Private Power Utilities: Economic Benefits of Captive ... · Private Power Utilities: The Economic Benefits of Captive Power in Industrial Estates in Indonesia List of Pre-release

Private Power Utilities: The Economic Benefits of Captive Power in IndustrialEstates in Indonesia

March 2016

Private PowerUtilities: TheEconomic Benefitsof Captive Power inIndustrial Estates inIndonesia

www.pwc.com/id


List of Pre-release actions to discuss with GE

BKPM citation on land/power bottlenecks

GE to confirm PwC’s modelling assumptions

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Important Notice: By reading this report, any person who is not an addressee of this report acceptsand agrees to the terms set out on page 56.


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Foreword

Saleh HusinMinister of Industry

“Indonesia as a strong industrialcountry” is the objective of theMaster Plan of National IndustryDevelopment (RIPIN) 2015 –2035. A key policy directionsupporting this objective is thedevelopment of Industrial Estatesand Special Economic Zones, aswell as the overall development ofthe industrial sector. RIPIN targetsto add 9,000 new large andmedium industrial firms with halfoutside Java as well as 20,000small industrial firms. To achievethis growth, abundant and reliableelectrical power is necessary.

In past decades, Indonesia hasreduced its shortfall in electricitysupply through large investmentsin power. To meet future powerdemand, an additional 70.4 GW ofadditional generating capacity isgoing to be needed between 2015and 2024.

As a large investment is required tomeet this need, the IndonesianGovernment has already invitedprivate sector to participate interms of Independent PowerProducers selling to PLN. There isalso another form of which theprivate sector could participate tomeet the Nation, especiallyindustry growing needs for powerin terms of Captive PowerProducers selling power toindustrial players.

This report highlights how theprivate sector, PLN, and theGovernment can benefit byworking together to identify anddevelop key opportunities forelectrical power investment inIndustrial Estates and SpecialEconomic Zones, with the ultimateobjective to drive economic activityacross Indonesia.

It is my hope that Captive Powerwill prove to be a catalyst forIndonesia’s industry. Industrialgrowth will remain a major thrustof the Government's economicdevelopment strategy, and we viewindustrial estates and specialeconomic zones as the crucialdrivers. The long-termdevelopment of these estates andzones must not be constrained byweak infrastructure.

I believe that the use of CaptivePower will help to make this policya success and because of that I amglad to have been associated withthis report and welcome what ithas say.


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As Chairman of Industrial EstatesAssociation (HKI) and Vice Presidentof the Indonesian Chamber ofCommerce and Industry (KADIN) inthe Economic Zones Developmentdivision, I was delighted to be askedto contribute to this report.

Industrial Estates are crucial forIndonesia’s prosperity. The IndustrialEstate has a strategic role forIndonesia’s development. IndustrialEstates can improved the efficiency ofinfrastructure provision, increaseenvironmental pollutant control,increase employment opportunitiesand attract investment. Besides,Industrial Estates also encourage thegrowth of supporting industries bothin the private and public sector.Moreover, Industrial Companieslocated in Industrial Estate broadlycontribute 21% to GDP.

Industrial Estates provide a focalpoint for manufacturing investment,integrate supply-chains acrossindustries, and allow theconcentration of infrastructureneeded for production and access tomarkets. Investors, suppliers, andconsumers all benefit from thisagglomeration of economic activity.

Recognising this, the Government ofIndonesia has mandated (in PP142/2015 and UU 3/2014) thatmanufacturing industry companiesare located inside Industrial Estatesand that tenants’ basic needs must bemet, for example, water andelectricity. Expanding manufacturingactivities in Industrial Estates will becritical to Indonesia’scompetitiveness, industrialdevelopment and the creation of well-paying jobs. But, the lack of reliableand universally available powerrepresents an obstacle to achievingthis expansion.

This study by GE and PwC confirmsthat blackouts and brownouts damagemanufacturing businesses inIndonesia, and may account for atUSD 415 million of business costsannually in key manufacturing sectors(see page 27). For this reason,potential tenants are increasinglyevaluating Industrial Estates based ontheir power supply, and a reliablepower supply helps attract tenants.Tenants whose activities areparticularly power-sensitive require ahigher level of service quality than isstandard today. GE and PwC haveresearched different ways to developpower projects to meet these needs,and we are open to any developmentstructures and parties who can fulfilthese needs.

Industrial Estate developers will alsobenefit from an increase in captivepower arrangements. Not only willthese premium tenants increaseoverall revenue, but infrastructureinvestments provide an attractivereturn and stable cash flow even whenthe wider real estate market is down.

The government has an importantrole to play in supporting the privatesector to realise this opportunity.There are many possible investmentdestinations for global private sectortenants, so we need to makeIndonesia the most attractive.

I sincerely hope that the Governmentof Indonesia can work together withbusiness to provide a clear set ofopportunities for power generationunder the Kawasan Industri andKawasan Ekonomi Khususprogrammes, and will underwriteprivate sector risks where needed.Lastly, I hope that permits andlicenses will be forthcoming forreputable players who wish to developthese opportunities.

Foreword

Sanny IskandarChairman of Industrial EstatesAssociation (HKI)


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About This Report

PT PricewaterhouseCoopers IndonesiaAdvisory (PwC) was commissioned by PTGE Operations Indonesia (GE) to developthis report. The project started inSeptember 2015 and was completed inMarch 2016.

The key objective of the project is toincrease understanding of the benefits ofcaptive power to the private sector, theGovernment of Indonesia as well as PLN.Throughout this report, we refer to captivepower, defined as power supply that isgenerated by a firm for its own use. Thiscan refer to an individual firm, or to anindustrial estate that generates power to beultimately sold to its tenants.

Private Power Utilities: The EconomicBenefits of Captive Power in IndustrialEstates in Indonesia explores the potentialbenefits that captive power can bring toIndonesia – not only to the private sector,but also to the Government of Indonesiaand PLN.

The report focuses on three key questions:

• What are the cost savings from reducingincidences of blackouts and brownouts?

• How can captive power benefit bothtenants and developers in an industrialestate?

• How can captive power supportGovernment and PLN in achieving theircapacity expansion and electrificationtargets?

To answer these questions we draw oninsights obtained from interviews withprivate sector firms and industrial estatedevelopers, as well as governmentofficials.

To gauge potential costs from blackouts,PwC engaged with stakeholders viaquestionnaires and face-to-faceinterviews, then used this insight to buildan economic model for seven sectors forwhich data was available.

PwC developed the approach and draftedthe report. GE provided valuablecomments and feedback over the courseof the project. Stakeholder consultationwas conducted jointly. During the projectPwC and GE also received valuablecomments and feedback from:

• Indonesia Investment CoordinatingBoard (BKPM)

• Industrial Estates Association (HKI)

PwC retained overall editorialindependence, and this report ultimatelyreflects the data collected, independentanalysis, and third party opinionsreceived during the project.


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Contents

05 About This Report

07 Key Messages

08 Executive Summary

11 Section 1: Electrical Power and Indonesian Development

24 Section 2: Economic Benefits of Captive Power

30 Section 3: The Way Forward

55 Get in Touch

56 Important Notice

57 Appendix


Key value of Captive Power in Industrial Estates

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For Government …

Captive Power (Private Power Utilities (PPU)) can support economic activity

• Power supply was identified by BKPM as a key bottleneck for Industrial Estate development.

• Captive Power could increase the power supply to key industries in Indonesia, without public sectorfunding, and improve Indonesia’s ranking in the global Doing Business Index.

• Industrial Estates are key GDP and job generators, and can move Indonesia up the value chain.

• Recent regulation (PP 142/2015) on the development of power for use in industrial estates iswelcome, but there is still a need to clarify the precise conditions under which Wilayah Usahalicenses will be granted, and to streamline the regulatory environment so the private sector cancontribute more.

Captive Power represents a significant revenue opportunity, where PLN has acommercial role to play

• Captive Power reduces the pace of PLN’s demand growth in core areas, allowing it more time to buildgeneration capacity and improve reserve margins under the 35 GW Plan.

• Captive Power does not normally require PLN to take on new liabilities, such as entering into longterm, USD-denominated contracts. This allows PLN to focus its debt capacity on priority projects.

• Captive Power reduces the need for PLN to make extensive Transmission and Distribution (T&D)investments to extend the grid to remote locations, while also meeting its Public Service Obligations.

• Captive Power is strategically aligned with PLN’s intention to develop 35 GW of capacity before 2019,and, through cooperation and deals with the private sector, presents an opportunity to generatesignificant revenue with limited costs.

For PLN …

Captive Power attracts high quality tenants, in turn attracting other tenants andincreasing overall occupancy.

• For developers, a full industrial ecosystem, including power supply, is essential to attract highquality tenants, and financial returns on Captive Power can make it an attractive investment.

• It could provide significant new sources of long-term, recurring income in the real estate portfolio.

For Industrial Estatedevelopers …

Captive Power could avoid costs associated with blackouts and brownouts

• By improving the stability of the power supply, costs such as lost output, spoiled inventory anddelayed production can be avoided.

• This could save firms in seven manufacturing sectors around USD 415 million a year if they avoid anaverage of around 60 hours of blackouts per year.

• Tenants in the food and beverages, chemicals and textile sectors may see the highest benefits fromCaptive Power.

For tenants …


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01

Executive summary

The Indonesian government, andin particular BKPM, hasrecognised the role of IndustrialEstates as a key driver ofeconomic growth. Therealisation of the potential ofIndustrial Estates as growthcentres may be delayed bybottlenecks.

Major barriers to developingIndustrial Estates include landacquisition/preparation andpower supply. In particular, therapid growth in demand forpower has outpaced capacityincreases, and some areas arenot yet electrified.

Captive Power, or Private PowerUtilities (PPUs), or powergenerated by a private owner forits own/other companies’ use,reduces load on the grid. It canincrease reliability, reducesbusiness costs, and can rapidlydeploy power to regions thatcurrently lack power.

In doing this, captive powergenerates productivity benefitsto tenants in Industrial Estates,particularly in areas with poorgrid connectivity.

“Energy is thelifeblood of theglobal economy.”

Introduction

PwC and GE have jointly developed this publication on PrivatePower Utilities: The Economic Benefits of Captive Power inIndustrial Estates in Indonesia in order to explore the potentialbenefits that Captive Power (Private Power Utilities) can bring toIndonesia – not only to the private sector, but also to thegovernment of Indonesia and PLN.

The focus of this report is to identify not only who benefits fromcaptive power, but also how and why they would benefit fromcaptive power. Interviews with Industrial Estate managementand tenants were used to identify benefits and design amethodology for modelling sector-wide blackout costs (orbenefits from PPUs) at the national level.

World Economic Forum

Indonesia’sgrowth potential isbeing constrainedby the availablepower supply.

Captive power isone solution thatcould helpovercome thisconstraint


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Executive summary (cont’d)

Figure 1: Captive power as a mutually beneficial strategy

Captive power would significantlyreduce the risk of blackouts tofirms, lowering overtime and gensetcosts, avoiding loss of revenue.High level calculations estimateblackout costs of around USD 415million/year for the seven sectorsmodelled in this study (whichaccount for 20% of GDP and 85 %of manufacturing GDP), assumingannual blackouts of around 60hours.

PLN/Government

Industrial estatemanagement

Tenants

Reduced load capacity, reduced risk of delays to electrificationplans, increased economic activity outside of Java

Increasedproductivity

and reliabilityHigher quality

tenants

The costs for each sector are asfollows:• USD 12 million in Printing• USD 17 million in Machinery• USD 28 million in

Petroleum/Coal• USD 42 million in Paper• USD 44 million in Textiles• USD 106 million in Chemicals• USD 167 million in Food and

Beverages.

These estimates exclude damage tomachinery and inventory costs.Accounting for these, based oninternational studies, could increasethese cost estimates by a further70%.1

A more reliable power supply in turncould help real estate developersattract higher quality tenants.Developers can also capture some ofthe value premium through powerbills.

At a national level, industrial captivepower reduces the additionalcapacity burden on PLN. PLN has aPublic Service Obligation to servehouseholds in Indonesia. Byallowing the private sector to drivecaptive power for key industrieswithout any need for additionalfunding, PLN can maintain its focusand funding on the mission ofpowering residential andcommercial customers across thenation.

The use of captive power not only benefitsfirms and industrial estate developers, butalso Indonesia as a whole

Both the privateand the publicsector stand to gainfrom captive power

1 Source: Source: http://www.onpower.com/pdf/epricostofpowerproblems.pdf


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Executive summary (cont’d)

Electrical power is essential tothe government’s plan ofindustrial development andpoverty alleviation in Indonesia.Electricity not only supportsindustries, but improvesoutcomes such as quality of life,access to health and education.

Captive power can free up limitedresources and help to developindustrial areas, especially inareas where it is both challengingand costly to connect to the grid.

The Government and PLN havemade great strides in progressingthe 35 GW programme. However,investment still lags demandgrowth. The World Bank arguesthat such under-investment ininfrastructure risks creating avicious cycle which could depressgrowth, revenue and taxes2.

The use of industrial captivepower can change this ‘viciouscycle’ to a ‘virtuous circle’, andprovide benefits for eachstakeholder:

• Tenants benefit from a morereliable power supply.

• Industrial Estate and PowerPlant developers (and co-developers) benefit fromdiversified, stable andsustainable sources of income.

• PLN benefits from avoidinggrid overload at key locations,and could also participate indeals to generate incrementalrevenue (e.g. bulk buy-backcontracts with a margin).

• The Government of Indonesiabenefits from attractinginvestment to IndustrialEstates and StrategicEconomic Zones and havingflexibility and options in thecase of delays to the 35 GWPlan.

Converting a“vicious cycle” intoa “virtuous circle”

Captive Power can play an important andcomplementary role to PLN in Indonesia’sgrowth

Figure 2: A virtuous circle of improved power quality

Increased powerreliability andavailability• Captive power can help

avert blackout costs inindustrial areas

• Greater investorconfidence

Higher value-addingindustries• Greater investor

confidence leads toincreased investment

• More technology-intensive and skilledindustries

Increased economicactivity• Investment and

improvedproductivity leads togrowth

• This increasescorporate revenueand profits

Improvement ininfrastructure• Increased profits and

revenue allows for moreprivate investment ininfrastructure

• More economic activityleads to higherinfrastructure utilisationand better business cases

2 Source: World Bank, Connecting East Asia: A New Framework for Infrastructure


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02

Electrical Power and Indonesian Development


A cornerstone of Indonesia’s ambitious developmentplans is Industrial Estate development

Indonesia aims to increase incomelevels significantly by 2019

Indonesia aims to almost double its GrossDomestic Product (GDP) per capita to USD5,500 by 2019 under the National MediumTerm Development Plan (RPJMN) 2015 –2019. This requires GDP to grow bybetween 6.0% and 8.0% per annum during2015 – 2019. To achieve this, Indonesiarequires accelerated industrialisation, witha target growth for the industrial sector of7% per annum in the years 2015 – 2019.

The manufacturing sector is a keycontributor to the Indonesian economy,forming 21% of 2014 GDP. However,manufacturing has under-performedcompared to the economy as a whole, andto regional competitors, since 1997. Theshare of manufacturing in GDP hasdeclined from 29% in 2000 to 21% in2014.3

Industrial Estates will be theengines to drive investment andeconomic activity

The development of Industrial Estatesis likely to be essential to theachievement of these challenginggrowth targets, given the need toencourage manufacturingcompetitiveness. Industrial Estates arecreated in order to focus industrialactivities on a concentrated area,encouraging economies of scale andenabling the easier management ofsupply chains. They are also asignificant employer; themanufacturing sector employed 15.3million people in 2014, based on BadanPusat Statistik (BPS) data.

Based on UU no. 3/2014, the Ministryof Industry announced that it willcreate at least 15 new industrial estatesto spread growth to the country’s less-developed provinces.

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3 Source: World Bank

About Industrial Estate Regulations in IndonesiaThese zones are regulated under PP 41/1996, PP 24/2009, UU 3/2014

These regulations state that:

• All manufacturing activities must take place within Industrial Estates.

• The domestic or foreign private sector is allowed to own and develop designatedIndustrial Land. Up to 70% of land may be sold/leased to tenants, with the restbeing used for green spaces and infrastructure.

• Estates must meet certain infrastructure requirements, including electricaltechnical specifications in line with Standar Nasional Indonesia, with criminaland financial penalties applicable for violations.


Figure 3: A significant proportion of current tenantsare in wood and metal products, with chemicals, food,textiles, and electronics also prominent

Wood, metalsand printing

32%

Pharmaceuticalsand chemicals,

16%Food7%

Textiles4%

Electronics6%

Others25%

Buildings10%

Key industrial trends point to significant opportunitiesin Industrial Estates and infrastructure development,particularly outside Java

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Source: BKPM

Key trends

1. Industries are movingtowards more value-added andmanufacturingactivities. Food andBeverages, Electronics,and Apparel stand out assectors expected to beboth large and fast-growing.

2. Industrial shift toprovinces outside Javalikely to continue,driven by governmentsupport as well asincreasing costs in WestJava.

3. A plannedinfrastructureprogramme is likely tosupport thedevelopment ofIndustrial Estates intraditionally undevelopedareas, especially ifpower, deep-water ports,natural gas and betterroad/rail infrastructurecan be provided.

The outlook for Industrial Estates is positive, though withrealisation risks

The Widodo Administration is planning to create 11 new SpecialEconomic Zones (SEZs) and 15 new Industrial Estates acrossIndonesia before 2019. This amounts to at least 24,000 ha of newIndustrial land, which we estimate will require 8-10 GW of new powercapacity.

In November 2015, BKPM announced a relaxation of foreignownership restrictions for some SEZs. Under the new NegativeInvestment List, foreign investors will be able to own a majority ofshares and lease land for up to 80 years.4

However, these should probably be interpreted as ‘stretch targets’,given that the historical realisation of planned Industrial Estates hasbeen patchy. Only 31%5 of the planned Industrial Estate hectarage wasoccupied by tenants in 2013. Realisation rates were highest in Java,Northern Sumatera (excluding Aceh), East Kalimantan and SouthSulawesi.

In the short term, Food and Beverages and Automotive appear to bestrongly expanding sectors. Industrial land purchases in 2014 wereconcentrated on Logistics/Warehousing (28%), Automotive (23%),and Food and Beverages (29%).6 The relationship between theseindustries and Captive Power is described in Section 3 of thisdocument.

4 8-10 GW estimate based on individual zone presentations and assumption of 4 ha/MW where data is not available.Source: bisniskeuangan.kompas.com/read/015/11/05/140000526/ Pengelolaan.Kawasan.Ekonomi.Khusus.oleh.Asing.TerbatasStrictly speaking, Special Economic Zones (Kawasan Ekonomi Khusus), including Free Trade Zones, differ from Industrial Estates(Kawasan Industri) and are regulated under UU 39/2009. SEZs are eligible for a broader range of tax and regulatory incentives. Forthe purposes of this report we refer to all Kawasan as “Industrial Estates”

5 Source: GIZ: An overview of Industrial Estates in Indonesia6 Source: Colliers International


Industrial growth may be encouraged by a shifttowards more value-added and manufacturing activities

Slowing GDP growth is linked to aslowdown in primary sectors

Overall GDP growth in Indonesia hasslowed since 2013, and is expected to be4.7% in 2015. This has been largely due topoor performance in primary sectors, forexample mining slowed overall GDPgrowth by 0.5% in Q2 20157. Some of thesesectors (Energy, Metals and Mining, andPlantations) could slow further withoutgovernment intervention or a globalrebound in commodity prices. Vertically-integrated supply chains such those in theminerals sector are exposed to cash flowsqueezes upstream, although non-vertically integrated companies may see aboost from reduced input costs.

However, manufacturing’s contribution togrowth has remained broadly steady, withonly a few exceptions. The medium-termtrend of strong growth in smaller, highervalue-added sectors such as Machineryand Equipment, Automotive and Textilesis forecast to continue8. Key growth factorsinclude interest rate cuts by BankIndonesia, infrastructure investments, andthe increasing wealth of Indonesians.

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Key sectors to consider for IndustrialEstates developments are the large, fastgrowing sectors. Oxford Economicsexpect Electronics, Food and Beveragesand Apparel to maintain growth rates ofat least 5.4% up to 2024, despite alreadyaccounting for sales of over IDR 150trillion (USD 11.1 billion). These sectorsare not all “energy-intensive” but aresignificant power users with operationsoften sensitive to the availability andquality of power supply.

So, for Indonesia to continue itsindustrial development, reliability of thepower supply is likely to be important.

With uncertain commodity prices, andChina rebalancing away fromcommodity-hungry industrial-ledgrowth, Indonesia needs to prioritisedevelopment of the manufacturingindustry to ensure long-term growth.

Figure 4: Size and growth rates of major industries in Indonesia

Source: Oxford Economics, Ministry of Industry

Designated as energy intensive by Ministry of Industry

Chemicals Food & drink

Electronics

Textile/Garments

Pharmaceutical

Printing

WoodMetals

Automotive

Apparel

Leather

Petroleum and Coal

Machinery

Electrical

Furniture

0

40,000

80,000

120,000

160,000

200,000

240,000

280,000

320,000

4% 5% 6% 7%

Large, fast-growingsectors

GDP, 2014 IDR billion

GDPgrowth

Transport equipment

Plastics, rubber

Non-metallic mineralproducts

7 Source: World Bank, Indonesia Economic Quarterly(October 2015)8 Source: Oxford Economics (GDP Forecast 2015)


Figure 5: Land prices and wages have risen sharply in Jakarta in recent years

Land prices in and around Jakarta haveincreased by 50% – 100% over the last 10years

The minimum wage in Jakarta is atleast 20% higher than in other areas

2015 minimum wage, USD/month

250

200

150

100

50

2006 2009 2012 2015 Q3

Tangerang Bekasi Karawang

USD/m²

Government policies and rising costs in West Java arelikely to drive a shift in industrial activity to otherprovinces

The government has a concurrentaim to encourage growth outside ofJava

Most Industrial Estates in Indonesia arecurrently in DKI Jakarta, West and CentralJava, in line with Indonesia’s overallhistorical economic development.Exceptions include Batam and Bintan,which have developed in order tocomplement Singapore's economy. Factorssuch as population density, per capitaincome, infrastructure access andagglomeration effects (when businessesbenefit from being located near each other)give these areas a significant advantage infuture industrial development.

The Government is expected to pay specialattention to less developed regions likeEast Indonesia. For example, it aims toraise the proportion of manufacturersoutside Java from the current 27% of thetotal to 40% by 2025.9

The cost of doing business in‘traditional’ industrial areas suchas West Java is increasing.

Depleting land banks around Jakarta, aswell as significant competition withresidential and commercialdevelopments, have led to rising landcosts. Labour costs are also increasing, asthe government has mandated a rapidrise (relative to GDP growth) in theminimum wage in recent years.

All else being equal, this trend may wellspur industries to relocate to new areas inCentral and Eastern Java, SouthernSumatera, and Kalimantan. New factoriesare especially likely to consider locatingthemselves in these areas.

15

Source: BPS, Colliers International

9 Source: ‘http://www.kemenperin.go.id/artikel/6974/Investasi-Manufaktur:-PMDN-Diarahkan-ke-Luar-Jawa

95

120

139

140

146

150

200

0 50 100 150 200 250

Central Java

North Sumatera

Riau

West Java

South Sumatera

East Kalimantan

DKI Jakarta


0

30

60

90

120

150

2006 2012 2018 2024

The planned infrastructure programme should helpsupport Industrial Estate development

The infrastructure programme wasoutlined in the National Medium TermDevelopment Plan (RPJMN) 2015 - 2019.The government expects infrastructurespending to increase to USD 81.5 billionper annum from 2015 - 2019.

On a like-for-like basis, our projections arearound a fifth lower. However, totalinfrastructure investment is still projectedto increase by 87% in real terms, comparedto the 2010 - 2014 spending.10

There is significant uncertainty regardingthe timing of the realisation of governmentinfrastructure targets. The public sector,including State Owned Enterprises, canfund around 69% of the target, but privatefunding is needed for the remaining 31%10.

In the power sector specifically, asdiscussed on page 21, it is possible thatsome delays in reaching the 35 GWCommercial Operations Date target ofDecember 2019 will occur.

Infrastructure and institutionalimprovements, particularly tothe power sector, will be key toenabling the growth ofIndustrial Estates.

The realisation of the potential ofIndustrial Estates as growth centresmay be delayed by bottlenecks, whichimpact economic growth more broadly.PwC has previously highlightedconcerns over land acquisitionprocurement, the stability of theinvestment climate, and the lack ofcoordination between governmentagencies.10

Industrial Estates requireinfrastructure, especially ports androads, power, water, and often naturalgas access. This requirement is likely toadd momentum to those IndustrialEstate developments which are near toplanned infrastructure developments,such as East and Central Kalimantan,East Java, Eastern Sumatera as well asmany areas in Sulawesi and WestPapua (see map on next page).

BKPM has identified that the mainbarriers to doing business in Indonesiafor Industrial Estates are landacquisition/preparation and powersupply11. If the required infrastructure,especially the 8-10 GW of requiredpower capacity, is not available, itcould seriously hinder the developmentof Industrial Estates.

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Figure 6: Indonesia infrastructurespending 2006-2024

Note: 2014 exchange ratesSource: Oxford Economics, PwC

10 Source: ‘Building Indonesia’s Future – Unblocking the Pipeline of Infrastructure Projects’, PwC Indonesia11 Source: Discussion with BKPM

USD bn

Industrial zones located near key infrastructure such as natural gas plantsand ports would have a competitive advantage

17

FSRU Lampung

FSRU Benoa (unconfirmed)

Jayapura

Biak

Merauke

Manokwari

Fak-Fak

Ternate

Ambon

Kalabahi

Tenau Kupang

Maumere

Ende

Waingapu

Bitung

Anggrek

Toli-Toli

Pantoloan

Pare-Pare

Larantuka

Aceh Besar

Lhokseumawe

Langsa

Belawan

Asahan

SibolgaGunung

Sitoli

Dumai

Pekanbaru

Banten

Tanjung Priok

Cirebon

Panjang

Bengkulu

Jambi

Palembang

Pangkalan Balam(Bangka)

Tanjung Pandan

Pontianak

Teluk Bayur

Karimun

Rengat

Selat Panjang

Tanjung Pinang

Nunukan

Tanjung RedebSengata

Bontang (planned)

Samarinda

Balikpapan

Makassar

Kendari

Gorontalo (planned)

Sorong

Bandanaira

Kumai

SampitTrisakti (planned)

Pulau Pisau

Kota Baru

Tjg.Emas

Tegal

TanjungIntan

Tanjung Tembaga

Tanjung Wangi

Bima

CelukanBawang

Lembar

Benoa

Tarakan

FSRU Cilakap(under development)

FSRU Central Java

Bojanegara

Porong

Simenggaris

Salawati

Tangguh

Nusantara

Arun

Donggi-Senoro

Sengkang

Lombok

Halmahera

Pomalaa

Tanjung Batu

Pesanggaran

Abadi

Bengkalis

Indragiri Hulu

FSRU West Java

FSRU Cilamaya (under development)

Tanjung PerakGresik

FSRU (Floating Storage andRegasification Unit)

Pelindo Ports

Gas PipelineLNG Terminal (regasification)

LNG Facility (liquefaction)

Legend


Jenepoto

Batakan

Planned gas PipelineLNG Terminal (regasification) -planned

LNG Facility (liquefaction) -planned

Area of promisinginfrastructuredevelopment forIndustrial Estates


The lack of reliable power is a key infrastructureconstraint

18

Rapid growth in demand for powerhas outpaced capacity increases

Strong economic growth (5.9% averagefrom 2009 - 2013) and a rapidly expandingmiddle class have caused a surge indemand for electricity. Capacity growthhas not kept up, and PLN has been forcedto implement blackouts in some provinces.As a result, many users own their ownbackup diesel generators.

For example, according to PLN Statistik,consumers in Riau province were disruptedfor on average 14.1 hours per disruption in2014. In Central Java and Yogyakarta atypical electricity consumer wouldexperience on average 13.1 powerdisruptions per year.

Both the System Average InterruptionDuration Index (SAIDI) and System AverageInterruption Frequency Index (SAIFI) inIndonesia (5.8 and 5.6 respectively) lagbehind regional neighbours such asMalaysia and Singapore.

Figure 7: The base cost of electricity is relatively low in Indonesia, but reliability is also low.

Source: Ministry of Energy and Natural Resources, PT PLN, Energy Commission of Malaysia, Singapore Power, Vietnam Electricity,Thailand State Enterprise Review (Provincial Energy Authority). Tariffs calculated by PLN using utility and FX rates at the year end 2014

5.8

5.60

0

2

4

6

8

10

12

14

16

0

20

40

60

80

100

2004 2006 2008 2010 2012 2014

SAIDI (hours/consumer/year)

SAIFI (times/consumer/year)

Indonesia SAIDI(hours/consumer/year)

Indonesia SAIFI(times/consumer/year)

0.92

5.16

5.58

18.1

0 5 10 15 20

Singapore

Malaysia

Thailand

Indonesia

Vietnam

2014 SAIFI (times/consumer/year)

0.0087

0.94

3.00

5.81

52.23

0 20 40 60

Singapore

Malaysia

Thailand

Indonesia

Vietnam

2014 SAIDI (hours/consumer/year)

0.007

Industrial power prices in Asia 2015(USD cents per kWh)

5.76

7.49

7.90

9.41

12.51

14.27

0 5 10 15

Vietnam

Indonesia

Malaysia

Thailand

Singapore

China

Peak hour premium (1.4 – 2.0x normal tariff)

10.48 – 14.98


Figure 8: Reserve margins are low in many provinces, and system interruptions are common

The 35 GW plan is intended to increase capacity andreduce the frequency of power interruptions

19

Source: MEMR, Masterplan on Indonesia Power Plant Development, PLN RUPTLNote: SAIFI refers to the average number of interruptions experienced per year

The 35 GW plan is planned to becompleted by 2019

This stress on the power grid is evident acrossthe country, with Reserve Margins (*thedifference between capacity and peak demand)in every island group, except Java – Bali, belowthe International Energy Agency'srecommended level of 20-35%.

Further, the Java - Bali average reserve marginis deceptively high. In fact, the distribution ofload (heavy in DKI Jakarta and West Java)versus capacity (concentrated in Banten,Central and East Java) still creates localisedissues for the grid on Java.

In recent years, when the reserve margin has fallento 15%, PLN was forced to implement loadshedding, leading to 2-3 hour daily blackouts12.

For this reason, the 35 GW Plan was launched, andis planned to be completed by 2019. The target setfor the power sector is to increase Indonesia'scapacity by 43 GW by 2019, including 8 GW ofleftover projects from an earlier Fast TrackProgramme (FTP). This additional capacity,illustrated in the graphic above, is designed toalleviate the power deficit in Indonesia.

Sumatera

Java and Bali

Kalimantan

Maluku andPapua

Nusa Tenggara

RM: 7% RM: 5%

Sulawesi

RM: 8%

RM: 9%

RM: 21%

RM: 29%

1.9 GW 2.70GW

0.6 GW

8.8 GW

20.9 GW 0.7 GW

Net Capacity 2014 Peak Demand 2014

Additional capacity from 35 GW Plan

SAIFI < 3

SAIFI: 3 - 6

SAIFI > 6Reserve Margin 2019 (RM)*

12 Source: http://www.adb.org/sites/default/files/linked-documents/41074-013-ino-ssa.pdf


If the 35 GW Plan is delayed by two years, power gridswill be under extreme stress

20

Reserve Margin 2019 (RM)Net Capacity 2019 (+2 years delay) Peak Demand 2019

However, given the expected rapidgrowth in demand, delays to the 35 GWPlan would mean continued stress onthe grid.

We have performed a 'what if' scenario, lookingat a two year delay in the CommercialOperations Date (COD) of the planned powerplants to 2019, compared to the expected peakload growth over the same period. The results,illustrated above, show that only a two yeardelay in the 35 GW Plan would lead todeteriorating reserve margins in Sumatera andJava - Bali.

This would be likely to lead to a deterioration ingrid performance measures such as SAIFI andSAIDI.

The Government has made great strides inaccelerating the 35 GW Plan. But, as outlined inthe following section, it is quite plausible givenhistorical experience, that the Plan will still bedelayed by two years due to land acquisition,procurement and other bottlenecks. In thiscontext, Captive Power provides flexibility andbackup options for the Government in the eventof delays to the national Plan.

Source: MEMR, Masterplan on Indonesia Power Plant Development, PLN RUPTL

Sumatera

Java and Bali

Kalimantan

Maluku andPapua

Nusa Tenggara

RM: 29% RM: 7%

Sulawesi

RM: 31%

RM: 66%

RM: 13%

RM: 11%

Figure 9: If capacity increases are delayed, reserve margins could fall to <13% in Sumatera, Java/Baliand Sulawesi


21

Procurement constraints may delay the implementationof the 35 GW plan

Figure 10: Typical timeline of IndependentPower Producer plant development

Typical Independent Power Producer plantdevelopment timelines mean it is unlikely thatprojects not yet at the tender stage will comeonline before 2019

Given historical procurement and construction times, thereis a risk that the 35GW Plan may not be completed in time.This is despite significant progress by Government andPLN in seeking to address bottlenecks (e.g. the 8acceleration step programme, Presidential RegulationNo.4/2016).

Independent Power Producer (IPP) projects account for 29GW out of the total 43 GW target capacity. However, as ofJanuary 2016, only 14 GW of Power Purchase Agreements(PPA) had been signed13.

Given the typical timeline for power plant development (seegraphic opposite), this means that at least 15 GW of projectsare unlikely to come online even by 2020. Those projectswhich form part of the 14 GW and which have signed PPAsbut are not near Financial Closing are also unlikely to comeonline by 2019. Our estimate is conservative, as it assumesconstruction timelines which are aggressive for Indonesia.

Leading IPP investors have also highlighted the risk ofdelays in the 35 GW Plan due to the lengthy procurementprocess14, and there are also concerns among investorsregarding:• Land acquisition (for generation sites and transmission

corridors)• Transmission capacity• Permit-granting procedures at the sub-national level• The financial sustainability of some consumer/Feed-in

Tariffs (fixed per-kWh prices for some technology types)

In February 2016, the Minister of Energy and MineralResources, Sudirman Said, also stated his uncertainty thatthe full 35 GW Plan would come online by 201915.

Depending on the offtake options and procurementprocess, a Captive Power Plant could be developed toFinancial Close within two years, plus a construction timeof one to two years for gas-fired power plants.

01

02

03

04

Pre-Qualificationdocuments/preparationand issuance[3-12 months]

Pre-Qualificationreview[3-4 months]

Tender Process[6-12 months]

Preferred bidders selectedand PPAs signed[1-3 months]

05 Financing[6-12months]

06Construction[18-54 months]

Technology Average ConstructionTime (months)

Coal 36-54

Gas 18-32

Hydro 24-48

Source: PLN, PwC Analysis in consultation with IPPs,IEA, IRENA.Note: Stages are also broadly appropriate for PLNEPC contracts as well as IPP tendering.

13 Source: Ministry of Energy and Mineral Resources website(esdm.go.id)14 As quoted by President Director of PT Cirebon Energi Prasarana, inCoal Asia, December 201515http://bisniskeuangan.kompas.com/read/2016/02/03/204640226/menteri.esdm.tak.yakin.mampu.selesaikan.proyek.35.000.mw.pada.2019


22

Full implementation still might not be enough

Even if currently planned powergeneration programmes areimplemented on schedule, theremay not be sufficient capacity toservice some Industrial Estates

To illustrate this underlying supply issue,one of the plans to develop industrialactivity in Morowali, Central Sulawesiproposes a nickel smelter company andstainless steel companies as tenants of theplanned Industrial Estates. Thesecompanies would require an estimatedtotal of 1,030 MW of power.

However, the nearest transmission line isapproximately 200 km away. The threeexisting IPP power plants near the areawould be insufficient once the smelterscame online, as their total capacity is 435MW. There are no plans under thecurrent RUPTL (2015-2024) to meet thisdemand.

A local source of power will clearly beneeded regardless of the progress of the35 GW plan. There are other examples ofIndustrial Estate demand exceeding theplanned generation or transmissioncapacity under the RUPTL, for example,Maloy (palm oil and coal based SpecialEconomic Zone) and Buli (plannedSpecial Economic Zone for metalsextraction and refining).


Captive power can address these risks

What is captive power?

A captive power unit is a generator orpower plant set up by a company togenerate electricity primarily for itsown use or for the use of itscustomers.

There are two types of units:

The first type is a Captive PowerPlant (CPP), designed to serviceprimary power needs. This istypically bigger than 1 MW and canrun on fossil fuels (gas, coal, oil) orrenewable sources of energy.

CPPs can be divided into two sub-categories :

(a) CPPs that are built to supplypower to many companies. Themain examples of this type ofsetup are the CPPs used inIndustrial Estates, which areanalyzed in this study. InIndonesia, these are referred toas Private Power Utilities (PPUs).

(b) CPPs that are built to supplypower solely for the owner’s ownuse (e.g. one CPP for onefactory).

23

The second type is a backupgenerator set (genset), which isbuilt for use in the event that otherpower sources fail, and runs onlywhen needed. These range fromsmaller household units (10 kW) tolarger industrial backup gensets (upto 10 MW). These need to run on afuel type which can provide electricalenergy on demand, and thus areusually diesel-fired.

Reliable statistics are hard to find,but a 2009 estimate placed the totalCaptive Power capacity in Indonesiaat 16.8 GW, of which 8.5 GW was forprimary use, and 7.8 GW for backuppower. 49% of Captive Powercapacity was in Java.16

There is strong potential forcaptive power to help drivegrowth in industrial areas

As noted in the previous section, thetimeframe of the 35 GW Plan isambitious, and there are still manyareas where CPPs present a goodopportunity, as the 35 GW Plan doesnot include meeting the power needsof those areas.

16 Source: ‘Overview of Diesel Consumption for Captive Power in Indonesia’ GIZ


24

03

Economic benefits of captive power


Economic benefits from avoided blackouts/brownoutsare wide-ranging

25

Our interviews suggested blackout(cash and opportunity) costs arein the range USD 10,000 –100,000 per blackout

Five tenants and three industrial estatemanagers/operators were interviewed tounderstand the benefits of Private PowerUtilities with Uninterruptible PowerSupplies (UPS). All five tenants agreedthat blackouts could be expensive fortheir businesses, although two of thesewere averse to any increase in powerbills, despite potential overall savings.

A brief blackout can damage equipment,or require machinery to be restarted.Inventory which is in the process ofmachining, cutting or heating may needto be written off as a result. Workers arelegally entitled to overtime pay at 1.5 – 3times the normal wage for the hoursneeded to make up lost production. Inthe meantime, overheads are still beingincurred. Downtime hours may not beable to be made up later. Alternatively,significant fuel costs may be incurredrunning in-factory diesel generators.

Based on the interviews conducted, theseblackout costs can range widely, fromaround USD 10,000 to USD 100,000 perblackout. Detailed illustrations of thepotential total annual costs to two ofthese five firms are included overleaf.

In the longer term, firms may takemitigation measures to reduce thesecosts. This may include equipment toprotect machinery from surges, holdingexcess inventory to avoid missingdelivery deadlines, changes to workers’shifts, or expenses to buy and maintaindiesel generators.

… Damage to machineryor buildings

… Ongoing overheadexpenses

… Inventory damage orspoilage

… Overtime required tomake up lost production

… Generator fuel costs

When a blackout or brownoutoccurs, there may be …

… Installing power surgeequipment

… Holding excess inventoryto meet delivery deadlines

… Changing shift patternsand labour contracts

… Buying and maintaininggenerators

In anticipation of blackouts andbrownouts, firms may take long-term but costly mitigationmeasures such as …


Illustration: how a typical blackout affects firms’ operations

Case Study: Consumer goodsmanufacturer

Company X is a manufacturer based in WestJava. They produce consumer goods for export.

Case Study: Plastics manufacturer

Company Y is a manufacturer based in Java. Theyproduce a variety of packaging film products forindustrial and consumer use.

Blackoutof 5hours

USD75,000 60%x

Average normalrevenue inblackout period

Revenue cannot bemade up due tolimited backuppower

= USD45,000

Lost revenueper blackout

0.30USD/kWh

24,000kWh

x

Marginalcost of dieselin Indonesia

Generation perblackout of dieselgenset (40% normalpower consumption)

= USD7,200

Backupgenset costper blackout

Total cost of a five hourblackout USD52,200

+

1 tonne USD2x

Material lossper blackout

Material costper kg

= USD2,000

Material losscost perblackout

USD12 8,000x

Wage perblackout forovertime

Number ofemployees

= USD96,000

Overtime costper blackout

Total cost of a five hourblackout

USD98,000

+

Overtime costs to make up for lost productionMaterial loss costs

Lost revenueBackup generator cost

USD/blackout USD/blackout

Blackoutof 5hours

Calculating blackout costs

Based on interviews, an economic model was builtfocusing on four cost items for which data wasavailable:

• Lost Production during blackout

• Lost Production during restart period

• Overtime wage costs

• Diesel fuel costs

Two items of costs for which data were not available– damage to equipment and material losses – havebeen demonstrated to account for around 40% oftotal blackout costs globally (see page 59). This couldmean the estimates are around 70% under-stated.

Brownouts (varying voltages which can causeequipment damage and productivity losses) werealso not included in the calculations.

These statistics cover the seven sectors listed below,

accounting for 49 TWh of power consumption in2015. This represents 66% of industrial powerconsumption in Indonesia, compared to 45% ofindustrial GDP (20% of total GDP).

The scenarios that follow assume that the:• Low Case: annual number of blackouts will be

5.6 (2014 SAIFI), and the average duration 5.8hours (2014 SAIDI).

• Medium Case: annual number of blackouts willbe 10.0, and the average duration 5.8 hours.

• High Case: annual number of blackouts will be15, and the average duration 8 hours.

Full details on model assumptions and process areincluded in the Appendix (Methodology).

1. Machinery

2. Petroleum and coal

3. Paper

4. Chemicals

5. Food and beverages

6. Textile and garments

7. Printing

26


The annual costs of blackouts to manufacturingbusinesses in Indonesia could be USD 415 million …

27

Figure 11: Potential business benefits of captive power (assuming 58 blackout hours per year)

Revenue (USD billion), 2014 55.2 23.1 11.1

Labour cost /revenue (%), 2014 4.1 4.6 8.3

Food andbeverage

ChemicalsTextile/

Garments

The results depend heavily onassumed blackout hours. In theLow Case (32 blackouts hours) thecost would be USD 233 millionand in the High Case (120 blackouthours) the cost would be USD 871million.

The Medium Case (58 hours)corresponds to reported durationand frequency of blackouts forsome provinces already (see page18). The number and duration ofblackouts is also non-linear withrespect to the reserve margin. Asdiscussed on page 20, the reservemargin is likely to fall dramaticallyin the event of a delay in the 35GW Plan, potentially leading to themagnitude of results in the HighCase.

Results may also vary by province.For example, wages in West Javaare typically higher (e.g. minimumwage is 15% higher than nationalaverage minimum), boostingovertime costs by around 15%.

Tenants in the food andbeverages, chemicals andtextile sectors may bear thehighest costs

These sectors have the highestrevenue levels among the sevensectors modelled. As such, thepotential revenue that cannot berecovered can be significant forsuch tenants – food and beveragesrevenue, for example, was aboutUSD 55.2 billion, leading topotential losses of USD 166million/year.

While not modelled (as damageand material costs depend heavilyon company-specific information),it is worth noting that blackoutsmay be even more costly for firmsin the food and beverages sectorand the chemicals sector. Theirraw materials could easily bespoilt without appropriatetemperature controls.

“In early 2015, we lost amonth’s revenue due to powerfailures. Even with backuppower and overtime, we willnever make that up.”

Leading Indonesian Foodand Beverages Manufacturer

Paper Machinery

8.6 2.5

5.4 8.8

Across these seven manufacturingsectors, it was estimated that blackoutscould cost businesses around USD 415million/year:

• USD 74 million in diesel fuel costsfrom running gensets during blackouts• USD 9 million in employeeovertime costs after blackouts• USD 332 million in lost productionduring blackouts that cannot be madeup due to lack of time. This includes thetime spent restarting operations.

Spread across these industries’ annualpower consumption, this is around0.9c/kWh. Or, 0.3% of annual revenue.

Capacity utilisation (%), 2010 73.1 80.1 80.7 85.0 86.0Material loss and equipmentdamage during blackout

Various by industries, not included in estimation

Assumed restart times(hours)

0.5 2.0 0.5 2.0 0.5

Estimated annual blackoutcosts (USD million) 166.0 105.8 44.3 42.4 16.5

Blackout costs/ revenue (%) 0.3 0.5 0.4 0.5 0.7


… implying the full cost of grid power to businesses is atleast 9.5c/kWh

28

.

Base IndustrialPower Tariff

Average PeakIndustrial Power

Tariff

Diesel Cost Overtime Cost ForfeitedRevenue (incl.restart cost*)

Total Cost ofGrid Power

USD cents/kWh (LHS)USD million (RHS)

High case

Mediumcase

Low case

7.5

1.1 0.10.20.3

0.010.020.03 0.4

0.71.4

10.4

9.5

9.1

3,670

54774

41

153

6915

186

332

7055,090

4,634

4,450

Source: PwC Analysis, Base Industrial Power Tariff based on PLN tariff for large industry in Indonesia 2015, Average Peak Industrial Power Tariffbased on PLN Peak Hour multiplier of 1.7 for peak hours 6pm to 10pm with Baseload-Peak ratio of 0.7 . Total consumption for 7 sectors: 49 TWh.Note: Restart cost is the time taken after a blackout for manufacturing to restart, during which time revenue is not earned. Key assumptions: Dieselprice IDR 9,000/litre, 68% of firms have diesel generators, firms are not able to run higher than 90% capacity utilisation, USD:IDR 13,500

By providing reliable captivepower, developers can capture theavoidable costs of blackouts

This economic cost could be expressed asa price premium (i.e. the extra that a userwould be willing to pay) for reliablepower of, on average, 0.9 cents per kWhon total power bills.

This suggests that the full cost of gridpower to businesses is at least 9.5c/kWh(1,280 IDR/kWh):

• 7.5 c/kWh base industrial tariff

• 1.1 c/kWh peak hours surcharge(estimated average)

• 0.9 c/kWh economic costs (seeprevious page)

And, this excludes equipment damageand material losses, which are around40% of total blackout costs based oninternal experience.

Industrial estate developers looking atnew ways to improve their margins andattract quality tenants may be in aposition to capture these gains byproviding an Uninterruptible PowerSupply (UPS) under a PPU arrangement.


Captive Power supports industry as well as thegovernment’s development goals

29

High quality power supply would alsoattract investors and encourage economicactivity

Increased/improved electricity capacity wouldbenefit Indonesia in global competitivenessrankings and encourage investors. Currently,obtaining electricity in Indonesia takes around 79days, compared to 32 days and 31 days in Malaysiaand Singapore respectively.

The 79 days required to obtain electricity includesapplications and contracts with electricity utilities,all necessary inspections and clearances from thedistribution utility and other agencies, and theexternal and final connection works. However, in atleast one leading Industrial Estate, Captive Poweronly takes 14-30 days to obtain.

If Captive Power can contribute to significantlyreducing the time taken to obtain electricity from79 days to 30 days across Indonesia (close toMalaysia’s current time), Indonesia’s ranking in theDoing Business Index would improve by 5 places.

In addition to this, it is estimated that a 10%increase in service penetration of electricity andtelecommunications would increase long-termeconomic growth rates by approximately 0.25 %17.

Figure 12: Number of days to obtain electricity

17 Source: Schwartz, Jordan, Luis Andres, and Georgeta Dragoiu. 2009. “Crisis in Latin America: infrastructure investment,employment and the expectation of stimulus.” World Bank. Policy Research Working Paper 5009

Note: MEMR is reportedly considering new regulations to reduce the time to connect to the grid to 40 days (Source:http://www.cnnindonesia.com/ekonomi/20160121131311-85-105786/kementerian-esdm-pemasangan-listrik-baru-maksimal-40-hari/), but the date for enactment and the speed of practical implementation is unclear.

“Captive power is not just adifferentiator for IndustrialEstates; it’s a necessity.”

Director,Industrial Estate development

company and power plantdevelopment company in Java

Indonesia Malaysia Singapore

Reducing the time taken to obtainelectricity to regional standards wouldimprove rankings by 5 places

79

30

Captive Power may also open upnew economic opportunities

Through access to UPS, firms can avoidthese blackout costs and may reap widerbenefits including:

• Greater capacity to negotiate long-term contracts, as well as higher-value contracts

• Less risk of penalties for missingcontractual targets

• The confidence to enter intocontracts supporting just-in-timevalue chains

Just-in-time supply chains do not have acushion of raw materials as a fallbackand so confidence that operations canbe maintained during power outages isneeded to supply to these value chains.Such supply chains are common in theautomotive sector, as well as high-techsectors.


30

04

The Way Forward


How is private sector participation in power regulatedin Indonesia?

Introduction: private sectorparticipation in power

The core legal framework for electricitysupply is set out in the Electricity Law of2009 (UU 30/2009), which allows theprivate sector to hold generation licenses(IUPTL).

This is now supplemented by PP no.142/2015 (see page 34), which grants eachIndustrial Estate developer in Indonesia afacility to ease the development andmanagement of its electricity supply for itsown use and for the use of its tenants.

Private sector generation and sale,primarily to the grid, is allowed throughIPP arrangements.

Private Power Utilities (PPUs), oftenreferred to in broad terms as CaptivePower, the generation of power primarilyfor own use or to a customer base (tenants)rather than for sale to PLN, is alsopermitted.

PPUs must acquire an Izin Operasi as wellas an IUPTL.

The 2009 electricity law also provides aright of first refusal for PLN to provideelectricity supply to an area before thegovernment can offer the opportunity toregionally-owned entities, private entitiesor cooperatives.

MEMR 28/2012 clarifies the requirementthat there must only be one supplier ofpower in any one area (Wilayah Usaha),and states that a Wilayah Usaha can begranted if:

1. The area is not yet covered by anexisting Wilayah Usaha holder; or,

2. The existing Wilayah Usaha holder isnot able to supply power, or not ableto supply power with goodquality/reliability; or,

3. The existing holder has returned itsWilayah Usaha.

There have been 21 Wilayah Usaha18

granted by MEMR since 2009, to variouspower generation entities.

As far as we are aware, there is no legaldefinition of ‘good quality/reliability’ orof the criteria needed for the existingholder (usually PLN) to have to return itsWilayah Usaha to the Ministry ofEnergy.

With the introduction of the BKPM “OneStop Shop” under MEMR 35/2014,investors can now obtain all theirnational permits, including IUPTL, IzinOperasi and Wilayah Usaha throughBKPM upon the submission of the correctpaperwork.

31

18 Source: Draft RUKN, June 2015:http://www.djk.esdm.go.id/index.php/rencana-ketenagalistrikan/rukn-djk


The private sector can sell excess power to PLN, but theregulations may not fully support this.

Regulations regarding sale of excesspower

In recent years, several cooperation dealshave been struck between PLN and CaptivePower Providers, involving offtake,backup, synchronisation and buy-backarrangements under long-term contracts.These deals were usually ad hoc,depending on local circumstances.

Private sector participation is allowedthrough Independent Power Producer(IPP) arrangements. IPP appointments aremost often made through tenders,although IPPs can be directly selected orappointed in certain circumstances.

32

In line with Government RegulationNo.14/2012 as amended by No.23/2014and MEMR Regulation No.1/2006 andNo.4/2007, MEMR RegulationNo.3/2015 states that PLN may purchasepower using the direct selection methodwhen changing the feedstock of anexisting power plant from diesel to non-diesel, and that PLN may use the directappointment method for mine-mouth,marginal gas or hydro projects (includingpurchases of excess power from PPUs),for critical and emergency power supply,and for expansion projects. Themaximum timeframe for the execution ofthe PPA is 45 days for direct selectionand 30 days for direct appointment fromdue diligence document evaluation toPPA signing.

Further details on the procurementprocess are available in PwC’s 2015Power in Indonesia: Investment andTaxation Guide19.

19 URL: https://www.pwc.com/id/en/energy-utilities-mining/assets/Power%20Guide%202015%20(final-octL).pdf


Maximum tariffs for sale are defined but function moreas benchmark prices

The “maximum tariff” for the sale of powerto PLN, based on assumed fuel prices andother factors, is defined in MEMR 03/2015.These are set out in Figure 13 below. Othertechnologies, such as hydropower, are alsoincluded in the regulations.

Note that these are “maximum benchmark”prices. Actual prices may be both higher(with Ministerial Approval) and also lower.

In practice, the price offered is likely toneed to match the relevant PLN Wilayah’s(Regional PLN) generation costs to beaccepted. If these generation costs are low(perhaps due to a high coal or hydro shareof generation), the Excess Power tariffsmay not be relevant, and the business casefor Captive Power may be undermined.More transparent costs of generation ofeach Wilayah should be made available toallow CPPs to set competitive and relevantprices.

Power Wheeling

In addition to offtaking of excess powerby PLN, since MEMR 01/2015, CaptivePower Plants have been able to “wheel”(i.e. transmit) power over the PLNTransmission and/or Distribution (T&D)Network to other customers (who may behundreds of kilometres away from thegeneration site).

However, access to PLN’s T&D network isnot guaranteed, or may not be available,and tariffs per kVA or kWh have not yetbeen specified in implementingregulations.

33

Figure 13: Maximum tariff for sale of power to PLN

Capacity Unit (MW) 15 50 100 300 40 - 60 100

Price (USD cents/kWh) 10.61 9.11 8.43 7.25 8.64 7.31

Assumptions

Availability Factor 80% 85%

Contract Period 25 years 20 years

Heat Rate 3,500 3,200 3,000 2,600 9,083 8,000

Calorific Value (GAR) kcal/kg 5,000 -

Fuel price USD 60/Metric tonne (CIF) USD 6/MMBtu

Coal (Non Mine Mouth) PowerPlants

Gas/Gas EnginePower Plants

Source: Ministry of Energy and Mineral Resources Regulation 03/2015


What can Government do? Promote projects fordevelopment and streamline the regulatory process.

34

Extentofbarrier

Key Barriers Potential Solution

Critical/Urgent

• Wilayah Usaha (Key permit) isdifficult to obtain, and theprocess is not transparent orwell understood

• Clarify 'good quality and reliability‘ criterion in MEMR 28/2012, Article 6(see page 31).

• Automatically grant Wilayah Usaha where a developer meets the criteriain MEMR 28/2012, Article 4.

• Consider granting the developers of SEZs and Industrial Estates anautomatic Wilayah Usaha where they pass appropriate screening/duediligence mechanisms.

• Automatically include potential Captive Power projects in IndustrialEstates/Special Economic Zones in the RUPTL (PLN’s business plan).

• Uncertain demand(unbankable offtake contracts)

• To address unpredictable tenant ramp-up rates, PLN could provideshort/medium term excess power agreements (<10 years) at guaranteedprices to reduce offtake risk.

• BUMN (state-owned enterprises) to make clear commitment to purchasepower from strategically important industrial Estates.

• Investment opportunities withgood project economics arehard to find

• Lack of clarity as to whetherPLN will supply a site’s powerneeds means projecteconomics are not clear

• Identify areas not included under the 35 GW Plan and/or at risk of delaysin receiving new capacity, and provide a master list of opportunities tothe private sector.

• Publish PLN Wilayah local generation costs to help developersunderstand the likely maximum tariffs they will receive.

• New rules for CPPs inIndustrial Estates are unclear(Government RegulationNo.142/2015)

• Accelerate implementing regulations for PP 142/2015, ensuring thatclear guidance is provided on: Process and conditions for acquiring Wilayah Usaha Likely tariff for excess power in each Industrial Estate. Potential/permitted commercial arrangements with PLN including

eligibility for backup power arrangements.• Discuss regulations with industry before finalising.

Important • Some projects socio-economically beneficial butnot financially viable,especially in remote regions

• Provide public Viability Gap Funding (Government-provided capital costssubsidy for projects with socio-economic benefits but not financiallyviable)

• Provide tax incentives

• Unclear commercialprocess/cost for powerwheeling

• Accelerate implementing regulations for MEMR 01/2015

• Other permits and licensessometimes difficult to obtain

• Streamline overall permit application process and absorb localgovernment permits under BKPM's One Stop Shop as far as isconstitutionally permissible.

Recognising that power supply is crucial to the success of Industrial Estates, the Government recentlyissued PP No. 142/2015 (Government Regulation No. 142/2015), which contains a key provision on CaptivePower, under which each Industrial Estate developer in Indonesia is granted a facility to ease thedevelopment and management of its electricity supply for its own use and for the use of its tenants. Furtherdetails regarding the facility will be regulated in a Ministry of Energy and Mineral Resources decree.

This provision is welcome. However, additional steps can be taken to encourage investment in projects.Those identified in the course of this study are listed below:


Other countries have made similar moves to promoteCaptive Power development.

35

Case study:Captive Power in India

The Indian Electricity Act 2003

This regulation encourages captive power capacity additions throughthe de-licensing of captive generation in India. As stated in the Act“any generating company may establish, operate and maintain agenerating station without obtaining a licence under this Act if itcomplies with the technical standards relating to connectivity with thegrid referred to”.

Benefits for industry

The avoidance of productionloss outweighs the cost ofcaptive diesel power generation.Industries which have a highlevel of value added throughreliable electricity input willnaturally insulate themselvesthrough standby power.

Benefits for the country

Captive Power lowerstransmission and distributionlosses and the need for crosssubsidisation of electricity forrural areas. It has also led to theimprovement of the financialcondition of State ElectricityBoards, as well as promotingeconomic growth.

• The Electricity Act 2003facilitated the setting up andoperation of captive powergenerators

• The National Electricity Policynoted that liberal policies forcaptive power wereimplemented to:

• Build cost effectivepower

• Generate Employmentopportunities

• Support industrialgrowth

• The 2003 act removedlicensing needs forgeneration, and removedcontrols for captive power.

• The result of the aboveregulation was that the totalinstalled Captive Powercapacity reached almost onequarter of the country’s totalinstalled capacity in 2012-2013.


So why invest in Captive Power forIndustrial Estates?

Rewards of captive power projects

The potential benefits for Industrial Estates and CPP Developers arethreefold:

1. A chance for new and ongoing profit streams, while thepotential to expand the core business (land development) is finite.

2. A chance to diversify revenue and profit, with a more stablestream of long-term cash flow less correlated with the widereconomy and property market than the core business.

3. A chance to ‘brand’ zones to attract premium tenants, who may inturn attract other premium tenants, increasing overall occupancy.

36


Captive power investments can help to drive new andrecurring profit streams for developers

37

Figure 14: Gross profit breakdown for aleading developer (2014)

Historically, land development hasbeen lucrative for many developers.

Industrial land prices for sale and leasearound Jakarta doubled between 2010 and2015. Land development generallyaccounts for the majority of profits even ondiversified estates (shown in Figure 14).

However, land is fundamentally finite, andbased on a sample of Industrial Estates inWest Java20:

• Total saleable land is around 9,000 ha.Given existing tenancies, only 1,500 haremains immediately available for sale.

• With further investment, only another4,000 ha could be brought online.

Industrial land absorption in and aroundJakarta has been 400-1,200 ha a yearbetween 2010 and 2014. The existing landbank (1,500 ha) is equal to a little over oneyear of industrial land demand at the 2012peak levels, or four-and-a-half-years ifother available land (4,000 ha) wereinvested in.

Limited land and capacity issuesmean that developers needadditional profit generators

Many zones have already reached fullcapacity20, and there are limited alternativeoptions for Industrial Estates to generatecash. Service fees generally only coveroperational costs, and despite rising wageand fuel costs, have not risen for severalyears now in most Industrial Estates.

In the case of one Industrial Estate, theshare of profit derived from infrastructureprojects has risen from 12% (see Figure 14)to 17% over the past nine months, as powerrevenue remained stable while overallIndustrial Estate revenue fell.

Utilities development, in the form ofon-site water and power provision,may represent an attractiveadditional source of profits

Tenants might be willing to pay a premiumfor an Uninterruptible Power Supply (seepage 27), suggesting a total Captive Powertariff of at least 9.5 USD cents/kWh (IDR1,280/kWh) may be able to be charged.And, they may be willing to pay more ifequipment damage and material losses areimportant to them.

The “levelised” cost, which is a per-kWhlifetime cost, discounted at the cost ofcapital, for a 100 MW Gas-fired power usingthe latest technology, and sourcing gas atUSD9/MMBtu would be about the same asthe current PLN premium tariff21. Becausethe levelised cost as a lifetime cost alreadyassumes an attractive return on capital, thisimplies that significant profits areattainable, if best practice cost profiles canbe achieved. The return could even behigher if Combined Heat and Power (CHP)is applied, as explained on the next page.

20 Source: Colliers International, Research Report, Industrial Land, Jakarta (Q4 2014)

21 Assumptions were made on $/kW capex, capacity factor and years of operation/concession.Source for cost data: GE, market consultation and internal data.

Source: Company accounts

Real Estatesand Others

72%

Infrastructureincluding

Power Plant12%

Service &Maintenance

16%

USD 101million


38

Double Value: Co-generation/CHP

Case study:CHP in Thailand22

IRPC Public Company Limited(IRPC) is a Public SET (StockExchange of Thailand)-listedPetroleum and Petrochemicalcompany in Thailand.

IRPC began producingpetroleum and petrochemicalproducts in 1982 and has sinceexpanded its line of productionto many products.

IRPC’s refinery andpetrochemicals complex islocated in its own industrialestate in Rayong province. Theestate is fully equipped withinfrastructure and utilitiessupporting production,including a deep-sea port, oiltank farm and a power plant.

The decision was taken byIRPC to install a co-generationplant to generate heat andpower (CHP), given tenants’needs for both, with thefollowing characteristics:• 220 MW capacity• 53% thermal efficiency• Pipeline natural gas input• Steam pipeline to tenants• Distribution via IRPC-

owned system

Business model

An IRPC subsidiary owns the asset and sells power and heat from the co-generation plant directly to the tenants in the Industrial Estate, under amix of long-term and short-term contracts for offtake, depending on thetenant’s needs. Excess power is sold back to the grid at a non-fixed ratebased on short-term avoided generation costs with no obligation tosupply power during the system peak months. Carbon credits based onemissions reductions formed an additional revenue stream.

The gas sales agreement is a long-term agreement with Thailand state-owned SET-listed oil and gas company (PTT) under a combinedindustrial and non-firm power rate. Operation and Maintenanceactivities are handled by the owner, but other parties are contracted forthe long-term servicing of the gas turbines.

Introduction

Co-generation or Combined Heat and Power (CHP) is the productionof electricity simultaneously with the recovery and utilisation of heat.

Financing/commercialcase

• IRPC provided [all] of theequity required for theinvestment. IRPC usuallyraises equity from the SET(Stock Exchange ofThailand).

• The project is financed on-balance sheet (i.e. IRPCraised debt using its owncollateral to invest in theproject vehicle).

• The Board of Investment ofThailand provided additionalcommercial incentivesincluding import/corporatetax reductions/subsidies.

Benefits for stakeholders

• Tenants in Industrial Estatesexperience “significant cost savings”in their power/heat bills.23

• Reduced emissions compared tocrude oil boilers: by 400,000tonnes/year of Co2.

• Reduced fuel consumption of 1.46million MMBtu/year and avoidedgrid imports of 100MW, comparedto the oil boilers previously used forthe same electrical and heat output.

• High reliability of supply - crucialfor continuous process industriessuch as petrochemicals andrefineries.

22 Source for all information on this page: IRPC and GE23 Source: Customer quote


Captive power can also help to diversify profit streamsand build premium branding

Diversified profit streams help toreduce overall risk

These new profit streams arecomplementary to existing profits as theydiversify risk. Land development and realestate margins are typically reasonablypro-cyclical; their ‘beta’ in terms ofindustry output growth with respect toGDP growth was 0.51 over the lasteconomic cycle (see Figure 15).

While infrastructure projects entail theirown risks (see next page), their cash flow isgenerally stable and often only looselycorrelated with GDP once they areoperational. Taking power supply as theclosest proxy for operating power assets,the beta against GDP is only 0.24. The betais likely to be near zero in the case of cashflow secured against a long-term offtakecontract, such as excess power offtake toPLN. This stable, ‘defensive’ cash flowenables diversification against the pro-cyclical cash flow of the real estate sector.

The point is illustrated with GDP data, butthe same argument could be made withequity indexes, and would suggest a lowercost of equity for diversified firms.

It is not necessary to take on responsibilityfor infrastructure development, or to bearthe full commercial risk. Internationalpartners can provide the majority of equitycapital and bring project developmentexpertise. Defensive (counter-cyclical)plays can be made through lease, royalty,or profit-sharing agreements withdevelopers, while still delivering thebenefits of diversified, stable profits.

Building a ‘premium’ brand helpsto attract high quality tenants

The prevailing view in the real estateindustry is that securing one or two‘premium tenants’ (i.e. large, well-known corporate brands) has asignificant impact on the ease ofsecuring other tenants (both premiumand non-premium). This was confirmedduring the interviews conducted for thisstudy. Attracting such tenants thereforeremains a priority for most IndustrialEstate management teams.

Engagement with industry developersindicated that a key benefit of providingcaptive power was the ability to attracthigher quality tenants.

39

Figure 15: Economic beta (2009 – 2014)

0.00.10.20.30.40.50.6

Power Supply withGDP

Real Estate withGDP

Source: BPS, PwC Analysis

Note: Beta is defined as covariance of sector outputgrowth with overall GDP growth, divided by variance ofoverall GDP growth. It measures how much industryrevenue changes for each 1% change in GDP.


Captive power carries risks typical for aninfrastructure project

40

Risk Description Key riskfor IPP

Key riskforCaptivePower*

Comment

1. Capacity/revenuerisk

For the plant to beprofitable, it must sellgenerated units of powermore than 60-80% of thetime. If the customer basedeclines or consumptionfalls, returns will fallsignificantly due to the highproportion of fixed costs.

a) More likely to be highrisk issues for CPPs thanIPPs because of thelarge numbers of smallcontracts, short contracttenors, and changes totenant composition

b) Adding PLN as anofftaker of ‘excesspower’ partly mitigatesthis risk.

2. Macroeconomicrisk

Depending on tariffdenomination andindexation in the powersales contracts, the projectmay be exposed toinflation or exchange ratemovements, eroding realreturns. These risks cansometimes be hedged orotherwise insured against.

3. Fuel price risk Fuel costs make up about50% (coal) to 70% (gas) ofthe power price. Givenvolatile fuel prices, poweris generally structured on afuel cost pass-throughbasis. While the project isprotected from fuel pricerisk under such anarrangement, the offtakequantity may be take-or-pay (especially gas),leaving fuel costs too highif power cannot bedispatched. Fuelavailability may also be anissue in some areas due tologistical considerations orrestrictive practices.

a) It is easier to negotiatefuel cost pass-through tolarge, diversified utilities(i.e. PLN) than to small,unhedged IndustrialEstate operators/tenants.

Infrastructure projects are exposed to aunique set of investment risks due to theirlong payback periods, physical immovability,and high financial and operational leverage.

Payback periods are likely to exceed those ofthe core investment of an industrial estate (i.e.land development). Risk factors for a powerproject development typically include:

Note*: Above-and-beyond the risk profile for typical IPP projects


Captive power carries risks typical for aninfrastructure project (cont’d)

41

24 Source: PwC Capital Projects and Infrastructure publication: Correcting the Course of Capital Projects

Risk Description Key riskfor IPP

Key riskCaptivePower*

Comment

4. Construction risk Large construction projectsare prone to cost inflationand/or delays unless wellmanaged24. This could bedue to difficulties gettingequipment to site, wagedemands, unforeseentechnical/engineeringissues, weather and otherissues.

a) Cost overruns can bemitigated via Lump SumTurnkey contracts, andliquidated damages built-in for delays in the plantcoming online for bothIPP and CPP projects

5. Operational risk Turbine breakdowns maystop the production ofelectricity, overloading ofmachines may causemalfunctions or permanentdamage, and other eventsmay disrupt the operationalactivities such as forcemajeure, employeedemonstrations, naturaldisasters, etc. These wouldresult in cash flowinterruptions.

a) Depending on the cause,this risk is sharedbetween the equitysponsor and the O&Mcontractor.

b) CPP may carry a slightlyhigher equity risk if thesponsors operate theplant themselves.

6. Political/regulatory

General changes in lawsand regulation including taxlaw, environmental andsocial regulations,employment regulations,power sector technicalrequirements and otherscould entail additionalcompliance costs. Morespecific changes inregulations relevant to CPPscould change the economicsor legality of a project.Changes-in-lawcompensation clauses canbe negotiated underPPP/IPP frameworks, butare simply an inherent risk ofdoing business for purelyprivate arrangements.

a) If not selling to thegovernment orgovernment-relatedentities, it is likely to bedifficult to get equivalentcompensation clauses inthe contract. Privateinsurance may or maynot cover these risks, butthey will have a cost if so.

b) Precedent forlegal/commercialstructure for CPPs isharder to identify.

Note*: Above-and-beyond the risk profile for typical IPP projects


Captive power: a model for thefuture?

How could an investment in captive power be structured?

Developing captive power is a complex task requiring experience,expertise and a degree of patience.

Any infrastructure project development is complex, and captive poweris no exception. Project development timelines are likely to span 2-3years. For those with sufficient patience and risk equity to coverdevelopment costs, the rewards could be significant, as highlighted inthis report.

42


Developing captive power is a complex task requiringexperience, expertise and a degree of patience

Outlined below are some of the major stepsin captive power project development inIndonesia (until financial closing) alongwith possible challenges at each stage. It isassumed that the investors already own theland, and that public sector financialsupport is not required.

The following is roughly in chronologicalorder, but many stages are moreefficiently processed in parallel(especially given likely delays to permitacquisition).

43

Stage Comments

1. Site Selection • Developers will need to target sites consistent with their developmentexpertise, risk appetite, and ability to negotiate the regulatory system.

• Key decisions include whether to focus on greenfield or brownfield,electrified or remote regions, tenant type and power requirements,and what technologies are consistent with local fuel infrastructure.

2. Pre-FeasibilityStudy

• The developer will need to analyse the potential investment to helpdetermine whether it is even worth moving to the feasibility phase.

3. Investor andDeveloperAgreement

• Having identified an industrial site, the initial developer will need todecide if they are going to develop it independently; in partnershipwith another power company, manufacturer, or fuel supplier; or, inconjunction with the land/real estate developer.

4. Support fromLocalGovernment

• The developer will need to obtain a supporting letter from the localgovernment head (Bupati or Governor); this is a regulatoryrequirement and also could help with negotiating a deal later.

5. Licensing andPermitting

• The developer will need to obtain National permits including IUPTL,Izin Operasi and Wilayah Usaha.

6. Consent fromPLN(depending onstructure)

• If excess power is being offtaken, power “wheeled” via PLN’s T&Dnetworks, or other arrangements being made with PLN (e.g. backupconnection), the developer may need to negotiate with PLN.

• PLN will also likely have a role in granting a Wilayah Usaha, if thearea is currently served by PLN.

7. FeasibilityStudy

• The developer will need to confirm the practical and logisticalfeasibility of the project, and evaluate technological and financingoptions.

8. Drafting ProjectContracts

• The developer will need to choose its key partners (operator, fuelsupplier, etc.) and agree key contracts including EPC, O&M, FSA,PLN or private offtaker PPAs with its business partners.

• Typically, Heads of Agreement are drafted early in the project tobegin the financing process, with full contracts drafted as otherdevelopment tasks are completed.

9. Financing • The developer will need to structure its credit agreements, focusingon the currency of debt repayment, level of recourse to thesponsor(s), and credit enhancements in cases of limited offtakesecurity.


A typical business model for captive power investmentsis built around a special purpose company

In general, power generation projects arestructured around a Special PurposeCompany (SPC). The SPC acts as a ring-fenced entity for the project and entersinto contracts with other companies toimplement the project. This could also be adedicated corporate subsidiary.

Firstly, an Engineering, Procurement, andConstruction (EPC) contractor will designthe installation, procure the necessarymaterials and build the project, eitherdirectly or by managing othersubcontractors. They purchase keycomponents, e.g. turbines from technologyproviders such as GE.

An Operation and Maintenance (O&M)contractor will then operate, maintain, andoften manage the performance of theproject.

Thirdly, investors and lenders will financethe project through equity and/or debt.The SPC will receive equity investmentfrom the sponsors to fund construction inexchange for dividend payments. The SPCwill fund the remaining construction costsusing debt, and make repayments overtime.

44

T1

Customers and Tenants

T2 T3PLN

EPC Contract O&M Contract

Technology Supply Contract

O&M Operator

EquipmentManufacturer

EPC Contractor

Loan and Repayments

Power Purchase Agreements

Industrial Estate Management

Co-investor/Developer

Project Sponsors

Investment and ProfitFinanciers/Lenders

Special PurposeCompany

Lending is usually from banks; sponsorscould be either the Industrial EstateDevelopers, or dedicated Power Plantdevelopers. Pure financial investors(such as private Equity firms) areunlikely to feature in the deal at thisstage, with trade or strategic investors(such as power companies) typicallymore interested.

Fourthly, customers would purchase thepower. In an Industrial Estate, the maincustomers would be tenants, whonormally purchase under short termcontracts (usually a year). Under thenew regulation, excess power can also besold to PLN under a Power PurchaseAgreement.

The roles and contractual relationshipsdescribed are typical of a Captive Powerproject. However, several differentoptions exist in practice for projects inIndonesia. The key project optionsrevolve around:• Offtake structure• Ownership and development

structureSome typical options are mapped out onpages 46 and 49.


Financing a power project depends mainly on thedesired exposure of sponsors to the project

Financing: Project vs. BalanceSheet

Broadly speaking, there are two ways offinancing a power project: projectfinancing and balance sheet financing.The key difference is the exposure of thesponsors to the project. Balance sheetfinance relies on the cash flow availableto the sponsor.

Project finance relies on the cash flowgenerated by the project, and routedthrough the SPC to fund the servicing ofthe debt. For a Project Finance project tobe “bankable”, more robust contractualstructures and project economics aretherefore required.

Based on interviews for this project, mostIndustrial Estate tenants use short-termcontracts to purchase power. This may beinadequate for the banks to lend moneyon a pure project finance basis (withoutrecourse to sponsors). The exception tothis may be where there are largerofftakers (say, greater than 30 MW) suchas petrochemical facilities, who may enterinto 10-20 year offtake contracts.

Funding directly from the parent, orProject Finance with recourse to theparent, is often a more straightforwardoption. Thus, sponsors with a strongbalance sheet (i.e. low debt to equityratios) may need to directly raise orguarantee project debt in order for asubsidiary to obtain project funding.

45


Offtake options

46

Note*: Sell output to utility under PPA and buy back for tenant consumption

On page 44, a generic project structure was set out, whereby the SPC sells power to acombination of tenants and utilities (such as PLN). In practice, there are a number of availableoptions for power offtake contracts based on the existing regulations and market precedents todate. The table below highlights some of these. Option 4 is most conducive to ProjectFinancing.

The key features characterising these offtake arrangements are:

• To whom the project is selling power (selling largely to local tenants, other power users viapower wheeling, or largely to utilities).

• How long the buyers are committed for (short-term or long-term agreements).

• What the role of utility is in providing operational support (backup and/orsynchronisation).

• What the contracted price of power is, and its currency denomination (USD or IDR).

Additional contracts may support the offtake contract in practice (e.g. separate backup powersupply agreement) and/or multiple agreements may be bundled into a single contract (e.g.PPA and bulk re-selling agreement).

These options refer to the offtake of power from the project development as a whole. Theremay be either virtual or actual offtake agreements between the project developer andoperator depending on the risk allocation. These are considered on pages 49, 50, and 51.

Offtake options Typical offtakecontract length

Additionalcosts

Comment

1. Standalone operationwith tenant offtake (i.e.not connected to utilitygrid)

Small tenants: 1 yearLarge tenants: 10years

Local gridstabilisation

Generally difficult tostabilise an isolated, smallgrid operation

2. Tenant offtake withbackup grid connectionin case of excessdemand or maintenance

Small tenants: 1 yearLarge tenants: 10years

Backup/synchronisationcosts

Not likely to becommercially attractive forutility

3. Tenant offtake withagreed volume ofexcess power offtake byutility

Small tenants: 1 yearLarge tenants: 10yearsUtility (Excess power):3 years

Excess powertariff generallylower than tariffcharged totenants

Tariff may be bound byregional utility generationcosts as well as nationalregulations regardingexcess power tariffs

4. Collaboration with utility 10-30 years Margin payableto utility

Probably most attractiveoption for utility

5. Power wheeling Unknown T&D networkaccess charge

Implementing regulationsare not yet defined so T&Daccess costs not yet clear


Offtake options (cont’d)

47

The offtake options described on the previous page are illustrated below:

1. Standalone operation with tenant offtake (i.e. not connected toutility grid)

T1

Tenants

T2 T3

Special Purpose Company

• Good margins onpower generation

• Avoid procurementprocess for utility

• Difficult to balanceload and supplyduring maintenanceperiods

• No incentives forutility

2. Tenant offtake with backup grid connection

Tenants • Good margins onpower generation

• Secured connectionthrough back upavailable from utility

• Limited incentive forutility to supportproject

• Extra costs forsynchronisation

T1 T2 T3


Utility Supply Agreement

Utility

Backup

Backup/synchronisation

costs



Offtake options (cont’d)

48

3. Tenant offtake with agreed volume of excess power offtake by utility

Tenants• Provides additional

revenue security forsome years whiletenant occupationramps up

• Security of revenuefrom excess power

• Offtake contractslikely to be <5 years

• Additionalprocurement stepsrequired

T1 T2 T3



Utility

Backup

Power PurchaseAgreement

(PPA)

4. Collaboration between two utilities: Sell output to utility under PPAand buy back for tenant consumption

Tenants• Gives utility incentive

to support project• Flexible when

occupancy changes• Secured back up

connection

• Some level of priceincrease for tenantsor reduced equityreturn

• Procurement stepsunclear

T1 T2 T3



Utility

Backup

PPA

5. Power wheeling

Tenants in zone 2 • Gives utility incentiveto support project

• Economies of scale onplant size

• T&D tolling feeunknown

• Currently unclearstructure for end-usercontracts

• Need transmissioncapacity

Bulkbuyback

agreement

T1 T2

T&D Network Access Agreement

Utility

T1 T2




Tenants in zone 1


Development options for sponsors

49

There are a number of potential commercialstructures for the Real Estate/Industrial Estatedeveloper to develop a power plant. These include:

• Joint Venture: The Industrial Estate andPower Developer each hold equity in an SPCand share market risk on the offtaking ofpower by tenants/PLN.

• Own Project: The Industrial EstateDeveloper sets up an SPC or dedicatedsubsidiary to develop the project, holding100% of the equity (or the Power Developerdoes the same thing). The developer in eithercase bears market risk on the offtake of powerby the tenants/PLN.

• Build-Operate-Transfer (BOT)(Landlord-style): The Industrial EstateDeveloper grants a “concession” for the PowerDeveloper to sell power to the zone’s tenants(and PLN) in exchange for a land lease orother fixed or variable payment. The PowerDeveloper is responsible for building,operating and transferring the asset back tothe landlord at the end of the concession. TheIndustrial Estate Developer may or may notbear market risk depending on the paymentstructure, but in either case is not responsiblefor debt service.

• Build-Operate-Transfer (BOT) withPPA: The Industrial Estate Developer entersinto a long-term Power Purchase Agreement(PPA) with the Power Developer, who isresponsible for building, operating andtransferring the asset back to the landlord atthe end of the PPA term. In this case, themarket risk lies with the Industrial Estate,which is responsible for on-selling power totenants/PLN.

The returns under each model would be expected tobe proportional to the amount of risk beingassumed.

In principle, the sponsorship arrangements areseparate from the offtake arrangements. However,note that the sponsorship structures and offtakestructures together will largely determine the debtfinancing structure. In practice, short-term offtakecontracts with high market risk exposure areunlikely to be financeable using limited recourseProject Finance.

It is also important to consider exit arrangements.At least one developer is reportedly considering anInitial Public Offering (IPO) to raise equity from itsCaptive Power projects, which would be the first ofits kind in Indonesia. Especially once operational, itis possible that developers could also sell equitystakes to financial investors including PrivateEquity Funds or Infrastructure Funds, who arecurrently eyeing up the market.


Development options for Sponsors (cont’d)

50

Options for the commercial structures on the previous page are illustrated below:

1. Joint Venture

2. Own Project


Industrial EstateDeveloper

Power Developer

Shareholding


Industrial EstateDeveloper or

Power Developer

Tenants/Utility

Tenants/Utility

Utility SupplyAgreement


Shareholding(100%)

Benefits Risks

Industrial Estatedevelopers

• Share equity upsideand market risk

• Benefit from specialistexternal expertise

• Still exposed to somemarket risk

Power developers • Share equity upsideand market risk

• May have role inmanagement of zone

• Still exposed to somemarket risk

Benefits Risks

Developer • Earning all equityupside

• Need specialistexpertise in-house

• Exposed to full marketrisk


Development options for Sponsors (cont’d)

51

3. Build-Operate-Transfer (BOT) (Landlord-style)

4. Build-Operate-Transfer (BOT) with PPA

Industrial EstateDeveloper/Landlord

Power Developer

Concessionand BOTcontract

Land Lease/other fixed orvariablepayment

Tenants/Utility

Industrial EstateDeveloper

Power Developer

PowerPurchaseAgreement(PPA)

Tenants/Utility





Concessionand BOTcontract

Shareholding

Shareholding

Benefits Risks


• Payment streams arepredictable and low-risk

• No equity upside• Less control over

tenant services

Power developers • Earning 100% ofequity upside

• Exposed to full marketrisk

Benefits Risks


• Margin from sellingpower to tenants

• Bearing market risk

Power developers • Secure income fromPPA

• Effectively no marketrisk

• Landlord’s marginreduces demand andcapacity factor


Concluding remarks

52

The Indonesian government has envisioned IndustrialEstates as the manufacturing hubs of Indonesia in future.A successful Industrial Estate and Strategic EconomicZone programme could boost Foreign Direct Investment,overall Investment, GDP and Employment, as well asopening up Eastern Indonesia for industrial development.

However, a pre-requisite for success is a functioningsupporting infrastructure, including in particulartransport and power infrastructure.

Industrial Estates will be the engines drivinginvestment and economic activity in Indonesia.

This report represents the first publicly-available researchon Captive Power in Industrial Estates in Indonesia. Basedon interviews with Industrial Estate management andtenants, and economic modelling, Captive Power has a keyrole to play in Indonesia's industrial development. Thisconclusion is re-iterated in five parts:

Captive power, or power generated by a firm/landlord forits own or its customers’ use, reduces load on the powergrid. It can increase reliability, reduces business costs, andcan rapidly make electrical power available to regions thatcurrently lack power.

In so doing, captive power can improve the productivity oftenants in Industrial Estates, particularly in areas with lowgrid connectivity.

However, power supply is one of the majorbarriers to developing Industrial Estates inIndonesia.

1

2


Concluding remarks (cont’d)

53

High value-added industries are likely to need reliablepower to drive growth, with a higher level of reliabilitythan is currently available on-grid.

Captive Power - including privately-financed and -provided power for Industrial Estates - represents anopportunity to meet this need. Especially in remote orgrid-stressed areas, it may represent the only practicaloption.

Captive Power may be one solution to helpovercome this obstacle.

Many stakeholders can benefit from targeted CaptivePower expansion:

• Tenants benefit from a more reliable power supply,and examples of their willingness to pay for thebenefit were revealed in stakeholder interviews.

• Industrial Estate and Power Plant developers (andco-developers) benefit from diversified, stable andrecurring sources of income. Returns could be veryattractive under certain circumstances.

• PLN benefits from avoided grid load at keylocations and could participate in deals to generateincremental revenue.

• The Government of Indonesia benefits byattracting investment in Industrial Estates andStrategic Economic Zones, as well as havingflexibility and options in the event of a delay in the35 GW Plan.

Captive Power would benefit not only tenantsand Industrial Estate developers, but alsoIndonesia as a whole.

3

4


Concluding remarks (cont’d)

54

To spur market development, some clear steps areneeded, including the following:

• Publicise strategically important projects moreeffectively to the market.

• Streamline and accelerate the granting of WilayahUsaha (determination of business area) licences toreputable power developers.

• Provide government support for economicallybeneficial but financially marginal projects (notablyencouraging PLN to sign longer-term excess powerofftake contracts under MEMR 03/2015).

• Encourage State Owned Enterprises to purchaseCaptive Power in strategically important locations.

• Accelerate implementing regulations for the newregulations on Industrial Estates (GovernmentRegulation No. 142/2015) and Power Wheeling(MEMR 01/2015).

We estimate that providing a clear regulatory frameworkcould support the potential investment pipeline of 8-10GW of capacity within the next five years.

Captive Power can play an important andcomplementary role in Indonesia’s growth. TheGovernment can catalyse this.

5


55

George DjohanTel: +62 (0) 811 888 [email protected]

Kazunari FukuiTel: +65 (0) [email protected]

Irzan MartakusumahTel: +62 818 220 [email protected]

Sacha WinzenriedTel: +62 (0) [email protected]

Triono SoedirdjoTel: +62 (0) [email protected]

Agung WiryawanTel: +62 (0) [email protected]

Patrick SE TayTel: +60 (0) [email protected]

Tim BoothmanTel: +62 (0) [email protected]

Get in touch


56

Important Notice

The report has been prepared by PT PricewaterhouseCoopers IndonesiaAdvisory for PT GE Operations Indonesia under the terms of our WorkOrder under Global Master Framework Agreement dated 23 September2015.

Any person who is not an addressee of this report, by reading this reportaccepts and agrees to the following terms:

1. The reader of this report understands that the work performed by PTPricewaterhouseCoopers Indonesia Advisory was performed inaccordance with instructions provided by our addressee client andwas performed exclusively for our addressee client’s sole benefit anduse.

2. The reader of this report acknowledges that this report was preparedat the direction of our addressee client, and may not include allprocedures deemed necessary for the purpose of the reader.

3. The reader agrees that PT PricewaterhouseCoopers IndonesiaAdvisory, its partners, principals, employees and agents neither owenor accept any duty or responsibility to the reader, whether incontract or in tort (including without limitation, negligence andbreach of statutory duty), and shall not be liable in respect of any loss,damage or expense of whatsoever nature which is caused by any usethe reader may choose to make of this report, or which is otherwiseconsequent upon the gaining of access to the report by the reader.Further, the reader agrees that this report is not to be referred to orquoted, in whole or in part, in any prospectus, registration statement,offering circular, public filing, loan, other agreement or documentand not to distribute the report without PT PricewaterhouseCoopersIndonesia Advisory’s prior written consent.


57

Appendix


Appendix

Methodology

58

Stakeholder engagement

The study team also conducted detailedinterviews with five firms in order toprovide a qualitative analysis of thebenefits of captive power. These interviewsalso included discussions of the key driversof the cost of blackouts, which guided themodelling approach taken in the study.

Data enabling the estimation of theblackout costs for the seven sectors

The study drew on country and sector-leveldata; a list of data collected and used isshown opposite. The most recent dataavailable was used.

Data Source

Sector capacityutilisation (2010)

KementerianPerindustrian

Sales data (2013) Badan PusatStatistik (BPS)

Electricity demand(2014)25

National EnergyCouncil

Annual labour cost(2013)

BPS

Total employment(2013)

BPS

Overtimeregulations

UU no. 13 Tahun2003 TentangKetenagakerjaan

Cost of runninggensets, per kWh

Discussion withindustrystakeholders

25 Due to inconsistent categorisation of industries, assumptions were made for certain sectors: energyconsumption for fertilisers were used as a proxy for chemicals, while petroleum and coal products wereassumed to have similar demand for energy to the cement sector


Appendix

Methodology (cont’d)

59

Approach

The results depend on the length of ablackouts, as well as the number ofblackouts a year. PLN report that this iscurrently around 32 hours/year basedSAIDI and SAIFI. The central scenarioreported in this report considered a two-fold increase in SAIFI, meaning 58blackout hours/year. In a blackout, themodel estimates one of two mutuallyexclusive outcomes:

1) Firms with backup power switch to adiesel genset during a blackout andresume production (68% of firms26).The total hours worked remain thesame. Marginal fuel costs were basedon the following assumptions:

• 11,000 Btu/kWh heat rate

• 9,000 IDR/litre diesel cost(approx. USD 130/barrel fordiesel, and including margin anddistribution costs)

2) Firms without backup power (32% offirms) resume production after theblackout, with costs as follow:

• Incurring wage overtime costs,which were calculated based on thepermitted three hours of overtimeper worker per day, and theovertime wages mandated byIndonesian law. Overtime costswere only applied to 58% of eachsector’s employment, assupervisory level employees do notcollect overtime. This assumptionwas made based on educationalattainment (42% of manufacturingworkers had high school diplomasand above).

• If the legal overtime maximumwas exceeded, or the firm wasimplicitly running at more than90% capacity utilisation torecover the earlier downtime, thehours were counted as‘unrecoverable’ or ‘lostproduction’. This was calculatedbased on the annual revenue foreach sector divided by 5,280annual operating hours (330days/year running 16 hours/day)

• It was also assumed that forcontinuous process sectors(Chemicals, Petroleum and Coal,Paper), 2 hours re-start time isneeded and that revenue cannotbe earned during this time. Forother manufacturing sectors(Machinery, Textiles, Food andBeverages, Printing), a re-starttime of 30 minutes was assumed.

Equipment damage and material losseswere not included in these calculations,as these are highly firm- and sector-specific, making generalisationinappropriate without detailed data.Working capital losses from holdingexcessive inventory were also notincluded. This implies that our estimatesare conservative for group 1) above inparticular. Based on one study in theUnited States, equipment damage andmaterial losses accounted for around40% of the total costs of blackouts27.

The exchange rate used was IDR 13,500to USD 1.

26 Estimated based on data from Final Report: Overview of Diesel Consumption for Captive Power inIndonesia, Winarno et al (2013)

27 Primen (2001) The cost of power disturbances to industrial and digital economy companies


List of relevant regulations

60

Appendix

Type Number/year Summary

Government Regulation 24/2009

This regulation relates to Industrial Estates in Indonesiaincluding their development, parameters, facilities, activitiesand obligations.

Key points for Captive Power:• All manufacturing activities must be within Industrial Estate

areas.

Electricity Law 30/2009

This regulation is about the general business framework forelectricity in Indonesia.

Key points for Captive Power:• PLN has the “right of first refusal” for electricity supply in

an area.• The Private sector can hold IUPTLs.• Regional authorities can provide IUPTLs for power projects

which do not involve sale of power to holders of CentralGovt. License (i.e. PLN). IUPTL holders can sell directlywithout connecting to PLN's transmission grids.

• PPUs are allowed (holding IUPTL + Izin Operasi) togenerate, transmit and distribute power for own use or toits customer base (such as an Industrial Zone).


This regulation is about the development of Industrial Estates

Key points for Captive Power:• The domestic or foreign private sector is allowed to own

and develop designated Industrial Land. Up to 70% of landmay be sold/leased to tenants, with the rest reserved forgreen spaces and infrastructure.

Ministerial Decree 28/2012

This regulation sets out the general framework for obtaining abusiness area (Wilayah Usaha) licence for an electricitysupply business.

Key points for Captive Power:• For any one area (Wilayah Usaha) there can only be one

supplier of power, which must be an IUPTL-holder. TheWilayah Usaha can be allocated to a company if:1. The area is not yet covered by an existing Wilayah

Usaha holder2. The existing Wilayah Usaha holder is not able to supply

power, or is not able to supply power with goodquality/reliability

3. The existing holder has returned its Wilayah Usaha


This regulation deals with power wheeling schemes.

Key points for Captive Power:• IPPs and PPUs can use PLN's transmission/distribution

networks for a toll charge.


List of relevant regulations (cont’d)

61

Appendix



This regulation sets out the power purchasing procedures tobe used by PLN, including the direct appointment and directselection methods.

Key points for Captive Power:• PLN may purchase power using the direct selection

method when changing the feedstock of the power plantfrom diesel to non-diesel, and PLN may use the directappointment method for mine-mouth, marginal gas orhydro projects (including purchases of excess power fromPPUs)

• This law also regulates benchmark prices for coal, gas andlarge hydro power plants.

Indonesia Law 3/2014

This regulation deals with the general framework of Industryin Indonesia.

Key points for Captive Power:• Each Industrial Company in Indonesia must meet any

technical specification according to the SNI (IndonesiaNational Standard) in their equipment and products(goods and services including electricity).

• Companies that deliberately ignore this SNI requirementwill be penalised IDR 3 billion, while in cases ofnegligence the fine would be IDR 1 billion.


This regulation deals with the “one stop shop” for obtainingnational permits for electricity supply businesses.

Key points for Captive Power:• Investors can now obtain all their national permits,

including IUPTL, Izin Operasi and Wilayah Usaha throughBKPM upon submission of the correct paperwork


This regulation sets out the general framework for IndustrialEstates including development, maintenance, land permit, therights and obligations of tenants, and facilities.

Key points for Captive Power:• Each Industrial Estate developer in Indonesia is granted a

facility to ease the development and management of itselectricity supply for its own use and for its tenants.

• Further detail regarding the facility will be regulated in aMinistry of Energy and Mineral Resources decree.


List of relevant regulations (cont’d)

62

Appendix


Presidential Regulation 4/2016

This regulation provides provision relating to the 35 GW Plan,the development of 46,000 km of transmission lines, andprioritising the use of renewable energy.

Key points for Captive Power:• The development of power infrastructure can be carried

out in the form of Partnership, when:- The project requires substantial funding- There is a high risk in relation to construction, especiallynew locations that require land acquisitions- There is a risk relating to the availability of fuel supply- Power is to be generated from renewable energy- Expansion of the existing IPP power plant, and/or thereare several IPPs planning to develop a power plant inspecific area.


Glossary

63

Appendix

AKR Aneka Kimia Raya

ANTAM PT Aneka Tambang Tbk.

BKPMIndonesia Investment Coordinating Board (BadanKoordinasi Penanaman Modal)

BPS Central Bureau of Statistics(Badan Pusat Statistik)

CIF Cost, Insurance and Freight

CHP Combined Heat and Power

COD Commercial Operation Date

CPP Captive Power Plant

EPC Engineering, Procurement and Construction

ESDMEnergy and Mineral Resources (Energi dan Sumber DayaMineral )

FDI Foreign Direct Investment

FSRU Floating Storage and Regasification Unit

FTP Fast Track Program

GAR Gross Calorific Value

GDP Gross Domestic Product

GE PT General Electric Operations Indonesia

GIZDeutsche Gesellschaft für Internationale ZusammenarbeitGmbH

GW Gigawatt

ha Hectare

HKIIndonesian Industrial Estate Association (HimpunanKawasan Industri)

IDR Indonesian Rupiah

IDX Indonesian Stock Exchange

IEA International Energy Agency

IPP Independent Power Producer


Glossary (cont’d)

64

Appendix

IUPTLPower Supply Business License (Izin Usaha PenyediaanTenaga Listrik)

JIIPE Java Integrated Industrial and Port Estate

KADINIndonesia Chamber of Commerce and Industry (KamarDagang dan Industri)

kcal Kilocalorie

kg Kilogram

km Kilometre

kW Kilowatt

kWh Kilowatt Hour

kVA Kilovolt-amps

MEMR Ministry of Energy and Mineral Resources

Mha Million Hectares

MKIIndonesia Electrification Community (MasyarakatKetenagalistrikan Indonesia)

MMBtu Million British Thermal Units

MRT Mass Rapid Transit

MW Megawatt

O&M Operation and Maintenance

OECDOrganisation for Economic Co-operation andDevelopment

PP Presidential Regulation (Peraturan Presiden)

PF Project Finance

PLN State Electricity Company (Perusahaan Listrik Negara)

PMN State Capital Investment (Penanaman Modal Negara)

PP Government Regulation (Peraturan Pemerintah)

PPA Power Purchase Agreement

PPP Public-Private Partnership

PPU Private Power Utilities

PwC PT PricewaterhouseCoopers Indonesia Advisory


Glossary (cont’d)

65

Appendix

RAPBN-PBudget Presented to the Parliament – Amendment(Rancangan Anggaran Pendapatan dan Belanja Negara –Perubahan)

RPJMN National Medium Term Development Plan (RencanaPembangunan Jangka Menengah Nasional)

RUPTLPower Supply Business Plan (Rencana UsahaPenyediaan Tenaga Listrik)

SAIDI System Average Interruption Duration Index

SAIFI System Average Interruption Frequency Index

SEZs Special Economic Zones

SME Small Scale and Micro Enterprise

SOE State-Owned Enterprise

SPC Special Purpose Company

T&D Transmission and/or Distribution

UPS Uninterrupted Power Supply

USD United States Dollar

UU Undang-Undang (Constitution/Law)

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