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Meeting Indonesia’s Energy Needs. Geothermal Development in Indonesia: Challenges and Opportunities for Scaling-Up the World ‘s Largest Reserves. Migara Jayawardena Senior Infrastructure Specialist EAP Infrastructure Unit Sustainable Development Department February 28, 2011

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Geothermal Development in Indonesia: Challenges and Opportunities for Scaling-Up the World ‘s Largest Reserves

Migara Jayawardena

Senior Infrastructure Specialist

EAP Infrastructure Unit

Sustainable Development Department

February 28, 2011

Knowledge Series – Emerging Indonesia

Washington DC

key challenges facing indonesia s power sector
Key Challenges Facing Indonesia’s Power Sector
  • Looming power shortages in face of growing economy
  • Momentous investment needs of $4-$5 billion annually to meet demand
  • Lack of clear vision due to legal, policy and regulatory uncertainties
  • Only 70% of population with formal access to electricity
  • Sub-optimal power generation mix is dominated by fossil fuels - with heavy reliance on diesel and substantial expansion of coal underway with significant environmental impact






28 GW


87 GW

GoI is taking action to scale up generation capacity
  • In 2006/07 Indonesia embarked on its 1st 10,000 MW Crash Program based on coal-fired power generation
  • Coal was seen at the time as the most readily available and least-cost option to
    • Reduce reliance on fuel oils (replace high cost generation units)
    • Increase supply at affordable price, and reduce the subsidy burden
  • HOWEVER, this poses substantial impact on local environment, contribute to more greenhouse gas emissions
  • THEREFORE, the GoI, for its 2nd 10,000 MW Crash Program, included a substantial amount of renewable energy, particularly geothermal.
geothermal provides one of the best options for improving base load power mix
Geothermal Provides one of the best options for Improving Base Load Power Mix


  • Reduction in harmful local pollutants (such as TSP, NOx, SO2)
  • Reduction in Greenhouse Gases (GHGs)


  • Enhance energy security by exploiting dependable indigenous (non-tradable) resource


  • Geothermal “fuel” price does not fluctuate (once developed) unlike fossil fuels, providing a natural hedge in managing Indonesia’s energy portfolio
how does geothermal work
Filename/RPS NumberHow does geothermal work?


Condensor/ Cooling Tower



  • Drill “wells: to expose high temperature underground water reservoirs and extract steam under high pressure (production well)
  • The steam is then used to operate turbines that generate electricity
  • After power generated, the steam is condensed back to water and reinjected into ground, and cycle repeated (making it renewable!)
barriers to developing geothermal in indonesia
Barriers to developing geothermal in Indonesia

Incremental Costs

Resources Risks

Off-Take Uncertainty

Domestic capacity for conducting credible transactions

The financial cost of geothermal development is higher than the cost of developing an equivalent base-load substitute (i.e. coal), particularly when environmental impacts are not considered.

There are indications that Indonesia’s geothermal resource risk is not excessive, but it is something inherent in the sector worldwide

The PLN credit/off-take risks due to its heavy reliance on GoI is seen as a considerable risk to all IPPs, including geothermal

Limited government experience in conducting credible competitive tenders in a transparent manner as per Geothermal Law. As a result, no geothermal tender has reached financial closure thus far

These barriers make it a challenge to mobilize momentous investment requirements of $10-$12 billion for achieving GoI target

world bank group support to indonesia geothermal development program
World Bank Group Support to Indonesia Geothermal Development Program

Geothermal Sector Reform

Carbon Finance and Climate Change

Investment Lending to Strengthen Institutions

Lahendong II CDM Transaction

(under implementation)

  • Purchase CER from PLN for 20 MW geothermal project

Carbon Finance Framework for Geothermal

(under preparation)

  • Support the provision of wholesale access to carbon revenues for geothermal

Investment Loan to PGE

(under preparation)

  • Immediately scale-up investment
  • Blended concessional financing from IBRDand CTF (up to $350 million)
  • Institutional capacity building

IFC financing

for Private Developers

(under identification)

  • $4 mil. early-stage risk capital
  • Collaboration w/ regional and international developers

GEF Grant

(under implementation)

  • Enhance policy framework by:
    • Pricing & Incentives
    • Upstream Risk Mitigation
    • Legal & policy review and amendments
  • Transactions to tender projects for development
  • Long-term domestic capacity building

Also supported by funding from PPIAF, ASTAE, ESMAP, INIS (AusAID), IDF

pge s ambitious investment plan aims for a four fold increase in its geothermal capacity
PGE’s Ambitious Investment Plan Aims for a Four-Fold Increase in its Geothermal Capacity

PGE is the leading geothermal developer undertaking a quarter (1000 MW) of GoI’s geothermal program

proposed project description
Proposed Project Description

IBRD/CTF Loan/Grant ($587.2 million) to PGE

Increase renewable generation capacity and mitigate impact of local and global pollution

Component A

Investment in Geothermal Power Generation Capacity

(US$580.2 million)

OPTIONAL: Component B

Technical Assistance for Capacity Building

(US$7 million)

  • Investment in drilling, SAGS, and Power Plants
  • Ulubelu (Units 3 & 4) -110 MW
  • Lahendong (Tompaso) (Units 5 & 6) - 40 MW
  • strengthening the capacity of PGE to undertake its geothermal development program.
  • Already mobilized $2.5 million grant for FS, ESIA
  • In discussions with donors re: grant funding for $7 million


  • Pertamina/PGE own funds: $ 280 million, equity return of 14%
  • IBRD: $175 million, LIBOR + 0.48%, 9 year grace, 24.5 year tenor
  • CTF: $125 million, 0.25%, 10 year grace, 40 year tenor
  • Grant: $7 million
is ctf ibrd concessional financing necessary and justified
Is CTF/IBRD Concessional Financing Necessary and Justified?

Financial NPV

of geothermal project

(with tariff at 6.4 US cents/kWh, 14% rate on equity)

PV of Economic Costs

Geothermal vs. Coal

(at 10 % social discount rate)

incremental costs and risks make development more costly compared with coal
Incremental Costs and Risks make development more costly (compared with coal)

Benchmark Price (Coal) + Local & Global Environmental Costs

Benchmark Price (Coal) + Local Environmental Costs

Benchmark Price (Coal)

Incremental Costs

Although about 10 GW may be economically justified (including externality), the associated financial incremental costs could be between IDR 6-9 trillion per year!

*Based on data from 49 geothermal fields from JICA Study

resource risks make it more challenging to mobilize investments particularly for new green fields
Resource risks make it more challenging to mobilize investments particularly for new (green) fields
  • Uncertainties associated with geothermal field conditions and resource characteristics during the initial stages of field development will cause developers to require a price premium for taking on this risk

It is only after considerable drilling that the success rate stabilizes and become predictable

Data based on over 200 geothermal wells drilled in Indonesia


Dejan Ostojic, Sector Leader (Energy)

East Asia and Pacific Region, The World Bank

February 28, 2011

Knowledge Series – Emerging Indonesia

Washington DC


Hydropower can play an important role in Indonesia’s energy mix

  • Indonesia has 75GW of hydropower potential
    • Yet only 4 percent has been exploited to date
    • The Government has embarked upon a low carbon development growth initiative
    • New and renewable energy constitutes 50 percent of the Government’s 10,000 MW crash program (Phase 2)
    • PLN has indicated their intention to build 3,835 MW of hydropower, with IPPs planning to build another 905 MW by 2018
    • PLN has also indicated their intention to build 70 MW of mini hydro with another 122 MW of mini hydro to be developed by IPPs by 2018

Least cost and flexible peaking generation capacity is urgently needed

  • Electricity consumption in the Java Bali power system grew by 35 percent from 2003 to 2009;
  • The installed capacity grew by less than 23 percent over the same period
  • The system load factor has increased from 72 percent in 2003 to 78 percent in 2009 indicating significant suppressed demand

Demand is seriously underserved especially during the peaking hours

  • As a result, load shedding has reappeared sporadically across Java Bali
  • Quality of system frequency has worsened especially during the peaking hours
  • With a difference in peak and off-peak of over 6,000 MW each day, the peaking demand is supplied by oil-fired gas turbines, increasing the fuel cost which is already a large portion of PLN’s operating costs
how does hydropower pumped storage work
Filename/RPS NumberHow does hydropower pumped-storage work?
  • Water is pumped during off-peak hours from lower to upper reservoir
  • Hydroelectricity is produced during peak hours
  • Hydroelectric units are fast-responding and quick-starting and therefore suitable for rapid response during load changes in the power grid, as well as “black-start” facility after system black-outs
how does hydropower pumped storage work1
Filename/RPS NumberHow does hydropower pumped-storage work?

Over 127 GW of pumped storage plants in operation around the world,

about 1% of the total power generation capacity installed

Recent surge in new projects related to facilitation of renewable (wind and solar) power generation

strategic context project contribution
Strategic Context – Project Contribution

The project will:

  • reduce the operating cost of PLN by substituting oil-based generation during peaking hours and reducing “cycling” of coal-fired power plants; and
  • provide over 1,000 MW of peaking capacity and fast-responding reserve contributing to frequency control and emergency reserve capacity in the Java-Bali system;
  • Therefore, the project will help improve the overall security, efficiency and reliability of electricity supply in Java-Bali
project development objectives
Project Development Objectives

The project will be the first pumped storage and largest hydropower generation facility in Indonesia

  • The project development objectives are to:
    • significantly increase peaking capacity of the power generation system in Java-Bali in an environmentally and socially sustainable way
    • strengthen PLN’s institutional capacity in hydropower planning, development, and operation
  • The project will contribute to higher level objectives by:
    • improving the business climate by better meeting the increasing demand for electricity in Java-Bali
    • strengthening the technical, managerial and operational capacity of PLN to implement large scale investment projects
project description
Project Description
  • The project consists of three components
    • Development of the 1,040 MW Upper Cisokan Pumped Storage Power Plant
    • Social and environmental impact management
      • Land acquisition, resettlement, and livelihoods restoration
      • Environmental management
    • Institutional capacity building and preparation of feasibility study and basic design for the Mattengeng Pumped Storage Project
  • The project will be located in West Java in the catchment of the Upper Cisokan river, 150 km west of Jakarta, and 30 km from Bandung
key sector challenges
Key sector challenges

The Java-Bali power system will face acute peaking and supply reliability risks without sufficient increase of flexible peaking capacity in the medium-term

  • Electrification ratios remain low, while robust and sustained economic growth is driving the demand for electricity to grow at an annual rate of over 7 percent
  • Sub-optimal generation fuel mix and low electricity price leading to large Government subsidies to state-owned power utility, PLN
  • Frequent restructuring of PLN in the past two decades has weakened its capacity to efficiently operate and expand a large and modern power system
key sector challenges world bank response
Key sector challenges – World Bank response
  • The Bank is supporting a large investment lending program to finance:
    • public sector power infrastructure projects, especially renewable energy, to sustain economic growth
    • development policy lending programs to support GoI’s efforts to establish a sustainable policy environment for infrastructure project development and move the energy sector towards a low-carbon development path
    • technical assistance to rationalize the electricity tariff and subsidy regime, establish incentives for geothermal resource development, and strengthen the capacity of national state-owned companies in the energy sector