Geothermal energy is considered one of the best alternative sources of clean energy to diversify Indonesia’s energy mix, which still relies mainly on fossil fuels. Cases for development are wider than the fact that the country is home to an estimated 28,000 megawatts (MW) in extractable geothermal power, equivalent to 12 billion barrels of oil.

First of all, geothermal energy addresses global warming as it is clean, renewable and exacts low and stable electricity-transmission costs. Its price is not highly volatile as coal and other fossil fuels. Moreover, around 14,000 MW of potential energy can be found in Sumatra, 9,000 MW in Java and Bali, and 2,000 MW in Sulawesi.

These regions  make up the largest concentration of consumers.

This sector, largely neglected until four years ago, has only developed 1,200 MW and has now risen to the top of energy development programs. That capacity is a mere 3 percent of the state electricity company PT PLN’s total output, with 36 percent still fired by oil fuels, 33 percent by coal, and 15 percent each by hydro and natural gas.

Geothermal energy is designed to account for 48 percent or 4,700 MW of the second-phase 10,000 MW power generation capacity to be built within the next five years with a total investment of US$17.5 billion. The target seems to be quite a tall order, especially because development is expected to be entirely funded by the private sector.

The government has significantly improved the regulatory framework for geothermal development. Most important of the new rules is a recent regulation that caps the price of geothermal energy at 9.7 US cents per kilowatt per hour.

This pricing factor is crucial because geothermal development, due to the heavy up-front investment it requires, depends mainly on long-term price security and sales contracts. For example, the development of one megawatt of geothermal generation costs around $2.5 million, as opposed to $1.3 million for the same amount of energy generated by a coal-fired plant. But the initial high cost of a geothermal plant is offset by its low, long-term operating (including maintenance) costs.     

The main challenge now is to educate regional administrations and help build institutional capacity regarding geothermal as a major source of clean, renewable energy because under the 2003 Geothermal Law they are the “owners” of geothermal resources and are thus supposed to be responsible for awarding concession agreements under tender.

Another area of great concern to potential investors is the fact that the tender for geothermal exploration is not directly related to the price of electricity to be bought by PLN, which is the country’s only power company.

However, PLN will no longer hold a monopoly on power when the new electricity law, enacted last September, comes into effect later this year. The new legislation breaks up the PLN grip on the power sector and allows private investors and regional administration-owned companies to not only generate but also transmit, distribute and sell electricity to consumers under a government-controlled pricing system.

These provisions are relevant for a geothermal energy sector that has a specific character in that, contrary to coal and oil, which are transportable and exportable, geothermal energy requires power generation on site.

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