Indonesia looks into co-insurance scheme for future IPPs
JAKARTA (JP): The government is planning to set up a co- insurance scheme with the World Bank to protect power projects in the country against risks which may stem from social and political uncertainties, according to an executive of global energy organization World Energy Council (WEC).
Chairman of WEC's local branch, the Indonesian National Committee, Endro Utomo Notodisuryo said the co-insurance scheme was aimed at allowing the government or the state electricity company to share political risks with independent power producers (IPP).
"Investors and the country where they invest must bear equal risks," Endro, who is also former director general of electricity and energy development at the Ministry of Energy and Mineral Resources, told reporters during a press meeting.
He said the co-insurance scheme was initiated by WEC to promote power investment and protect power projects in African and Southeast Asian countries with high political risks.
Under the scheme, each country and investing IPPs must pay an annual premium to the co-insurance firm.
"If anything goes wrong, they (the countries and IPPs) can draw their claim from this insurance firm," he explained.
However, the government and the World Bank would meet in April to hammer out details of the co-insurance scheme, he said.
According to him, Indonesia suffers from its current contracts with the IPPs because of the absence of a co-insurance scheme.
"The IPPs have turned Indonesia into their investment experiments without being willing to bear the risk of failure," Endro complained.
When Indonesia opened its power sector to private investors during the mid-1990s, state power company PT PLN signed 27 IPP contracts to cope with a surge in power demand.
During the economic crisis however, power demand dropped and the rupiah fell sharply against the U.S dollar, thus raising the price of power in rupiah sold by the IPPs to PLN.
Under the 27 contracts, PLN buys electricity from the IPPs at an average price of 6 U.S. cents per kilowatt per hour (kWh) (about Rp 580 at the current exchange rate), as compared with its average selling price of Rp 240 per kWh.
The government subsequently canceled construction of some of the power projects.
But that decision caused a backlash when the United States state-owned insurance firm Overseas Private Investment Corp. (OPIC) billed Indonesia with a US$290 million insurance claim from IPP MidAmerican Energy Holding.
MidAmerican called in its OPIC insurance claim, after Indonesia suspended its power plant project in Patuha, West Java, and after PLN refused to pay for power from MidAmerican's geothermal power plant in Dieng.
Endro said that under the co-insurance scheme, Indonesia would not be obliged to pay compensation for losses caused by political risks.
However, he added, if such a scheme was established, Indonesia could not force the IPPs to join it.
"Indonesia joining the co-insurance scheme has no impact on the existing contracts with the IPPs," he explained.
Visiting WEC secretary-general Gerald Doucet also charged that the contractual period of 30 years for the power purchase agreements signed by PLN and IPPs was too long.
"The IPPs are too dependent on long term contracts, while the burden falls mainly on the government or the people of Indonesia," Doucet said.
He did not say what the ideal contract term was, but added that a co-insurance scheme would help balance the rights and obligations between the IPPs and governments.
Doucet also criticized Indonesia for hampering the entrance of new IPPs by continuing to subsidize power prices.
To attract foreign investors for the power sector, Indonesia should allow market prices to drive the competition, he suggested.
He called for power market reform, where competition would result in providing affordable power prices to the public.
The government is drafting a new electricity law as part of a deregulation of the power sector, and is expecting to submit its bill to the House of Representatives sometime this year.(bkm)