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Energy & Mining | Investing in Geothermal Energy in Indonesia

Recent changes in regulations surrounding geothermal energy signal an effort to encourage private sector involvement in the sector and the issuance of new geothermal working areas has surged in the past year. Foreign companies have been involved in the sector since Chevron pioneered the first geothermal plant 20 years ago. Recent developments in the sector to encourage investment have witnessed other big names come to the fore such as General Electric, Tata Group and the joint cooperation between GDF Suez and Sumitomo Corporation with Supreme Energy.

The sector is incredibly attractive to investors given the imminent demand for electricity from Indonesia’s rapidly growing population, but it requires investors who are in it for the long run. Bureaucracy and regulatory hurdles heavily delay the execution of projects and reduce attractiveness. In addition, it takes around 8 years for a plant to be fully operational and then, as with any utility; the internal rate of return is around 15%. Bret Mattes of Star Energy notes that “the company’s project in West Java took 10 years to get going but is now very successful” and advises investors to ‘stick with it’ considering that the fundamentals are very much there and the business works.

Geothermal operators are keen to attract investors and partners considering the high initial costs of the projects. The tender process requires that bidders deposit 2.5% of the first year exploration costs as well as an exploration security deposit of $10,000,000 USD for the winning bidder. Then there are additional costs for developing infrastructure around the working sites that are mainly in remote areas such as roads as well as access to the electricity transmission and distribution grid. Financial partners as well as technical expertise due to the lack of qualified human resources are in high demand by geothermal companies and consortiums planning to bid on future working area tenders. Rohmad Hadiwijoyo of RMI Group spoke to GBG about the need for international investment in the sector; ‘geothermal takes a lot of initial investment so there is an unwillingness of the government and the private sector... we still need investors in the geothermal sector, locals here are not prepared to put in the investment.’

Working with a local partner is advantageous for new investors as geothermal involves dealing directly with regional governments and therefore demands a deep understanding of local knowledge. Supramu Santoso stresses the paramount need for local knowledge when operating a geothermal working area; ‘with local government you have to know the way to handle them effectively, some local governments are very friendly, some are still very difficult so it is very varied. I do not see it as a problem but for a newcomer local knowledge is very important’. Selection of a local partner should therefore take into account their connections and experience in a given working area as a priority alongside their professional history. Local partners differ in their requirements; companies with expertise and experience in geothermal are seeking out financing for projects that cannot be obtained through local banks whereas others may look for operational and technological partners to assist in putting together a competitive bid for tenders.

Methods of Entry into Geothermal Investment

(see Understanding the Negative Investment List and Setting up a Business in Indonesia)

Joint Ventures

  • Power plants under 1MW are reserved for local companies only and the regulations are not clear as to whether these can be conducted in partnership with foreign companies.
  • Foreign companies must set up as a representative office in Indonesia through BKPM.
  • Electricity generation projects are permitted to have up to 95% foreign ownership, therefore a local partner must be taken on as a shareholder.

Technological & Operational Partnerships

  • The lack of qualified human resources trained in the geothermal sector means that there is high demand for those in the geological sector for the exploration stage as well as expertise in the training of operators once the plant is functional. Expertise can be offered as a consultancy service whereby a foreign company may set up as local company with up to 95% foreign ownership.
  • Operational patners are permitted with up to 90% foreign ownership.

Extract of Negative Investment List 2010

Investing in Geothermal Energy in Indonesia

Outline of the Legal Framework governing private sector involvement in geothermal energy

  • Geothemal mining permit - Izin Usaha Pertambangan Panas Bumi.
  • Power Supply Business License - Ijin Usaha Penyediaan Tenaga Listrik.
  • Law No. 27/2003 on Geothermal mining - regulates the geothermal mining authority, operational and business activities, use of land, granting of geothermal permits and state income and supervision.
  • Ministry of Energy and Mineral Resources Regulation No. 2/2011 on the assignment of PLN to purchase power from geothermal power plants within the PPA ceiling price.
  • Government Regulation 59/2007 - regarding preliminary surveys for geothermal activities.
  • Ministry of Finance Regulation No. 177/PMK.011/2007 Exemption of customs duties on imports of goods for upstream exploration activities for oil, gas and geothermal activities.
  • Ministry of Finance Regulation No. 242/PMK.011/2008 on exemption of VAT on the import of goods for exploration in business activities pertaining to oil, gas and geothermal.
  • Ministry of Finance Regulation No. 24/PMK.011/2010 on tax concessions for renewable energy projects (tax reduced by 5% for 6 years, reduced tax rate on dividend payments for international investors, projects exempt from VAT and import duties for equipment).
  • Ministry of Energy & Mineral Resources (MEMR) Regulation No. 11/2008 on Procedures for determining the sites of geothermal working areas.
  • MEMR Regulation No. 2/2009 on Guidelines for geothermal surveillance duties - procedure for tendering preliminary geothermal survey assignments to the private sector.
  • MEMR Regulation No. 5/2009 on Guidelines for electricity purchasing price by PLN from cooperation and other business entities - which sets out a process for establishing tariffs.
  • MEMR Regulation No. 11/2009 on Guidelines for implementation of geothermal business activities - regulating the working area tender process, tender and performance guarantee.
  • Law No. 30/2009 on the decentralisation of the authority over electricity that hands over power to local and regional authorities.
  • Law No. 39/2004 (amendment of Law No. 41/1999) on Forestry and subsequent Presidential Decree February 2010 that derives from that law permitting underground geothermal mining in protected forest.
  • Negative Investment List 2010 Presidential Decree 36/2010 stipulates that all electricity generating power plants have a maximum limit of 95% foreign ownership.
Plan for development of Geothermal Power Plants to 2018

Source: BP MIGAS

As of March 2011, the Ministry of Energy and Mineral Resources announced 26 new geothermal working areas with a capacity of 2,951 MW.

Recent geothermal working areas announced by the Directorate General of Renewable Energy and Energy Conservation, to be tendered by the relevant local authority (May 2011):

New Geothermal Working Areas

Source: Ministry of Energy & Mineral Resources

MEMR.

Global Business Guide Indonesia - 2012

icone share

Indonesia Energy Snapshot

Contribution to GDP: 3.44% (2016) Oil & Gas Imports: $1.22 billion USD (Jan 2016)
Proven Oil Reserves: 3.69 billion barrels (2016)
Proven Gas Reserves: 2.85 trillion cubic metre (2016)
Proven Coal Reserves: 28 billion tonnes total reserves (2015)
Proven Potential in Geothermal Energy: 27 GW
Proven Potential in Hydropower: 75 GW
Other Energy Sources: Coal Bed Methane, Biomass, Waste, Ocean Current, Solar, Wind.
Current Energy Mix: Petroleum 41%, Coal 30%, Natural Gas 23%, Renewables 6% (2014).