Precarious financing, poor planning endanger a major environmental energy program
In the face of widespread power cuts hitting Jakarta and the provinces,Indonesia's state power utility PLN is planning a second 10,000 MW crash program, 48 percent of it based on geothermal energy. But the program is suffering from a multitude of shortcomings.
With about 1,189 MW of geothermal energy installed, the country wants another 4,733 MW to deliver electricity by 2014. But the financing for the first 10,000 MW accelerated program, initiated in 2006 and based on conventional coal-fired power stations, has only just been completed ata cost of US$5.65 billion in dollars and Rp23.2 Indonesian rupiah ($2.9billion). This 10,000 MW, years behind schedule, is to be supplied by33 coal-fired plants, 10 larger ones for the more developed Java-Bali system and 23 smaller ones in the provinces. About 50 percent of the program is expected to be finished by the end of 2010 and the rest by 2013.
This is too long for a country facing a power crisis.Rolling blackouts have continued to increase, with business leaders complaining that the power shortages are endangering investment plans and production capacity and discouraging multinationals from coming into invest. At least nine Facebook groups hoping to attract 1 million members have sprung up as Jakartans turn to social networking in their frustration . The problem has grown serious enough that in October President Susilo Bambang Yudhoyono summoned cabinet ministers and government officials in an effort to find solutions. The government is also considering raising electricity prices by 10 percent to 20 percent.
Indonesia, which sits on the so-called Ring of Fire, the confluence of several tectonic plates grinding together and producing 155 live volcanic systems, has an abundance of geothermal steam boiling away not far from the surface. Nonetheless, getting it out of the ground and into turbines is problematical. The ambitious geothermal program has been held up by financing problems, weak initial pricing in Power Purchase Agreements and coal supply and logistics problems. PLN is reportedly renegotiating about 50 power purchase agreements as it would be easier than starting all over.
Without guarantees or other assurances from the Ministry of Finance the first10,000 MW program would still be up the creek. The Ministry of Finance had to stump up state guarantees to keep Chinese export banks in the bigger deals, as well as leaning on state banks to help finish program financing. Indonesian Finance Minister Sri Mulyani Indrawati shook hands with PT PLN president director Fahmi Mochtar recently as the final loan agreements were signed for the last six power stations in the first program, with the support of four Indonesian state banks plus export credits from the Bank of China.
Geothermal energy is more difficult to finance than conventional power plants. Bank Mandiri,Bank BNI, Bank BRI and Bank BCI all agreed to put a syndicated loan of4.8 trillion Indonesian rupiah into the last six projects. But at this stage of the game the same banks would be less likely to risk their money on geothermal projects, even though the country desperately needs more base-load energy.
The suggested Indonesian model for new geothermal development is to negotiate drilling and resource rights with local governments (without clear recourse if the relationship goes wrong), then explore and develop, and sign up on a purchase agreement with an offered standard price for geothermal of 9.7 US cents per kilowatt before you know for sure how much steam you will get, its quality, or the real cost of getting it – the equivalent of buying an expensive lottery ticket.
Hanan Nugroho, an energy planner at the Indonesian National Development Planning Agency says Indonesia has plenty of steam (enough for 27,000 MW) but the new 4,733 MW geothermal program, he told local media, is "challenged by several constraints: a weak tendering process, lack of sufficient and reliable data, lack of human resources, inadequate financial support and -- the most basic -- weak power purchase agreements.
As things stand drilling and exploration risks are not likely to be accepted by investors or bankers without state guarantees, international donor grants or subsidized state-backed insurance on steam reservoir exploration risks. Hanan says local authorities don't have the capacity and know how to start projects, the banking and construction industries lack know-how on geothermal and the carbon financing scenario is unclear. The risks look too high.
In addition, foreign participation is restricted onall renewable energy power investment for power stations below 10 MW,while smaller one-off geothermal projects have disproportionately high risks and transaction costs.
So when I asked a journalist at the recent Geothermal Workshop run by the Indonesian Geothermal Association and the Mines and Energy Society (Bimasena) in Jakarta,what was new, he replied "The news is, that there is no news. As Hanan Nugroho said, unless the big challenges are addressed, Indonesian geothermal potential "will remain buried in the ground".
Terry Lacey is a development economist who writes from Jakarta