Indonesia’s geothermal development facing obstacles

Alexander Richter 18 Dec 2009

Based on a recent article from Indonesia, the country might face the issue that geothermal development might face delays in development. It particularly names “precarious financing and poor planning endangering the country’s major environmental energy program”.

“Indonesia, which sits on the so-called Ring of Fire, the confluence of several tectonic plates grinding together and producing 155 live volcanic systems, has an abundance of geothermal steam boiling away not far from the surface. Nonetheless, getting itout of the ground and into turbines is problematical. The ambitious geothermal program has been held up by financing problems, weak initial pricing in Power Purchase Agreements and coal supply and logistics problems. PLN is reportedly renegotiating about 50 power purchase agreements as it would be easier than starting all over.

Geothermal energy is more difficult to finance than conventional powerplants. Bank Mandiri,Bank BNI, Bank BRI and Bank BCI all agreed to put a syndicated loan of4.8 trillion Indonesian rupiah into the last six projects. But at this stage of the game the same banks would be less likely to risk their money on geothermal projects, even though the country desperately needs more base-load energy.

The suggested Indonesian model for new geothermal development is to negotiate drilling and resource rights with local governments (without clear recourse if the relationship goes wrong), then explore and develop, and sign up on a purchase agreementwith an offered standard price for geothermal of 9.7 US cents per kilowatt before you know for sure how much steam you will get, its quality, or the real cost of getting it – the equivalent of buying an expensive lottery ticket.

Hanan Nugroho, an energy planner at the Indonesian National Development Planning Agency says Indonesia has plenty of steam (enough for 27,000 MW) but the new 4,733 MW geothermal program, he told local media, is “challenged by several constraints: aweak tendering process, lack of sufficient and reliable data, lack of human resources, inadequate financial support and — the most basic –weak power purchase agreements.

As things stand drilling and exploration risks are not likely to be accepted by investors or bankers without state guarantees, international donor grants or subsidized state-backed insurance on steam reservoir exploration risks. Hanan says local authorities don’t have the capacity and know how to start projects, the banking and construction industries lack know-how ongeothermal and the carbon financing scenario is unclear. The risks look too high.

In addition, foreign participation is restricted on all renewable energy power investment for power stations below 10 MW,while smaller one-off geothermal projects have disproportionately high risks and transaction costs.

So when I asked a journalist atthe recent Geothermal Workshop run by the Indonesian Geothermal Association and the Mines and Energy Society (Bimasena) in Jakarta,what was new, he replied “The news is, that there is no news. As Hanan Nugroho said, unless the big challenges are addressed, Indonesian geothermal potential “will remain buried in the ground”.

Source: Asian Sentinel