Indonesia looks into co-insurance scheme for future IPPs

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)