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The signing of a financing agreement for the Sarulla power plant in May 2014 marks a milestone in Indonesia's development of geothermal energy. It is a breakthrough in a project that had stalled for more than two decades and may reinvigorate the entire industry at a time when Indonesia urgently needs more investment in renewable sources of electricity (See Renewable Energy in Indonesia – A Sleeping Giant). The resumption of the project required the involvement of various ministries and agencies and coincides with what appears to be greater political support for geothermal energy. During its last months in office, the Yudhoyono government vowed to improve incentives for developers, while the new administration following the July 2014 presidential elections must pull out all the stops to attract more investment and avert a looming energy crisis.
Harbouring an estimated 40% of the planet's total reserves thanks to its unique location on the Asia Pacific ‘Ring of Fire', Indonesia has more geothermal energy potential than any other country on Earth. So far, it has largely failed to utilise this immense natural resource, relying instead on coal, natural gas and oil to meet the bulk of its electricity needs (See Indonesia’s Electricity and Power Generation Sector). Private investors in the past considered the market unattractive or outright risky for reasons pertaining to geography and infrastructure, laws and regulations and not least the monopoly of state-owned utility PT Perusahaan Listrik Negara (PLN) in electricity distribution. Amid ongoing legal reforms, however, the tide may be turning in Indonesia's geothermal industry, to the benefit of developers and suppliers of equipment and services.
With a planned capacity of 330 MW in three generating units, Sarulla is set to become the world's biggest geothermal power plant and sell electricity to PLN for thirty years. The project, located in the regency of North Tapanuli in North Sumatra, only resumed after securing debt funding of $1.17 billion from six commercial lenders together with the Asian Development Bank (ADB) and the Japan Bank for International Cooperation (JBIC) as lead structuring banks. It is expected to commence operations in 2016 and be fully completed in 2018. Shareholders are Indonesia's Medco Power (37.5%), Japanese companies Itochu Corporation and Kyushu Electric Power (25% each) and US-based Ormat Technologies (12.5%).
Industrialization, population growth and the extension of the power grid to electrify formerly disconnected communities is seeing a rapid increase in electricity consumption. Total national capacity (peak load) is projected to increase to 186 GW in 2030 from 33 GW in 2012, or at a compound annual growth rate of more than 10%. Over the decade 2013-2022, PLN expects the Java-Bali system's electricity needs to rise by an average 7.6% a year. In Eastern Indonesia and in the Sumatra region, demand over the same period will rise faster yet at annual rates of 11.2% and 10.6%, respectively, according to PLN's Power Supply Business Plan.
To meet rising demand, Indonesia will require 59.5 GW in additional generating capacity, or an average of 6 GW a year. The required increase is nothing short of a herculean task, and the expectations with regards to geothermal power are particularly high. While PLN's planning foresees coal to remain the prime source of electrical power (See The Coal Sector in Indonesia), followed by natural gas (including LNG), geothermal’s contribution to the national electricity mix is seen to more than double from 5% in 2013 to 11% in 2022. This would put it in third place and well ahead of hydroelectric power at 5.1%. However, the target will prove unreachable unless there is a massive private-sector effort.
Indonesia's entire renewable energy sector has suffered from years of under-investment, which is why only a very small portion of the country’s energy is green today. The daunting task of raising output quickly, unfortunately, has put environmental concerns on the back burner, but if Indonesia wants to maintain a fighting chance at meeting its carbon commitments, it needs to attract massive investment into renewables. The advantages of geothermal power are clear: it provides clean energy utilising an abundant resource that is not subject to price volatility. Increased exploitation of geothermal energy to meet domestic needs would improve energy security and reduce greenhouse gas emissions, while freeing up resources such as coal and gas for export.
Ranking behind the US and the Philippines, Indonesia is already the third-largest producer of geothermal energy, but it has the potential to become number one. With just below 1,350 megawatts (MW) of installed capacity in mid-2014, the country exploits less than 5% of its proven reserves, which are estimated at 28,000 MW and may actually be much higher than that. This resource base provides ample scope for Indonesia's urgently needed shift towards renewable sources of energy and to diversify its energy mix. If fully utilized, geothermal resources could theoretically cover more than half of the country's current electricity consumption. In practice however, many of these resources are too hard to exploit to make this calculus viable. Many prospective locations lie on remote islands, making them costly to develop. Many potential sites are also deeply tucked away in forests, which not only makes them hard to access logistically, but also legally, if the area is protected for conservation.
Despite these difficulties, there are enough sites that could be viably developed. Within the renewable sector, geothermal is attracting most attention from international investors, and unlike other sources of electricity in Indonesia, geothermal generation is dominated by independent power producers (IPPs). While the official target to increase installed capacity to 9,500 MW by 2025 looks overly ambitious, development of the industry is high on the government's agenda for energy security. Geothermal plays a major role in the second so-called Fast-Track Programme to boost national power output. After years of neglect, Indonesia can now be described as the most happening place for geothermal development, with more megawatts under construction than in any other country in the world, according to a 2013 Report from the Geothermal Energy Association. Furthermore, the Ministry of Energy and Mineral Resources in June 2014 opened bidding for nine geothermal working areas with a combined potential estimated at 1,030 MW. The areas on offer for development lie in East Java (4), North Maluku (2), West Java (1), Jambi (1) and West Sumatra (1).
The government of Indonesia has recently undertaken a number of encouraging steps aimed at attracting geothermal energy investment, and further moves are being prepared. The Geothermal Fund Facility (GFF) provides support for data acquisition and exploration activities, which is seen as crucial to mitigate risks and justify the high upfront costs for project development. In forested regions, exploiting geothermal resources is often hampered by the fact that they lie in protected conservation areas, where mining activities are prohibited. Acknowledging, however, that these rules impede exploitation of a major chunk of potential sites (and that the environmental impacts of geothermal power are small compared to other mining activity), the government is revising the Geothermal Law (Law No. 27/2003) so that geothermal projects would no longer be defined as mining projects. Energy and Mineral Resources Minister Jero Wacik also announced in June 2014 that a ministerial decree had been signed on the pricing for electricity from geothermal resources in a bid to eliminate another major obstacle to geothermal development, namely purchasing prices paid by PLN, which many potential investors consider too low. The minister promised an attractive feed-in tariff scheme.
A number of issues continue to hamper geothermal exploration and development, including poor infrastructure in isolated regions, local residential opposition to some projects and cumbersome permit procedures that involve central, provincial and district-level authorities. The role of state-controlled enterprises can also be intimidating for private-sector players, particularly the ability of energy giant Pertamina and PLN subsidiary Indonesia Power to attract debt funding at below-market rates thanks to their implicit state backing.
Notwithstanding these ongoing concerns, private-sector investment is clearly enjoying increasing political support. The issuance of the Land Acquisition Act in 2012 and subsequent regulatory changes expedite the land purchasing process and, alongside more supportive rules on public-private partnerships (PPP) (See Indonesian Infrastructure: Tremendous PPP Opportunities), should help to alleviate infrastructure bottlenecks. Given the massive pressure to boost national power supply and assuming the positive momentum continues, business opportunities abound in Indonesia's geothermal industry, and groundbreaking on the Sarulla project will be just the beginning.
Global Business Guide Indonesia - 2014
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).
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