Opinion: geothermal risk insurance important to drive development in Indonesia

Drilling rig at Sarulla project, Indonesia (source: Sarulla Operations)
Alexander Richter 25 Nov 2016

In a recent opinion piece in local media, the argument for an insurance model to mitigate geothermal exploration is propagated to help spur interest in financing and the development of geothermal projects in Indonesia.

Mitigation of the drilling risk for geothermal projects continues to be one of the key issues discussed internationally, which includes Indonesia.

In presentation earlier this month Riki Ibrahim, Lecturer Postgraduate Darma Persada University (Department of Renewable Energy) and former Finance Director Tuban Petrochemicals Industries, published a paper entitled “Implementation efforts Building Project ‘zero’ CO2 Emissions for Indonesia – Development of geothermal power plants.”

In it, he discusses that the provision of insurance is important to build a geothermal power plant (geothermal) . Moreover, the existence of insurance to mitigate financial losses due to failure of exploratory drilling can also minimize project financing (project financing).

in his presentation, Riki said that since 1970 has been an attempt to mitigate the risks of geothermal exploration wells were carried out in several countries. The goal is to accelerate the development of geothermal energy.

Generally, the incentives provided in the form of loan guarantees, collateral costs in part for the failure of the drilling of geothermal wells, an insurance program to help with the costs of exploration drilling, a tax deduction on construction facilities, as well as collateral electricity sales geothermal energy at an attractive price.

Riki looked, Indonesia should take advantage of the facilities fund management efforts geothermal (FDG), which is already approved by the House of Representatives to fund geothermal (FDG) in the 2011-2013 state budget, which amounted to Rp 1 trillion per year.

According to Riki, effort the government would be realized if the fund geothermal (FDG) can be covered by insurance. What is the reason?

Despite its tremendous geothermal potential and various geothermal power plants the contribution of geothermal power plants to the overall energy mix in Indonesia is still small in number compared to the development of geothermal power plants in the Philippines, because of the construction of geothermal power plants in Indonesia is plagued with low electricity prices through PLN. But despite a rice in electricity prices for geothermla power plants, development does not seem to pick up. Why is that?


The reason, according to Riki, namely the cost of exploration and development wells and infrastructure preparation costs are still high.Currently, the total cost of the construction of geothermal wells around $7 million per well. The estimated total cost for a geothermal power plant in Indonesia, including wells and systems above ground level (Steamfield Above Ground System) is about $4m to $5m per MW.

With the cost of infrastructure such as the provision of roads and land as well as three well exploration drilling likely carried by the government the price of geothermal power could be around $0.12 cents per kWh.

“It should be noted that the current costs of drilling exploratory wells and preparation of infrastructure in the field such as roads and land acquisition is the responsibility of the developer. this activity is still difficult to get financing or loan from the bank, “wrote Riki. Currently financial institutions or banks are reluctant to disburse financing of exploration because assess the risk of failure is high. Therefore that, Riki assess the importance of insurance to mitigate the cost of losses due to failure of exploratory drilling. The presence of insurance can also minimize project financing (project financing).

Riki stated, if the existence of the insurance companies and financial institutions such as PT Government Investment Center (PIP) and PT Sarana Multi Infrastruktur (SMI) goes well, of course similar mechanism can be offered also to private national conducting geothermal project development. The next question is, whether the project is feasible geothermal power plant insured?

According to Riki, very decent. The reason is, first, the technical briefing based on the data published, about 300 geothermal wells in Indonesia proved to be 75 percent of them successfully drilled exploration wells, with an average production of about 7 MW.

As with the drilling of hydrocarbons in Indonesia only reaches 7 percent -10 percent of success.

Second, with more data, the insurer would be easier to understand the structure of geothermal exploration risk. Description of geothermal projects that required the insurer in the estimation of wells to be drilled.

Descriptions include a feasibility study geology, interpretation of seismic investigation, the concept of enterprise development, the design of the location of wells, well stimulation program if necessary.

Also includes the plan of geothermal power plants that will be installed, all licenses, the information contractors and vendors to work together, including information directors are responsible together with power akli independent trust in making the proposal.

However, there are still challenges of the use of this insurance in geothermal exploration. First, the insurance benefits for drilling exploratory wells and geothermal development in Indonesia is still not known. Second, exploration is a major challenge and the greatest risk of utilization of geothermal energy, because this activity is key in the business chain. However, financing and insurance is still low.

“In fact, unlike the development of fossil fuels, the development of renewable energy (geothermal) should be easier to get a soft loan of the world, such as through cooperation mechanisms developed countries to undertake the activity of builders of the project” Low Carbon, low emission CO2 “and others,” said Riki, who also serves as the Board of Experts Indonesian Renewable Energy Society.

The third challenge, the ratification of the body Financial Services Authority (FSA), and describe the ‘Terms and Conditions’ joint technical calculations actuary as the basis for calculating the premium insurance.

The assumption on drilling exploration and development of geothermal energy easily available and not hard made formula for the calculation of technical actuarial, as insurance in the oil and gas sector in Indonesia.

The fourth challenge, all parties must understand that the geothermal drilling is an activity that is not too high risk compared with the drilling of hydrocarbons (oil and gas).

In addition, the location of geothermal wells they are on the mainland, and not on the ocean, so it can be assured insurance cover exploration on loan geothermal (FDG) government to exploration or search wells geothermal energy .

Thus, funding the development of geothermal electricity (PLTP) can be returned (not lost), with a term agreed upon by both parties (developer and PIP or SMI).

Challenges fifth, incentives for development of renewable energy such as heat energy earth clean environment should receive a significant incentive policies draw from the government. For example, through a scheme of insurance benefits that have been successfully implemented in several countries.

“No doubt, insurance exploration risk as risk mitigation for the failure of exploratory drilling geothermal, also needed to mitigate the costs for project financing (project financing), in an effort to implementation of development projects ‘zero’ CO2 emissions in Indonesia “, added Riki.