June 30, 2014 10:00 pm JST

Indonesia: the slow boil geothermal superpower

HARRY JACQUES, Contributing writer

PANGALENGAN, Indonesia -- Abundant renewable energy in Indonesia could generate an estimated 29 gigawatts, enough to easily power 500 million homes, from beneath its 17,000 islands. But its emergence as a global geothermal superpower is a 20-year tale of frustration and missed opportunities.

     That might be starting to change with some ambitious new projects and policy changes in train. In early June, work finally began in North Sumatra on the world's largest geothermal facility -- the $1.6 billion Sarulla plant. Due for completion by 2018, by some estimates it will reduce overall carbon dioxide emissions by 1.3 million tons each year.

     "[Sarulla] will be the largest single geothermal contract in the world," Boediono, Indonesia's vice president, told reporters at the opening of an energy conference in Jakarta. "It shows that Indonesia becoming a geothermal superpower can be a reality -- not just an idea."

    The government has also announced plans for energy pricing and land acquisition that could alter the risk equation in power generation -- and finally provide a foundation for sustainable energy development in coal-happy Indonesia.

     "The government has realized that they have to prioritize geothermal energy," says Abadi Poernomo, head of the Indonesian Geothermal Association and a former chief executive of the geothermal business of Pertamina, the state-owned energy company.

     "Geothermal energy could be a triple win for developing countries: clean, reliable, locally-produced power," noted World Bank managing director Sri Mulyani Indrawati at the launch of the bank's geothermal development plan last year. "And once it is up and running, it is cheap and virtually endless."

Uphill struggle

Indonesia faces the daunting -- some would say insurmountable -- task of increasing electricity supply to keep pace with 9% growth in annual demand while simultaneously cutting greenhouse gas emissions by at least a quarter by 2020.

     The emission reduction targets relate to the government's ambitious environmental agenda. President Susilo Bambang Yudhoyono has pledged to cut greenhouse gases by between 26% and 41% of projected emissions by 2020. The lower figure is said to be attainable from purely domestic efforts, the higher figure with the full international assistance requested by Indonesia.

     Geothermal energy certainly has plenty to offer: it emits no greenhouse gases; offers improved energy security to a net-importer of oil and serial carbon abuser; and -- unlike solar or wind -- can supply power to the national grid 24/7.

     Indonesia's geothermal potential amounts by some estimates to 29GW. The government is targeting 10,000 megawatts of installed geothermal power by 2025. So far, only 1,132MW has been installed -- well behind the Philippines and the U.S. A meager 62MW is due to be added this year.

     While the potential of geothermal energy seems enormous, it is a demanding business that runs on tight margins and involves risky, capital-intensive work to bring plants online.  

     "You're taking oil-and-gas risks for utility returns," warns Agnes Safford, the former investment banker who now runs GreenWorksAsia, a consultancy.

     Drilling exploration wells costs millions, with no guarantee of success. Economies of scale at giant facilities such as Sarulla may drive down per megawatt development costs, but under present arrangements, larger plants are then paid less by the grid for their electricity. Smaller facilities face drilling costs averaging $3 million per megawatt of power -- or around $5 million including plant construction. Overall drilling and construction costs for a small 20-megawatt facility can easily run to $100 million.

     "The government has stumbled rather badly incentivizing geothermal development," says Alex Smillie, senior adviser at Star Energy, the Indonesian energy company behind Wayang Windu, one of the country's first geothermal facilities.

Regulatory reform

Perhaps to make up for lost opportunities, the government has announced new pricing regulations. Backed by World Bank and Asian Development Bank studies, new feed-in tariffs would effectively double the price paid to greenfield projects from the current average of 6 cents per kilowatt hour. Smillie describes the development as "very positive."

     The government is reviewing tariffs for existing individual projects. There has also been talk of front-loading tariffs earlier in 30-year contracts to speed up the recoup of exploration capital, but nothing concrete has yet been approved.

     At Star Energy's 220MW Wayang Windu facility, a two-unit geothermal station, a network of cameras monitor a weekend shift of workers. Pipes snake through a tea plantation down the hillside, transporting steam from the outlying wells into turbines. Enough electricity is generated by the plant to power around 4 million homes.

     Wayang Windu was conceived around the same time as Sarulla, in the dying embers of the Suharto regime in the 1990s. It cost $200 million and was finally activated in 2000, with backing from Deutsche Bank and Credit Suisse First Boston. It was one a few projects in Indonesia to muddle through the Asian financial crisis in 1997. Other geothermal projects failed when the grid cancelled rupiah purchase agreements from companies backed by dollar-denominated finance.

     Star Energy hopes that a renegotiation of the electricity price paid by the state-owned grid, Perusahaan Listrik Negara, for power from Wayang Windu will lessen the company's reliance on rolling finance, and that other potential sites across the archipelago will then become more attractive investment prospects.

     Pricing reforms are crucial if long-term national geothermal targets are to be realized. Projects under development are meanwhile being stymied by Indonesia's highly decentralized political framework.

     The governor of Bali has held up a project in Bedugul, Tabanan, because of the religious significance of the mountains among locals. In Lampung Province, a 220MW plant is being built by Jakarta-based Supreme Energy on Mount Rajabasa. The project, backed by Sumitomo Corp. and French utility GDF Suez, has been delayed by opposition from local residents.

     Bigger opportunities in the geothermal sector could be opened up if a 2003 ban on drilling in the country's forests, protected by conservation regulations, were relaxed. Under draft regulations, geothermal drilling would no longer be considered a type of mining, which would facilitate access to conservation areas. Indonesia has both "protected" and "conservation" forests. Geothermal is allowed in protected forests but not conservation forests.

     Up to 50% of geothermal resources are located in conservation areas, and this has been a problem. Geothermal executives contend that drilling rigs and actual power plants have small footprints. A concern, however, is that a keyhole operation in conservation forests can have a much more invasive legacy.

     Power plants require access roads. These enable local residents to move into previously inaccessible parts of the forest to cut trees, plant vegetables and introduce seeds that can disrupt ecosystems. While the site at Wayang Windu occupies only 130 hectares, as much as 1,000 hectares of forest have been eroded by local communities since its access road was built. 

     "We can't control local people and we can't control access," admits Star Energy's Smillie. "That's my worry about getting approval to go into conservation land -- it will have an impact, like it or not, and we have to be aware of that. It's not good enough to put a gate up."

One at a time

Anwar Purwoto, forest director at the World Wildlife Foundation Indonesia, is broadly supportive of geothermal energy but says individual environmental impact assessments will have to be conducted for each contract in conservation forests before the government can auction off concessions. Although guidelines have yet to be established, some project proposals may not stand up to such scrutiny.

     "We will need to conduct a survey first to see the kind of impact geothermal will have," he says. After that, it would be down to the fine print to determine if a project is environmentally unacceptable.

     Drilling in conservation forests is not going to happen until the 2003 ban is revisited by parliament. Patchy, sometimes contradictory, regulation of the electricity market also limits investment in the sector. Pricing is meanwhile hamstrung by the fact that developers must sell to a single buyer biased in favor of cheap coal, however polluting.

     Geothermal executives also complain that international investors have walked away from tenders after unqualified companies bought up concessions to turn over for a quick profit -- a practice that the energy ministry has pledged to stop.

     Insiders doubt that the government will achieve many of its targets, but there is some optimism that the geothermal sector is seeing some progress. That might improve the investment climate for more than 250 potential sites in Indonesia.

Foreign opportunities

The Sarulla plant is the first project to close financing since Wayang Windu. It might never have happened without guarantees from the Asian Development Bank, but the project is at least underway and giving hope to foreign support services and manufacturers. Halliburton has been hired for drilling and three turbines have been ordered from Toshiba.

     The project is sponsored by Itochu Corp. and Kyushu Electric Power (25% each); Medco Power Indonesia (37.5%), a unit of Medco Energi Internasional; and Ormat International (12.5%), a unit of Ormat Technologies.

     The financial institutions involved in financing the project are the Japan Bank for International Cooperation, the ADB, Bank of Tokyo-Mitsubishi UFJ, ING Bank, Societe Generale, Sumitomo Mitsui Banking, Mizuho Bank and National Australia Bank.

      "Geothermal is one of the energy resources that we have in abundance," says David Samual, chief economist at Bank Central Asia in Jakarta. "It's been a while since [Indonesia's early projects] were developed, and I think much depends on the political will of the next government."

     Domestic developers and international companies who have already entered the sector -- such as Chevron, the early pioneer in Indonesia, General Electric, both of the U.S., and India's Tata -- are looking at new concessions with the possibility before October of a friendlier pricing regimen. New blocks would open up if the forestry regulations are reformed.

     "It can all move slowly," Star Energy's Smillie reflects. "But it's looking good -- it could be a very exciting period."

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