Consultative Meeting on Reports of Joint Crediting Mechanism Feasibility Studies 2012 in Indonesia Small-scale Hydropower Projects

February 21, 2013

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Small Hydro Power Project

Small Hydro Power Project Structure Project Site Location

Waterway Headpond

Toba Lake PJ site

Penstock Powerhouse Project Information Site Location Average Water Flow Capacity Factor Generation Capacity
Source: NEDO. Micro Hydro Power Installation Guide Book

North Sumatra 21 m3/sec 62% 5MW * 2 57GWh/year

Electricity Generation
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Project Outline (1) - Issues Identified

Small hydro power has been promoted with FIT and other incentives by the Government of Indonesia, and many developers have entered into the market. However, there are still some issues to be addressed in order to accelerate development of small hydro power in Indonesia.
Four Major Issues Recognized through the Discussion with Indonesian Stakeholders Issue #1 Issue #3

Creditworthiness of the developer

Severe cash flow when the repayment of loan is huge

Issue #2

Issue #4

Few Financial Institution taking construction risk

Developer's inexperience in small hydro / underestimation of engineering aspect

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Project Outline (2) - IDIs Support Proposal Utilizing Joint Crediting Mechanism
IDI proposes to utilize Japanese financial and technology support as well as application of simple mechanism for realizing better development of small Hydro & value of emission reductions.
IDIs Support Proposal

Financial Support
Japanese Financial Providers Including Energy Fund Sharing Construction Risk with Developers

Joint Crediting Mechanism

Simple MRV Positive Approach (eligibility)

Japanese Technology
Well Experienced Japanese Consulting Company Providing Reliable Technology & Knowhow

Issue #1

Issue #2

Issue #3

Issue #4

Creditworthiness of the developer

Few Financial Institution taking construction risk

Severe cash flow when the repayment of loan is huge

Developer's lack of experience in small hydro / underestimation of engineering aspect

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Project Outline (3) - Financial Support & Technology Support from Japan
Financial Support
Senior lender can only provide about 70% of total project cost as senior loan in general Developers need finance provider to fill the gap as they may have project pipeline Limit 70% Senior Loan Asset Funding Gap Equity PPA Senior Loan Asset Equity or Mezzanine Equity
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Technology Support
Some developers underestimate importance of engineering, and end up redoing studies/designs Experienced Japanese company involvement from early stage will help successful development Permit Permit F/S Permit

Pre-F/S Possible application of Japanese technology & knowhow

Possibility of Japanese financial support

Financing Construction Operation

Review of Designs, etc Construction Trouble Equipment Trouble

Need to redo surveys / designs

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JCM draft MRV Methodology Proposed by IDI - Reference Scenario

Eligibility Greenfield small hydro power project of 20,000 kW and under that is replacing grid and/or use of diesel power plant and equipped with meters for power generation = Positive Approach Reference Scenario can be (1), (2), or combination of (1) & (2)
Substitute for Grid

Reference Scenario (1)

Small Hydro Power Plant

Operation of Existing Power Plant GRID New Power Plant

Substitute for Diesel

Reference Scenario (2)

Small Hydro Power Plant

Factory

Operation of Existing Diesel Power Plant

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JCM draft MRV Methodology Proposed by IDI - Reference Scenario Calculation

Reference Scenario (1) Calculation
Substitute for Grid

Electricity Generation (kWh/year)

Emission Factor (Grid) (tCO2/kWh)

Emission Reduction (tCO2/year)

Reference Scenario (2) Calculation

Substitute for Diesel

Electricity Generation (kWh/year)

Efficiency Diesel Power (GJ/kWh)

Emission Factor (Diesel) (tCO2/GJ)

Emission Reduction (tCO2/year)

Reference Calculation for F/S PJ (1)

Electricity Generation (kWh/year) Generation Capacity

5,000 kW * 2

Hours/year
8,760h

Capacity Factor
62%

Emission Factor (Grid)

0.000748 tCO2/kWh

Emission Reduction
40,625 tCO2/y

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JCM draft MRV Methodology Proposed by IDI - Important Feature / Early Verification
Early Verification Electricity Generated for First Three Months (kWh/3months) Electricity Generation for the Year (kWh/year) Emission Reduction (tCO2/year)

Important Feature

Instead of having to wait one or two years for verification, this methodology enables to have early verification and possibly early revenue

Credit Transfer Mechanism Issues to be Addressed

Risk of Over Verification

Up to G to G Discussion on the Design of mechanism

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Early verification may estimate more/less emission reduction than actual amount for the year

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Early Verification / Approach to Solve Issues Identified - In case of substitute for Grid
By monitoring 3 months of electricity generation and water flow, this methodology can estimate amount of emission for the year for verification
Start of Commercial Operation Emission (tCO2/year) Electricity generated: (kWh/3months) Year 1

Possible Revenue Timing within the same year Water flow monitored (m3/s) M1 M2 M3

Historical average Water flow

MHA1

MHA2

MHA3

Coefficient k takes the minimum number of each month rate and 1

Using conservative coefficient reduces the risk of estimating emission reduction more than the actual reduction amount
Emission per year (tCO2/year)
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Electricity per year (kWh/year)

Conservative coefficient (k)

Emission Factor (tCO2/kWh)

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Why Early Verification & Possible Early Revenue for Developers Matter?
<Current Finance Situation> 9 Regular repayment schedule by the local banks start with huge amount of repayment (Year 1) making it difficult for developers to repay. 9 There are some cases where Indonesian financial institution allows balloon type schedule. 9 However, it still creates refinance risk at the end year (Year 6). <Proposed Methodology by IDI> 9 Our proposed methodology helps developers by providing option to conduct verification within the Year 1 and possibly receive revenue within the same year 9 Therefore, credit revenue would help developers to finance their project, and the earlier the revenue comes in, the more projects can be financed and developed.
Regular Repayment Schedule by the local banks
Revenue line Interest Interest Principle Year 1
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Balloon Type Repayment Schedule

Revenue line

Principle Year 2 Year 3 Year 4 Year 5 Year 6

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Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

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Project Valuation
Assumption: Credit Price:

5 euro/ton

Reduction Volume: 40,354 tons/year

Balloon Type Case (Without Credit Revenue)

Million Rp. Year Base Case Revenue (Credit Sales) (no credit Loan Repayment revenue) Cash Balance Operation Construction -2 -1 1 2 3 4 5 6 7 8 9 10 0 0 47,686 47,686 47,686 47,686 47,686 42,532 42,532 42,532 42,532 42,532 0 0 0 0 0 0 0 0 0 0 0 0 0 0 15,013 17,358 19,412 23,291 30,176 60,923 0 0 0 0 47,800 500 6,205 11,629 17,303 21,851 22,736 -9,675 24,167 57,830 91,305 124,582

Cash Shortage
JCM Case (With Early Verification & Credit Revenue)
Million Rp. JCM Case (credit paid since 1st year) Year Revenue (Credit Sales) Loan Repayment Cash Balance Construction Operation -2 -1 1 2 3 4 5 6 7 8 9 10 0 0 47,686 47,686 47,686 47,686 47,686 42,532 42,532 42,532 42,532 42,532 0 0 2,682 2,682 2,682 2,682 2,682 2,682 2,682 2,682 2,682 2,682 0 0 15,013 17,358 19,412 23,291 30,176 60,923 0 0 0 0 47,800 500 8,887 16,993 25,350 32,579 36,147 5,747 41,600 77,275 12,762 148,051

Positive Cash Flow

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Summary

Four issues regarding small hydro power development are identified based on the local stakeholders opinion and IDI assessment IDIs support proposal addresses each issue by bringing Japanese finance support, Japanese technology and Joint Crediting Mechanism. IDI has met with more than 15 respectable developers, and their total capacity exceeds 100MW, which have potential to reduce emission of roughly 400,000 tCO2/year There are many more small hydro developers and projects in Indonesia, and Indonesia has abundant hydro resources that can be utilized for development JCM scheme has the potential to push great number of small hydro power project developments

Thank you
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