Investor Presentaiton

RENEWABLES FINANCE Financial institutions: lack of bankable projects hinders access to finance Our interviews with financial firms reveal that there is no lack of finance for renewable projects. There is, however, a lack of bankable renewables projects to finance. The bankability of renewables projects in Indonesia is mainly hampered by unattractive tariffs, Build-Own-Operate-Transfer (BOOT) scheme, and risk allocation. In many cases, however, IPPS submitted low quality Feasibility Studies (FS) to lenders. This has been one of the main causes of many PPAs signed in 2017 have not reached financial close. In addition to quality FS, lenders also require reputable and experienced sponsors to guarantee credits provided by lenders, which are difficult to access by small-scale developers. While most financial institutions interviewed agreed that tariff is not the primary factor defining a project bankability, they admitted that the current tariff is unattractive, thus makes renewables projects difficult to build in low-BPP areas such as Java and Bali. However, a project can still be made bankable, for example by offering a longer tenor to IPPS, so that renewables projects are viable and IPPS will still obtain a decent profit. Currently, only international lenders can provide a longer tenor to IPPs, as long as the risk allocation between IPPs and offtaker is balanced. The BOOT scheme has raised objections from IPPs as they usually use their assets as collaterals. When IPPs fail to repay the loan, lenders cannot recover it through the assets (collaterals) as the assets belong to PLN. In addition, the option to factor in the land costs in the contract is deemed difficult considering that PLN caps the tariffs at 85% of BPP. Under MEMR Reg. No. 10/2018, PLN and IPPS share a risk if natural Force Majeure (natural disaster) happens and prevents PLN from taking power from IPPs. At this situation, PLN is not required to pay termination payments when natural FM causes long-term interruptions. PLN, instead, may extend the PPA by the length of time of disaster. The banks perceive this clause as troublesome as they need regular debt payments from project cash flow. The option to use an insurance to mitigate this risk is deemed impractical, as it will likely increase the project costs and thus tariffs. The premium is also difficult to claim. One financial institution interviewed mentioned that the risk allocation is the main problem which prevents projects from getting finance. IESR (Institute for Essential Services Reform) | www.iesr.or.id 27

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