Meeting Indonesia’s Energy Needs

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

Migara JayawardenaSenior Infrastructure SpecialistEAP Infrastructure UnitSustainable Development Department

February 28, 2011Knowledge Series – Emerging IndonesiaWashington DC

Key Challenges Facing Indonesia’s Power Sector

200928 GW

201987 GW

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

Geothermal3.2%

Geothermal7.0%

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.

GoI is taking action to scale up generation capacity

Geothermal Provides one of the best options for Improving Base Load Power Mix

I. ENVIRONMENT BENEFITS OF UTILIZING CLEAN ENERGY SOURCE

Reduction in harmful local pollutants (such as TSP, NOx, SO2)

Reduction in Greenhouse Gases (GHGs)

II. ENERGY SECURITY BY UTILIZING ABUNDANT NATIONAL RESOURCE

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

III. HEDGE AGAINST VOLATILE PRICES FOR FOSSIL-FUELS

Geothermal “fuel” price does not fluctuate (once developed) unlike fossil fuels, providing a natural hedge in managing Indonesia’s energy portfolio

No.Major

Islands

Geothermal Potential (MW)

Speculative /Hypothetic

Probable(w/ detailed

surveys)

1 Java 9,671 3,086

2 Bali & NT 1,676 871

3 Sumatra 13,416 5,433

4 Kalimantan 45 -

5 Sulawesi 1,907 721

6 Maluku 734 142

7 Papua 50 -

TOTAL 27,499 10,027

Filename/RPS Number

How does geothermal work?

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!)

SteamSeparator

TurbineCondensor/

Cooling Tower

Barriers to developing geothermal in Indonesia

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.

Incremental Costs

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

Resources Risks

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

Off-Take Uncertainty

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

Domestic capacity for conducting credible transactions

These barriers make it a challenge to mobilize momentous investment requirements of $10-$12

billion for achieving GoI target

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

Geothermal Sector Reform

Geothermal Sector Reform

Carbon Finance and Climate Change

Carbon Finance and Climate Change

Investment Lending to Strengthen Institutions

Investment Lending to Strengthen Institutions

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

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

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

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 IBRD and 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

Investment Loan to PGE (under preparation)

Immediately scale-up investment

Blended concessional financing from IBRD and 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

Pertamina Geothermal Energy (PGE): Geothermal Clean Energy Investment Project

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

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

Proposed Project Description

OPTIONAL: Component BTechnical Assistance for

Capacity Building (US$7 million)

OPTIONAL: Component BTechnical Assistance for

Capacity Building (US$7 million)

• 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

• 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

Component AInvestment in Geothermal

Power Generation Capacity (US$580.2 million)

Component AInvestment in Geothermal

Power Generation Capacity (US$580.2 million)

• Investment in drilling, SAGS, and Power Plants

• Ulubelu (Units 3 & 4) - 110 MW • Lahendong (Tompaso) (Units 5

& 6) - 40 MW

• Investment in drilling, SAGS, and Power Plants

• Ulubelu (Units 3 & 4) - 110 MW • Lahendong (Tompaso) (Units 5

& 6) - 40 MW

IBRD/CTF Loan/Grant ($587.2 million) to PGEIncrease renewable generation capacity and mitigate impact of

local and global pollution

IBRD/CTF Loan/Grant ($587.2 million) to PGEIncrease renewable generation capacity and mitigate impact of

local and global pollution

FINANCING• 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

FINANCING• 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

12

Key Indicators CTF/IBRD ProjectPGE’s Scale-Up

Program

Government Long-Term Program

New geothermal power generation capacity 150 MW 1,000 MW 9,500 MW

Additional power generation (kWh per year ) 1,209 million 8,059 million 76,562 million

Avoided CO2

- tonnes per year- lifetime (tonnes/30 years)

880,000;26 million

5.9 million;176 million

55.8 million;1,673 million

Environmental co-benefits in terms of avoided local pollution (tonnes per year)

NOx - 3,000;

SO2 - 3,900;

TSP - 1,800

NOx - 26,100;

SO2 - 20,100;

TSP - 12,500

NOx - 248,200;

SO2 - 191,400;

TSP - 118,600

Public health benefits from avoided local pollution US$45 million US$241 million US$ 2,293 million

Project Impact and Transformational Potential

PV of Economic CostsGeothermal vs. Coal(at 10 % social discount rate)

Is CTF/IBRD Concessional Financing Necessary and Justified?

10/16/08

Financial NPVof geothermal project

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

Some Additional Value-Added Aspects of World Bank Engagement

BACK-UP SLIDES

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

Benchmark Price (Coal)

Benchmark Price (Coal) + Local Environmental Costs

Benchmark Price (Coal) + Local & Global Environmental Costs

Incremental Costs

*Based on data from 49 geothermal fields from JICA StudyAlthough about 10 GW may be economically justified (including externality), the associated financial incremental costs could be between IDR 6-9 trillion per year!

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

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

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

Data based on over 200 geothermal wells drilled in Indonesia

INDONESIA: UPPER CISOKAN PUMPED STORAGE HYDRO POWER PROJECT

Dejan Ostojic, Sector Leader (Energy)East Asia and Pacific Region, The World Bank

February 28, 2011Knowledge Series – Emerging IndonesiaWashington DC

Background

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

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

Background

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

Least cost and flexible peaking generation capacity is urgently needed

Filename/RPS Number

How 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

Filename/RPS Number

How 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

Developed countries' capacity (2004)

Pumped storage capacity, MW

% of country's total installed capacity

OECD Total 79013 3.29%

EU-25 31515 4.47%

Japan 24689 8.97%

United States 19569 1.86%

Switzerland 1655 8.64%

OECD installed PSP capacity (1970-2004), MW

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

1969 1974 1979 1984 1989 1994 1999 2004

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

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

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

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

Annex

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

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