T

he government has asked British business leaders, who accompanied UK'€™s Prime Minister David Cameroon during his visit to Indonesia last week, to invest in geothermal power development in the country.

But not a single investor will be interested in this kind of renewable energy until the government resolves the problems of tariffs, purchasing-power agreements with the state electricity monopoly (PLN), the tendering process and the poor coordination between the ministries and state companies involved in this sector.

Geothermal, like hydrocarbon resources, is highly risky, requires huge upfront investment and has a gestation period of up to eight years from exploration to power generation. But unlike oil and gas mining contractors that can sell their oil or gas to domestic or international buyers, geothermal investors face monopsony because geothermal steam cannot be exported but must be harnessed on site into power sold only to PLN through its grid.

Therefore, the feed-in tariff policy should be designed to provide a fair level of tariff to developers and be supported with a mechanism for periodical tariff reviews over the project implementation cycle, because the tariff set at the outset of exploration may not be commercially unfeasible seven or eight years later when commercial production starts.

The level and certainty of tariffs or pricing for the steam is therefore quite crucial for investors. This pricing factor is key because geothermal development, due to the heavy up-front investment it requires, depends mainly on long-term price security and sales contracts.

But the overall investment condition for geothermal energy in Indonesia seems to be unattractive, as evidenced by the fact that only 1,400 megawatt of the potential geothermal capacity of 28,000 MW has so far been developed. In fact, between 2010 and 2014 only 175 MW of additional capacity in geothermal power was built.

The World Bank'€™s latest quarterly report on Indonesia'€™s economy devoted a special chapter to analyzing the great potential of geothermal power to become a major source of renewable energy for the country. But the report points to four main sets of issues affecting investor interest in this sector. The issues highlighted concern pricing policies, the negotiation process for purchasing agreements with PLN, the tendering process and institutional barriers.

Geothermal could indeed become one of the best alternative sources of clean, renewable energy to diversify Indonesia'€™s energy portfolio, which currently depends mainly on fossil fuels. The country lies on the Pacific Ring of Fire and is home to an estimated 28,000 MW in extractable geothermal power, or equivalent to 12 billion barrels of oil fuel.

The government has set up a funding infrastructure with a seed capital of US$200 million to finance surveys and exploration aimed at improving the geological data on geothermal areas to be offered to investors.

But without significant improvement in the steam power pricing policy and coordination between the ministries and the three state-owned companies engaged in geothermal development, this sector will remain less attractive to investors.