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Geothermal projects in Indonesia

Wednesday, January 3, 2007

Update on renewable energy investment in Indonesia. There is an interesting article in the Jakarta Post on Geothermal investment. Indonesia has developed only less than a thousand MW of geothermal power although it is estimated to have nearly one-third of the world's geothermal resources. A research (in Bahasa) from the ministry of mineral resources mentioned that there are 252 geothermal locations which have been identified along a volcanic belt extending from Sumatera, Java, Nusa Tenggara, Sulawesi until Maluku. These heat resources has the total potential of 27 GWe, which puts Indonesia as the biggest geothermal potential country in the world!

The Jakarta Post op ed told that (i) tax uncertainties and (ii) legal uncertainties are among the frontlines of investment barriers. Geothermal investment is really a high risk-high return investment scheme which involves huge exploration and exploitation funds. It is never intended as a short term investment. Investors are afraid that their contracts are not being honoured.

I'll give a little comment on the legal barriers. Generally contract observance remained high. Business partners will think twice before deciding to bailout from a contract since litigation costs are too high. The problem stems not from observance of the contract but mainly due to regional autonomy. How much share will the regions receive are the hot issue. There has been a case where Garut regional government requests Chevron and the Central Government to disburse concession money for their region. They even threatened to invalidate Article 41 of the Geothermal Law to the Constitutional Court. Article 41 governs a transitory provision which stipulates that all contracts prior to the entry into force of the Geothermal Law will remain valid. Under this transitory provision, regions don't receive any money. Of course, their attempts to invalidate the article are futile.

It must also be noted that the 2003 Geothermal Law gave many power to regions in particular with respect to licensing. This is a good opportunity for investors as they can now deal directly with the regions. During the old days, people will have to deal with state owned enterprise such as PLN or Pertamina. However, it is necessary to make sure that both central and regional government approves or condone the projects. It wouldn't be good if after a few years of investing the license given by regional government is revoked by the central, or a license given by central government is revoked by the central. In any event, although the regions are granted more power, it is always important to asks some sort of condonation from the central government.

Click here to read the Jakarta Post article and here to get some general views on geothermal potentials in Indonesia.