Indonesia Works To Secure Lead in "Ring of Fire" Geothermal Market

Renewable Energy World, By Ivan Castano, Contributor , November 2, 2011    

Jakarta, Indonesia -- Indonesia is aggressively moving to build up its geothermal industry with plans add as much as 9,000 MW of installed capacity by 2025. However, industry observers say the Southeast Asian country's government must do more to attract foreign investment if it wants to achieve that target.

"The tenders are out there, they just need the investors to come in," says Paul Brophy, president and chief executive of geothermal consultancy GES, which is working with the Indonesian government to help boost foreign investment and develop the geothermal industry. "So far, some 20 to 30 concessions have been issued so there is still lots of room for new companies to come in and develop the resources."

Industry observers say Indonesia, with the world's highest number of active volcanoes, has the greatest geothermal potential in the so-called Ring of Fire volcanic region straddling the country as well as New Zealand, Philippines, Japan and the Eastern part of Russia. Of all those countries, Indonesia, Philippines and Japan have the strongest development potential, observers say.

However, Indonesia has more volcanic "hot spots" (some 265) and a more aggressive development scheme than the other countries. Developers are using these hot spots to drill holes that can produce steam from volcanic energy. So far, Chevron is the leading foreign developer in the sector but others including Indian industrial conglomerate Tata, Shell, Canada's Raser Technologies and Australia's Origin Energy are also looking to set up geothermal plants.

Investment Challenge

Brophy said the biggest stumbling block in the way to Indonesia's development dream is a dearth of foreign investment as the government does not want to finance the 9,000-MW build-up, estimated to cost $30 billion, on its own.

To do this, the government recently issued a law that would allow foreign developers to pursue their own projects as long as an Indonesian player receives a five percent stake in them. To meet this requirement, international developers must set up consortiums that include at least one Indonesian company, Brophy explained, adding that he thinks that the law will boost investment. This is because before, foreign companies were mostly restricted to partner with state energy group Pertamina if they wanted to build a geothermal project in Indonesia.

"They don't need to partner with Peternina anymore. They can go on their own as long as an Indonesian player has at least five percent equity in the project," adds one industry observer.

Jennifer Derstine, a renewable energy analyst at the U.S. Department of Commerce's international trade mission, agrees that the government is working to attract more international players. She adds that when the department of commerce launched a geothermal trade mission two years ago, the investment framework banned foreign companies from pursuing small geothermal projects on their own. However, that is now allowed and is expected to bolster interest from U.S. and other foreign companies to roll out projects.

"The law had reserved smaller-size development permits of geothermal plants under 10 MW for Indonesian companies. Now, the market is open to U.S. geothermal developers and investors," says Derstine.

"Uncompetitive" Tariffs

However, echoing other views, she says tariffs are still too low to make geothermal projects competitive.  Brophy says Jakarta is also working to address this issue. State electricity company PLN recently established a U.S. $0.097 feed-in tariff per kilowatt-hour (kWh) for geothermal plants, but the region is wiling to negotiate a higher price for projects located far from the power grid. However, some investors are concerned about whether debt-ridden PLN will ultimately be able to pay those prices as state coffers are already burdened with high subsidies for the energy sector, observers say.

Because building geothermal plants is expensive, with the ultimate capacity that can be extracted from them, uncertain, developers are looking for the highest possible tariffs and assurances that the projects will be profitable before jumping into the market. Brophy adds that the government is aware that tariffs must be more competitive and that it is likely to shift some traditional power subsidies into renewable energy to develop the geothermal space as well as other green technologies. 

The Indonesian tariff is lower than in the U.S. where developers are paid $0.10 to $0.12 per kWh. Development costs are much lower in Indonesia, however, Brophy says.

If all goes well — and barring a prolonged and deeper global recession — Brophy hopes Indonesia will be able to attract enough foreign money to meet its 2025 geothermal targets, which could ultimately make the country the world's biggest producer of geothermal power. But it will need to watch over rivals like the Philippines and Japan. The former is looking to install 3,000 MW by 2020, up from 1.95 MW now. And as it moves to diversify its energy matrix following its recent nuclear disaster, Japan could also draft ambitious plans to develop its "vast" geothermal resources, Derstine adds.

For now, eyes are on Indonesia as a potential leader in geothermal energy as long as it can get the funds it needs to meet its ambitious development targets.

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