Indonesia’s electricity demand is expected to increase from 206.5 terawatt-hours (TWh) in 2013 to 442.5 TWh in 2022, according to an energy report issued by Transparency Market Research. The report also projected Indonesia’s power generation capacity would double to 90.1 gigawatts (GW) by 2022. The Indonesian government has set an ambitious goal of adding 35 GW of new installed capacity by 2019, increasing the share of the population with access to electricity from 85% to 98% by 2022 (See Investment in Indonesia’s Electricity Sector; Sparks of Life). The government has been promoting reforms to facilitate geothermal investment as it aims to increase generation capacity from 1.6 GW in 2013 to 6.6 GW by 2025 which for now appears to be a highly ambitious target despite the positive momentum.
The estimated $93 billion USD expansion of Indonesia’s electricity generation capacity will involve the construction of 291 generation plants, 47,000 km of new transmission and distribution lines, as well as 1,375 new substations. State-owned electricity company Perusahaan Listrik Negara (PLN) is investing $50.5 billion USD in the project, while the private sector is set to provide the remaining $40.5 billion USD of funding, accounting for up to 30 GW of the 35 GW of installed capacity.
With about 40% of the world’s geothermal reserves being located below the surface of Indonesia, the country is estimated to contain the world's largest geothermal energy reserves and therefore contains huge potential for this renewable energy source. However, this potential remains largely untapped. Today, Indonesia only uses 4-5% of its total geothermal capacity.
The Geothermal Law, passed in 2014 but yet to be implemented, aims to remove several barriers to geothermal development including by centralising the tender process to sidestep delays in permitting at the local level. The law also increased the price ceiling range to between $0.12 USD and $0.30 USD per kilowatt-hour (KWh) to reflect the high costs of developing geothermal-produced electricity. Perhaps most significantly, the law states that geothermal activities are no longer considered mining activities. Under the previous classification, geothermal projects were prohibited in protected forest and conservation areas, which limited development.
The Indonesian government is also expected to issue a new investment regulation allowing foreign investors to have 100% ownership of geothermal power plants with a capacity of at least 10 megawatts (MW); currently, foreign ownership is set at 95%.
The best example of the evolution in the sector lies in the Sarulla project. It took more than two decades to start construction of the $1.6 billion USD Sarulla Geothermal Power Plant in North Sumatra (North Tapanuli regency), designed to be the world’s largest geothermal plant, with a total net guaranteed delivery capacity of around 330 MW for a period of 30 years (enough to power about 330,000 homes). Having been delayed due to severe bureaucratic hurdles and lack of financial resources, the ground breaking for the project was finally conducted in June 2014. The plant is expected to start operations in 2016 and will be fully completed by 2018.
The Sarulla Geothermal Power station will replace Star Energy's Wayang Windu Geothermal Power Station as Indonesia's largest geothermal power station. The Wayang Windu Geothermal Power Station, located south of Bandung (West Java), has a total installed capacity of 227 MW. The financing of the project has been heralded as a breakthrough for Indonesia's largely undeveloped 29 GW of geothermal potential.
Besides the aforementioned project, the Ministry of Energy and Natural Resources of Indonesia plans to auction 21 geothermal working areas to investors. A total of 16 blocks will be offered through an open auction, eight in 2016 and eight in 2017. For the remaining five geothermal blocks the government will select the operator (a state-owned company) through direct appointment. Most likely the government will appoint Pertamina Geothermal Energy (PGE), a subsidiary of energy company Pertamina, to operate these blocks.
Indonesian geothermal power producer PT Pertamina Geothermal Energy (PGE) will also invest $2.5 billion USD to develop seven geothermal projects, that may be commissioned by 2019. By 2025, PGE targets a total geothermal capacity of 7,094.5 MW from 437 MW at present. Some of these projects may already be known since Pertamina has stated its interest in taking over geothermal assets on the pipeline to be sold by multinational oil giant Chevron.
Two Chevron subsidiaries now own and operate geothermal projects in Salak and Darajat fields — two geothermal working areas in West Java in which Pertamina also has a minority interest — with a capacity to generate 647 MW of power.
Following earlier news that the Indonesian government has very ambitious plans to expand renewables in the country (See Renewable Energy in Indonesia – A Sleeping Giant), it has also been reported by the state that it is seeking to allocate 5 trillion IDR ($375 million USD) from the state budget next year (2017) for geothermal exploration, in order to accelerate development of the energy source that has a potential of 28,000 MW. The funds account for half of the 10 trillion IDR renewable energy budget that the government plans to spend next year.
BMI Research notes that the improving regulatory environment for the Indonesian geothermal sector is evidenced by the growing private sector interest in the market. The country has seen investment announcements by French ﬁrm Alstom in February 2015 and Japan-based Inpex Corporation in June 2015.
However, the country’s ambitions might be too lofty. Indonesia is planning to produce 6,023 MW of geothermal power by 2020, but experts warn that the country may fail to meet its ambitious targets due to regulatory challenges coupled with extremely high exploration costs.
Indonesia’s targets may simply be too steep. As of 2016 geothermal energy makes up just 1.1% out of the entire renewable energy share; by 2025, Indonesia aims to raise it to 5.8%. In order to reach these targets, Indonesia will need to add roughly 300 MW of geothermal energy per year, which translates to drilling around 60 wells per annum.
A 2015 joint Asian Development Bank-World Bank (ADB-WB) report entitled “Unlocking Indonesia’s Geothermal Potential” is blunter in its assessment of Indonesia’s geothermal sector, noting widespread perceptions that Indonesia’s geothermal program has essentially “stalled”: From 2010–2013, just 135 MW was added, and best estimates suggest that by the end of 2016, no more than an additional 190 MW is likely. No power purchase agreements (PPAs) were signed under the 2012 FIT (Feed-In Tariff).
Nevertheless, even with these hurdles, the country’s non-hydro sector — which includes geothermal — is expected to grow by double digits in terms of generation and capacity by the next decade. A total of 13 geothermal projects are currently in the construction phase on the islands of Java, Sumatra, Sulawesi and Maluku-Ambon, as well as close to 50 projects in early or prospective phases.
So what else needs to be done? According to the ADB-WB joint report, only concerted and coordinated action in all areas simultaneously will unlock Indonesia’s geothermal sector. The report highlights that the underlying problem is really one of capital mobilisation for a generating option that is unusually capital intensive: just to achieve an additional 3,000 MW geothermal capacity in the foreseeable future will require $4 billion USD in equity and $9.5 billion USD in debt finance (assuming $4,500/kW total cost, and 30% equity).
The report adds that a key problem for raising debt finance is that even the international financial institutions (IFIs) (ADB, International Finance Corporation, World Bank/International Bank for Reconstruction and Development [IBRD]) are reluctant to fund up-front exploration and typically will provide financing only once 50% or more of the steam resource is proven.
Global Business Guide Indonesia - 2016
Indonesia has the largest proven reserves of geothermal energy in the world and is aiming to become the largest producer of it over the next decade. This section looks at some of the challenges in the sector that have held back development and the recent regulatory changes to boost it.
Indonesia’s domestic electricity demand is increasing at an average of 9% annually thus pressing the need for accelerated development of its geothermal resources. This section looks at how investors can enter the sector and the legal framework governing the industry.
Contribution to GDP: 11% (Q3 2015)
Oil & Gas Imports: $22.8 billion USD (Jan-Nov 2015)
Proven Oil Reserves: 3.7 billion barrels (2015)
Proven Gas Reserves: 101 trillion cubic feet (2015)
Proven Coal Reserves: 28 billion tonnes total reserves (2015)
Proven Potential in Geothermal Energy: 29 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).