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Future of Geothermal Bright for Indonesia, Philippines — Finance and Regulatory Stability Critical

Feb 22, 2012

Ahead of the GeoPower Indonesia & Philippines conference in Jakarta, I caught up with Edward McCartin, Senior Development Advisor at Alterra Power, a speaker at the June meeting that will host the key stakeholders in the Asian geothermal industry.

Alterra Power Corp is a leading renewable energy developer, whose portfolio includes two geothermal facilities in Iceland and another in Nevada, USA. Edward is Alterra's representative in Asia, where he has been working since 1998, gaining a wealth of experience in the financing, construction and operation of power facilities in Indonesia and the Philippines.

PS: What is the most challenging aspect of developing a geothermal project in Indonesia?

EM: For Indonesia, it is regulatory stability.  Geothermal is hard to begin with.  There is no need to make it more complex by changing regulations when things start to look up.  Further, the lack of coordination among government ministries and other players creates needless complication.  For years we have had the situation where the Energy Ministry supported geothermal development and the Forestry Ministry refused to permit the projects to go ahead because of issues as to the forests as mapped.  Similarly, the Energy Ministry gave rosy predictions of how matters would be handled regarding payment of tariffs but Ministry of Finance took adverse positions and PLN was not consulted and rejected the structures put in place.  Coordination of the ministries is crucial, extremely weak and not really an area where the private sector has the ability to foster development.

PS: So what policy changes do you think would accelerate the growth of the industry in South East Asia?

EM: For the Philippines, it is more in the nature of seeing how the first generation of post-PSALM power stations get built and dispatched in the new competitive market there.  What we have seen over the past decade is really just moving assets from NPC to others but nothing new.  Financing has largely been through the ADB/IFC and local banks.  Some of the older units are beginning to die off and real efforts are being made to develop new power stations but it has been in this second generation of development that has been the downfall of many of the competitive markets.  In this regard the key policy drivers will be maintaining compliance with the rules by all market participants and trying to rationalize the irrational state of the merit order in the Philippines where gas is base-load and coal is on the margin.

For Indonesia, the answer is putting in place a stable, reliable and attractive government support package until PLN creditworthiness is accepted by international financing entities.  Regardless of what PLN believes, the IPPs believe, or what the Indonesian Government thinks, international financing entities are not willing to accept PLN’s credit profile at this time.  The Government has put together a guarantee of PLN’s solvency in the form of a regulation but the financial industry is still lukewarm toward accepting that to support the billions of dollars needed to get the development moving.  We need to bridge that gap in order to get the flow of funding to come.

PS: Financing will certainly be critical for the future development of the sector. What do you see as the key factors for ensuring on-going investor confidence in geothermal?

EM: Indonesia and the Philippines are a bit of an odd part of the geothermal industry.  In many nations where there is geothermal resource the main issues are technical.  Will we find steam?  How many wells will we need to run the plant?  With the Indonesian and Philippine fields, there have been very few weak links.  As mentioned, the problem has been the creditworthiness of the sole off-takers and how the governments have deal with issues arising around those off-takers.  The Philippines took a bold step of going ahead with a competitive market but NPC and PSALM did not always follow their own rules leading to investor confidence questions.  Those and other questions as to how the system would work left most commercial banks on the sidelines.  While the Filipino Banks have liquidity, using that money for power stations means it is not available for funding rural electrification projects.  Furthermore, other options for developers are likely to be needed as the Philippines moves from acquisitions of existing assets and into development of Greenfield projects.

Indonesia seemed to deny that some of the problems of the late 1990s impacted the development of the power sector.  That denial all but forced them to bring power generation costs completely back on to the government balance sheet and caused several years of delays in bringing needed power in Java-Bali on stream and delaying even further bringing power to the other islands.  The Government’s unwillingness to accept the central truth that it controls PLN’s tariffs, and thus its solvency, kept developers and financiers on the sidelines for the better part of a decade. 

For geothermal, the change in the structure following the end of Pertamina’s oil, gas and geothermal monopoly, and bringing in a host of new regional government actors with little experience, rendered the entire issue of development moot for almost a decade.  Finally, with some positive developments in the regulatory scheme and an appreciation that geothermal can play a major role in several areas of Indonesia as a hedge on rising fossil prices, we are seeing movement.  The key is to keep that movement aimed and proceeding in the right direction rather than cutting it off once it gets moving.  Investors are showing up.  Financiers are getting comfortable and I see a bright future for geothermal here if we can keep the stakeholders focused on maintaining a reliable, legally certain and also attractive structure; legal certainty that an investor will lose money is not going to attract investors.

PS: With this in mind, what do you predict the region’s geothermal industry will look like in 5-10 years time?

EM: The future is bright, but it always has been.  Geothermal suffers more than many other forms of power development because we need stability for several years before we have our fuel lined up.  Coal plants sign a long term contract for fuel.  We have to find it and need to know that if we take the risk and are successful that we will be rewarded.  Changes in policy every 6 months will not foster development.  I remain confident that we will have several new good-sized projects on-stream in Indonesia in the next 5-10 years if we keep a stable and level playing field.

Alterra Power is one of the companies that will be continuing these discussions at GeoPower Indonesia & Philippines. Between the two countries, over 10 GW of expansion is targeted in the next 15 years, and the conference will provide the platform for companies looking to capitalise on the wealth of opportunity in the region. 

Edward McCartin joins a speaker line up that includes geothermal developers Star Energy, Pertamina Geothermal Energy, Energy Development Corporation, PLN Geothermal, Panax, International Power-GDF Suez, Aboitiz Power and many more.

Full details of the event can be found at www.greenpowerconferences.com/geopowerasia.

The information and views expressed in this blog post are solely those of the author and not necessarily those of RenewableEnergyWorld.com or the companies that advertise on this Web site and other publications. This blog was posted directly by the author and was not reviewed for accuracy, spelling or grammar.

For Green Power Conferences in London, I am working as a Research Analyst. My role focuses on the research and production of senior level business meetings for renewable energy industries across the globe.I have a particular interest in the progression of emerging renewable energy markets, and id...

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