Thu, 15 May 2008
From: Asia Times
By Andrew Symon
DARJAT, West Java - In the shadow of steep volcanic mountains, Indonesia is seeking to develop a cleaner future for its energy industry. Pressurized steam from a score or more of wells is piped to power generation plants a few kilometers away, feeding into the country's main Java-Bali power grid. There are no coal storage yards, no power plant smokestacks to mar the area's beauty or sully with soot the vegetable gardens that thrive in the rich volcanic soil.

Indonesia appears ready to tap geothermal energy resources estimated by some industry analysts and experts to be the world's largest. New investor-friendly regulations, the growing cost competitiveness of geothermal energy compared with oil, gas and coal, and improved financial incentives are persuading foreign investors to pour funds into developing the environmentally friendly fuel resource.

Geothermal generation is essentially a matter of driving turbines using steam from boiling water held under pressure in underground reservoirs. Much of Indonesia sits on an area of active volcanoes, popularly known as the "Pacific Rim of Fire'', and some 251 locations across the archipelago have been identified as potentially viable sites for geothermal power production.

Executives at US oil-and-gas giant Chevron, which operates two geothermal power plants at Darajat and Salak, West Java province, with a combined capacity of 581 megawatts (MW), say they hope to double the size of their geothermal business in Indonesia by 2020. Electricity generated by the existing plants is sold to state power utility Perusahaan Listrik Negara (PLN), while they also supply geothermal steam to a 55 MW unit at Darajat run by Pertamina, the Indonesian state petroleum company.

"Geothermal is very clean energy and its economics can make sense. This is a terrific business for us," said Steve Green, managing director of Chevron's IndoAsia business unit, in an interview with Asia Times Online.

Indonesia has geothermal resources sufficient for 27,000 MW of power capacity, or the largest store of geothermal resources identified anywhere in the world, say government geologists and engineers. Actual proven, probable and possible reserves are about half that, according to government figures. Elsewhere in Southeast Asia, the Philippines has 2,000 MW of installed geothermal capacity, the second-largest in the world after the US, which has about 2,500 MW of capacity.

Twenty years after Indonesia's first geothermal plant came on-line, the country has only about 1,000 MW of capacity installed. Yet of all the non-conventional or alternative energy sources, geothermal arguably is the one that could make a real dent in meeting the country's growing demand for power. Indonesia is finding it ever harder to keep pace with surging demand, witnessed in the increasingly frequent brown and black outs across the country.

The government aims to install 8,000 MW of new geothermal power plants by 2026, part of its goal to have by then 90,000 MW of new installed power from all sources including nuclear, according to the ministry of energy and mineral resource. At present the country has 30,000 MW of installed power generating capacity.

Other non-conventional energy sources such as solar, biomass and wind are unlikely to offer power on a large scale, although they could be important in meeting lower levels of demand in rural areas that without power or that currently use expensive small diesel systems.

Indonesia looks set to pick up the pace in harnessing its geothermal potential after the setbacks of the 1997-98 economic collapse and subsequent fall of the Suharto regime. Prior to that, the government had awarded 11 development contracts for geothermal power plants, mostly to foreign private operators. The government subsequently suspended seven of these projects and plans for nine private fossil-fuel power plants on the advice of the World Bank and International Monetary Fund. Had those contracts been honored, a total of 3,417 MW of new geothermal capacity would have been brought on-stream between 1998 and 2002.

Over the intervening years, the government and PLN have re-negotiated most of the contracts. Chevron inherited the geothermal operations developed by fellow US energy giant Unocal upon Chevron's takeover of the company in 2005. Its recent US$110 million power plant extension at Darajat came on-line in July 2007.

Another geothermal project pointing to new confidence in the sector is the 110 MW expansion of the Wayang Windu geothermal power plant, close to Darajat. The project, operated by Indonesia's Star Energy in conjunction with Ashmore, a UK-based investment management company, is backed by a $298 million financial package secured last May and underwritten by Standard Chartered Bank. Dung Ho, the bank's Singapore-based head of power for Asia, said the financing shows that Indonesian geothermal projects are now attractive to foreign and local investors and banks.

Other factors said to be sparking investor interest is the recovery of PLN since the financial crisis of a decade ago and its renewed ability to meet contracted payments. Chevron, for one, says PLN now pays its invoices well on time. For PLN, geothermal is attractive because the cost of power is not linked directly to global oil, gas and coal prices, all of which have recently spiked sharply.
Carbon credits
Boosting interest in geothermal energy is the possibility that projects will earn carbon dioxide credits under the Clean Development Mechanism (CDM) of the United Nations Kyoto Accord on climate change. Projects that show that they avoid carbon dioxide emissions that would have been generated by similar fossil fuel-run plants gain credits that can be sold into carbon markets or used by companies to offset their own carbon dioxide emissions.

Indonesia as a developing country does not face mandatory targets under the Kyoto Accord but does come under the CDM program. Geothermal power facilities of 360 MW capacity are estimated to emit 2.6 million tonnes less carbon dioxide per year than a coal-fired plant of the same capacity. Chevron's Darajat plant, for example, will gain for the company 650,000 tonnes of carbon emission credits per year.

Legal and regulatory uncertainties still hang over the sector. A 2003 law for geothermal investments is unclear on the responsibility local governments will have in the administration and allocation of new areas of geothermal exploration and development.

Investors such as Chevron hope that new regulations defining responsibilities between local authorities, which stand to gain royalties when geothermal resources are tapped in their areas, and the central government will be in place this year. Under the old law, the rights to the resources were held exclusively by Pertamina.

Under that regime, private companies could develop geothermal resources under contract to Pertamina then sell the steam-produced energy to another company or companies that operated power plants, which in turn could sell the power to PLN. Pertamina still directly operates some geothermal sites and sells their power-producing steam directly to PLN-operated plants.

Also under the new 2003 law, Pertamina no longer manages geothermal resources for the state but continues to play a significant role in the sector because it holds rights to geothermal contract areas and plants established under the old law. Existing geothermal developments, including Chevron's Darajat and Star Energy's Wayang Windu extensions, are operated under leases signed while the old law was in force and no new greenfield areas have been awarded since the 1990s.

There are also hard-to-hedge geological risks. Geothermal plants must be built near to the geothermal resources. The main power demand center, the heavily populated and industrialized island of Java, is an area endowed with the greatest geothermal potential after Sumatra Island. Yet the uncertainty of whether a geothermal field will provide sufficient steam over a long-enough period to recoup initial investments is a major risk. As such, geological exploration must be extensive and on-going so as to ensure backup wells, in case the developed operating wells lose pressure and heat.

Areas that do have geothermal potential generally entail small geographical areas because of the nature of the sub-surface geology. Chevron's Darajat field covers an area of just 3,000 hectares. As a result, geothermal power plant units are usually of modest size - of 100 MW or less - and are commonly developed in modules over time as more geothermal resources are identified.
On the other hand, this incremental approach and the smaller size of plants compared with traditional coal- or gas-fired generation plants can make for more digestible financing demands on developing economies. So long as global oil prices hover at around US$125 a barrel, the drawbacks of geothermal projects look to be outweighed by the attractions.

Andrew Symon is a Singapore-based analyst and writer specializing in energy and natural resources. He can be reached at andrew.symon@yahoo.com.sg



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