Geothermal Bill: Major Step To Unlock Growth
BMI View : We believe that the new geothermal bill, which proposes removing the classification of 'mining activity' from geothermal energy development, would make it easier for investors to tap the country's huge geothermal energy potential. This is because much of the country's geothermal potential is located in protected forests and conservation areas, and mining-related activities are legally prohibited in such areas. The government has also addressed the issue of poor returns for investors, and the passing of the bill combined with higher returns would drive growth in the sector.
On October 21, a special committee in the Indonesian House of Representatives approved the geothermal bill proposed by the government, which would make it a step closer to becoming law. Currently, geothermal activities are lawfully defined as 'mining activities' (Law No. 27 2003), which implies that it is prohibited to be conducted in protected forest and conservation areas (Law No. 41 1999). However, the new bill would remove the classification of 'mining activity' from geothermal energy development, allowing the development of geothermal resources in these restricted areas. The new bill would also legally oblige geothermal concession holders to sell a 10% interest to regionally owned enterprises or state-owned enterprises after it enters the exploitation stage. The bill will now have to be approved by a House plenary meeting in April 2014 before it can be fully implemented.
We believe that the passing of the new geothermal bill would make it easier for investors to tap the country's huge geothermal energy potential. Despite the country's sizeable geothermal resources - estimated at 28GW or 40% of global potential geothermal resources - geothermal energy only accounted for 6% of total electricity generated in Indonesia in 2012. There were several factors behind the lack of development of geothermal potential, such as:
The location of geothermal potential: Approximately 60% of geothermal potential in the country is located in protected forests and conservation areas, and regulations prohibited development of potential in these areas as it was considered a 'mining activity'.
Poor business environment: Land acquisition and permit issues have been a major challenge for the sector. Indonesian state utility Perusahaan Listrik Negara had revealed in July 2012 that 13 geothermal power projects were stuck in various exploration stages and were likely to miss development deadlines due to difficulties in both matters (see 'Shaky Foundations For Geothermal', May 24 2012).
Poor returns: We have long said that low levels of producer profitability were another factor preventing development in the sector (see 'Sarulla Geothermal Plant Finally Moving Forward', April 19 2012).
The new bill addresses the first two problems as the declassification of geothermal development as a 'mining activity' would unlock a much greater number of geothermal plots for development. The issue of land acquisition and land rights could also be avoided should geothermal plots be located on state-owned land.
|Issue Of Poor Returns Addressed|
|Indonesia - Geothermal Tariffs, US$/kWh|
We also highlight that the Indonesian government has addressed the problem of poor returns. Over the last two years, the government had raised the tariff for geothermal energy several times, with the most recent hike taking place in June 2013 (see 'Long Awaited Tariff Increase Could Unlock Growth', June 14). Should the new bill be passed in April 2014, the combination of higher returns and greater access to geothermal plots would drive growth in the sector, potentially allowing the government to achieve its renewable energy targets.
|Share Of Renewables To Soar|
|Indonesia - Existing And Target Energy Mix|
We note that the clause obligating geothermal concession holders to sell a 10% interest to regionally owned enterprises or state-owned enterprises after the exploitation stage would increase local participation in the sector. Local corporations and provincial governments could benefit from revenues and technology transfers from foreign investors.