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Geothermal power requires incentives
With more than 150 volcanoes, of which 127 are active, Indonesia has an abundance of geothermal reserves waiting to be tapped
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With more than 150 volcanoes, of which 127 are active, Indonesia has an abundance of geothermal reserves waiting to be tapped.
A geothermal energy is a renewable energy, which has many comparative advantages in environmental conservation and costs.
However, until now, geothermal energy in Indonesia remains largely underdeveloped and under-utilized due to a host of licensing, regulatory and financing barriers.
If the government is really serious about achieving its target of developing geothermal power capacity to 7,000 megawatt by 2025, from about 1,500 MW now, as part of the broader program to source 23 percent of total energy mix from renewable energy, concerted efforts should be made to remove these barriers.
Despite the fact, the regulatory framework and licensing process of the current geothermal development has been centralized at the central government after the enactment of the 2014 Geothermal Law, the number of permits required by geothermal investors is still very high, at almost 60. This bureaucracy has been slashed down to 15 offices to expedite the process of investment.
Geothermal exploration costs can be slightly higher than those of oil and gas, reaching as high as US$60 to $75 million for one working area just to ascertain as to whether there are commercially viable reserves due to poor and inadequate infrastructure. In general, geothermal exploration costs are higher than oil and gas because they are not located in the ocean.
However, even though the success ratio in Indonesia so far is just 70 percent, these upfront exploration costs must be financed with equity as in the oil and gas sector because of the fact that not a single bank is willing to lend to such a highly risky venture.
No wonder not many companies are willing to invest in the geothermal exploration due to the high risks. However, the experiences of other countries, which have successfully harnessed their geothermal resources, such as Iceland and the Philippines, show that risks can be mitigated if the government takes up the exploration risks.
Many countries have developed their geothermal facilities by mitigating the risks of exploration through financial and fiscal incentives provided by their government. They include loan guarantees, partial collateral costs for drilling failures, an insurance program to support the costs of exploration, a tax deduction on the construction of geothermal facility, and a guarantee of energy sales at attractive prices.
The success of a geothermal development project depends on the availability of reliable geological data on proven reserves. It is therefore recommended that the government insures the exploration works and tenders only geothermal concessions, which already have proven reserves so that potential investors and creditors (banks) are better able to calculate the risk and the expected internal rate of return.
Well drilling exploration and development represent the biggest risks in this business. No financial institutions in Indonesia offer funding for geothermal exploration.
Like in countries such as Iceland, Germany and many in East Africa, aided by the World Bank and France, geothermal companies enjoy the support of an exploration insurance scheme.
An insurance scheme for geothermal exploration would not only mitigate the risks of drilling failures, it can also cut project financing costs.
Insurers need more data and information to get a better understanding of exploration risks. They moreove need access to geology feasibility studies, interpretations of seismic investigations, the concept of enterprise development, the design of the wells location and wells stimulation programs. They moreover need to have knowledge about the development of a geothermal power plant, the licenses involved and information about contractors and vendors.
The geothermal law authorizes the government to use budget funds to finance exploration operations to build up a broad data bank on proven geothermal resources in many potential areas across the country. In fact, the Finance Ministry in 2011 set up a Geothermal Fund Facility with an annual budget appropriation of Rp 1 trillion ($765 million) a year to be managed by state-owned PT Sarana Multi Infrastruktur (previously to PT PII) to speed up geothermal harnessing.
But unfortunately, this fund has remained unspent because of the absence of viable insurance coverage to make the fund sustainable.
Today, the government through Energy and Mineral Resources Ministry (ESDM) allows serious developers to conduct a survey with their own financing and well exploratory drilling in geothermal areas with the condition that they will be given the first priority in tendering process, if proven reserves are discovered in the assigned areas.
Second priority are given to three state-owned geothermal developers — the oil and gas company PT Pertamina , geothermal power producer PT Geo Dipa Energi and electricity company PT PLN — to conduct with their own financing, survey and well exploratory drilling in remote areas through the government assignment in accordance with the Geothermal Law No. 21/2014.
Power pricing uncertainty is another major barrier to geothermal investment. It should be kept in mind that geothermal investment is long term in nature, requiring up to seven years for surveys and exploration drilling and three to five years for production development before power generation starts up.
Hence, even though a development project is based on a fixed power purchase agreement with the PLN, the implementation of the Minister of Energy and Mineral Resources Decree No. 12/1017 related to the price of geothermal electricity makes the selling price of geothermal power far below the price of the project feasibility, namely the level of the cost of the geothermal project that can be carried out economically.
The recent pricing directive as stipulated in the Minister of Energy and Mineral Resources Decree No. 12/2017 could even be destructive for development of geothermal as renewable energy in Indonesia.
Moreover, the ministerial decree caps the rates of electricity produced from renewable energy sources based on the national electricity supply costs (BPP) of PLN. The rate caps described in the rule replace the previous feed-in tariff mechanism.
The rule caps electricity feed in tariffs of renewable-sourced electricity equal to or at a maximum of 85 percent of the BPP, whenever prices at the level of BPP are not competitive and are far below the economic prices of geothermal project development.
The new ministerial decree is expected to appease PLN, which has largely been reluctant to purchase electricity from renewable energy based power plants because of its higher costs compared to its present fossil fuel counterparts.
But then again, renewable energy producers argue the pricing rule is contrary to the 2007 Energy Law, which stipulates that energy prices or tariffs must be set based on “just economic value,” consisting of production, conservation and environmental costs, in addition to ensuring that the public can afford the electricity tariff.
The only exceptions from the pricing rule are geothermal and waste-to-energy plants. No cap will be imposed if the regional BPP is higher than the national average, but a business negotiation with PLN is required.
Furthermore, the provision on the business negotiation described in this ministerial regulation has not been explained in technical details, thereby causing confusion.
On other hand, even with the exemption, the power tariff directive is still not attractive to geothermal investors because of the fact that that geothermal power generation cost is on average much higher than the average BPP of PLN, taking into account, the specific risk characters of geothermal steam development.
The prices of geothermal power in many other countries are lower than in Indonesia and yet are already commercially viable because a good portion of the exploration and development risks have been taken over by their governments.
Additionally, in Indonesia geothermal resources are located mostly in forested areas with utterly poor or inadequate infrastructure that makes the capital costs of development unusually high because the investors themselves must be responsible for building the necessary infrastructure.
Comparing the price of geothermal power to the prices of fossil fuels also seems irrelevant, not apple to apple, and not conducive for the promotion of renewable energy in the country.
Geothermal power plants are environmentally sustainable. It leaves no carbon footprint, and the only waste comes in the form of hot water and a tiny amount of H2S, which is injected back into the reservoir as substitute fluids.
Unlike oil, gas or coal, the environmental contamination from geothermal exploration and exploitation is almost negligent. Given the nature of geothermal — fluids and hot steam — it is a source of energy that can only be used for local power generation, and not for exports.
Analysts have estimated that the targeted 5,500 MW of additional geothermal capacity to be developed by 2025 in Indonesia, if achieved, will represent a significant cut-off in CO2 emissions, the equivalent emission from more than 38 million tons of coal or more than 25 million tons of petroleum.
The additional geothermal capacity will replace 88 million barrels of oil or 13 million tons of coal, which Indonesia burns every year. In monetary terms, this will be a saving of $4.5 billion currently spent on petroleum or $1.5 billion on coal every year.
The development of geothermal energy therefore has an important role in the diversification of energy or reducing dependence on fossil energy, oil, gas and coal to generate electricity and to build local energy sovereignty for national energy security.
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The writer is a member of the board of experts at the Indonesian Renewable Energy Society and president director of PT Geo Dipa Energi. The views expressed are his own.
