World Bank: encouraging geothermal investment in Indonesia

City skyline Jakarta, Indonesia (source: flickr/ Charles Erbianco, creative commons)

Alexander Richter 12 Dec 2017

In a recent article published on the website of the World Bank, the bank discusses challenges and opportunities in geothermal energy development. It particularly addresses the World Bank’s support to the development of geothermal power in Indonesia, which is a key component of the World Bank Group’s Country Partnership Framework for Indonesia.

In a speech this week in at the One Planet Summit in Paris, France World Bank Group President Jim Yong Kim introduced “Indonesia Geothermal – a Resource Risk Mitigation Facility, established by the Government of Indonesia with support from the World Bank and other partners. The Facility will provide concessional funding and grants to pool and reduce the exposure of developers in the early exploration and drilling phases of geothermal projects. With a 150 million dollar investment from the Government of Indonesia and 325 million dollars in concessional financing, Indonesia Geothermal is expected to leverage up to four billion dollars in private sector funding to develop more than one gigawatt of new thermal capacity, which is part of Indonesia’s target to add 5.8 gigawatts of geothermal power generation by 2026.”

Challenge and Opportunity

Tapping into pockets of hot water or steam below the Earth’s crust is increasingly being used as an affordable and sustainable alternative to fossil fuels. Geothermal energy is one of the few renewable sources of energy able to produce steady power on a 24-hour basis. Under the right conditions, it can be cost-competitive with coal or natural gas, which means countries can depend less on imported fuels and increase their energy security. Being a cleaner source of electricity, geothermal energy can also play a major role in decarbonizing the power sector.

Despite this potential, high upfront costs for the initial exploration stage and the risk of unsuccessful exploration continue to be barriers for making use of this natural resource on a large scale. Global experience shows that risk mitigation, especially during the initial exploratory phase, can effectively unlock investment. A global scale-up of geothermal energy will require major mobilization of private sector investments facilitated by risk mitigation mechanisms that include using concessional funding from public resources, climate finance and guarantees.

The World Bank’s Energy Sector Management Assistance Program (ESMAP) leads the Global Geothermal Development Plan to mobilize new funds for the initial investment phases which carry the greatest risk. So far, the plan has raised $235 million.

The International Finance Corporation (IFC), a member of the World Bank Group, is also providing financial and advisory services to support the exploration and development of private sector geothermal power projects in emerging markets. For example, in 2010, IFC arranged a $190 million financing package to support construction of Nicaragua’s largest greenfield geothermal power project. Once completed, the 72 megawatt San Jacinto project will provide nearly 20 percent of Nicaragua’s power needs. And in 2013, IFC signed an agreement with international reinsurer Munich Re to develop and pilot geothermal exploration risk insurance products in Turkey. The four pilot projects are funded by $420 million of private investment and are expected to add 140 megawatts of geothermal capacity.

Transformative Action

Indonesia has the world’s largest geothermal potential. The World Bank’s support to the development of geothermal power in Indonesia is a key component of the World Bank Group’s Country Partnership Framework for Indonesia, which focuses on government priorities that have potentially transformational impact.

At present, Indonesia is highly dependent on fossil fuels such as coal, its primary source of electricity production. Shifting to geothermal energy will help Indonesia reduce greenhouse gas emissions considerably, and support the national climate mitigation goals set out in its Nationally Determined Contribution (NDC) to the Paris Agreement.   To meet its increasing energy demand in an environmentally responsible way, the government has embarked on an ambitious plan to develop its geothermal resources.

To achieve its target of adding 5.8 gigawatts (GW) of electricity production with geothermal resources by 2026, Indonesia will need an estimated $25 billion of investments over the next eight years, a major portion of which is expected to come from the private sector.

With support from the World Bank and other partners, the government of Indonesia is planning a new Geothermal Risk Mitigation Facility. This would leverage several billion dollars in private sector funding, unlocking investments through risk mitigation for exploration and early production drilling. This would allow investors to prove sufficient resources to attract commercial finance for large-scale development. Over the next seven years it is expected that the facility will lead to the development of more than 1 GW of new geothermal capacity.

This new facility builds on a long engagement around geothermal energy in Indonesia. In 2012 the World Bank supported the government through a grant from the Global Environment Facility (GEF) to undertake key reforms to enhance the investment climate for geothermal development. It also helped Pertamina Geothermal Energy (PGE) to kick-start its ambitious geothermal expansion program through a $175 million IBRD loan, along with concessional financing of $125 million from the Clean Technology Fund (CTF).

More recently, in 2017, the World Bank provided $55.25 million in grants to support the Geothermal Energy Upstream Development Project in Indonesia, which aims to facilitate investment in geothermal power generation in the country. The Clean Technology Fund (CTF) is contributing $49 million to support infrastructure development and exploration drilling. The Global Environment Facility (GEF) contributes an additional $6.25 million to support technical assistance aimed at building capacity in geothermal exploration, including safeguards due diligence. The Ministry of Finance and PT. Sarana Multi Infrastruktur, a state-owned infrastructure financing company, will match the CTF funding for the Project.

Expected Results

Indonesia has a target of increasing the share of new and renewable energy in its primary energy mix to 23 percent by 2025, including by adding 5.8 GW of geothermal capacity. The Geothermal Risk Mitigation Facility will help Indonesia meet this target by leveraging billions of dollars in commercial financing to develop more than 1 GW of new geothermal capacity. Indonesia currently has around 1.8 GW of geothermal electricity; its total potential is 29 GW. Using Indonesia as a model, other countries can potentially apply a similar approach to scaling up the use of geothermal energy.

Key Facts & Figures

• Global geothermal power generation potential is between 70 to 80 gigawatts (GW). However, just 15% of known geothermal reserves around the world are exploited for electricity production, generating just 13 GW.
• An exploration campaign and initial test drilling program of three to five geothermal wells costs anywhere from $20 to $30 million.
• Geothermal power is the second-largest renewable energy resource in Indonesia after hydropower and a clean alternative to coal-fired power generation. Some 30 million Indonesians – or 12 percent of the population – lack access to modern and reliable electricity.

Source: WorldBank, World Bank