Indonesia is on the cusp of sparking a sea change in global
renewable energy development. But discussions on
feed-in tariffs will make or break the success of the
Currently the country has 1000 megawatts of geothermal energy
online. But it has the potential to provide almost 27,000
megawatts. That amounts to around 40% of the global geothermal
The expense of geothermal implementation is proving a serious
impediment to the market's development, however. As a result,
Indonesian authorities have stipulated the price paid for
generated energy is sufficient to cover base costs via a
'feed in tariff'.
Panelists at IFLR's 2012 Indonesia Forum in Jakarta this week
warned the feed in tariff could create more problems than it
Asia Renewables managing director Edward McCartin said
he could not yet see how the feed-in tariff was going to work
on the geothermal side. "It's a bit of a new animal, he
The displeasure of Indonesian government-owned corporation,
PLN, with the system is set to prove one major obstacle to its
success. "We have heard grumblings in the
market that PLN thinks the tariffs are too high and have
indicated they were not properly consulted," he said.
PLN has a monopoly on electricity distribution in Indonesia.
Around 30% of its annual revenue is subsidised. But the cost of
what they sell is still more expensive than what they're
receiving from their customers.
"Geothermal takes a fair bit of expertise it also takes a
pretty fat pocket book and that's not going to change," the
The protection for geothermal is a 9.7 US Cents/kwh cap. He
believed that those who can't make money at that level probably
shouldn't be in the business.
This is a very different product from biomass, he
explained. Biomass is harder to make work
for utility style generation, but it rather works pretty well
with the feed-in tariff. Geothermal is utility scale because it
needs large capex and thus larger plants to make it cost
effective. In most of emerging markets it is hard to get a
biomass plant in excess of 20MW which does not really attract
attention in a market like Indonesia.
Biomass works in the classical model for an FIT, whereas
geothermal does not in that biomass is small scale generation
which can be fed into the grid and has little impact on the
overall conditions whereas geothermal deals need to be on the
100+MW scale to be of moment, said one market
participant. At US$4 Million per megawatt of installed
capacity, that is a serious investment.
Others said the government needed to address the various
prevailing uncertainties around the feed-in tariff. For
example, said one Indonesian lawyer, if there is no increment
path for the tariff over the years the exploration project
becomes very frail because of the very high cost of the
How the PLN was going to pay higher tariffs also remained
unclear, he said. "The easy solution would be for the
Indonesian government to give comfort to the bankers in the
form of a guarantee to address these issues," he said.
McCartin said PLN takes Power Purchase Agreements (PPAs)
negotiations very seriously and want to
assure that they get the best price and terms they can live
with. "When you negotiate with PLN you
know you are going to have your work cut out for you," he
Another panellist said PLN did not do cookie cutter PPAs,
although they do very small hydro deals denominated in local
currency that are certainly not financially viable as an
international project finance.
What's more, it takes PLN a month to get a letter appointing a
negotiation team signed by all PLN directors.
"Part of the problem with this market's development, is that
many new offshore investors dont understand the logistics
of investment in this country," he said
Gibson Dunn's Saptak Santra agreed that there remained
inefficiencies in the market.
But he remained optimistic. "There has been almost a
complete sea change in attitudes to Indonesian energy and
infrastructure in recent years," he said. "The country is
seeing almost record levels of foreign investment in both."
McCartin said there was a great deal
of potential in geothermal and the government seemed quite
focused on the development.
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