Given Indonesia’s plentiful coal reserves and the need to build vast amounts of power generation quickly, a heavy reliance on fossil fuels is predicted initially. After the completion of the country’s first 10,000-MW fast-track plan, expected in 2014 and primarily relying on coal-fired generation, the table is set for renewable energy to shine. The government’s second fast-track development plan leans more heavily towards alternative energy sources than its predecessor, with two-thirds of the accelerated programme’s 10,047 MW dedicated to renewable energy sources, including 4925 MW of new geothermal power generation as well as 1753 MW of hydropower generation to be achieved by 2018.

CLEAN ENERGY: The proposed expansion stems from the government’s larger policy goals of reducing the country’s heavy reliance on costly, finite fossil fuels and replacing them with cleaner, domestically produced renewable sources. In 2011 88.03% of all power generated in the country was derived from the burning of fossil fuels, with just under 12% generated by renewable power plants. Under the development strategy of state power producer Perusahaan Listrik Negara’s (PLN’s) through the year 2020, the contribution of renewable power generation is expected to cover 18% of domestic needs (12% from geothermal generation and 6% from hydro) within six years and fuel oil usage for power generation will be phased out until it supplies just 1% of the national total. The national energy strategy calls for alternative energy sources to account for 17% (including geothermal, solar, hydro, wind, biomass, nuclear and coal liquefaction) of Indonesia’s energy needs by 2025, with the remaining needs fulfilled by coal (33%), natural gas (30%) and oil (20%).

Hopes remain high that these new plans will be able to kick-start a sector that has been relatively stagnant of late. The industry has not fully recovered since a bevy of geothermal projects were mothballed as a result of the 1997/98 financial crisis. Renewable energy production has been static these past few years, resulting from limited investment in new production.

PUTTING IT ALL IN PLACE: Indonesia boasts total renewable energy potential in excess of 150 GW not including solar potential of 4.80 KWh per sq metre per day and a wind power capability ranging from three to six metres per second, according to data released by the Ministry Of Energy and Mineral Resources (MEMR) Directorate-General of Renewable Energy and Energy Conservation (EBTKE). This includes 75,670 MW of large hydro capacity, 49,810 MW of biomass, 29,038 MW of geothermal and 769.69 MW of small hydropower. Implementation of these power sources has so far been limited for a variety of reasons. As of 2012, large hydro projects were the most domestically utilised renewable energy sources with 5705.29 MW installed capacity, or 7.54% of total potential. Small hydro boasted a far higher utilisation ratio, with 28.31% of potential capacity currently in use at 217.89 MW. Meanwhile, geothermal installed capacity totalled 1189 MW (4% of potential). The combined installed capacity for biomass-fuelled power plants was 1618.4 MW, or 3.25% of its potential, while solar and wind power generation are negligible at 13.5 MW and 1.8 MW, respectively.

LOOKING TO FIT IN: In order to level the playing field, the Indonesian government has implemented a feed-in tariff (FIT) to provide additional financial incentives for renewable energy producers. The FIT scheme has been phased in over the past few years, with the enactment of MEMR regulation No. 4/2012 in August 2012 representing a large step forward in solidifying incentives for geothermal and other selected small-scale projects. The complex promotion framework sees different rates paid to geothermal producers depending on their location within six geographic regions and the voltage of each network that the project will connect to. The new FIT rates range from $0.10 per KWh to $0.17 per KWh for high voltage networks and $0.115 per KWh to $0.185 per KWh for medium voltages.

NUMBERS TALK: Small hydro and small biomass generators with an installed capacity of less than 10 MW are also eligible for special rates. Depending on the region where they operate, biomass and biogas power plants feeding a medium-voltage grid receive a FIT ranging between Rp975 ($0.10) and Rp1267.5 ($0.13) per KWh and between Rp1325 ($0.13) and Rp1722.5 ($0.17) per KWh for low-voltage connections with special FIT for municipal waste-fuelled power plants ranging from Rp850 ($0.09) per KWh to Rp1398 ($0.14) per kWh depending on voltage and technology employed. Small hydro rates range from Rp656 ($0.07) and Rp852.8 ($0.09) per KWh for medium voltage and Rp1004 ($0.10) and Rp1305.2 ($0.13) per KWh for low-voltage connections. Although yet to be implemented, EBTKE has stated that it is currently working towards calculating optimum rates for solar and wind generation technology as well. Initial projections by the government have estimated the FIT rates for solar at approximately $0.24 per kWh.

MEMR regulations stipulate that renewable energy producers be prioritised for offtake, guaranteeing that PLN must purchase all the electricity that is generated by these plants. With these newly mandated rates and guaranteed buyers, internal rates of return for the majority of renewable energy projects routinely top 18% – in line with Eastern European countries.

NOT JUST YET: While the implementation of the FIT may have solved a primary barrier to entry by boosting potential margins, a number of other factors still weigh on the sector. “The main issue is whether or not investors have the money to invest,” Fabby Tumiwa, executive director of the Institute for Essential Services Reform, told OBG. “For many geothermal projects the developer has difficulty attaining equity financing. Banks require 30% equity. Thus, for a $200m project the company would need to come up with $50m-60m. So they need to find additional investors, which requires additional due diligence processes that can take years, delaying construction, finance and drilling.” The state power company PLN incorporates the cost of all generation from inexpensive coal to costly renewable options into a single total average production cost. In 2012 electricity production cost approximately $0.04-0.05 per KWh. At an average of $0.15 per KWh, geothermal is three times as expensive. Adding in the growth of other renewable sources to the federal energy subsidies already paid out, the FIT could spread the budgets of PLN and the government fairly thin in the future.

EARLY RETURNS: Significant progress has been made in opening large-scale power plants in recent years, starting with the March 2011 signing of purchase power agreements between PLN and two separate developers, Pertamina Geothermal Energy (PGE) and Westindo Utama Karya. Spread over six new power plants, this represented a total installed capacity of 435 MW. As well, in 2012 contractor Sejahtera Alam Energy acquired an exploration licence for PLN’s 220 MW Baturaden geothermal power plant located in the Banyumas regency of Central Java province. This project is expected to come on-line by 2018 or 2019.