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Improvements for geothermal investment climate in Indonesia expected

View over Jakarta, Indonesia (source: flickr/ Nick Gray, creative commons)
Alexander Richter 5 Aug 2016

With previous geothermal policies not having delivered expected growth in development, Indonesia is currently working on a series of new policies that are expected to help unlock development of geothermal projects in the country.

In a recent analysis from a regulatory standpoint, a law firm in Indonesia is looking at the “temperature of Indonesia’s geothermal regulatory climate”.

It is well-documented, that Indonesia represents the country with the largest geothermal resources and potential in the world. But still development has been lagging behind despite numerous efforts to stimulate development.

In an article in Lexology, the lawyers look at early and existing legislation in relation to geothermal energy development in Indonesia.

Law no. 27 of 2003 (the “2003 Geothermal Law”) essentially created a roadmap for the development of up to 6,000 MW. Under the law and a Master Plan Study for geothermal power development in Indonesia, a feed-in-tariff was set up through MEMR Regulation No. 22 of 2012. A geothermal fund of $200 million was set up to mitigate resource risks and in 2014 a new FIT policy based on commercial operation dates and regions was set up.

Law No. 21 of 2014 (the “2014 Geothermal Law”), replaced the 2003 geothermal law, making a significant policy change separating the geothermal sector from mining activity.

After the 2014 Geothermal Law, there have been no more adaptation apart from MEMR Regulation No. 14 of 2015. This regulation set up procedures for dealing with non-tax state revenues derived from geothermal activities.

There are now various new draft regulations being circulated and there will be changes related to geothermal production bonuses, direct utilisation of geothermal resources. Among them would be allowing 100% foreign ownership for investments in geothermal plants with a capacity above 10 MW and 67% foreign share ownership for plants with a capacity of less than 10 MW.

Until today, geothermal development in Indonesia has not picked up as much as everybody has hoped, last but not least the Indonesian government. The lawyers in their article describe one key element that holds back development and this is the feed-in-tariff, which is seen as unattractive. The current FIT system and payments are seen as unattractive in light of the high capital requirements for development.

But there are efforts under way to change the FIT system, so things are progressing and will hopefully make Indonesia to the key growth market for the global geothermal energy industry in the coming years.

Source: Franciscus Rodyanto, SSEK Indonesian Legal consultants via Lexology