Unlocking Indonesia's Geothermal Potential This report was produced jointly by the Asian Development Bank and the World Bank and is based on a series of technical assistance activities conducted during 2013-2014. The study documents key issues that have constrained the development of Indonesia's geothermal power development sector, including taris, tendering processes, financial considerations, permitting, and inter-agency coordination. The report then makes a set of comprehensive recommendations to unlock the potential of the sector, including a new tari regime, improvements to the tendering process, re-negotiation of power purchase agreements, and innova- tive modes of financing and project de-risking. About the Asian Development Bank ADB’s vision is an Asia and Pacific region free of poverty. Its mission is to help its developing member countries reduce poverty and improve the quality of life of their people. Despite the region’s many successes, it remains home to two-thirds of the world’s poor: 1.6 billion people who live on less than $2 a day, with UNLOCKING INDONESIA'S GEOTHERMAL POTENTIAL 733 million struggling on less than $1.25 a day. ADB is committed to reducing poverty through inclusive economic growth, environmentally sustainable growth, and regional integration. Based in Manila, ADB is owned by 67 members, including 48 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance. About the World Bank The World Bank Group (also known as the “Bank Group”) is the largest anti-poverty institution in the world, oering loans, advice, knowledge, and an array of customized resources to more than 100 developing countries and countries in transition. Established in 1944 and headquartered in Washington DC, the Bank UNLOCKING Group is a specialized agency of the United Nations that is made up of 188 member countries. It works with country governments, the private sector, civil society organizations (CSOs), regional development banks, think tanks, and other international institutions on a range of issues—from climate change, conflict, and food crises to education, agriculture, finance, and trade—in its eorts to accomplish two goals: end extreme INDONESIA'S poverty by 2030 and boost shared prosperity for the bottom 40 percent of the population in all developing countries. GEOTHERMAL POTENTIAL THE WORLD BANK 1818 H Street NW Washington, DC 20433 United States www.worldbank.org ASIAN DEVELOPMENT BANK 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines ASIAN DEVELOPMENT BANK www.adb.org UNLOCKING INDONESIA’s GEOTHERMAL POTENTIAL Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) © 2015 Asian Development Bank and The World Bank Asian Development Bank The World Bank 6 ADB Avenue, Mandaluyong City 1818 H Street, NW, US 1550 Metro Manila, Philippines Washington, DC 20433 Tel +63 2 632 4444; Fax +63 2 636 2444 Tel +202 473 1000; Fax +202 477 6391 www.adb.org; https://openaccess.adb.org www.worldbank.org; https://openknowledge.worldbank.org Some rights reserved. Published in 2015. Printed in the Philippines. ISBN 978-92-9254-901-5 (Print), 978-92-9254-902-2 (e-ISBN) Publication Stock No. RPT146821-2 Cataloging-In-Publication Data Asian Development Bank and The World Bank. Unlocking Indonesia’s geothermal potential Mandaluyong City, Philippines. 1. Geothermal energy. 2. Indonesia. 3. Energy economics. I. Asian Development Bank. Asian Development Bank. The views expressed in this publication are those of the authors and do not necessarily reflect the views and policies of the Asian Development Bank (ADB) or its Board of Governors or the governments they represent. ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. The mention of specific companies or products does not imply that they are endorsed or recommended by ADB. By making any designation of or reference to a particular territory or geographic area, or by using the term “country” in this document, ADB does not intend to make any judgments as to the legal or other status of any territory or area. The World Bank. This work is a joint product of the staff of The World Bank with external contributions. 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Contents List of Tables, Figures, and Boxes vi List of Stakeholder Comments ix Abbreviations x Currency and Units xii Foreword xiii Acknowledgments xiv Executive Summary xv 1 Introduction 1 1.1 Background 1 1.2 Objectives 2 1.3 Defining the Geothermal Resource 2 1.4 Geothermal Targets 3 1.5 Scope 9 2 Tariff Design 10 2.1 General Principles of Tariff Design 10 2.2 Fixed Tariffs or Competitively Bid Tariffs 11 2.3 Ceilings 13 2.4 Production Costs or Benefits as a Basis for Ceiling Prices? 15 3 Implementation Issues and Procedures 18 3.1 Tariff Ceilings and Escalation 18 3.2 Transparency 18 3.3 Recovery of Incremental Cost 19 3.4 Tariff Setting as a Process 21 3.5 Conclusions on Implementation Procedure 21 4 Tariff Ceilings Based on Benefits 22 4.1 Alternatives to Geothermal 22 4.2 The Components of Avoided Costs 24 4.3 Macroeconomic and Global Energy Price Forecasts 24 4.4 Avoided Fixed Costs 25 4.5 Avoided Variable Costs 26 4.6 Avoided Global Externalities 29 4.7 Local Environmental Externalities 33 iii iv CONTENTS 4.8 Premium for Price Volatility 36 4.9 Avoided Cost of Transmission 40 4.10 Local Economic Development Benefits 41 4.11 Proposed Tariff Ceilings 43 5 Power Purchase Agreements 46 5.1 Escalation and Indexation 46 5.2 Renegotiation of Power Purchase Agreements 48 5.3 Adjustment for Project Size 50 5.4 Adjustment for Delay 51 5.5 Procedure 58 6 Recovery of Incremental Costs 59 6.1 Cost of Existing Projects 59 6.2 Incremental Costs of Future Projects 60 6.3 Impact on Ministry of Finance 65 7 Tendering 67 7.1 The Issues 67 7.2 Evaluation of Past Tenders 68 7.3 Options for Improving the Tender Process 69 8 The Tariff Impacts of Front-End De-risking 73 8.1 Cost Recovery Options for the Fund 75 8.2 Sensitivity Analysis 79 8.3 Conclusions