Indonesia’s geothermal policy, a panacea!

The Indonesian government is to issue the details of a new regulation that will allow foreign investors to hold 100 per cent ownership of geothermal power plants with a capacity of 10 MW or more. For plants with a capacity of less than 10 MW, foreign investment will be capped at 67 per cent.
While it represents Indonesia’s efforts to streamline the approval, many consider the new regulation insufficient to boost investment in clean, renewable energy in the country.
In fact, the regulation contradicts present laws and regulations on geothermal undertaking, which do not limit foreign participation based on the size of the power plant. The new policy reflects a lack of understanding and coordination among policy makers on resolving the real problems and constraints in the development of these renewable energy resources.
In particular, it fails to consider the unique characteristics of geothermal power development, which differs from the power projects of independent power producers (IPPs).
Geothermal energy has unique attributes that pose challenges to its development. Unlike coal or gas power plants, commercial development of geothermal energy requires electrical power plant development on-site.
Also, the size of the power plant is ultimately determined upon the completion of exploration activities. As such, it would not be practical to distinguish at the outset which of the plants may be owned partly or wholly by foreign investors.
In addition, the development requires high initial capital costs and the commitment to purchase a large portion of the eventual power supply at start-up in the form of development wells. Long-term operating costs, however, are quite low.
Thus, geothermal contracts require base load status and long-term price security in order to justify development. Looking back at its development, the majority of existing geothermal power capacity (1,300 MW) was installed as a result of Presidential Decree (PD) No. 22/1981, which granted state-owned oil company Pertamina the right to explore and exploit geothermal resources for power generation.
But PD No.22/1981 was amended by PD 45/1991, which authorizes private-sector development of geothermal potential with fundamentally different terms.
Under the PDs, there were two alternatives to participate in Indonesia’s geothermal
venture; the first alternative was to only
explore and develop the steam field in cooperation with Pertamina and to sell the
geothermal energy to state electricity
monopoly holder PLN.
The second alternative was a total project through a joint-operation contract with Pertamina involving upstream and downstream activities and selling the electricity to PLN.
Pursuant to the PD 49/1991, the applicable tax rate for the total project would not exceed 34 percent of the net income. The 34 percent included any taxes, duties or levies in respect of the geothermal operations.
In 2003 the government enacted Law No. 27/2003 on geothermal energy, which mandated that future geothermal fields should be transparently and competitively tendered for development.
The law also grandfathered the fields previously allocated under PD45/1991, enabling existing operators to retain control. The government also developed a geothermal blueprint, including a roadmap to develop a total of 6, 000 MW of geothermal capacity.
Under the new law, 51 geothermal power projects were awarded to investors consisting of six projects to be carried out by Pertamina-PLN joint operations or PLN alone.
However, most of the projects have stalled following failure on the part of the project developers to raise funds for exploration, insufficient pre-exploratory data, poor project preparation, failure to appreciate exploration risk, cumbersome permit and license processes and low bid prices.
A new geothermal law was promulgated on Aug 26, 2014, with major changes intended to ease development of the country’s geothermal energy industry.
The breakthrough of the new law includes the removal of geothermal undertaking from the category of mining activities and improvement of the structure of geothermal transactions, coupled with a feed-in tariff (FIT) regulation.
Also, the new geothermal law involves fundamental changes to the process and procedures related to geothermal development. Under the new law, the majority of the licensing and tender process was transferred from the authority of governors and regents/mayors to the central government, and geothermal activities are now classified as non-mining activities. As of today, about 17 months after the promulgation of the new geothermal law, no government regulations have been issued to implement the law.
Although the new law has classified geothermal development as non-mining activities, the forestry law still classifies geothermal as a mining activity. Hence, the forestry law may need to be further amended before the new geothermal law of 2014 can be fully enforced.
In addition, several barriers must still be overcome. Unlike fossil fuel projects, geothermal projects require integrated efforts and risk management between upstream and downstream activities.
The installation of power plants involves various stages of work and clearances, including project identification, project allotment, pre-feasibility reports, detailed project reports, techno-economic clearance, environmental and other clearances, financial closure, finalizing contracts for civil and mechanical work and commencement of construction.
Also, the government may still need to provide assistance in securing the land, in particular the project included in the accelerated power plant program. The lack of finances has also hampered the development of geothermal resources. Therefore, the financial capability and technical competency of companies bidding for geothermal development projects need to be thoroughly assessed during the bidding process.
In conclusion, investment in geothermal development faces substantial uncertainties and continuing challenges.
The industry has identified high capital costs, resource risk, long payback periods for investment, financing mechanisms, cumbersome permit and license processes and inappropriate regulations as major issues impeding geothermal development.
—Deutsche Presse Agentur

Madjedi Hasan is a director of an energy development process consulting company in Jakarta