R

ecently, Energy and Mineral Resources Minister Jero Wacik announced a raise in the feed-in-tariff for electricity generated from geothermal energy to 10-17 US cents per kilowatt-hour (kWh) from 9.7 cents per kWh.

The tariff is expected to be a fixed price as opposed to a ceiling price and is based on the location of the plant and fuel mix of the grid that it serves.

Indonesia, which is among those countries with the biggest geothermal energy potential, has been struggling to boost electricity production from this renewable resource.

For decades, Indonesia has only managed to tap into 3 percent of its total reserve of about 28 GigaWatts (GW), while the use of fossil fuels such as coal and diesel for electricity generation grows unchecked in order to meet the country’s steeply rising energy demand.

What has hindered large-scale geothermal energy development in Indonesia? The price at which the electricity is purchased by state electricity company PLN has long been cited as the culprit of this problem.

When priced too low, geothermal energy becomes unprofitable given the exploration and production risks and stands little chance against competition from fossil fuel-based electricity generators, which usually run lower risks and require substantially lower capital investment.

Therefore, the ministry’s decision to increase geothermal pricing, possibly levelling it with the cost of coal-fired electricity, should be hailed as a great step forward.

The policy is in line with major recommendations made by reputable agencies within the government.

The Finance Ministry’s Green Paper, published in 2009, suggested 13 cents per kWh, while a report commissioned by the Energy and Mineral Resources Ministry in 2010 recommended 8-14 cents per kWh depending on location.

In particular, the decision to fix the price as opposed to setting a ceiling price could mean slicing through red tape as it virtually eliminates the need to haggle over a final price for individual power purchasing agreements (PPA), which could take months and even years.

But pricing is only part of the story.

The higher price may lure potential investors and attract new players to the sector. But the high risks, particularly related to the early phases of development, may force them to think twice.

Unlike conventional electricity generation, the developers need to engage in resource extraction before turning hot steam into power. The government is tasked with performing surveys and initial exploration prior to the auctioning of a geothermal site.

The key to reducing risks lies in the government’s ability to provide potential developers with high quality, reliable information about the thermal and chemical characteristics of a selected site.

Recently, the government set up a Geothermal Fund of US$ 145 million managed by the Government Investment Unit (PT PIP). Local governments can access this fund for the purposes of financing pre-auction exploration activities.

Yet questions regarding the capacity of local governments in producing internationally verifiable resource data remain unanswered. A lack of transparency and foul play may also shroud the process, which could distort the auction process and outcome.

The fund, too, is not immune to risks, among others, in the case that the resource potential fails to materialize. Therefore, another key move could be introducing a government exploration insurance scheme.

Another complex issue pertains to permits, particularly when sites are located inside forests. Developing geothermal energy in conservation forests will take investors to go through more red tape as they are required to secure multiple permits and concession rights from the Forestry Ministry and regional governments.

The good news is that the Forestry Ministry and the Energy and Mineral Resources Ministry have agreed to join forces in addressing the matter.

In December last year the two ministries signed an agreement to accelerate the permit process of 28 geothermal working areas.

In addition, from an environment standpoint, geothermal energy development in a pristine, bio diverse forest area could bring substantial negative impacts, unless properly assessed and regulated. Therefore, stronger laws are needed to ensure the sustainability of geothermal energy and provide a basis for dispute resolution.

Geothermal energy seems to be the answer to Indonesia’s energy security woes as it has been linked it to the policy goals of increasing the electrification rate (currently at less than 70 percent). Yet boosting energy supplies through geothermal energy can only occur with the right transmission infrastructure.

At present, the state of Indonesia’s electricity grids is less than desirable. Existing transmission lines are in need of a serious overhaul and vast areas are yet to be connected. At present, there are many separate grids, with the Java-Bali grid as the only inter-island grid system.

In order to optimize the power produced by utility-scale geothermal plants, a proper grid with high connectivity between major urban and industrial centres across islands is needed to distribute electricity
efficiently.

There is still hope. PLN recently announced plans for a $3 billion Sumatra-Java interconnection project to channel 3 GW of power across the two major islands, expected to be completed in 2017.

The 2009 Electricity Law scraped public monopoly for the distribution of electricity; theoretically, the provision of this infrastructure is no longer PLN’s exclusive domain. Incentives and schemes need to be put in place to encourage the development of new transmission lines by governments and the private sector and enable grid connectivity.

In the case of geothermal energy, it is clear that “the price” is not the only thing that Indonesia needs to get “right”. These complex problems still await a comprehensive, permanent solution, possibly in the form of a revised geothermal law, to pave the way for the desired level of geothermal energy development and to help Indonesia attain sustainable development.

The writer is a postgraduate research student in the Crawford School of Public Policy at the Australian National University, Canberra, and recipient of the 2010 Australian Leadership Award.