In a country heavily dependent on coal and other fossil fuels for energy, accessing geothermal energy could both curb climate-changing emissions and provide much-needed new energy.
But officials say an effort to transform Indonesia’s energy generation, by providing access to international loans to develop the country’s rich geothermal potential, has potential but is running up against bureaucratic barriers that could slow progress toward reducing greenhouse gas emissions and creating additional power.
To support the development of geothermal power, the country is accessing $125 million in loans, at lower than usual interest rates, through the Clean Technology Fund (CTF), part of the Climate Investment Funds, a $7.6 billion international financing mechanism to support low-carbon development and adaptation to climate change in developing countries.
Backers of the project hope that initial funding will leverage up to $450 million in additional support for the project from Indonesia’s government, the Asian Development Bank, the International Bank for Reconstruction and Development and private companies.
The aim is to develop two new geothermal energy sites in Ulubelu, in Lampung province, and Lahendong, in North Sulawesi province.
The two new plants would produce 500 megawatts (MW) of power, and would be expected to reduce climate-changing greenhouse gas emissions by the equivalent of 184 million tonnes of carbon dioxide over the project lifetime.
The funds are due to be disbursed by the end of 2013, after which construction will begin.
However, Adriansyah, president and director of Pertamina Geothermal Energy, a subsidiary of the national oil and gas company, Pertamina, said that soft loans from international institutions come with rules that complicate the process of developing power plants.
“They have their own procurement mechanism (for goods and services)which mostly represent their own best interests,” said Adriansyah (who, like many Indonesians, uses only one name).
The Indonesian government’s approval process is also lengthy, he explained.
“To use the funds, there are steps. We would have to go to the parliament first,” Adriansyah said. “It’s not that we mind, (but)it will not be efficient in terms of time and resources. Meanwhile, we are (incurring) lots of costs during that process.”
Indonesia is estimated to have more than 29,000 megawatts of potential geothermal power—40 percent of the world’s reserves—but only about 1,300 MW, or 5 percent, have been tapped so far. The country has set a target of producing 9,500 MW of geothermal power, equal to 12 percent of the country’s energy mix, by 2020.
Gevorg Sargsyan, the Clean Technology Fund’s programme coordinator, said that CTF financing would support Indonesia’s goal of providing 17 percent of total energy use from renewable energy by 2025 and improving energy efficiency by 30 percent over the same period.
Sargsyan said the funding should help address some of the barriers inhibiting the scale-up of Indonesia’s renewable energy potential.
“Having CTF funds as part of the project financing package will help mitigate or offset some of the high upfront costs, which in turn will encourage investors to enter into geothermal projects,” he said.
As part of the effort, the International Bank for Reconstruction and Development, an arm of the World Bank, is also providing $9 million worth of technical assistance to PGE for project preparation and capacity building.
Adriansyah said that the CTF loans could help support geothermal power in one particularly important way. Today, geothermal power is more expensive to produce than electricity generated by coal-powered plants in Indonesia. That has made the Indonesia State Electricity Company (PLN) reluctant to buy geothermal power. Government efforts to mediate by setting prices have not yielded significant results.
Sargsyan said that the CTF investments would promote economies of scale that over time could reduce the cost of developing geothermal power, making it more competitive with conventional sources.
Abadi Poernomo, chair of the Indonesia Geothermal Association, said that the complicated disbursement method for the CTF funding was a challenge, and that the loans would not be sufficient to cover the expense of developing geothermal power plants and would need to be mixed with commercial funding, as the CTF envisions.
But the CTF funding is particularly valuable, he said because it also aims to help the country meet its targets for reductions in greenhouse gas emissions.
Nyoman Iswarayoga, climate and energy director of WWF Indonesia, agreed that some organisations were not satisfied with the structure of the funding, but said that the lower interest rate on the loans would help make geothermal power more viable.
“If (the funding) is being used properly, then it could reach its ultimate goal (of reducing greenhouse gas emissions) because our electricity sources still mostly depend on coal, oil and gas which contribute more on emissions,” Iswarayoga said.
The CTF’s Sargsyan said there was a need to strike the right balance between the rules and guidelines for the funding, as decided by the donors, and the need for flexibility on the part of the fund's beneficiaries.
Don Purka, principal investment specialist in the Asian Development Bank’s climate change unit, said that the bank was exploring the possibility of a loan to PGE which would not require a government guarantee and would be more in line with commercial lending practices.
“As Pertamina frequently taps the international capital markets for the commercially viable parts of its operations, this type of blended ADB/CTF loan may provide the flexibility sought by PGE/Pertamina for its higher-risk and less viable geothermal activities that it undertakes on behalf of the government,” Purka said.
The potential of geothermal power to help meet Indonesia’s growing need for power while offsetting greenhouse gas emissions is welcome news to those who live near the planned plants.
“We welcome it because we know that the benefit is not just for us but it is also meant for others,” said Suroyo, head of Ulubelu subdistrict of Tanggamus district, in Lampung province, where one of the CTF-funded projects will be built.
“However, it would be great if people surrounding the plant could also get benefit from it,” he said
Suroyo said that of the 16 villages under his administration, with a total population of 30,000 people, eight use hydropower turbines that they have installed themselves in rivers to produce electricity.
But “not far from the plant site ... two “dusun” (hamlets), Mekar Sari and Airlingga, still have no electricity,” he said.
Bambang Permadi Soemantri Brodjonegoro, head of the finance ministry’s Fiscal Policy Body, acknowledged that the CTF loans had limitations, given that projects must be proposed by the government and approved by the parliament.
“We really encourage that the private sector take that important role instead of government on maximising the geothermal effort,” said Brodjonegoro.