Geothermal Energy

Geothermal energy is a relatively environment friendly energy source that is derived from the earth's inner heat. Water that is pumped into the earth by men or by natural causes (rain) is collected at the earth's surface in the form of steam, which can be used to drive turbines for the production of electricity. Exploration costs as well as the capital cost of the geothermal plant is higher than for plants that run on fossil fuels. However, once in use, production costs are low compared to the fossil fuel-fired plants.

Besides electricity generation, geothermal energy can be used for heat pumps, bathing, space-heating, green- houses, aquaculture, and industrial processes.

The table below lists the top five countries that generate electricity using geothermal energy:

  1. United States        3,092 MWe
  2. Philippines        1,904 MWe
  3. Indonesia        1,197 MWe
  4. Mexico          958 MWe
  5. Italy          843 MWe

MWe = megawatt electrical
Source: International Geothermal Association

In recent years the geothermal power market grew significantly, in particular in emerging markets where - due to economic growth - more and more low income and rural communities are connected to the electricity grid. Many governments are also increasingly focused on lessening dependence on expensive and environmentally unfriendly fossil fuels.

Indonesia is one of these emerging markets that sees its electricity demand increase by about ten percent per year (particularly outside the island of Java) and thus the country needs about six GW per year in additional generating capacity. Indonesia's electrification ratio - which is the percentage of Indonesian households that is connected to the nation's electricity grid - stood at 80.38 percent at end-2013, implying that there are still roughly 50 million Indonesians who lack access to electricity. The Indonesian government has high hopes for geothermal energy. Containing the world's largest geothermal reserves, the government aims to enhance the role of geothermal power in the country's energy mix. As energy demand is rising quickly in Southeast Asia’s largest economy - on the back of population growth in combination with structural economic expansion giving rise to a rapidly expanding middle class as well as the influx of new investments and industrialization - the government has made efforts to smoothen investments in geothermal power exploration after having more-or- less ignored this sector until recently. Instead, the government relied on coal, natural gas, and crude oil to fuel the country's power plants. Similarly, the government has ignored the potential of other renewable energy sources (such as hydroelectric power, photovoltaic solar energy, biofuels and biomass). There has also been a lack of interest from the private sector to invest in Indonesia's renewable sources sector as the country’s investment climate is complicated (bureaucracy, corruption, the lack of decent infrastructure and lack of legal certainty). Furthermore, the abundance of cheap coal in Indonesia made investing in the country's renewable energy sources unattractive.

Geothermal Energy in Indonesia

Indonesian Production and Consumption of Geothermal Energy

With about 40 percent of the world’s geothermal reserves being located below the surface of Indonesia, the country is estimated to contain the world's largest geothermal energy reserves and therefore contains huge potential for this renewable energy. However, this potential remains largely untapped. Today, Indonesia only uses four to five percent of its geothermal capacity.

The primary factor that hampered investment in geothermal development was Indonesia’s own legal framework. For long geothermal activities were lawfully defined as a mining activity (Law No. 27/2003) which implied that it was prohibited to be conducted in protected forest and conservation areas (Law No. 41/1999), despite the fact that geothermal mining activities only have a minor impact on the environment (compared to other mining activities). However, as about 80 percent of Indonesia's geothermal reserves are located in protected forest and conservation areas, it was therefore impossible to tap this potential. In August 2014, not long before the end of Susilo Bambang Yudhoyono’s second presidential term, Indonesia’s House of Representatives (DPR) passed Geothermal Law No. 21/2014 (replacing Law No. 27/2003) separating geothermal from other mining activities and thus paving the way for geothermal exploration in the country’s protected forest and conservation areas. The passing of this law is an important breakthrough. However, at the time of writing (December 2014) this new bill still needs to be streamlined with other ministerial regulations.

The Indonesian government has also undertaken other efforts to make investments in geothermal energy more attractive. The Geothermal Fund Facility (GFF) provides support to mitigate risks and provides information regarding the relatively high upfront costs for geothermal development.

Another obstacle is Indonesia’s uncompetitive power tariffs. Through government subsidies, these tariffs are kept cheap. Moreover, state-owned company Perusahaan Listrik Negara (PLN) holds a monopoly on the distribution of electricity in Indonesia and therefore electricity from independent power producers is required to be sold to PLN. However, in June 2014 the Indonesian government announced that it would make purchasing prices (paid by PLN) more attractive through a new feed-in tariff scheme.

Lastly, geothermal exploration in Indonesia is hampered by poor infrastructure development in the country’s isolated regions, local communities’ opposition to these projects and bureaucracy (lengthy and costly permit procedures that involve central, provincial and district-level authorities).

The largest reserves of geothermal energy are located in the western part of Indonesia where energy demand is highest: Sumatra, Java and Bali. North Sulawesi makes the most advanced use of geothermal energy for electricity needs: approximately 40 percent of total electricity demand is supplied by geothermal energy.

Geothermal Energy Production of Indonesia

Sarulla Geothermal Power Project in North Sumatra

It took more than two decades to start construction of the USD $1.6 billion Sarulla geothermal power plant in North Sumatra (North Tapanuli regency), designed to become the world’s largest geothermal plant with a total net guaranteed delivery capacity of around 330 MW for a period of 30 years (enough to power about 330,000 homes). Having been delayed due to severe bureaucracy and lack of financial resources, the groundbreaking for this project was finally conducted in June 2014. The plant is expected to start operations in 2016 and will be fully completed by 2018. A total of USD $1.17 billion for the funding of the project was collected through loans from six commercial lenders (Bank of Tokyo-Mitsubishi UFJ Ltd, ING Bank NV, Societe Generale, Sumitomo Mitsui Banking Corportation, Mizuho Bank Ltd and National Australia Bank) as well as the Asian Development Bank (ADB) and the Japan Bank for International Cooperation (JBIC). The Sarulla project is led by a consortium consisting of Medco Power Indonesia (37.5 percent), Itochu Corporation (25 percent), Kyushu Electric Power Company (25 percent) and Ormat International (12.5 percent).

The Sarulla geothermal power station will replace Star Energy's Wayang Windu Geothermal Power Station as Indonesia's largest geothermal power station. The Wayang Windu Geothermal Power Station, located south of Bandung (West Java), has a total installed capacity of 227 MW.

The development of the Sarulla geothermal plant is an important step to enhance the importance of renewable energy sources within the country’s energy mix, to tap Indonesia’s enormous geothermal power potential, and to meet rising energy demand in Southeast Asia’s largest economy.