Indonesia is increasingly starting to peak renewable energy investors’ interest. However, with unique opportunities come unique challenges inherent to the country. In our recent webinar, on Managing Risks in the Indonesian PV market, a number of essential technical and financial challenges were discussed that successful project managers cannot ignore. The full webinar recordings are available for streaming.
The webinar took place as preparation for the Solar PV Trade Mission Indonesia set to take place in Jakarta from the 27th of February to the 3rd of March, 2017. More information about the trade mission can be found on the event’s website: http://www.solartrademissionindonesia.com. Both webinar speakers will also be on stage during the event.
Based on the speakers’ expert opinion during the webinar, two main sources of risk exist for project developers who are planning to pursue solar projects in Indonesia. One of the main risk factors manifest themselves in the design of solar panels with respect to local infrastructure and climate; the other stems from the financial difficulties burdening projects due to the underdevelopment of the local financial sector.
Indonesian PV project managers are bound to face a wide range of financial risks throughout the project lifecycle. Geoffrey Tan, managing director of the Asia Pacific branch at the U.S. government’s development finance institution (DFI), the Overseas Private Investment Corporation (OPIC), walked us through the unique risk factors that are specific to the Indonesian solar energy market. OPIC’s expertise on the matter stems from its large exposure through the 26 projects in the Asia Pacific, amounting to USD 838 million of commitments.
“Full, committed availability of equity and debt is essential to fund construction and reach commercial operations in the region” states Mr. Tan to kickoff his assessment. A considerable challenge in Indonesia is the limited, available financial resources that tend to describe local partners. As a result, Indonesian partners may seek carried interests, contributions in-kind or even both. This aspect is especially troubling if one considers the foreign ownership restrictions in the country. For projects in the range of 1 MW - 10 MW a maximum of 49% of the equity can be sourced from outside of Indonesia, whereas foreign ownership for projects with a capacity greater than 10 MW is capped at 95%.
For the operation phase, creditworthiness and the availability of Government of Indonesia (GOI) support is necessary. Furthermore, price competitiveness and grid compatibility on the local scale are both factors that are heavily taken into account when deciding a plant’s viability. The local community is also an important stakeholder with big influence on a project’s outcome, therefore its involvement is also necessary.
One of the most paramount precursors for debt financing is the need to secure land for the project. Based on Mr. Tan’s experience in the region this is the biggest landmark projects must overcome to continue on their journey to success. Once land is secured, debt may be obtained from local banks for the construction phase of the project, however, this option generally relies on sponsor support. Long term, limited recourse debt is only available from DFIs such as OPIC, along with political risk cover.
Finally, when applying for debt, project managers must choose appropriate debt terms paying careful attention to foreign exchange rate, interests rates and other important terms. The most prevalent source of debt are DFIs for solar due to to the comprehensive risk associated with it. The underdevelopment of local commercial banks is another reason why those seeking debt must turn to DFIs.
Image credit: Asian Development Bank
Apart from the financial aspects related to solar development, there are a number of technical and climate-related issues to take into serious consideration. Indonesia has a complex microclimate, meaning that the standard practices used internationally may not be applicable in Indonesia. Therefore, a deeper understanding of the solar resource is required. In the planning phase, it is imperative for project developers to account for the country’s tropical climate and design PV plants accordingly. A key feature of the design of PV plants is determining where the project site should be. In order to maximize electricity output a small miscalculation in the expected solar irradiation levels may translate into a significant loss in revenue throughout a plant's lifetime.
One course of action that could potentially minimize risks inherent to the project site is relying on solar irradiation data that is available from either satellite-derived data or ground-measured data. However, Phil Napier-Moore urges to understand the unique advantages and disadvantages of each source and rely on them with huge precautions. Mr. Napier-Moore is the solar program director at Mott Macdonald, a global engineering, management and development consultancy firm with a track record of supporting 300 MW of solar and wind projects in Indonesia and a significant network of local engineering experts.
Neither source of information is without flaws. Even though ground-measured data is very accurate in determining solar irradiation, the surface for which it can predict with high precision is rather small and thus inefficient in determining locations with the best potentials. Satellites, on the other hand, despite their ability to give an estimation on irradiation levels across entire regions, can be rather imprecise in case atmospheric conditions are not adequate. Considering Indonesia’s island climate and archipelagos, this issue is of huge importance.
In light of such limitations, Mr. Napier-Moore advises to consider the two sources of information in tandem in order to achieve the most reliable results. Mott MacDonald, using the same principle, is able predict actual energy output with a 1% error rate. Even with such high precision, it is important to also consider air quality as a confounding factor because satellite data is unable to account for it (Figure 1). Due to the frequent forest fires, some regions in the country have considerably higher air pollution levels than others.
Looking at the data available, Phillip noted that BMKG (Badan Meteorologi, Klimatologi, dan Geofisika) has been taking long term measurements with an instrument called the Gunn-Bellani Radiometer. Data is available for the past 20 years with adequate accuracy. This can also be cross-checked with the pyranometer data which is available for up to two years.
Interestingly enough BMKG mentioned that no private company ever requested this data, which can mean lack of awareness of the quality of the data of these stations. Below the overview of those 60 available stations.
Projects in the remote islands could be even more challenging considering the infrastructure, weaker grids and maintenance. Once the location of the PV plant is determined, the design of solar panels is the next crucial point that needs to be addressed to mitigate the risk of cost overrun and equipment failure. High temperatures and high levels of precipitation are the most frequent causes of trouble for solar projects. As a result, non-corrosive material selection and electrical enclosure design require increased attention prior to construction. Furthermore, drainage design and adequate mounting structure foundations are also of high importance, due to the heavy precipitation.
Even if all factors are accounted for, there are still risks for plant owners to bear in mind. Nuisance trips may occur for a wide-variety of reasons including; low isolation resistance particularly during damp periods; over-voltage and/or coordination of settings; or simply a lack of local maintenance. The main reason for inverter outages in the region is grid over- and under- voltage especially in rural areas or weakly interconnected islands.
In conclusion, the opportunities for Indonesian solar PV are vast but they do not come risk-free. Risk sources are plentiful and they span from external factors such as weather conditions and local infrastructure to internal ones including setting up the right financial structure for a project. Despite these issues, if one is aware of the risks and takes the necessary measures to pre-empt them, one may enjoy the first-movers’ advantage in the promising, untapped solar PV market of Indonesia.