Jakarta's geothermal goal too ambitious

John McBeth, Straits Times 12 Apr 10;

INDONESIA may be home to 28,100 megawatts of potential geothermal power, equivalent to 12 billion barrels of oil or the current capacity of the main Java-Bali grid, but only now is it starting to focus on harnessing it as a major part of the country's energy mix.

Under a US$17.3 billion (S$24 billion) so-called Second Crash Programme, scheduled for completion in 2014, the government wants to build 44 new geothermal plants, adding 3,997MW to the existing output of 1,179MW.

While the initial plan was to add 4,500MW, the boost still represents 40 per cent of the 10,153MW programme, with clean and renewable energy offered by geothermal, natural gas and hydro power taking precedence over coal, which dominated the first fast-track projects.

Geothermal currently makes up only 3 per cent of state-run utility Perusahaan Listrik Negara's (PLN) power generation, behind coal (33 per cent, but soon to rise to 40 per cent), oil (36 per cent), natural gas (18 per cent) and hydro (18 per cent). The national energy policy stipulates that geothermal usage should rise to 9,500MW by 2025.

Mines and Energy Ministry officials hope that an international geothermal conference in Bali later this month will provide an opportunity for Indonesia to attract global investors to a sector that has been largely neglected.

Experts, however, are already questioning whether PLN and private power developers will be able to raise the estimated US$12 billion needed for the new plants.

The order-of-magnitude cost of a geothermal project works out at about US$2.6 million a megawatt, far greater than the US$1.3 million for a coal plant because of the heavy up-front investment needed to develop and pay for the resource.

Much will depend on the government's willingness to issue sovereign guarantees and also on how private developers view the Ministry of Mines and Energy's decision to set a price ceiling of 9.7 cents per kilowatt hour.

While that is double what PLN pays for coal-fired power, it may still not be enough for firms to make a sufficient return in such new 'greenfield' areas as Sulawesi, Maluku and the Nusa Tenggara island chain.

One guide to future pricing may come from the recently concluded negotiations between PLN and an Itochu Corp-Ormat Technologies-Medco Energi consortium over the two-stage 440MW Sarulla geothermal plant in North Sumatra.

When the consortium took over the US$600 million project in 2006 from the original developer, a joint venture between PLN and the Pertamina state oil company, the kilowatt-per-hour price of 4.52 US cents was based on 2004 levels.

The newly negotiated rate is 6.79 US cents, short of the 8 US cents the consortium is believed to have been holding out for, but apparently sufficient to cover a 40 per cent increase in construction costs over the last five years.

The project is crucial in providing future base load power for PLN's electricity-starved 1,130MW North Sumatra- Aceh grid system, with sales revenue expected to top about US$115 million a year when it reaches full capacity.

Sarulla will be Indonesia's second biggest geothermal plant, after the Wayang Windu complex in West Java, where Indonesian-owned Star Energy plans to add a further 240MW extension to its existing 110MW and 117MW units.

Star has similar pricing concerns, but industry sources say the Sarulla deal may fall short as a benchmark because of different contract variables and a greatly reduced price escalation clause in the new 30-year contracts.

Developers are also concerned that while price escalation in earlier contracts kicked in from the date of signing, it now won't begin until the plant goes commercial - a four-year period during which capital costs could change dramatically.

'The government needs to take hard decisions on re-pricing,' says one power executive. 'But nowhere do we see either the leadership or the understanding of what it takes to ensure contract surety.'

Not everyone is sympathetic. 'Risk transfer is the whole idea behind private power,' says one Western financier. 'The independents have to factor all this in. If PLN gives in too much, it could face allegations that it has caused losses to the state.'

While the government is paying commendable attention to the power needs of Sumatra and the outlying islands, analysts believe about half of the 44 plants are not viable because of poor economies of scale.

Among 12 planned projects at 20MW or below each are a 7MW plant on Sabang island, off Aceh's northern coast, and even smaller 5MW plants in Central Sulawesi, North Maluku and East Nusa Tenggara.

Another impediment is the fact that only a handful of specialised companies, including Chevron, Star, Medco and Supreme Energy, have the international financial backing and the expertise to build a geothermal plant.

'There are a lot of cowboys out there with no visible means of support,' says a senior industry executive. 'The government tender committee now tends to put in onerous pre-tender provisions just to weed them out.'

PLN recently announced it was transferring six of its originally planned 11 geothermal projects, with a total capacity of 860MW, to independent producers because of the problems it has had in securing financing.

Three of the projects in East Java were the subject of protest from the provincial government, which correctly argues that under the 2003 Geothermal Law it has the sole right to choose investors and decide on downstream usage.

PLN has yet to issue a draft power purchase agreement to regional administrations which, as designated owners of geothermal resources, are supposed to award the concession agreements.

Geothermal plants take five years to build, which means the government is already facing an uphill struggle to meet a deadline that was hopelessly ambitious in the first place.