Legal Protocols, Lack of Funding Stall Geothermal Development in Indonesia


AUGUST 09, 2015

Jakarta. Despite Indonesia already having several plants and government plans to develop the geothermal industry, progress has been stalled by legal protocols and a lack of funding, the World Bank says.

Indonesia’s position on the Pacific Ring of Fire – the intersection of three tectonic plates – means that the country is a hotbed of seismic activity. The Indonesian Energy and Mineral Resources Ministry estimates that the country might have the potential to generate almost 28 gigawatts of energy this way – 40 percent of the world’s geothermal energy resources.

The recent Indonesian Economic Quarterly published by the World Bank in July highlighted geothermal energy production as an area of great potential. Despite a 2012 Finance Ministry fund to develop the geothermal energy sector and capital seeding of more than $200 million, the sector has not expanded as expected.

Plans to build 44 new plants and triple production capacity to 4000 MW were included in the National Energy Policy last year. However, only 175 megawatts were added between 2010 and 2014. The World Bank attributes this to several factors, including a hesitancy to invest, and a feed-in tariff that has discouraged the market.

Additionally, the country’s legal framework protecting forest areas from mining activities was only amended to allow geothermal mining in August 2014, toward the end of then-president Susilo Bambang Yudhoyono’s term.

The feed-in tariff, a subsidy scheme between geothermal energy suppliers and government-run electricity monopoly PLN, failed to be implemented as sellers and buyers were not able to agree on a fixed price.

The high level of upfront investment required for geothermal projects also means that pricing needs to be able to cover the costs. The government-regulated returns made by PLN, said the World Bank, were too low to cover the risks of geothermal development.

Aside from PLN, other major finance institutions such as the Asian Development Bank and the World Bank’s International Finance Corporation are often reluctant to fund geothermal projects from the get-go, preferring to invest once the project has been proven to have at least 50 percent of its potential.

The World Bank has recommended improvements to the tendering process for development, including not allowing areas to be put to tender without certified proof of its geological potential. The institution also suggests a tariff reform based on a continuous review process, so that present tariff can be readjusted to future rates.

With electricity demand growing at almost 4.8 percent annually and 35 percent of the country’s inhabitants living without electricity, according to the International Energy Agency, geothermal power could be the solution, especially as it is free from the price uncertainty associated with traditional fuels.

“Geothermal power represents an energy source that is not subject to volatility as the price remains flat. It will also free up other resources such as coal and oil for export,” says Rahul Shah, chief financial officer at Sorik Merapi Geothermal Power.

Geothermal energy is widely understood to be a proven technology that is more environmentally friendly, with fewer resultant greenhouse gas emissions. Development in the industry means generating power is becoming easier and more efficient.

“This energy is replenished through natural means and therefore does not lead to concerns of energy security for our future generations,” Shah said. He added that with new developments in technology, geothermal plants were now able to generate power at much lower temperatures than before.

Another development in the sector is a technology known as Enhanced Geothermal Systems (EGS), which artificially cracks hot rocks to release steam to power the turbines without the need for a nearby water source.

Geothermal plants are often located in forest areas and displace nearby inhabitants, raising concerns over the land space needed as well as the impact on biodiversity.

However, with research and new technology, pinpointing potential geothermal spots can be space-efficient, says Indra Sari Wardhani, climate and energy manager at WWF Indonesia. She cites the plant in Salak as an example, saying that the facility, which has a capacity of 330 MW, takes up around 175 hectares of land.

“When you have determined the amount of capacity and the potential points, the area that is used is not big,” she says.

The WWF developed guidelines last year for sustainable development of the geothermal sector in forest areas, highlighting environmental considerations such as maintaining biodiversity and mitigating deforestation and social disruption.

Indra Sari says geothermal energy is likely to be a huge part of Indonesia’s move toward renewable sources of energy.