Indonesia’s has what is considered to be the largest potential for geothermal energy in the world, a blessing for a country determined to reduce its high rate of dependence on polluting fossil fuels. But private investment has been slow, held back by the lack of a strong energy policy framework, legal uncertainties, and overlapping jurisdictions, both within the central government and between Jakarta and local authorities.
A new Geothermal Law, passed by Indonesia’s House of Representatives in September 2014, is expected to remove many of these bottlenecks. The law followed from a ministerial regulation on geothermal pricing and policy that was the result of many months of work between Indonesia’s Ministry of Energy and Mineral Resources (MEMR) and a joint World Bank – Asian Development Bank team.
In 2010, the Indonesian government announced its intention to quadruple its geothermal capacity from the existing rate of 1,335 MW to 6,000 MW by 2020, which would make the country the world’s largest producer of geothermal power.
At the same time, the government introduced a feed-in tariff that guaranteed prices for electricity generated from geothermal sites, and established a Geothermal Fund with more than $200 million of initial capitalization to fund exploratory activities.
Yet private sector investment was still slow to materialize. Potential investors complained that the new feed-in tariff measures were in conflict with other regulations.
In response to these concerns, Indonesia’s Ministry of Energy and Mineral Resources (MEMR) in October 2013 requested World Bank assistance in making revisions to the government’s geothermal pricing policy. Over the next five months, an international advisory team of technical, economic, financial and legal consultants from the World Bank and ADB worked with MEMR on a rationale and methodology for a new geothermal tariff. On the World Bank side, the work was supported by the Energy Sector Management Assistance Program (ESMAP) and the Asia Sustainable and Alternative Energy Program (ASTAE).
This process was underscored by an intensive series of consultations and stakeholder workshops that established new standards for stakeholder consultations in regulation development.
“In the past, stakeholders from both the private sector and some government agencies felt they’d been excluded from the tariff-design process,” said Anh Nguyet Pham, a Senior Energy Specialist with the World Bank in Indonesia. “This time around, MEMR and the World Bank/ADB team wanted to ensure that all stakeholders were given the opportunity to inform the design and implementation of the new tariff system.”
As a result of these consultations, the ADB/World Bank team produced a series of recommendations that included:
A new system of ceiling tariffs based on the benefits of geothermal generation in each major region (displaced coal-powered generation in Java and Sumatra, and oil in small eastern Islands), with an agreed premium for avoided carbon emissions.
Reducing overlap and clarifying roles by tasking MEMR to serve as the sole entity responsible for conducting tenders on behalf of local governments .
The de-risking of prospective geothermal work areas prior to tender by carrying out test drilling with support from the Geothermal Fund.
The ministerial regulation issued in June 2014 was viewed as a major step forward in improving Indonesia’s geothermal regulatory framework. Unlike the 2012 feed-in tariffs, the new regulation has been widely accepted by the private sector and various government entities, including the Ministry of Finance.
As a result of its successful collaborative process with the World Bank and ADB, the MEMR requested further World Bank assistance in preparing three additional regulations. Indonesia’s Ministry of Finance has also requested assistance to improve the workings of the Geothermal Fund.