Developing countries will need about $531 billion of additional investments in clean energy technologies every year in order to limit global temperature rise to 2°C above pre-industrial levels, thus preventing climate change’s worst impacts. To attract investments on the scale required, developing country governments, with support from developed countries, must undertake “readiness” activities that will encourage public and private sector investors to put their money into climate-friendly projects.
WRI’s six-part blog series, Mobilizing Clean Energy Finance, highlights individual developing countries’ experiences in scaling up investments in clean energy and explores the role climate finance plays in addressing investment barriers. The cases draw on WRI’s recent report, Mobilizing Climate Investment.
The development of Indonesia’s geothermal energy sector—and the starts and stops along the way—provides an interesting case study on how to create readiness for low-carbon energy. By addressing barriers such as pricing distortions and resource-exploration risks, the country has begun to create a favorable climate for geothermal investment.
The History of Geothermal Power in Indonesia
Indonesia holds the world’s largest source of geothermal power, with an estimated potential of 27 GW. However, less than 5 percent of this potential has been developed to date. Indonesia began to explore its geothermal resource in the 1970s, with support from a number of developed country governments. The country made some progress in advancing geothermal development by the 1990s. However, development stalled during the Asian financial crisis in 1997-98 and was slow to recover.
In the early 2000s, a number of barriers limited investment in the sector, including a policy and regulatory framework that favored conventional, coal-fired energy over geothermal. Plus, the high cost and risk associated with geothermal exploration deterred potential investors and made it difficult to access financing from banks.
The Indonesian government took a number of steps to try to advance geothermal development and received support from a wide range of international partners, including multilateral development banks and developed country governments. In 2003, it passed a law to promote private sector investment in geothermal, establishing a target of 6,000MW installed capacity by 2020.
Although the new law was a step in the right direction, the pricing regulations for geothermal energy continued to discourage potential developers, as there was no certainty that they could sell the power produced at a rate that would recoup their investment costs.
Furthermore, under the 2003 law, the developer had to bear the full cost of exploration of a potential site – taking on the considerable risk that the site may prove not to be financially viable to develop.
In 2010, Indonesia hosted the World Geothermal Conference. President Susilo Bambang Yudhoyono announced lofty ambitions for Indonesia’s geothermal sector. The following year, the government announced that it would establish a fund to support geothermal exploration, thereby taking on some of the risk previously borne by developers. After a number of changes to the pricing regulations for geothermal power, the government announced a feed-in-tariff last year that sets prices for different regions of Indonesia based on their different costs of producing geothermal energy.
What Lies Ahead for Indonesia’s Geothermal Energy Sector?
Although geothermal investment has been slow to pick up since the Asian financial crisis and Indonesia is not likely to meet its ambitious geothermal targets, significant changes in the last few years have addressed some important barriers to investment.
This case study highlights the importance of addressing price distortions – prices that did not reflect the true costs of production of different types of energy – and creating a stable pricing policy that gives investors certainty and confidence in the government’s commitment to promoting the sector. It also highlights the importance of balancing the risk of exploration so that it is not borne entirely by the developer.
International partners have played an important role in helping to create an attractive investment climate in Indonesia’s geothermal sector. But ultimately, the government’s actions have been pivotal in addressing the major barriers to investment.
Moving forward, the government needs to continue to ensure a stable and attractive climate for geothermal investment, while also ensuring that the development of the sector is governed in a transparent way, giving voice to all relevant stakeholders and upholding strong environmental and social safeguards. This is particularly important because a significant part of Indonesia’s geothermal potential is located in its forests, which are home to its indigenous people. While the impacts of recent policy changes remain to be seen, it seems likely that Indonesia is on a path to see scaled-up investment in its geothermal sector in the next decade.