Indonesia’s geothermal potential limited by weak legislation

Indonesia, which lies on the Pacific Ring of Fire, holds approximately 40 percent of the world’s geothermal reserves, equivalent to about 27,000 megawatts of electrical power. However, the installed capacity of geothermal power plants is still only about 1,189 MW, lagging behind that of the Philippines and even the United States.

While geothermal energy is a clean, reliable, renewable source of energy, that is plentiful Indonesia’s geothermal potential has not been adequately developed yet due to a weak tendering process, lack of sufficient and reliable data, inadequate financial support, and a cumbersome power purchase agreements (PPA) process.

In response to high oil prices in the 1970’s and 1980’s the President issued a number of decrees (No. 16/1974, No. 22/1981 and No. 23/1981) instructing the state-owned oil and gas company to explore Indonesia’s geothermal potential.  The Decrees were significant in reducing exploration risks and providing a guaranteed buyer for the steam/electricity produced from successful exploration efforts.

However, the current geothermal development efforts in Indonesia face different regulations and challenges. Geothermal Law No. 27/2003 stipulates that permits and exploration-exploitation project are to be tendered by regional administrations. But due to a lack of experience and knowledge in dealing with international tendering standards, regional administrations have so far only been able to award a limited number of geothermal permits and projects.

Also, since the tender for geothermal exploration is not directly related to the price of the electricity to be bought by the electric company, there has been no development licenses to construct new power plants since the law was passed.

And unlike oil and coal, which can be sold worldwide, or natural gas, which has wider consumer potential, the market for geothermal energy in Indonesia is still limited only to power generation. Which could perhaps be viable if there was an unregulated market, but the electric company is still a monopoly in Indonesia and the only buyer of geothermal power.

On the other side, the selling price of electricity is regulated by the government, which provides a subsidy.  But how the established rate and subsidies will affect the negotiation of the PPA between the electric company and geothermal exploration companies has not yet been determined.  Therefore, negotiating a PPA in Indonesia can be a very long and cumbersome process that is difficult if not impossible to conclude.

Even though the government might rely – in part – on the “green projects” being developed by the electric company, the overall development of geothermal power in the country will have to address the above challenges before expanding the use and development of this source. Without addressing these constraints seriously, it will be hard to achieve the target and the countries geothermal potential will remain buried in the ground.


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