To become a renewable energy superpower, Indonesia must learn from Sarulla’s example
Sarulla was the first greenfield, commercial investment in Indonesia geothermal in almost 20 years, and remains key to demonstrating the sector’s commercial viability in the country.
With 40% of the world’s geothermal resources, Indonesia has been on the verge of becoming a renewable energy superpower for some time now.
Geothermal power plants emit less than 10% of greenhouse gases produced by fossil fuel thermal plants. They provide clean, reliable baseload power, and bolster energy security. Indonesia’s geothermal power potential represents two-thirds of the country’s current grid capacity; if the untapped resources could be confirmed, accessed and utilized, Indonesia would be able to lock in a unique clean energy competitive advantage. However, the resources remain underdeveloped: in 2013 less than 6% of Indonesia’s potential generation capacity from geothermal had been realized due to regulatory barriers, inadequate feed-in tariffs and high early-stage exploration risks.
Despite these obstacles, the Indonesian government is one of the few that has articulated clear goals on clean energy, vowing to increase the share of renewables in the country’s primary energy supply from 5% in 2010 to 25% by 2025, and thereby cutting greenhouse gas emissions by 26% by 2020. To achieve those targets, the country needs $132 billion in investment over the next decade. The government plans to invest $67 billion, so the rest must come from the private sector. Mobilizing private finance, though, can be difficult for geothermal power projects, which face high resource risks and low utility returns. Developers traditionally respond with a phased approach, financing power generation units one at a time as resources are proved. This typically translates to higher overall transaction costs for debt financing compared to larger ventures.
The 320 megawatt Sarulla Geothermal Power Development Project in North Sumatra tackled this challenge by capturing the economies of scale through a single-stage financing of three power generation units and all the associated wells. The landmark project is the key to demonstrating geothermal commercial viability in Indonesia and reigniting interest in clean energy investment.
Part of Sarulla’s unique approach involved building extra contingency and reserve funds into the project budget to cover traditional items like cost overruns, as well as more technical requirements like a robust completion testing regime to mitigate reservoir interference. (Indonesia’s geothermal regulatory framework places most of the resource risk on the project developer, with only limited compensation for requisite extra management.) However, tight project economics, capital market constraints, the lack of precedents, and the sheer quantity of upfront investment required, all constrained the amount of debt financing that could be sustained by the project’s cash flows. The only way the project could move forward was through the introduction of public finance support to cover risks that could not be shouldered by private finance.
ADB-administered concessional funding helped bridge the financing gap created between commercial lenders, equity investors and the government. ADB’s $250 million direct loan was blended with a $80 million loan funded from the Clean Technology Fund and a further $20 million loan from the Canadian Climate Fund for Private Sector in Asia, funded by the Government of Canada under ADB’s Clean Energy Partnership Facility. This was the first time ADB deployed the concessional funds in Indonesia, and these were structured as an innovative loan tranche that maintained the financial viability of the project. This feature, among others, distinguished Sarulla as Power Deal of the Year 2014 in Asia-Pacific by Project Finance International, one of six awards already won by the project.
Recent findings demonstrate how Sarulla’s successful project financing can guide policymakers, financiers and developers in their efforts to sustain the momentum of geothermal development in Indonesia. Here are a few takeaways from a case study by the Climate Policy Initiative:
- Single-contract, integrated financing is a viable model once a resource has been explored and proven. Sarulla benefited from data collected in early exploration efforts by Unocal in the 1990s. With extended political guarantees and limited concessional finance, commercial finance can be pulled together for large-scale financing once exploration is complete.
- Scaling up geothermal will require increased public finance support to compensate for resource risk. The government needs to take a larger role. For example it could make some level of concessional finance available to support private developers during early project development and exploration, the period of highest moment risk for investors. ADB has taken the first step in advancing exploration finance through its investment in the Rantau Dedap Geothermal Project.
- Sarulla was competitively priced, but sustainable geothermal development does require higher tariffs. A joint ADB-World Bank study recommended taking into account public benefits of clean energy vs. thermal power generation in tariff reform. These efforts guided the establishment of the 2012 geothermal law and subsequent tariff reform.
Sarulla is now in mid-construction and development, with the first unit to be commissioned by the end of 2016. Once it is fully operational in 2018, the project will increase Indonesia’s renewable capacity by 5%, and cut greenhouse gas emissions by 1.3 million tons per annum. ADB will continue to support geothermal development in Indonesia to ensure the country leverages its competitive advantage, fully commits to geothermal, and evolves to become a global renewable energy powerhouse as envisioned.