Photo by Perusahaan Listrik Negara

JAKARTA (TheInsiderStories) – As an archipelagic country, Indonesia has enormous potential of natural resources to be explored. The country of more than 250 million people is also trying to escape from its dependence on fossil fuels, and urgently switch to renewable energy sources.

The Asian Development Bank’s (ADB) Board of Directors has thus approved two loans totaling US$1.1 billion, intended to strengthen and diversify Indonesia’s energy sector — considered key to promoting inclusive growth and sustainable development in the country.

The first is a $500 million policy-based loan (including $100 million from the ASEAN Infrastructure Fund) for the Sustainable and Inclusive Energy Program—Subprogram 2. The second is a $600 million results-based loan to the State-own power producer PT Perusahaan Listrik Negara (PLN), guaranteed by the Republic of Indonesia, which will boost access to sustainable and modern energy services in eastern Indonesia.

“Increased access to affordable and sustainable sources of energy is a pre-requisite for the government to meet its economic growth aspirations,” Winfried Wicklein, ADB Country Director in Indonesia, pointed out.

“The two loans approved today will, respectively, improve the enabling policy environment to increase public and private investment in Indonesia’s energy sector, and support and develop the power distribution network in Eastern Indonesia.”

Indonesia’s energy sector faces far-reaching and interrelated problems throughout the value chain, from the supply of primary energy to the distribution of electricity, leaving some 23 million people lacking access to power. Energy subsidies over many years have led to underinvestment.

Indonesia also lags behind many of its Southeast Asian neighbors in the development of its abundant renewable energy resources, such as solar, wind, and biomass. This leaves the electricity industry dependent on coal, which accounted for fueling more than half of energy generation in 2016.

With help from this policy-based support, the government will build on various reforms to improve fiscal sustainability, such as further rationalizing tariffs; introducing measures to improve private investment in electricity and gas; and supporting the scale-up of renewable energy and energy efficiency measures.

The accompanying technical assistance grant will support the expansion of energy efficiency programs through efficiency standards and labeling & testing programs for household appliances, and the development of private-sector investments in energy efficiency projects.

The $600 million loan to PLN, meanwhile, is part of a series of investment programs meant to enhance people’s access to sustainable and modern energy services, with a focus on developing the eastern part of the country as a new growth hub.

As part of the project, a strengthened electricity distribution system will help eight provinces across Nusa Tenggara and Sulawesi spur businesses and activities relying on a stable energy supply, including agriculture, fisheries, small and medium-sized enterprises, as well as tourism.

Local loans encouraged for domestic infrastructure

In fact it has never been easy to find capable financial institutions willing to finance exploration of renewable nature sources. Green infrastructure is indeed a sector that is still very vulnerable in the eyes of financing institutions.

Thus, recently Finance Minister Sri Mulyani Indrawati has recently signed a regulation about funding management of infrastructure for geothermal sector. The parameters were set to accommodate a local infrastructure financing company, PT Sarana Multi Infrastruktur Persero (SMI), with the objective of minimizing risk and costs in financing at the exploration stage.

The high risk of geothermal development has made bankers reluctant to consider financing it (low bankability).

Through a Geothermal Fund Facility (GFF) scheme, SMI secured a $55 million loan from the World Bank. The donor offered a risk mitigation scheme, planned to be introduced in Indonesia for quite some time.

By collaborating with the World Bank, SMI could gave state owned electricity company PLN a funding facility worth US$640 million to develop six geothermal power plants with 160 megawatt (MW) capacity.

Nicke Widyawati, Corporate Planning Director at PLN, said that the six geothermal power plants, spread across Indonesia, include Atedei power plant in Flores, East Nusa Tenggara, Songo-Wayaua power plant in North Maluku, Tangkuban Parahu power plant in West Java, Borapulu power plant in Central Sulawesi, Oka Ile Ange power plant in Flores, East Nusa Tenggara Timur as well as Gunung Sirung power plant in Pulau Pantar, Alor, East Nusa Tenggara.

“We will develop eight other geothermal power plants in the future. We aim to establish geothermal power plants with a combined capacity of 1,000 MW in the next eight years,” she said.

According to her, the funds from SMI and the World Bank will be used for exploration until development of power generation installations. Additional capacity is expected to help the government’s energy mix target of 23 percent by 2025. Current energy mix utilization reaches 1,750 MW, or about 12.5 percent.

“We have already collected initial data from the Ministry so we will continue to further survey, and start drilling after we confirm the probability of access,” she explained.

Established in 2011, GFF was set up with an initial capital of $75.2 million and a planned annual refinancing of $226 million by 2013. But without appropriate regulations, those funds were never put to work.

Even with incredible and untapped geothermal resources, the high up-front cost and risk has meant that development of Indonesia’s geothermal resources has lagged behind government plans.

It is expected that the GFF will help to accelerate geothermal exploration, enabling the Ministry for Energy and Mineral Resources to tender more concessions with proven reserves. The program will help increase availability of reliable geological data on proven resources, and help potential investors calculate risk and the expected IRRs.

In the regulation put forward by the country’s Minister for Finance, winning bidders for geothermal concessions with proven reserves will have to pay PT SMI a compensation for the geological data they receive with the project. This ensures the sustainability of the GFF. The cost of exploration will be shared between the government and PT SMI in case the project does not discover any commercially-viable proven reserves.

There are 331 potential locations for geothermal that are spread across Indonesia, which is very strategic for investment to fulfill the country’s national energy needs, as set by the National Energy Policy.

According to Dadan Kusdiana, an official at the Energy and Mineral Resources Ministry, Indonesia now has 17,506 MW of geothermal reserves and up to 11,073 MW resources that have not been optimized.

He said that the government must be able to facilitate the participation of geothermal investors through fiscal and non-fiscal incentives, although the government has issued a special regulation regarding geothermal through Law No. 21/2014 on Geothermal.

Based on the improved capacity of geothermal power plants, the Ministry predicts that Indonesia will be able to be the largest geothermal electricity producer in the world by 2021. It is also predicted that the country will be able to surpass the Philippines as the second country with the most use of geothermal energy by 2018.

Writing by Elisa Valenta and Yosi Winosa