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New lease of life for Indonesia

Geothermal capacity on the rise; Chevron considering the potential

INDONESIA is taking decisive action to accelerate the development of geothermal power. The nation, which sits on the world’s largest reserves of geothermal energy, has struggled to attract investment. But government efforts to clarify pricing issues, coupled with new tax incentives and an exploration risk-mitigation fund, offer a new lease of life.

In an effort to boost investor confidence, the government will set aside $39m to compensate for any failures in geothermal exploration this year. Additionally, a ministerial decree ordering state-owned utility PLN to buy electricity generated from geothermal power plants at a ceiling price of $0.097 a kilowatt hour, is expected to end uncertainties over pricing. The move should pave the way for the resumption of 15 long-delayed geothermal projects, which have been hampered by the unwillingness of PLN to sign power-purchasing agreements.

Meanwhile, the government’s latest tax incentive for green energy offers renewed optimism. As a result, consulting firm Frost & Sullivan predicts Indonesia will lure more investment for geothermal power this year. But increased spending is expected to be moderate, at between 8% and 10%, because of the slow pace of development.

The finance ministry will reduce net tax by 5% a year on total investment for six years. It will also allow faster asset amortisation and impose a lower tax rate on dividend payments for non-resident investors. Renewable-energy projects will also benefit from an exemption in value-added tax and import duty for equipment.

Given the positive trends, Pertamina Geothermal Energy (PGE), an offshoot of the national oil company, was upbeat and that its plan to boost its generating capacity to 2 gigawatts (GW) by 2018 was within reach. PGE president director Abadi Purnomo said $6bn has been set aside to meet its target. This year PGE will drill 31 new wells at its existing geothermal fields and set up a steam-gathering system.

Later this year, the energy ministry expects to receive a $0.5bn loan from the Asian Development Bank to set up three geothermal power plants with a combined capacity of 165 megawatts (MW).

But despite Indonesia’s vast reserves and good intentions, there are still obstacles to overcome before it realises its geothermal ambitions. Conflicting low-level regulations and difficulties involving land acquisition continue to hinder development.

But the biggest hurdle comes from PLN itself. The utility offers little support for geothermal energy development, seeing greater benefit in cheaper coal-powered plants. But forcing PLN to buy geothermal energy at a higher price without government financial support – and in the face of customers’ unwillingness to pay more – will not solve the problem, argues Rohmad Hadiwijoyo, executive director of Indonesia’s Centre for Information and Development Studies. Hadiwijoyo says this ambivalence is holding back geothermal development.

During the 1990s, both local and foreign companies began developing geothermal power in partnership with PLN, but these projects collapsed under the weight of the 1997 Asian financial crisis. And, as a result, the government no longer offers guarantees to honour power-purchase agreements and international investors have been slow to return.

And while the nation’s reserves have the potential to power up to 27 GW of generating capacity, the country still lags behind its peers. The archipelago has only 1.1 GW of capacity from six geothermal fields, compared with 4 GW in the US, and 2.5 GW in the Philippines.

Looking forward, the nation aims to become the world’s largest user of geothermal energy, with a target capacity of 4 GW by 2014 and 9 GW by 2025, to help it meet rising electricity demand of 7% a year. And tapping its geothermal resources, could help realise another state objective – to reduce carbon emissions by at least 26% over the next decade.

Some investors see promise. “While we are still arguing about a carbon tax in Australia, the Indonesia government has already guaranteed a tariff for geothermal and created a market,” says Kerry Parker, who has forged an opening for Australian-based Panax Geothermal in Indonesia.

Chevron, the largest geothermal power producer in the world, has operated geothermal fields in Indonesia since the mid-1980s. The supermajor plans to double its geothermal capacity in southeast Asia by 2020 and is considering several of the 256 sites that Indonesia has identified as having potential.

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