Jakarta, July 26, 2011 - Indonesia is preparing to tap its vast geothermal resources to fuel a growing economy and address environmental concerns. The World Bank has a comprehensive engagement to support this effort. A new project to develop two geothermal fields with a leading Indonesian developer, complemented by the Bank’s ongoing policy and institutional reform work to improve the investment climate will help Indonesia move towards achieving its unprecedented expansion of geothermal power capacity.
4,000 Megawatts of geothermal power is the ambitious goal set by the Indonesian government, amounting to a 40 percent increase in the current global geothermal capacity of about 10,000 Megawatts. Geothermal is a priority in Indonesia’s low carbon growth strategy as a low-emission, dependable form of renewable energy which will encourage reduction of coal based power development. Despite its potential, less than 4% of the geothermal resources have been developed to produce power so far.
To help immediately stimulate investments and kick-start the geothermal scale-up program, The World Bank is providing $300 million in loans as a part of the Geothermal Clean Energy Investment Project. It includes funds sources from IBRD – the middle income window of the World Bank ($175 million) and the Clean Technology Fund ($125 million) that provides low interest loans for projects that benefit climate change. The loans were approved by the Bank’s Board of Directors on July 26.
The project will assist Pertamina Geothermal Energy (PGE), a government-owned corporation, to develop 150 Megawatts of geothermal power in two fields in the Indonesian islands of Sumatra and Sulawesi. The Bank is also helping strengthen PGE’s institutional capacity to undertake investments that meet industry and international standards, which will contribute towards PGE successfully implementing its expansion program to develop a globally unprecedented 1000 MW by 2015.
Abadi Poernomo, President Director of PGE says "We appreciate the World Bank's support. This assistance will contribute to PGE's goal of becoming a world class geothermal company.”
“The project is significant as the first Clean Technology Fund operation in the East Asia Region,” says Stefan Koeberle, World Bank Country Director for Indonesia.
“This project is a good example of the catalytic impact of CTF’s concessional financing. It makes good sense for the international community to contribute to such projects since the climate change benefits extend beyond Indonesia to the entire world. It also made the project financially feasible without further burdening Indonesia electricity consumers o the government budget” says Migara Jayawardena, Senior Infrastructure Specialist of the World Bank and project team leader.
The Bank’s support to Indonesia’s geothermal sector extends beyond only investment loans. To help develop the sector over the long-term and help the country meet its stated goal of 4,000 Megawatts, the Bank has been assisting the government with key policy and institutional reforms to enhance the investment climate in the sector. The ongoing Geothermal Power Generation Development Project, approved in 2008 and funded by a Global Environment Facility grant, is supporting the Indonesian Ministry of Energy and Mineral Resources undertake key policy and regulatory improvements. The Bank is also providing carbon offset financing through the Indonesia Lahendong Geothermal Project.
“A pricing and compensation policy for geothermal, for example, is essential for success, since geothermal electricity can financially cost more than coal-based power when its environmental and other benefits are not considered. Therefore, appropriate pricing mechanisms are needed to encourage developers to mobilize investments knowing that they can cover their costs and secure returns commensurate with the risks they are facing” says Jayawardena. “The Bank is well placed to assist Indonesia since we have been working in Indonesia for some time now, and we also have the capacity to bring similar experience from other parts of the world”.
Challenges Facing Geothermal Development in Indonesia
Indonesia’s geothermal power potential is estimated at 27,000 Megawatts, roughly 40 percent of the world’s resources and more than the entire power generation capacity currently available in the country. However, the total developed geothermal power generation capacity in Indonesia is only 1,189 Megawatts.
Numerous challenges have hindered development, including limited institutional capability to plan geothermal development and engage suitable developers; inadequate incentives, and pricing mechanisms that do not reflect the environmental and other benefits of geothermal; weak domestic capacity in the areas of resource assessment, equipment manufacturing, construction, operation and maintenance of geothermal energy facilities.
Power Plants Urgently Needed
Indonesia's power sector has struggled to keep up with the high electricity demand driven by robust economic growth. As a result, electricity blackouts have become common, affecting the daily lives of its people and impacting the country’s economic growth prospects.
The government began to take action in 2006 to expand power generation capacity by adding 10,000 Megawatts through a fast-track program, relying on Indonesia's abundant and relatively inexpensive coal resources. However, this would have a negative environmental impact and increase Indonesia's dependence on fossil fuels. Fossil fuels account for over 80 percent of electricity generated in Indonesia today.
To ensure a more balanced and environmentally sustainable approach, the government added a second 10,000 Megawatt fast-track program in 2008 focusing on renewable energy, with geothermal comprising 4,000 Megawatts. The Bank’s comprehensive engagement in the sector will help the government meet its goal.
Geothermal is the ideal alternative to coal
Geothermal is currently the only technology capable of replacing coal-based power in Indonesia. Here are some of its benefits:
- Non-intermittent 24 hour availability can directly replace coal power plants unlike most other renewable energy options
- Ideally located in major population centers where electricity demand is high and continues to grow
- Enhances energy security of the country as an indigenous resource that is not exported
- Serves as a natural hedge against the market volatility of fossil fuels since geothermal “fuel” costs remain largely steady once developed