Indonesia could spark renewables sea change

Author: | Published: 23 Oct 2012
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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 market.

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 potential.

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 solved.

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 said.

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 panelist said.

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 product.

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 said.

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 don’t 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.

See also

Wampu deal unleashes Indonesian renewable

Why Indonesia coal is best avoided

How to improve Indonesian corporate governance

Is MIST the next BRIC?