The consortium building the Wampu hydroelectric power plant in North Sumatra, Indonesia, pulled off a significant coup with its $130 million financing. With construction taking place in a protected forest, and conventional land rights not available, the sponsors needed to get lenders comfortable with a new security structure. The deal signals a resurgence in the Indonesian power market, and highlights the emergence of Kexim as a significant new player in the market. The deal was also the first development to reach financial close under Indonesia’s new government guarantee scheme.

Wampu Electric Power is a venture of Korea Midland Power (46%), POSCO Engineering (20%) and Mega Power Mandiri (34%). The project company will build a 45MW run-of-the-river hydro plant on the Wampu River, close to the city of Medan. Large swathes of Indonesia have the status of protected forest land, and the success of the sponsors in obtaining land rights for the development bodes well for the country’s infrastructure ambitions. Indonesia is experiencing increasing energy demand, and developers hope that the Wampu structure can serve as a template for the delayed pipeline of independent power projects.

The traditional land rights that are usually used as security for a project financing were not available on Wampu. Instead the developers were granted forest permits, and while these are not usually considered to be sufficient security, the lenders had to become comfortable with them. The deal was further complicated by the distance of the plant from existing transmission lines. Offtaker Perusahaan Listrik Negara (PLN) required the plant to connect directly into its existing infrastructure, as part of its agreement with the project company. This meant the construction of 125 tower locations for 42km of new transmission lines.

Because the project is run-of-river, it is eligible to register for clean development mechanism (CDM) credits, and a Korean carbon fund is buying the credits. Indonesia ratified the United Nations Kyoto Protocol in July 2004. Lloyd’s Register Quality Assurance conducted the validation that allowed the project to qualify for carbon credits, and, in October 2011, approved the project for CDM eligibility. The project company expects to generate 230,000 tons of certified emissions reductions annually, which should produce revenues of around $20 million each year.

PLN is the sole offtaker from the plant under a 30-year power purchase agreement, signed in April 2011, which has a tariff of 7.23 US cents per kWh. Wampu is the first project to reach financial close with the benefit of a business viability guarantee letter (BVGL) from the country’s government. Indonesia’s credit rating has started to emerge from junk status since the beginning of last year, and its economy continues to grow by around 7% per year.

But lenders still view state utility PLN as a risky credit because of its record of defaulting on power purchase obligations in the late 1990s, and the BVGL is a way for the government to protect power projects against the offtaker’s default. There has been criticism of the scheme, however. The guarantee only becomes effective once the plant covered starts to operate, and there is no direct recourse against the provider of the letter, the government.

Despite its faults, the BVGL was crucial to Kexim making a direct loan and covering a tranche on the financing, the first time it has participated in a hydropower deal in Indonesia. The $130 million debt facility closed on 23 February 2012, with Kexim providing $72 million. SMBC acted as financial adviser to the sponsors and also provided the remaining $58 million covered debt portion. The debt has a tenor of 16 years and four months.

Indonesia is now one of the biggest natural gas exporters in the world and some estimate that it has the largest potential geothermal resources anywhere. In 2006 the government announced a plan for the addition of 20,000MW of new generating capacity by 2014. Although a large chunk of this added capacity will come from traditional fossil fuel-fired plants, renewables projects like Wampu could meet a significant part of the new capacity requirements.

The project is the Indonesia’s first new hydropower deal in 15 years. By facilitating international export credit agency support using the BVGL, Wampu may inspire a new wave of IPPs. Supreme Energy, GDF Suez and Marubeni finally signed a power purchase agreement with PLN for their 220MW Rantau Dedap geothermal plant in November 2012, having signed the concession in December 2010.

Other power deals nearing completion in the country include a 50MW solar photovoltaic plant developed by Australian firm Solar Guys, with lead arrangers Mitabu Australia, and the 200MW KalSel coal-fired unit being developed by Adaro Energy and Korea East West Power. The biggest power deal near market is the 2,000MW ultra-supercritical Central Java IPP, for which J-Power, Adaro and Itochu are sponsors. That deal is being developed as a PPP, with the Indonesia Infrastructure Guarantee Fund providing another type of enhancement to the plant’s PPA. 

Wampu Electric Power
STATUS
Close 23 February 2012
SIZE
$174 million
DESCRIPTION
Financing for the development of a 45MW hydroelectric power project in North Sumatra, Indonesia.
SPONSORS
Korea Midland Power, POSCO Engineering, Mega Power Mandiri
DEBT
$130 million
LENDERS
Kexim, SMBC
SPONSORS’ FINANCIAL ADVISER
SMBC
SPONSORS’ LEGAL ADVISERS
Norton Rose (international); Susandani & Partners (local)
LENDERS’ LEGAL ADVISERS
Milbank, Tweed, Hadley & McCloy (international); ABNR (local)
TECHNICAL CONSULTANT
Mott MacDonald
EPC CONTRACTOR
POSCO Engineering