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o accelerate geothermal electricity generation, the government is considering implementing a feed-in rate. The current rate charged for geothermal power has been deemed too low and does not justify field development. Proposed prices are non-negotiable, at 10 to 14 US cents per kilowatt hour (kWh) ,depending on where a power plant is located.

Applied only to new projects or to the extension of IPP contracts, this rate is expected to push investment and support an ambitious goal of adding 4,000 Megawatts (MW) of geothermal power generation capacity by 2015.

The proposed rates are of significant importance for the national economy, without a doubt. It certainly would reduce subsidies for electricity. A feed-in rate would allow for the reallocation of price-volatile fossil fuels, such as diesel and coal, that otherwise would have been needed for electricity generation.

More importantly, a feed-in rate would attract investors to develop clean and renewable resources of energy. Increasing fossil fuel prices mitigates against variable costs and revenue. This is because fossil fuel is price variable. By reducing the component of your energy mix that is dependent on the price of fossil fuels — and increasing geothermal power use, which in the long term equals a fixed-based rate — takes away fossil fuel price risks.

There is a similar financial analogy. Think of the case when you move from a variable interest rate index, such as LIBOR, to a fixed interest rate, which protects yourself from surprise swings in interest rates.

The feed-in rate for geothermal is exactly equivalent to the premium paid when the interest you pay on a loan is fixed, rather than variable. With this framework in mind, you would “hedge” in Sumatra, mainly against the volatility of coal as Sumatra’s power generation networks are dominated by coal.

Meanwhile, the JAMALI (Java, Madura, and Bali) network uses a mixture of coal and fuel oil and the network in Sulawesi has a significant share of diesel in its energy mix. Given that a hedge against coal is cheaper, due to lower price volatility, than a hedge against diesel, which is very volatile, you have a simple but significant justification to apply a higher feed-in rate in Sulawesi as compared to Java.

From hedging, we now see another rational reason for feed-in rates. Think of the alternative cost of power from an equivalent power plan, such as a coal-fired power plant with a lower capacity but acting as a base-load, just like a geothermal plant.

Recognizing that coal-fired power plants will lead to significant emissions of greenhouse gases, we must definitely take into account the impact on the environment when using coal, as the International Energy Agency (IEA), the World Bank and the Inter-Governmental Panel on Climate Change (IPCC) have argued.

A number of countries have encouraged utilities to limit coal-fired utilities by introducing carbon taxes. So, a feed-in rate is basically a positive fiscal instrument to stimulate investment in geothermal generation. Recent studies have made a number of recommendations to price geothermal electricity at more than 4 cents per kWh over coal.

We must also acknowledge the rapidly increasing capital cost for geothermal power. A report in 2009 tipped investment costs at $3.4 million per MW, while recently committed projects show a price range of $5.5 million to $6 million per MW — almost double the 2009 figure. Of course, you have to recoup higher investment costs through a higher capital recovery in the cost of higher geothermal rates.

With these points, you might consider the benefits of a feed-in rate versus the cost of geothermal electricity in other countries. The feed-in rates for geothermal in every country except Iceland are higher than currently purposed. The Philippines does not have a feed-in rate. Its rates reflect the costs that must be incurred to obtain market-based financing prices. New Philippine geothermal projects are hitting 19 US cents per kWh, which is significantly higher than our purposed rate.

A feed-in rate would have a significant impact on the number of IPP contracts and would also expose the off-taker (PLN), as the price is unilateral and not market-based. PLN has to pay the difference for power purchased under the feed-in rate and its least-cost-option, coal.

A simple option for PLN would be to pass incremental costs to customers. But this is a dead-end, as retail electricity rates have been capped by the House of Representatives.

We also think twice before raising electricity prices, as it is a politically sensitive issue. An increase in the electricity subsidy is then the only option, which initially does not sound like a smart solution. But the “increase” will be offset by a tremendous reduction in subsidies for fossil-fuel electricity generation.

We can definitely attain possible savings in energy subsidies in the years to come.

Here are the numbers. According to the current IEA’s World Energy Outlook, coal prices are projected to increase to about $200 per ton by 2035, oil prices to $250 per barrel and natural gas prices to $30 per million Btu.

Over 80 percent of our installed capacity of power plant has historically been powered by fossil fuel, with oil-fired plants accounting for a significant portion. This reliance on oil has helped push the average cost of production from 6 cents per kWh in 2004 to 12 to 14 cents today, while the average consumer only pays 8.6 cents. To fill the gap, PLN is given an annual subsidy that totaled $5.5 billion in 2010 alone and accounted for about 35 percent of PLN’s revenue.

As it is not exposed to these price increases, geothermal could provide a very important element of a total electricity energy portfolio.

A typical 330MW geothermal plant would save $2.7 billion by 2050. If this is extrapolated to the total national target of 9,500 MW of geothermal capacity for 2025, a possible savings of $77 billion in energy subsidies could be attained.

Carefully implemented, a feed-in rate will expand geothermal’s share of the national energy mix, and therefore make a significant contribution to reducing energy subsidies and greenhouse gas emissions. With this framework, you are basically delivering real fiscal incentives for renewable energy development. “Green subsidies” are born.

The writer is the director for energy, mineral resources and mining at the National Development Planning Board (Bappenas). The opinions expressed here are his own.