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Mar 14, 2013 | 14:56 GMT

21 mins read

Hot, clean and complex: Unlocking Indonesia’s geothermal power

Partner Perspectives are a collection of high-quality analyses and commentary produced by organizations around the world. Though Stratfor does not necessarily endorse the views expressed here — and may even disagree with them — we respect the rigorous and innovative thought that their unique points of view inspire.

Published by Strategic Review.

Indonesia has huge potential geothermal resources, but development has been slow and speeding it up is considered a herculean task. The high cost of investment and lack of government capacity are often cited as hindrances to development, along with familiar concerns from the era of decentralized government about unclear regulatory and institutional frameworks.

Finding solutions to these issues is critical to further unlocking this indigenous, clean and renewable source of power. Success could bring positive benefits to the country’s energy security and climate change mitigation efforts.

OV Figure 1

Indonesia can no longer depend on fossil fuels, particularly oil, to power its economy. Soaring global oil prices have placed considerable strain on the economy. According to the Finance Ministry, energy subsidies – from both fuel and electricity – in 2012 cost the government $18.55 billion (17 percent of government expenditures). This is a significant increase from $9.78 billion in 2010, as shown by several studies (see Figure 1).The figure could even be higher since it reportedly underestimates the actual global oil price.

With Indonesia’s projected gross domestic product growth to remain steady at 4-6 percent and industrial production to slightly increase over the next couple of years, several studies, including from the National Council on Climate Change (NCCC) and the Energy and Mineral Resources Ministry (MEMR), have estimated that the power sector is projected to grow from 120 tWh (terawatt-hour) in 2005 to 970 tWh by 2030. If Indonesia continues to depend on oil, rising electricity needs would lead to the depletion of Indonesia’s domestic oil reserves sooner than expected. A 2012 statement from the energy ministry estimated that the country’s remaining 10 billion barrels of oil reserves will be exhausted in the next 20 years should no new reserves be found. In fact, the country has been a net importer of both crude oil and refined products since 2004.

Too much coal

The formidable task of meeting rising electricity demand requires a fundamental change in Indonesia’s energy policies, programs and actions. The country could opt for an easier solution, such as utilizing its abundant coal reserves. According to a 2009 World Bank report, the central government already has initiated a “crash program” to bring 10,000 MW (megawatt) of coal-fired power plants online as stipulated in Presidential Decree No 71.

Many critics, however, argue that while coal-fired power plants can alleviate short-term supply problems and reduce dependency on imported oil, the approach fails to address energy security goals and more importantly casts a shadow on the government’s pledge to tackle climate change and reduce emissions. Key Indonesian stakeholders interviewed in 2011 believed that the new coal power plants – purchased at low cost from China – were mostly dirty and inefficient, according to the paper, “An Environmental Perspective on Energy Development in Indonesia” included in the 2012 book “Energy and Non-Traditional Security in Asia.” If the use of coal continues to dominate the power sector, many experts predict that increased CO2 emissions from electricity generation by 2030 could reach 810 million metric tons of CO2 equivalent (CO2e), an increase of nearly seven times the amount in 2005 (see Figure 2A and 2B).

OV Figure 2A

This projected growth in emissions contradicts international commitments made by President Susilo Bambang Yudhoyono to reduce greenhouse gas (GHG) emissions by 26 percent by 2020 from a business as usual scenario. The promise was legally stipulated in Presidential Decree No 61 of 2011, creating a National Action Plan for the Reduction of Greenhouse Gas Emissions, which also calls for the increased use of renewable energy to account for 25 percent of total energy production by 2025.
 

OV Table 1

Against this backdrop of increasing fossil fuel prices, growing concerns over energy security, and a projected increase in GHG emissions, renewable energy is well positioned to play a critical role in Indonesia’s energy mix. The 2009 World Bank Report and a 2012 technical paper presented by Indonesian experts for the 2nd Congress of the East Asian Association of Environmental and Resource Economics, for instance, showed that renewable energy sources can meet up to 35 percent of Indonesia’s energy needs by 2035.
 

OV Figure 3

Of various renewable energy sources available in Indonesia, geothermal power appears to be the preferred solution. Geothermal energy, as argued in a 2008 paper, “Sustainable Energy: Without the Hot Air,” by David Mackay, has the potential to replace coal-fired power plants as a baseload electricity source with virtually no emissions, and Indonesia has more geothermal energy potential than any other country. According to the head of the Geological Agency at the energy ministry, as of 2011, Indonesia’s total potential geothermal resources and reserves were estimated at 28,994 MWe (megawatts-electrical) with an installed capacity of just 1,196 MWe (approximately 4 percent of total resources) (see Table 1 and Figures 3 and 4).
 

OV Figure 4

Of the 276 geothermal areas in Indonesia, a total of 37 can be considered as mining working areas, with 7,376 MWe of geothermal potential. To tap these resources, a second-phase crash program, to be implemented between 2009 and 2018 at an estimated cost of $21.3 billion, has been created by the government. According to Dr Montty Girianna, Director of Energy, Mineral Resources and Mining at the National Development Planning Agency (BAPPENAS), this program will source 60 percent of new capacity from renewable resources and at least 5,000 MW, with at least 48 percent coming from geothermal, mostly targeted at increasing access to electricity in the outer islands where most geothermal resources are located.
 

Benefits in waiting

If Indonesia can achieve its official target for geothermal development, the country is likely to gain positive economic, social and environmental outcomes including greater energy security, emissions savings, rising government revenues and greater employment. With regard to energy security, based on government data and various sources on proposed geothermal power plants in the second-phase crash program, it appears the country can have 3,967 MW of geothermal capacity – approximately 40 percent of total planned capacity – by 2014. If this succeeds, Indonesia can address its energy shortfalls and curb the need for imported oil in the power sector. A 2011 PricewaterhouseCoopers (PwC) report and a 2009 document written by Sugiharto Harsoprayitno for the World Bank further argued that this can help shield the Indonesian economy from fluctuations in oil prices.

Increased geothermal energy in the national energy mix can also contribute to significant GHG emissions savings, as several studies have illustrated. One such study by Muhammad Ery Wijaya and Bundit Limmeechokchai, published in the 2009 International Journal of Renewable Energy, for instance, showed that an increase of 10 GW (gigawatt) – the total geothermal potential presently ready for commercial extraction, according to the World Bank – in geothermal energy capacity by 2025 will result in emission savings of approximately 58 million metric tons of CO2e. These emissions savings are calculated by comparing the estimated amount of CO2 emissions coming from geothermal power plants with emissions from coal-fired power plants.

Energy scenarios developed by the ministry of energy exhibit similar patterns (see Figure 5). In this illustration, from 2011 onward, the national emissions based on a geothermal scenario will decline significantly in comparison with emissions based on a business-as-usual scenario.

The success of geothermal energy development can also translate into an increase in government revenue. According to Law No 33 of 2004 on Central and Local Fiscal Balance, the percentages of revenue sharing from geothermal tax and royalties are elaborated as follows: 20 percent to the central government, 16 percent to the province, and 32 percent each to the originating district/municipal government and other district/municipal governments in the same province. It is not yet clear how much the government will gain if it can develop 10 GW of geothermal, but it is clear that local governments will gain the most.

Another positive outcome that is likely to result from geothermal energy development is employment. In the United States, based on a 2004 report from the National Geothermal Collaborative, building a 50 MW geothermal power plant can create several hundred temporary jobs in construction and between 30 to 50 permanent, highly skilled, well-paying full-time jobs at the production facility. The same document argues that considering the economic multiplier effect, this should mean approximately 90 to 150 new full-time jobs in the community. In the case of Indonesia, Scott McInnis of the Geothermal Resources Council; Duncan Ritchie, CEO of energy advisory firm Aequero; and Gene Sullivan of Deloitte Asia-Pacific, for instance, presented findings in 2010 that geothermal energy in Indonesia could create as many as one million jobs – significantly more than other types of power generation.

Such high aspirations, nevertheless, require a hard reality check. As reported by many studies, achieving the official government targets for geothermal energy development have proven to be challenging. In 2010, a review conducted by Castlerock Asia on behalf of the energy ministry, found that it is difficult to meet the official government target of building 3,967 MW of geothermal capacity by 2014, and that the most the government can hope to deliver is 2,297 MW.

A 2008 World Bank report predicted similar figures. Figure 6 compares the projected installed capacity with the official target. Based on current trends, that Indonesia can only build around 1,700 MW of geothermal capacity by 2014, 2,750 MW by 2020 and only 4,000 MW by 2025. These projected figures are much lower than the government’s target of 6,000 MW by 2020 and 9,500 MW by 2025.

Pricing woes

For many years, the underutilization of geothermal energy resources was partly blamed on pricing disagreements between PLN, the state-owned electricity company, and the government. A newer tariff was eventually introduced in January 2011 by PLN – an 18 percent tariff hike ceiling compared to the previous one and in line with MEMR Regulation No 7 of 2010 – as a temporary measure to resolve tariff discrepancies. Since 2011, Indonesia’s feed-in regulation has brought a relatively higher tariff for geothermal power, 9.7 US cents/kWh (cents per kilowatt-hour), although the scope was limited to geothermal fields included in the second-phase “crash program.”

OV Figure 5

Prior to this increase, even when geothermal licenses were granted, developers delayed exploration, waiting for power-purchasing agreements with PLN that were on hold in anticipation of government pricing approval. Some developers, nevertheless, still viewed the new tariff as inadequate. A 2011 article by Ivan Castano in Renewable Energy World, described the Indonesian tariff as lower than in the United States, where developers were paid 10-12 cents per kWh, although development costs were much lower in Indonesia. The Indonesian tariff was also lower than in other developing countries including Turkey and the Philippines, where developers were paid 10.5 and 14.8 cents per kWh, respectively, according to Think Geoenergy in two articles published in 2010 and 2011. Since 2010, for instance, PT Star Energy Halmahera proposed a purchasing price of 17 US cents/kWh and had been in negotiations with PLN even though the government had increased the tariff to 9.7 cents/kWh. The regulation did allow for establishing a higher price, however, with the prior approval of the energy ministry.
 

OV Figure 6

In August 2012, the government increased the tariff again. Aiming to further encourage investment in geothermal energy, it started obliging PLN to pay a tariff on electricity generated from geothermal facilities of 11 cents-18.5 cents per kWh, depending on where the plants were located. The government hopes that with the newest tariff, companies will race to invest in geothermal energy – as stated at an electricity conference in Bali by Jero Wacik, the Energy and Mineral Resources Minister.

It appears, however, that despite a significant increase in tariffs, many other obstacles and risks remain. Ivan Castano, in a 2011 article in Renewable Energy World, for example, reported that some investors remain concerned about the ability of debt-ridden PLN to pay higher tariffs as state coffers are already burdened with high subsidies for the energy sector. A 2008 World Bank study found that a power purchase cost that exceeds 4.95 cents/kWh is likely to lead to further financial losses for PLN regardless of the power source, given the current energy mix and the retail PLN benchmark price, the level at which PLN can purchase power without incurring additional financial losses.

Nur Pamudji, PLN’s president director, agreed with the argument, according to an article in the Jakarta Globe newspaper published in October 2012. He said that he would prefer to buy electricity from coal-generated plants because the tariff was relatively cheaper (only as high as 6 cents per kWh). The report argued that while higher feed-in tariffs might benefit the producer, the new tariff could have a detrimental effect on PLN. It is further argued that even though the electricity price for low-income consumers is subsidized by the state, PLN still has to calculate the price for power based on its own operations.

Exploration risk

Another immediate risk that may hamper geothermal energy development is the high cost of exploration. According to a 2011 publication by KfW Bankengruppe, Germany’s leading development bank, a drilling project exploring a single geothermal location can easily swallow €15-20 million, which does not even take into account the costs associated with the risk of non-discovery. It can then take another ten years to develop a geothermal power plant to the level of commercial operation, with project financing available only in the latter phase of this process. In the same report, the fact that geothermal development often requires significant up-front equity is mentioned as a key issue for investors.

The accepted wisdom is that geothermal technology is still prohibitive, costing an estimated $800 million for a 333 MW power plant, or around $2.4 million/MW, which is beyond the financing capability of the Indonesian government. Masashi Shibaki and Fredric Beck, in a 2003 article, “Geothermal Energy for Electric Power: a REPP Issue Brief,” estimated costs of around $1.9 million/MW for direct geothermal power in terms of installed capacity. According to BAPPENAS documents, the cost of building a geothermal power plant in Indonesia lies in the range of $3,000-3,400 for each kWh of electricity that it produces, significantly higher than the cost of a coal-fired power plant, which lies in the range of $2,000-2,400 per kWh.

Recognizing the high risks of investment and initial development costs in geothermal resources, the World Bank announced a $400 million commitment from its Clean Technology Fund in early 2010, with the purpose of doubling Indonesia’s geothermal energy capacity. The World Bank, Asian Development Bank (ADB) and Japan International Cooperation Agency (JICA) jointly financed the Lahendong Geothermal Plant in North Sulawesi province. The plant is one of 12 subprojects under the ADB’s Renewable Energy Development Sector (REDS) Project, and the goal is to have a new plant with a 20 MW capacity ready in 2012.

Furthermore, in March 2008, JICA undertook a study on fiscal incentives to accelerate geothermal energy development. In its study, JICA argued that to address development costs, particularly in remote islands in the eastern regions, official development assistance (ODA) is needed for Pertamina, the state owned oil and gas company, and an increase in tariffs for private investors to exploit the most promising geothermal fields. The study further emphasized the government’s role in developing small geothermal resources in remote areas where private sector interest is unlikely.

In addition to an increase in tariff and financial support, other actions to accelerate geothermal energy development may be required. A 2009 World Bank’s report recommended three important steps:

  • Risk mitigation mechanisms to reduce high initial exploration costs.
  • Improved government planning and management capabilities at the district and provincial level.
  • Adequate domestic technical capabilities to support long-term growth in the sector.

One risk-mitigation mechanism is the use of government guarantees. In 2011, the Finance Ministry issued a decree stipulating government guarantees for geothermal projects that were part of the second phase crash program and have reached the construction phase. The ministry later revised the decree to extend the guarantee during the exploration phase, as the risks associated with geothermal exploration are significantly higher than power plant construction and operation. However, the revision, which was issued in August 2011, demanded that project developers secure financing within 48 months after the guarantee was issued or they risk losing it.

Government incentives

Introducing risk mitigation mechanisms to reduce high initial exploration may require further financial support. Risks could be mitigated by establishing a revolving trust fund, with repayments coming from the income provincial and district governments receive from the exploitation of geothermal concessions. The central government, under the auspices of the Finance Ministry, is currently setting up a new Geothermal Fund that may be accessed by local governments to enhance survey data (through the appointment of a third party) or by developers to carry out preliminary exploration. Anton Wahjosoedibjo and Madjedi Hasan, in a 2012 paper presented at Stanford University, noted that seed funding had been allocated in the 2011 State Budget in the amount of $145 million, which could finance up to five geothermal developments. The Fund is expected to become operational once governance arrangements have been sorted out. However, the tricky part lies in sharing the risk between the different entities involved: the energy ministry, the Finance Ministry, local government and developer.

The suggestion by the World Bank to increase government planning and management capabilities at district and provincial level appears to be one of the most appropriate. Since 1999, Indonesia has undergone far-reaching political and fiscal decentralization, but it was only with the passing of the 2009 Electricity Law that energy planning was devolved to district governments. The law provides a greater role for district and municipal governments to participate in the provision of electricity services, such as energy planning and setting a regional/local tariff within the bracket established by the central government. However, details remain unclear as implementing regulations have yet to be issued.

Who’s in charge?

The situation is similar when it comes to geothermal energy development. The 2003 Geothermal Law (No 27 of 2003) grants provincial and district governments the authority to develop geothermal energy including the handling of licensing, competitive tendering and dealing directly with investors. Under this law, provincial and district governments have become the owners of geothermal resources in their constituencies although they still have a joint responsibility with the energy ministry to develop fields and monitor exploitation.

It is important that regional governments have sufficient capacity to deal with issues related to geothermal energy development. Encouraging provincial and district governments to develop geothermal energy remains an enormous challenge, particularly when issues can only be resolved through negotiation and cooperation across regions, as most have little expertise and a limited understanding of energy development. The Director of Energy, Mineral Resources and Mining at BAPPENAS, in a 2009 paper, suggested that provincial and district governments require expert guidance and resources from the central government to develop the capacity to tender and monitor the exploration and exploitation of geothermal working areas. Without such guidance, the task is likely to be difficult, as the tendering process requires strong capacity at the local level.

But even increasing provincial and district government capability may not necessarily help reduce the risks of geothermal energy development if the division of power between central and local governments is not clarified. This lack of clarity around the country’s energy policy framework and institutional arrangements often discourages investment in the industry. As Chevron’s president of Asia-Pacific exploration and production Jim Blackwell pointed out in a press interview in 2010, Indonesia is unlikely to become a world leader in geothermal until there is “a stable legal and regulatory regime, which allows for long-term development rights, open markets created by long-term contracts and long-term prices with certainty of payment.”

Fazil E Alfitri, the president director of Medco Power Indonesia, in a 2012 interview with the Jakarta Globe, said that better coordination among related state agencies is needed and “the government needs to set up or assign a single authority handling issues related to geothermal projects.”

Missing data

Many experts are likely in agreement with the World Bank’s suggestion of building up domestic technical capabilities. The quality of surface exploration data produced by the Indonesian government, notably the Geological Agency of the energy ministry, has been criticized as inadequate by private developers and investors. Information such as the credible estimation of the depth and size of resources, the heat source location and upflow and outflow zones, the capacity of recharge and discharge zones and the possible permeable targets for drilling are critical and largely missing from government survey data. Anton Wahjosoedibjo and Madjedi Hasan, in a 2012 paper, argued that of all geothermal locations identified across the archipelago by the Geological Agency, only about 30 percent have been surveyed in detail.

Improving the reliability of geothermal data is a key to geothermal energy development. The scope and accuracy of the exploration data would determine the level of risk that private entities take on once they enter a working area. A well-defined standard to organize the characteristics of a geothermal field is needed to improve the data. Several countries, for example, have adopted the “Australian Code for Reporting of Exploration Results, Geothermal Resources and Geothermal Reserves: The Geothermal Reporting Code” as their standard to improve data collection.

In addition to previously identified obstacles, and recommendations made by the World Bank, another fundamental obstacle to reaching the government’s target is likely the fact that most geothermal resources are located in remote areas, which means additional financing is needed to connect produced electricity to the main grid. In June 2012, The Jakarta Post newspaper reported that only 65 percent of the country’s territory is connected to PLN’s grid, most of it in the more developed Western islands; only 45 percent of eastern Indonesia is connected to the grid.

The Global Competitiveness Report 2009–2010 also ranked Indonesia far behind Malaysia and Thailand in the quality of infrastructure, including electricity supply. Indonesia is currently trying to expand its infrastructure at all levels with support from a number of development banks, but without overhauling the grid system, geothermal energy development is likely to remain a sub-par performer.

Caring for the forest

One other complicating factor related to the remote location of most geothermal resources is the impact their development can have on forests and terrestrial ecosystems. Geothermal energy development in Indonesia is likely to take place in the country’s remaining protected forest areas, where 42 percent of potential geothermal resources are located, according to the energy ministry in 2011. The development of geothermal energy is thus also subject to the recently enacted law on pristine forests, which include stricter conditions under which licenses for energy exploitation and mining can be issued.

Geothermal power facilities do not commonly need large tracts of land – an entire geothermal field spans 0.4-3.2 hectares per MW versus 2.02-4.04 hectares per MW for nuclear plants and 7.67 hectares per MW for coal plants. The authors’ calculations on the projected total land area required to develop geothermal energy results in “only” 26,570 hectares to build 9,500 MW by 2025. This figure is small compared to other development activities in Indonesia.

Nonetheless, if not explored and exploited using the best available technologies and taking into account sustainability principles, geothermal can also lead to further destruction and degradation of forests. But if done responsibly, geothermal energy development can provide an incentive for the proper management of forests and support the livelihoods of forest-dependent communities. The geothermal energy development in Gunung Salak, West Java is a good example of balancing geothermal development with forest conservation – one United Nations study praised the development’s response to the community and also noted that the 362 MW plant emits approximately 2.6 million metric tons per year less carbon dioxide than a comparably sized coal fired plant.

With an explicit policy of support for accelerating geothermal energy development, it is imperative for the government to employ strong measures so that lands acquired for geothermal energy use are not high conservation value forests or sensitive ecosystems, and that the impacts and risks on forests are mitigated. Memorandum of Understanding No 7662 between the MEMR and the Ministry of Forestry (MoF) signed in 2011 to fast-track permits for geothermal energy development in production forest and protected forest areas, should also be used to prepare conservation of forest areas where geothermal energy development takes place.

Geothermal energy development, in partnership with local communities, can also be used to create “social fences” around high conservation value forests to prevent unwanted encroachment; this can be achieved by investing part of the energy revenues toward forest protection and community development. The costs of developing geothermal energy can scale up considerably (and unexpectedly) if concerns over social and environmental issues are not addressed. In Bali, for example, local government and communities are opposing a geothermal project in the Bedugul area, which should teach developers to listen to the aspirations of local communities before proceeding.

To conclude, the key challenges faced by geothermal energy development appear to have created uncertainty and political volatility in the sector and kept potential investors at bay. There are opportunities and possible solutions that can be used to advance the geothermal agenda. Utilizing these effectively, however, requires the right mix of government policy, economic strategies and political will. It is timely for Indonesia to unlock this enormous power.

 

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