The contract of affreightment defines Louis Dreyfus et Cie’s obligation to transport coal
from the Kelanis terminal to the Paiton plant.
The Kelanis facility agreement, signed by each of the sponsors, Paiton Energy and
Adaro, defines Adaro’s obligation to construct and operate a crushing and loadout facility and
a coal stockpile.
The coal supply plan, required under the PPA, is a plan for the reliable supply of coal
submitted to PLN by Paiton Energy.
From the beginning, both the lenders and the sponsors were concerned about the depend-
ability of the fuel supply. Each hired separate coal advisers. They did a great deal of due dili-
gence to verify the coal reserves, and to make sure that it could be produced at a reasonable
cost and delivered to the plant. When the financing was being arranged the Adaro mine was
producing about 2 million tons per year. For this project, however, 4.3 million tons per year
would be required. The lenders wanted to see proof of the Adaro mine’s coal reserves, and
they wanted to make sure that the required infrastructure would be in place four years on,
when construction of the power plant was expected to be completed. Interim milestones and
backup plans were developed. A team of sponsors and bankers devoted itself to the fuel sup-
ply contract until it was signed.
Negotiating the Power Purchase Agreement
Despite experience with private investors in other industries, the Indonesian government was
just beginning to learn about private power project financing. It explored the possibility of a
corporate commitment, but found that the sponsors were willing to do a project financing
only on a limited recourse basis. The Indonesian government was accustomed to purchasing
plants on a cost-plus basis and needed to learn why a fixed-price, turnkey contract was
required for a limited-recourse financing.
According to Jeffrey T. Wood, a vice president of Chase during the first project financ-
ing, the first draft of the PPA proposed by PLN looked more like an engineering, procurement
and construction (EPC) contract, with approval rights concerning how the plant would be
constructed. The sponsors persuaded PLN that the PPA should be more oriented towards
defining the amount of power to be delivered and giving the sponsors appropriate economic
incentives. Still, Wood recalled, an unusual amount of detail about plant design was provid-
ed to PLN.
Tariff structure
Discussions on the tariff were particularly time-consuming. First, the sponsors and the bank
advisers for the sponsors and PLN outlined the philosophy of tariff design and the different
ways in which PLN could structure the tariffs: held level, escalating over time or declining
over time. In the end the sponsors and PLN agreed on a tariff that declines over time. It was
calculated to provide a reasonable cost to PLN over the full 30 years on a discounted cash-
flow basis, but also to provide a cash-flow cushion in the early years when debt-service
requirements would be particularly heavy. The bankers thought that such a structure would
help to attract the debt that was required. The problem with the structure was the public per-
ception that the tariff was high in the earlier years, even though it was lower in the final 18
years of the contract. This is the main reason that tariffs in subsequent Indonesian PPAs have
PAITON 1, INDONESIA