In an attempt to attract investment in geothermal exploration in Indonesia, the central government decided to remove a land tax for companies that explore geothermal energy resources through a new decree. In 2017 this land tax will be scrapped for all companies that hold a geothermal business permit and are still in the exploration stage. According to information released on the website of Indonesia's Finance Ministry companies are entitled to a 100 percent tax reduction in land tax each year, for up to seven years.
Indonesia contains huge potential in terms of geothermal energy having about 40 percent of the world’s total geothermal reserves. However, this potential remains largely untapped. Indonesia only uses about 5 percent of its geothermal capacity.
Still, the government is eager to boost the role of geothermal power within the country's energy mix and the government's ambitious 35,000 MW power program. Indonesian President Joko Widodo wants Indonesia's power capacity to reach 35,000 MW by 2019, a program that will require heavy investments. Considering rapid economic expansion and an expanding population, electricity demand in Indonesia is growing sharply each year. Currently, the nation's electrification ratio is only approximately 81 percent, implying there are millions and millions of Indonesians who are not connected to the electricity grid (while many businesses complain about blackouts damaging their earnings).
Geothermal power has become more and more on the agenda in recent years particularly as emerging market governments have to meet rising electricity demand in their rapidly growing economies, while there has also been a growing worldwide focus on clean energy sources (hence reducing dependence on coal, crude oil and natural gas for power generation).
Renewable energy is envisaged to account for 23 percent of Indonesia's energy mix by 2025. Within these renewable energy sources, geothermal has been selected as the biggest contributor. However, the bleak investment climate of Indonesia makes many private investors hesitant to engage in costly and long-term investment in the energy sector. Therefore, the state-owned enterprises should play a particular big role in the development of geothermal energy in Indonesia.
Issues that make investors hesitant to investment in Indonesia's geothermal sector are red tape, high exploration costs, the lack of experienced developers licensed for the concession, lengthy negotiations with PLN for the feed-in tariffs, and the weak infrastructure in Indonesia, especially in the more isolated areas.