I

ndonesia gained new momentum for harnessing its 28,000 megawatts (MW) of potential geothermal power after the House of Representatives surprisingly approved on Tuesday a new Geothermal Law, which will allow geothermal development in conservation forests and the pricing of geothermal power according to its economic costs.

The new law stipulates that geothermal exploratory drilling and development are not categorized as mining operations. Hence geothermal development in conservation forests, where more than 50 percent of the country'€™s geothermal resources are located, does not violate the 1999 Forestry Law.

Yet more encouraging is that the new legislation, which replaces the old one enacted in 2003, will centralize the licensing for geothermal development and the tendering of geothermal concessions at the central government to turn away unqualified bidders intending only to sell the concessions for quick profits.

Geothermal has been one of the best alternative sources of clean, renewable energy to diversify Indonesia'€™s energy mix, which still depends mainly on fossil fuels such as oil, gas and coal. It also exacts low and stable electricity-transmission costs. Moreover, around 14,000 MW of potential is found in Sumatra, while there is 9,000 MW in Java and Bali, as well as 2,000 MW in Sulawesi, which form the largest concentration of consumers.

But thus far only 1,300 MW of the 28,000 MW potential has been tapped due to regulatory and bureaucratic barriers. This is way off the 4,700 MW target set under the second-phase 10,000 MW new power generation capacity, to be built within five years.

The new rule on the pricing of geothermal power is crucial because geothermal development, due to the heavy up-front investment it requires, depends mainly on long-term price security and sales contracts. Big geothermal investors in Indonesia such as Chevron estimate that the drilling costs for just one geothermal well could reach US$8-9 million and the construction of a geothermal power plant could take more than five years. But the initial high cost of geothermal plants is offset by their low, long-term operating (including maintenance) costs.

Geothermal executives contend that drilling rigs and actual power plants have small footprints. A concern, however, is that keyhole operations in conservation forests can have a much more invasive legacy as power plants require access roads. These enable local residents to move into previously inaccessible parts of the forests to cut down trees. This is where coordination and cooperation with regional administrations is vital.

After the removal of the regulatory and bureaucratic barriers and the introduction of a viable pricing policy, geothermal projects will become more attractive to lenders, especially as the 2010 Electricity Law also allows power producers to not only generate but also transmit, distribute and sell electricity to consumers without cooperating with state electricity company PLN, but still under a government-controlled tariff system.