Geothermal Energy in Indonesia Heating Up

June 28, 2012. As an emerging economy and the world's fourth most populous country, Indonesia's need for energy is tremendous. Based on the 2010 Energy Outlook report released by Indonesia's BPPT (Agency for the Assessment and Application of Technology), Indonesia is expected to become a net importer of energy by 2030 because by then it will no longer be able to meet demand domestically.

As world events have driven oil prices to unprecedented high levels in recent years, it is challenging for the Government of Indonesia to rely long term on this expensive and limited resource that continually puts a strain on the economy. Therefore, Indonesia is on a mission to explore all sources of renewable energy that it is endowed with.

Only 4.5% of Indonesia’s energy needs were met by renewable sources in 2006. However, in the same year, the government launched a presidential decree with a bold plan to raise the percentage to 17% by 2025, in line with the Millennium Development Goals. Further, in 2009, vision 25/25 (Visi 25/25) was announced as a step up to the 2006 decree, raising the bar to 25% and signalling the republic’s determination to ensure that Independent Power Producers (IPPs) would be attracted to invest in renewable energy.

Indonesia: Share of total energy supply

Indonesia--Share-of-total-energy-supply

Source: PLN

Unlike many other countries, where solar and wind are front-runners in the race to renewables, among the renewable energy sources that Indonesia seeks to exploit, geothermal may promise the brightest future. Indonesia has been heralded as having the world’s largest geothermal power potential with 28 gigawatts or about 40% of currently known global geothermal sources (i.e. underground natural heat sources). This potential has started to attract investment. Global players such as Marubeni, GDF Suez, Tata Power, Origin Energy and Panax Geothermal have been involved in various consortiums set up to develop this potential.

With abundant potential and large demand, geothermal may prove to be an opportunity not to be missed. Some of the key factors to be considered by companies interested in tapping into geothermal in Indonesia include:

Drivers

  • A government regulation ordering PLN (state-owned company controlling the electricity distribution in Indonesia) to purchase power from geothermal producers is a breakthrough for the geothermal development, providing some assurance for investors. Currently the ceiling price is set at 9.7 US cents per kilowatt-hour.
  • As an emerging sector, there are still many potential geothermal wells untapped and unexplored in the west part of Indonesia, which has more advanced infrastructure than the east, reducing costs for investors.

Restraints

  • Similar to other critical industries such as oil & gas and mining, geothermal in Indonesia is prone to policy inconsistency and unclear regulation. Regulations on production-sharing contract rules, land acquisition, environmental issues and exploration tax need to be closely monitored and included in the risk assessment study.
  • Technical uncertainties, such as drilling success rate and actual average MW produced per well, are still high.

Environmental Issues

  • Environmental issues, mainly forestry-related, have been identified as a key concern by PLN. As sustainability issues become more prominent, highlighted as affecting domestic perceptions by various IGOs, this may become a restraint if resources are not managed properly. On the other hand, an investor which handles this issue successfully may gain trust. Currently, PLN requires its partners in geothermal projects to conduct reforestation to compensate for any deforestation needed to build the plant. However, this only applies to projects run in partnership with PLN.

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