Global Business Guide Indonesia

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Energy & Mining | Overview of Geothermal Energy in Indonesia

Indonesia has the largest estimated geothermal energy reserves in the world at approximately 27 GW or 40% of the global total. The country’s unique geographical position on the Asia Pacific ‘Ring of Fire’ means that the amount of potential reserves could be far higher than current estimates and provides scope for the country’s much needed shift to use renewable energy sources to meet environmental commitments and to diversify its energy mix. Currently, Indonesia utilises less than 5% of the estimated potential or 1,191 MW and is only the third largest producer of geothermal energy behind America and the Philippines. The development of the sector has been delayed by numerous issues ranging from lack of financing for projects, conflict between central and local government as well as the high risk for investors given that the national electricity company, Perusahaan Listrik Negara, is the single buyer and has cheaper options available to it. Key developments on these issues such as the finalisation of the Power Purchasing Agreement with PLN for all geothermal power tenders and a Presidential Decree opening up areas of protected forest of strategic importance are providing a new impetus in accelerating development of the sector’s potential.

Overview of Geothermal Energy in Indonesia

Source: GOI 2011.

Indonesia’s intensified economic activity is coupled with an increased demand for energy; but supply is not keeping up. Brownouts are a regular occurrence and a shortage in capacity is often cited as a hindrance to industrial growth. Current electricity capacity for the entire country is approximately 31 GW with demand increasing by 9% every year. Approximately 80% of Indonesia’s electricity generation is currently generated by fossil fuels according to the World Bank (2010). Since the initiation of the Fast Track Program in 2006, this has shifted from oil to the cheaper alternative of coal. However, since 2008 the government introduced a second Fast Track Program to tap into renewable sources for an additional 10,000 MW of electricity, with the main focus on geothermal energy. President Yudhoyono has been very vocal about his commitment to geothermal energy and stated his ambition to be a geothermal superpower at the World Geothermal Conference in 2010. The plan is to generate 9,500 MW of geothermal energy by 2025 that will propel Indonesia to being the largest geothermal producer in the world, ahead of America.

2025 Targeted Energy Mix

Overview of Geothermal Energy in Indonesia

Source: MoEMR.

The advantages of geothermal power are clear; it provides clean, green energy utilising an abundant resource in a country where is it estimated that 35% of the population does not have access to electricity according to the International Energy Agency. In light of political uncertainty in the Middle East and rising oil prices, geothermal power represents an energy source that is not subject to volatility as the price remains flat. The country’s geothermal potential is also being underestimated; President Director of Star Energy, Bret Mattes told GBG that 27 GW of proven reserves only represents that of high temperature geothermal power ‘lower temperatures are being utilised in Australia [for geothermal power] and Indonesia’s reserves of this may be infinite’. Increased exploitation of geothermal energy to meet domestic needs would improve the country’s energy security, reduce greenhouse gas emissions while freeing up resources such as coal and oil for export.

In spite of the clear benefits, the sector has been slow to develop with only 4.2% of reserves being tapped as per 2010. This inertia has not been through lack of interest from investors, but rather through the uncertainty of overlapping government regulations as well as lack of knowledge among local authorities and the challenges of negotiating a power purchasing agreement with PLN that determines the commercial viability of a project. Financing is also very difficult to secure due to the high exploration costs involved and the lengthy process to recoup investment in comparison to oil and gas. The capital expenditure for a geothermal project estimated at $3 million USD per MW is far higher than a gas or coal fired power plant which are $0.6 million USD and $1 million USD respectively. President Director of RMI Group, Rohmad Hadiwijoyo explains that banks are still weary of geothermal projects; ‘the banks are only looking at the conventional methods, what you have got and what you get. They are not putting investment into renewable energy... what they forget is that in geothermal you only invest just the one time.’ New entrants to the market will find financing particularly difficult considering the negotiations on pricing only take place once the project has been quantified so the commercial value is still wholly uncertain. While this is the same case for oil and gas exploration; the risk and return is less favourable as the payback period is far longer for a utility.

Electricity in Indonesia is administered by state owned PLN who controls 83% of total capacity and is the single buyer for all power generation projects. At the beginning of 2011, the long awaited Power Purchasing Agreement was finalised with PLN. Regulation No. 2 of 2011 on the assignment of PLN to purchase electricity from geothermal power plants and setting a benchmark price for the purchase of electricity replaces the previous Regulation No. 32/2009. This regulation caps the purchase price of geothermal generated electricity at $0.097 USD/kwh obliging PLN to purchase electricity from all future tenders of geothermal concessions.

While the PPA is a very welcome move for independent power producers, it is not without its challenges in implementation. Geothermal concession tenders are done at a national level while the licenses are granted by the local authorities as per the Geothermal Law. PLN is not involved in the tender process itself and is not given a choice in selecting its supplier; the PPA must therefore be negotiated after the contractor has been selected. The company’s position as a monopolistic purchaser who is under obligation to sell electricity at a subsidised price to the public means that geothermal is an expensive option compared to coal for example. Supramu Santoso, President Director of Supreme Energy was heavily involved in lobbying to implement the PPA. He told GBG that PLN cannot be relied on to buy geothermal energy indefinitely because it is a commercial entity therefore price must be a key factor: ‘there needs to be further improvements to the regulations for the purchase by PLN. PLN rightly as a company wants to buy at the lowest possible price which is coal at the moment. If you look into the long term, geothermal will be able to compete with coal in my opinion in 5 years from now’. The pricing of electricity and the removal of subsidies will therefore be a critical factor in the further development of geothermal energy. Currently subsidies for electricity and fuel eat into the state budget, costing $5.99 billion USD in 2010. The value of geothermal therefore goes beyond just the price of the utility as it frees up valuable commodities such as oil and coal for export. The scheduled ending of subsidies by 2014 - 2015, as announced by the Ministry of Energy and Mineral Resources (MEMR) will therefore further highlight the benefits of investment in geothermal energy generation.

Decentralisation since 2001 is still in the adjustment phase and has given rise to varying levels of local government cooperation on geothermal projects. The various layers of authority have been a challenge, Bret Mattes of Star Energy notes the ‘teething problems’ that always accompany the process in any country and that ‘it takes time to sort out as there will always be differing interests at the national, regional, local and provincial level’. Under the Geothermal Law of 2003, all developers must work with the local government who are responsible for issuing the licenses for concessions. Many local governments do not have the expertise needed to gather the data on potential sites, to accurately judge the short term tradeoffs needed and to administer tenders effectively. The costs involved for initial exploration estimated at $4-5 million per exploration well fall outside of local budgets so the data is not available to administer the areas effectively before exploration begins. Operators therefore face a delicate task in balancing their project ambitions with the short term impact on the local community. The benefits are also not as clear cut considering there is only one buyer, in comparison to oil and gas where a proportion of revenue is submitted to the government.

Forestry is another tricky issue in the acceleration of geothermal power as around 80% of potential sites are in conserved forest according to the Minister of Forestry, Zulkifli Hasan. The Forestry Law No 39/2004 prohibits open mining in forest areas and places protected forests off limits. This law has been a major hindrance to the development of geothermal exploration. A Presidential Decree in Feburary 2010 has derived from this law and permitted geothermal mining and power plants of strategic importance in areas of protected forest.

In an effort to create a more conducive investment environment for geothermal energy to meet long term goals for both green house gas emissions reduction and improving domestic energy capacity; the Indonesian government has called on international bodies to stimulate renewable energy development with particular focus on geothermal, and reform the regulatory framework. Up to $400 million USD is being provided by the World Bank Group and the Asian Development Bank from the Clean Technology Fund for the Geothermal Power Development Project as per March 2011. The project is designed to help mobilise investment in the sector by refining the tendering process and help fill financing gaps in projects by offering attractive financing terms. Existing resources that are currently under exploration and operation by Pertamina Geothermal will also get a much needed boost to accelerate. The World Bank is also assisting the government in preparing a Carbon Finance Framework to facilitate pricing and adequate compensation for geothermal projects. The setting up of a $39 million USD risk exploration fund by the Ministry of Energy and Industry at the beginning of 2011 is another welcome move to attract investors. With the agreement of the PPA, this will bolster the commercial viability of geothermal projects and encourage banks and investors to back existing and future projects.

Global Business Guide Indonesia - 2012

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Indonesia Energy Snapshot

Contribution to GDP: 3.44% (2016) Oil & Gas Imports: $1.22 billion USD (Jan 2016)
Proven Oil Reserves: 3.69 billion barrels (2016)
Proven Gas Reserves: 2.85 trillion cubic metre (2016)
Proven Coal Reserves: 28 billion tonnes total reserves (2015)
Proven Potential in Geothermal Energy: 27 GW
Proven Potential in Hydropower: 75 GW
Other Energy Sources: Coal Bed Methane, Biomass, Waste, Ocean Current, Solar, Wind.
Current Energy Mix: Petroleum 41%, Coal 30%, Natural Gas 23%, Renewables 6% (2014).