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Geothermal Investors Wary of New Rules

Confidence in the geothermal sector has hit a low point following a series of new policies that only cater to state-owned firms and ignore private investors’ need for economic feasibility.

As a country known for its abundant natural resources, one would assume that there would be many investors scrambling to take advantage of Indonesia’s potential geothermal reserves of 29 gigawatts (GW).

However, this year’s attendance at the Indonesia International Geothermal Convention and Exhibition (IIGCE), the biggest event of its kind in Southeast Asia, is expected to be attended by fewer people than the 3,000 who attended last year due to much reduced enthusiasm for investment in Indonesia.

Indonesian Geothermal Association chairman Abadi Poernomo said on Wednesday that many private investors were currently in a “wait and see” mode following the Energy and Mineral Resources Ministry’s decision to issue ministerial decree No. 12/2017 earlier this year.

This decree sets a cap on electricity rates produced by geothermal power plants equal to the local electricity supply costs (BPP) if they are higher than the national average.

While the national BPP average was 7.39 US cents per kilowatt hour (kWh) last year, East Nusa Tenggara (NTT) boasted the highest BPP at 17.5 cents per kWh.

Moreover, the decree also states that electricity rates will be set through a business-tobusiness negotiation with stateowned electricity company PT Perusahaan Listrik Negara (PLN) in Sumatra, Java, Bali and other areas where the BPP is lower than the national average.

Abadi said this new decree contrasted with a previous one issued in 2014, which set a high cap of between 11.8 cents per kWh to 29.6 cents per kWh depending on the region and operation starting date.

“This policy is not economically feasible. There is still a question mark hanging over everything, especially since the rules of the game remain unclear. The fact that we are asked to negotiate rates through a business-to-business scheme with PLN will take a long time because its manpower is limited and it has many working areas to negotiate,” he said.

“Investors want to move fast in order to minimize costs,” said.

Drawn-out negotiations with PLN can take between two to seven years and the lengthy negotiation period is mostly due to different perspectives on the ideal rate of return, which many investors cite at around 14 to 16 percent.

Abadi added that the lengthy negotiations would most likely spillover into electricity prices for consumers as geothermal developers cannot cover all the costs spent during the period.

Despite hesitation from many private investors, Indonesia has set an ambitious target of becoming the world’s top geothermal electricity producer, with a goal to generate 7,241.5 megawatts (MW) of electricity by 2025.

In the first half of this year, the country produced 1,698.5 MW, with a target to reach 1,858.5 MW by the end of the year.

The government’s optimism about reaching this target is further highlighted by the appointment of state-owned infrastructure financing firm PT Sarana Multi Infrastruktur (SMI) to manage the country’s geothermal fund worth some Rp 3 trillion (US$22.52 million).

The fund will be combined with a grant of $55.25 million from the World Bank to fund advanced exploration activities for various geothermal power plant projects.

In total, the plan involves drilling 15 wells at five working areas, with each well estimated to cost around $7 million.

Under recently issued regulations, the Finance Ministry and the Energy and Mineral Resources Ministry will be able to appoint state-owned firms to use the fund for exploration activities.

However, the government’s focus on encouraging state-owned firms instead of private ones has been criticized as short-sighted.

Supramu Santosa, founder of PT Supreme Energy and an advisory board member of the association, said the government’s estimate of $7 million per well was modest as some could even reach as high as $15 million.

Moreover, actual geothermal development will cost around $4 million to $6 million per kWh, he explained. “You cannot rely on state-owned companies alone. The role of private investors is crucial and important. That’s why the issue of pricing will not go away,” Supramu said.

 

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