Big business stakes out geothermal power markets in Indonesia and the Philippines

Posted: July 26, 2012

Global geothermal market estimated to be worth US$6 billion by 2017
Indonesia has world’s biggest geothermal potential at 29 GW

All stories by Suvarna Beesetti

The big boys of the renewable energy industry are increasingly driving strategic stakes into the multi-billion dollar geothermal markets of Indonesia and the Philippines, the second largest after the US.

After a prolonged wait for market conditions to be more conducive to investors and financiers, it appears the stage is now set for a more active geothermal theme play in the two Asean countries, more so in Indonesia which has a fast-growing energy demand profile.

Origin Energy of Australia, India’s Tata Power and British Petroleum recently announced commitments to the Indonesian geothermal industry. These companies, together with Total, Chevron and Energy Development Corporation (EDC) of the Philippines, all have the resources and deep pockets to finance their own projects.

According to the International Energy Agency’s “Renewable Energy Medium-Term Market Report 2012”, which gives projections till 2017, the US has the largest cumulative geothermal installed capacity in 2011, with 3.1 GW. The Philippines and Indonesia followed, with 2.0 GW and 1.2 GW, respectively. Mexico and Italy closed the top five in 2011 with 1 GW and 0.9 GW, respectively.

The report says global geothermal power capacity will rise to 14.2 GW in 2017, up from 11.1 GW in 2011.

“The largest portion of development should take place in the US, where plants benefit from a production tax credit, and in Indonesia, which has the world’s largest estimated geothermal power resource potential, at 28.5 GW, and fast-growing power demand,” it says.

It predicts that by 2017, capacity in the Philippines will grow moderately to 2.2 GW while Indonesia should add 650 MW, bringing its total to 1.8 GW.

“Indonesia has tried for several years to unlock its vast geothermal potential, but developments have been hampered by institutional bottlenecks and exploration risk. In April 2012, the government entered into a cooperation arrangement with New Zealand, which has extensive experience with geothermal exploitation. This arrangement should help with policy and technology development as well as improve workforce education,” the report says.

(photo credit: EDC)

High risk

While geothermal is an excellent source of energy because of its ability to meet base load demand, it is a bane of the industry that projects move at snail’s pace and are exposed to the high risk of well-drilling for which debt financing is typically not available.

This is why only financially-sound players can afford to enter this market, and it is also why they often demand some guarantees from governments in terms of policies and purchase of electricity generated if they were to invest in this sector.

At the GeoPower Indonesia & Philippines conference held in Jakarta in June, some players pointed to bottlenecks that cropped up in Indonesia in the late 1990s.

Edward McCartin, senior development advisor of Alterra Power, says there have finally been positive developments in the regulatory scheme and an appreciation that geothermal can play a major role in several areas of Indonesia as a hedge on rising fossil fuel prices.

“Investors are showing up. Financiers are getting comfortable and I see a bright future for geothermal here if we can keep the stakeholders focused on maintaining a reliable, legally certain and also attractive structure,” he says.

Dr Bret Mattes, chief executive officer of OTP Geothermal, agrees: “Investors face some major risks before traditional debt finance can ’kick-in’ – which is probably not until the project is more than 90% certain. Hence, an effective management and decision process must be followed to mitigate risk and to ensure successful development.”

Indonesian market

Fuelled by an energy-hungry population, the Indonesian energy market has been growing at a tremendous 12% per annum, even during the regional recession. To deal with the country’s huge diesel fuel subsidy bill, which currently stands at US$9 billion per annum, the government has begun redirecting its attention towards seeding clean energy projects.

Herman Darnel Ibrahim (photo credit: GPA Photo)

Experts agree there is vast potential for the development of Indonesia’s renewable energy sources (see Table 1). In fact, Herman Darnel Ibrahim of the National Energy Council of Indonesia and a board member of the International Geothermal Association points out that the country’s domestic energy sources are enough to meet the projected consumption until 2100.

Table 1: Renewable energy potential of Indonesia

Source: PT Perusahaan Listrik Negara (PT PLN)

Table 2: Selected energy development in Java and outer Java up to 2015

Source: Directorate-General of Mineral Coal and Geothermal Indonesia 2009

As an indication, the development for geothermal energy in Java and outer Java is leading the pack vis-a-vis coal, gas and hydro in the energy race (see Table 2). This is partly driven by the fact that the government has set a long-term objective of having 10% of its total power production from geothermal.

The effort has the support of Jan Bartak, senior head of business development of International Power-GDF Suez, a leading global independent electricity generating company with nearly 76 GW in operation and a significant programme of 12.8 GW projects under construction. “In Indonesia, geothermal generation can make a sizeable contribution to the energy mix and limit excessive reliance on polluting fossil fuels,” he says.

Jan Bartak (photo credit: GPA Photo)

According to the Ministry of Energy and Mineral Resources of Indonesia, the country’s total potency of 29,038 MW (Geological Agency, December 2010), is about 40% of the world’s known reserves. Its ample geothermal resources are spread along the active volcanic belt from Sumatra, Java, Bali, Nusa Tenggara, North Sulawesi and Maluku.

Despite this huge potential, the Indonesian geothermal sector is largely underdeveloped at only 3% of the installed capacity. However, this is about to change soon.

According to the International Energy Agency (IEA), the ministry of energy and mineral resources formulated a Geothermal Development Roadmap in its 2006 vision to develop 9.5 GW of installed geothermal capacity by 2025 (see Figure 1).

More recently, in 2010, this goal was increased to 12.3 GW by 2025. A ministerial regulation dated January 27th 2010 also set up a short-term goal of nearly 4 GW of new geothermal installations by 2014, with private sector developers expected to fill around half of this gap.

With that kind of potential, Indonesia could become the fastest-growing geothermal market. This has led Nobel Peace Prize laureate and former US vice-president Al Gore to comment at the Asia Pacific Summit for the Climate Project in Jakarta last year that ”Indonesia has the potential to become the world’s geothermal energy superpower.”

Figure 1: Roadmap of Indonesia’s geothermal development 2006-2005