Account (“DSR”) prior to the payment of the power plant’s operational and maintenance costs;
- The IPP’s obligation to ensure that the first principal obligation is carried out in conjunction with (but not sooner than) the receipt of payment for the power purchase from PLN; and
- The IPP’s obligation to ensure that maintenance costs (e.g., major routine overhaul costs) can still be covered after the funds are placed in the DSRA and DSA.
E. Sustainability-linked Loan for Power Plants
- Definition: A loan instrument that incentivizes the IPP’s achievement of predetermined sustainability performance targets (SPTs) and has the objective to prioritize the economic, social, and environmental (ESG) aspects.
- Lenders and the IPP will set a performance target (related to the IPP’s business activities).
- The target will be monitored periodically (annually or semi-annually).
- If the IPP can meet the ESG performance target, then the lender may provide the IPP with certain benefits (e.g., the lender may decrease the interest rate).
- If the IPP cannot meet the ESG performance target, then the IPP can be imposed with a penalty, and lenders may set additional financial covenants.
For more information about Project Finance in the Power Plant Industry, please contact our firm.
About ADCO Law:
ADCO Law is a law firm that offers clients a wide range of integrated legal services, including in commercial transactions and corporate disputes in a variety of industry sectors. Over the course of more than a decade, we have grown to understand our client’s industry and business as well as the regulatory aspect. In dealing with business dynamics, we provide comprehensive solid legal advice and solutions to minimize legal and business risks.
From Upstream to Downstream, We Understand Your Industry. In complex transactions as well as in certain cases, we are actively engaged with financial, tax, and environmental specialists, accountants, and law firms from various jurisdictions to give added value to our clients. Having strong relationships with Government agencies, regulators, associations, and industry stakeholders ensures that our firm has a holistic view of legal matters.
ADCO Law is a Proud Member of the Alliott Global Alliance (AGA) in Indonesia. Founded in 1979, AGA is one of the largest and fastest-growing global multidisciplinary alliances, with 215 member firms in 95 countries.
As a law firm, we also believe in regeneration. To stay abreast of business changes and stay relevant, our formation of lawyers is comprised of the top graduates from Indonesian and international law schools.
For further details, please contact:
Alvin Mediadi, Business Development Manager, Indonesia