Indonesia Seeks to Tap Its Huge Geothermal Reserves

The 17,500 islands of the Indonesian archipelago, perched perilously on the arc of seismic activity known as the Pacific Ring, are plagued by unpredictable and often deadly volcanic eruptions. But there is an upside to living with fire: vast reservoirs of underground water, heated by the earth’s core, can be harnessed to generate electricity.

Indonesia has more than 40 percent of the world’s geothermal reserves, enough to produce 28,100 megawatts over 30 years, equivalent to the power generated from burning 12 billion barrels of oil, according to revised figures released by the Energy and Mineral Resources Ministry in March.

Geothermal energy could conceivably power a significant part of this sprawling country of more than 227 million people. Currently Indonesia is turning out less than 1,200 megawatts from six geothermal fields scattered across Java, North Sumatra and North Sulawesi — a negligible percentage of its potential, putting it behind both the United States and the Philippines. But Indonesian officials have ambitious goals for geothermal generation.

President Susilo Bambang Yudhoyono has said that by 2025 he would like geothermal generating capacity to rise to 9,500 megawatts, or about 5 percent of the country’s total requirements. And tapping into geothermal resources— a low-carbon, clean alternative to the oil and coal that dominate Indonesia’s energy consumption — could help him realize another stated objective: to reduce greenhouse gas emissions at least 26 percent over the next decade.

To reach these goals, Indonesia will need an upsurge of foreign investment. In late April, Bali was the host of the 2010 World Geothermal Congress, which attracted technical experts, officials and investors from about 80 countries. “The Congress was a way of introducing Indonesia to the world and saying, ‘We’re open for business,”’ said Ted Saeger, energy and natural resources officer at the U.S. Embassy in Jakarta.

The conference opened with the signing of 12 geothermal-related contracts worth about $5 billion, ushering in the second phase of a fast-track government program to develop Indonesia’s power industry. This phase, estimated to cost $12 billion and scheduled for completion in 2014, calls for an increase in geothermal generating capacity to nearly 4,000 megawatts.

A month after the congress, the U.S. commerce secretary, Gary Locke, led a trade mission to Indonesia of representatives from 10 clean technology companies looking for opportunities in geothermal development, particularly in the outer islands. Addressing an American Chamber of Commerce luncheon in Jakarta, Mr. Locke spoke about the prospects. “We cannot be so concerned about the initial cost,” he said. “Ultimately, the cost will go down, the technology will improve.

“The benefit to the planet, and to our health, and to the quality of life of today’s people and future generations, is so critical,” he added.

Yet his comments recognized a more problematic near-term reality. Technical risks, lengthy lead times and soaring exploration costs have deterred foreign investors seeking a quick return. Geothermal plants use wells to tap subterranean pockets of heated water, releasing pressurized steam capable of turning huge turbines. Operational and maintenance expenses are relatively low, but the initial investment in heat-extraction and power-generating technology is capital intensive, and additional infrastructure spending is often needed, for example to build access roads in remote and mountainous regions. By most estimates, moreover, preliminary geological surveys and exploratory drilling for a single plant can take seven to eight years.

“You might put $20 to $40 million into digging holes just to find out what the capacity of your field is,” said Brett King of the law firm Paul, Hastings, Janofsky & Walker, in Hong Kong, which has been involved in several geothermal deals. “No one will sign contracts until you know for sure.”

During the 1990s, under former President Suharto, a dozen or so companies, local and foreign, began to develop geothermal power in partnership with PLN, the national power utility. But most of these projects collapsed under the weight of the 1997 Asian financial crisis, and were canceled by Jakarta under pressure from the International Monetary Fund. Others were taken over by the government or renegotiated at lower prices, while a handful of cases went to arbitration.

In the aftermath of that experience, the Indonesian government is no longer offering sovereign guarantees to honor power purchase agreements, and international investors have been slow to return.

Regulatory and policy obstacles continue to plague the potentially lucrative sector. Investors are pushing the government to make long-term policy changes, particularly to its subsidy structure for fossil fuels. A low electricity tariff has also hampered progress, despite an average 10 percent rise this month.

“Over the last year there has been a lot of policy movement to get the investment climate in shape for foreigners to come in,” Mr. Saeger, the U.S. Embassy official, said. “But key barriers remain,” he added, including “a confusing tendering process and land acquisition problems.”

Chevron, the U.S. energy giant that is the largest geothermal power producer in the world, has operated two geothermal fields in West Java, Salak and Darajat, since the mid-1980s. It says it intends to double its geothermal generating capacity in Southeast Asia by 2020 and is considering several of the 256 sites that Indonesia has identified as having potential. But it also says it is able to develop geothermal resources largely because it operates on contracts signed during Mr. Suharto’s presidency.

Speaking at the Bali conference, James Blackwell, Chevron’s head of exploration and production in the Asia-Pacific region, held up the Philippines, the world’s second-largest geothermal producer, as an example to follow. Manila recently enacted a renewable energy law to stimulate private investment that he described as encouraging open and competitive power generation while reducing excessive royalties and taxes.

To encourage investment, the World Bank’s Clean Technology Fund made available $400 million of financing in March, as part of an effort to bolster spending to combat climate change in the developing world and to help double Indonesia’s geothermal capacity. The Indonesian government recognizes that because of PLN’s poor financial condition, the risk premium required in financing power projects tends to be prohibitive. A recently established Indonesia Infrastructure Guarantee Fund, backed by the World Bank, aims to provide political and payment risk insurance for infrastructure projects.

An exploration risk mitigation fund, specifically for geothermal, is also in the works, and already the Indonesian government is offering tax incentives to investors in renewable energies, Maryam Ayuni, director general of new energy at the Energy and Mineral Resources Ministry, said at a conference in Jakarta this month.

Mr. Saeger, of the U.S. Embassy, said, “I’m encouraged by Indonesian officials’ desire to get the policy right, but we’ll have to see if they can overcome the obstacles.”

Tricorona, a Swedish business that specializes in trading offsets from greenhouse gas reduction projects in emerging markets, is one company looking for an answer to that question. Besides biofuels and wastewater deals, Tricorona is eyeing a 50-megawatt geothermal project in Indonesia. “Geothermal holds a lot of emission reduction potential,” said Sushila Maharjan, Tricorona’s director for carbon sourcing in Southeast Asia. “We have a long-term view on the market and so we’re interested, regardless of barriers.”

By HILLARY BRENHOUSE
The New York Times