INO: Banten and West Nusa Tenggara Wind Power Development Project Preparatory Technical Assistance Paper
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Appendix 1 INO: Banten and West Nusa Tenggara Wind Power Development Project Preparatory Technical Assistance Paper Date: 23 March 2016 1. Country partnership strategy (CPS) / Regional cooperation strategy (RCS): Indonesia COBP 2015-2017 and Interim CPS 2015 Year included in CPS/RCS/COBP/ROBP/CPS or RCS Midterm Review Report: N/A Document reference number and date approved: N/A In case of change in the PPTA title, type, or amount, please state reason: N/A 2. Coverage Country Subregional Interregional Western Java and West Nusa Tenggara (NTB) sovereign non-sovereign 3. Assistance Focus a. Sector(s): Agriculture and natural resources Industry and trade Education Public sector management Energy Transport and ICT Finance Water supply and other municipal infrastructure and services Health and social protection Multisector Subsector(s): Renewable Energy b. Targeting classification Targeted intervention TI-H TI-M TI-G General intervention (more indirectly addressing poverty reduction) c. Theme(s) Economic growth Gender equity Social development Private sector development Environmental sustainability Governance Regional cooperation and integration Capacity development Subthemes: Renewable energy generation - wind d. Location impact Relative weight of spatial High Medium Low impact of the project Rural Urban National Regional 4. Partnership: PACE Energy (“PACE” or “the Sponsor”), a joint-venture between leading French renewable energy independent power producer, EREN, and CWP Energy Asia. 5. Name of the Specialist (project team leader) in Name of the Alternate Specialist: Martina Tonizzo charge of the project: Lazeena Rahman Local Number: 85511651 Local Number: 5684 Email Address: [email protected] Email Address: [email protected] 6. Department/Division: PSOD/PSIF2 7. Key Development Issues to be addressed: Identifying a clean energy path. A more secure and sustainable future for Indonesia is contingent on increased access to clean energy. With annual gross domestic product growth averaging 5% during 2009–2014, the demand for electricity is projected to rise by more than 8% per annum until 2029. Since Indonesia currently uses coal and oil to produce 65% of its electricity and fuel its economic growth, a failure to diversify into cleaner energy sources for power generation will magnify the country’s reliance on fossil fuels, constrain its ability to meet rising electricity demand, increase its contribution to global greenhouse gases (GHGs), and heighten exposure to commodity risk. The Government of Indonesia recognizes the economic imperative of sustainable growth and aims to increase the share of renewable energy in the country’s primary energy supply from 5% in 2010 to 23% by 2025 as part of the National Energy Policy. Furthermore, Indonesia recently strengthened its commitment by submitting the following intended nationally determined contributions (INDCs) for the United Nations Climate Change Conference in 2015: an unconditional emission reduction of 29% by 2030 relative to business as usual solely based on domestic support, with a further reduction of up to 41% if given adequate international support. Indonesian power sector overview. The Ministry of Energy and Mineral Resources (MEMR) is the main policy- making body for the power sector and thereby, a key driver behind the clean energy targets. It is responsible for preparing the laws and regulations for the sector, issuing business licenses, establishing tariff and subsidy policies, and guiding the development of the government’s rolling 10-year national power development plans. MEMR plans must be approved by Indonesia’s president after consultations with parliament. However, MEMR’s policies are largely realized through the actions of Perusahaan Listrik Negara (PLN), the state-owned electricity utility which controls 85% of the country’s installed generating capacity of 51.3 gigawatts (GW), manages power distribution as transmission system owner and operator, and remains the country’s single wholesale purchaser of electricity.1 It facilitates private sector participation in the power generation sector while maintaining control over system planning, operation, and pricing. Government approval of PLN tariffs takes the public’s willingness and ability to pay into account. As a result, the retail price of electricity in Indonesia is low and below the PLN’s average cost of generation. The Ministry of Finance is obligated to provide funding to bridge this cost–revenue gap under the support requirements of a law governing state-owned enterprises, known as the public services obligation (PSO).2 The current legal and regulatory framework for the electricity sector is provided by an electricity law adopted in 2009. The law made MEMR the primary regulatory body and effectively ended PLN’s 60-year monopoly as the only electricity supplier in Indonesia. PLN retained a right of first refusal over any activity in the power sector. Independent power producers (IPPs), provincial entities and cooperatives can only engage in power generation activities in areas unserved by PLN. Nonetheless, IPPs now represent nearly 8GW of installed capacity in Indonesia (15.3% of national capacity) and continue to be an active means of renewable energy development. Developing a nascent wind energy sector. Indonesia is endowed with several renewable energy options that can help PLN and IPPs contribute to INDC and renewable energy targets, including wind, solar, geothermal, hydro and biomass. Though hydropower and geothermal contribute to 7% and 5% of power generation, with 5.3 GW and 1.4 GW installed capacity, respectively, wind resources remain relatively unexplored with upwards of 10 GW of potential.3 Wind power has not benefited from extensive analysis in Indonesia over the past few years given the low pressure air at the equator and the implied lower wind speeds. The quality of the resource varies across the country, with most of the resource reflecting low average wind speeds of 4-7 m/s. However, the development of low wind sites has recently gathered pace, driven by technology developments as manufacturers release updated products. The large majority of these sites are now increasingly economically and technically viable, revealing wind power to be a potential contributor to Indonesian sustainable growth. Indonesia’s current pipeline of wind projects under development (i.e. advancement of feasible studies, compilation of comprehensive wind resource data and acquisition of requisite permits) now exceeds 300 MW.4 Identified opportunities include 195 MW in South Sulawesi, 60 MW in Java, and several smaller projects in West Timor and Sumba, among others. 1 Perusahaan Listrik Negara. 2015. November 2015 Investor Presentation. Jakarta. 2 Under Article 66 Law No. 19/2003, state-owned enterprises should be given a compensation for the full cost executing the government mission (i.e. PSO), directly from government’s budget. 3 Maritje Hutapea, Director of Various New and Renewable Energy, Ministry of Energy and Mineral Resources (MEMR), Directorate General of New, Renewable Energy and Energy Conservation. “Overview of Indonesia’s Renewable Energy Target and Corresponding Wind Power Feed-In-Tariff Policy.” (Presented at Indonesia Wind Energy Forum 2015). Jakarta (17 November 2015). 4 Ibid. The government has responded to the growing opportunity by establishing 2025 targets to increase the country’s total installed wind capacity to 970 megawatts (MW).5 ADB sovereign operations is playing a key role in the development of associated wind tariff regulation, giving private developers, investors and policymakers necessary guidance on likely returns of wind projects across the country. Based on a six-month study by ADB, the guidance promotes the principle that costs of wind power generation should not exceed the benefits to Indonesia. Such benefits include the avoided economic cost of fossil fuel displaced by the renewable technology and the avoided cost of greenhouse gas emissions. Initial studies show that wind projects in Java, Sulawesi and the eastern islands are economic and significant capacity is achievable at or below the benefit caps in these regions. The wind projects in Western Indonesia and Sulawesi will likely receive tariffs closer to 15 US cents per kilowatt-hour (USc/kWh), while diesel-dominated Eastern Indonesian islands can support projects with tariffs greater than 20 USc/kWh.6 The issuance of a new pricing regime for wind is expected in 2016. The varying tariff recommendations reflect the different benefits wind power can bring across Indonesia. For example, as the largest grid, Java presents the highest capacity to absorb the intermittent power. Low-cost coal supplies over 50% of Java power, so any additional wind capacity will make a tangible impact, improving the energy mix. Java also maintains close to 10GW in single- and combined-cycle gas-fired power installed capacity.7 Gas- fired power plants are fast responding and can absorb the intermittency usually accompanying renewable energy power generation, but the use of natural gas somewhat tempers the potential environmental benefits of wind for the Java grid. Nonetheless, applying the benefit cap method ensures that only the most competitive wind projects able to achieve viability under 15 USc/kWh advance. Consequently, the initial projects in Java will help provide competitive benchmarks for national sector development. For the smaller grids like Nusa Tenggara Barat (NTB), the drive for more sustainable energy comes together with strong economic