Geothermal Development: Indonesia to Tender 25 Projects in 2015
The new Joko Widodo-led government aims to triple domestic geothermal power production within the next five years in an effort to meet ever-increasing power demand in the world’s fourth-most populous country and to shift to more environment friendly energy sources (rather than the over-reliance on fossil fuels such as oil and coal). Although Indonesia is estimated to contain the world's largest geothermal energy reserves, the country only uses about four percent of its geothermal capacity potential.
Earlier, a senior official of Indonesia’s Energy and Mineral Resources Ministry said that the need for additional power supplies in Indonesia is estimated to reach 240,000 megawatts (MW) by 2030, implying that the country needs an additional production capacity of over 10,000 MW per year (the country’s current installed electrical generation capacity is about 50,000 MW). This also means that Indonesia needs at least IDR 200 trillion (USD $16.7 billion) per year in investment. Indonesia’s central government is unable to provide these funds and therefore encourages the private sector to invest in the country’s power generation sector. Containing great geothermal power potential, the government is eager to enhance the role of geothermal power in the country’s energy mix and to meet ten percent of domestic power demand by 2020. Currently the country is dependent on fossil fuels - oil, coal and natural gas - to generate power. In 2015 the government will tender 25 new geothermal development sites, mostly located in forest areas in Java and Sumatra.
Several factors have hampered geothermal development in Indonesia. The foremost obstacle was the regulatory framework. Until recently geothermal power exploration was lawfully defined as constituting a 'mining activity’, implying that it was prohibited to be conducted in protected forest and conservation areas (Law No. 41/1999). With about 60 percent of the country’s geothermal potential located underneath protected forest and conservation areas, exploration was therefore prohibited. However, a new bill - which was approved by Indonesia’s House of Representatives (DPR) in August 2014 - now separates geothermal mining activities from other mining activities. It has to be noted though that land acquisition remains a problem for any investment project in Indonesia.
Other obstacles for geothermal power development in Indonesia are bureaucracy (especially on the regional level, partly caused by weak policy coordination between the central and regional governments), legal certainty (for example regarding asset ownership) and the country’s uncompetitive power tariffs. However, besides last year’s approved bill, there has emerged optimism that other bottlenecks will also be dealt with as President Joko Widodo has showed his commitment to implement structural reforms in Southeast Asia’s largest economy. Earlier this week, Widodo (popularly known as Jokowi) raised prices of subsidized fuels by more than 30 percent. If further reforms regarding power price caps are implemented then it can make the geothermal sector more attractive for private investment.
Consultancy firm Frost and Sullivan said that Indonesia’s geothermal capacity could rise to 29 GW (about two-thirds of current overall power generation) resembling the situation in the Philippines where geothermally generated electricity accounts for a quarter of total electricity consumption.
Despite having around 40 percent of total global geothermal energy potential, Indonesia currently only has a geothermal production capacity of 1.4 gigawatt (GW), thus lagging behind geothermal production in the USA (3.4 GW) and the Philippines (1.9 GW). Indonesia now targets to enhance geothermal production to 4.9 GW by 2019, becoming the world’s largest producer of geothermal energy. This would also impact positively on the country’s wide current account deficit. This deficit, which makes the country highly vulnerable to capital outflows in times of global shocks, is primarily caused by expensive oil imports to meet ever-growing domestic fuel demand.
Sarulla Geothermal Power Project in North Sumatra
Due to bureaucracy and a lack of financial resources, it took 25 years to start construction of the world’s largest geothermal plant; the USD 1.6 billion Sarulla project in North Sumatra (groundbreaking was conducted in June 2014). The project is led by a consortium consisting of Medco Power Indonesia (37.5 percent), Itochu Corporation (25 percent), Kyushu Electric Power Company (25 percent) and Ormat International (12.5 percent). Medco Power Indonesia is a subsidiary of Medco Energi Internasional, an Indonesian oil & gas exploration and production company. The Sarulla plant will have a total net guaranteed deliverable capacity of approximately 330 MW for 30 years, enough to power about 330,000 homes.
Key Findings:
• Indonesia needs an additional power production capacity of over 10,000 MW per year, requiring about USD $16.7 billion worth of investment per year
• Indonesia contains the world’s largest geothermal power reserves but only manages to tap a fraction of its geothermal potential due to legal uncertainty, bureaucracy and uncompetitive power tariffs
• Indonesian authorities have improved the investment climate in geothermal exploration by passing a new law that allows for geothermal exploration in protected forest and conservation areas. Business players now hope that reform-minded President Widodo will tackle other obstacles in the sector
• Indonesia started construction of - what should become - the world’s largest geothermal power plant (Sarulla) in North Sumatra in June 2014