Indonesia’s geothermal driveFebruary 18, 2020
Winfried Wicklein, country director for Indonesia at the Asian Development Bank (ADB), talks to TOGY about how Indonesia’s LNG and upstream opportunities can be made more attractive and prospects for its geothermal drive. ADB supports the energy industry in Indonesia by financing private-sector projects, working with PLN on power projects and engaging on policy and regulatory reform.
Considering Indonesia’s steady economic growth, what challenges do you identify as key for President Joko Widodo’s second term?
Indonesia has made remarkable development strides over the last few decades, including sustaining economic growth above 5%, the reduction of the poverty rate to single digits, expansion of public services, investments in infrastructure and improvements in the business climate.
Indonesia is at the cusp of becoming an upper-middle-income country, and its main challenge now is to transition to higher income levels without getting stuck in the so-called middle-income trap. Toward this end, Indonesia needs to improve its competitiveness, reverse inequality and address climate change and environmental sustainability.
At the same time, Indonesia needs to navigate emerging mega trends – including demographic changes, technological disruptions, rapid urbanisation and shifting economic powers – to capitalise on their accompanying benefits and minimise associated risks.
ADB welcomes the government’s determination to address these challenges by prioritising the focus on improving infrastructure and connectivity, accelerating the development of human capital, promoting investment and pursuing bureaucratic reforms and sound macro and fiscal management.
What is the current state of Indonesia’s banking system and what leverage does it have in leading developments in the energy industry?
Indonesia’s finance sector is dominated by banks, especially by a few large financial conglomerates, with banks’ assets constituting approximately three quarters of the financial system. At the same time, Indonesia’s capital market is relatively small and underdeveloped. As a result, financing for infrastructure projects is quite expensive, and especially so for larger and riskier projects. Deepening the finance sector is hence critical for infrastructure financing.
The government is recognising the need to deepen the finance sector. The Ministry of Finance, Bank Indonesia and the OJK [Financial Services Authority] have established co-ordinating mechanisms and are working on a masterplan and additional capital market instruments such as green bonds, sukuk and municipal bonds. There would also be a significant upside for the capital market if Indonesia can develop insurance and pension funds as domestic institutional investors in the capital market.
ADB is supporting the government in financial deepening, including through policy advice and capacity building in areas such as municipal bonds and Islamic finance. We are also supporting financial inclusion, particularly increasing access through fintech.
Furthermore, infrastructure financing is a core area of ADB’s engagement in Indonesia. We support the government, state enterprises and the private sector in developing and financing infrastructure projects with a wide range of financial products, including debt, equity and credit enhancement, as well as knowledge solutions.
We are also working on financing innovative mechanisms with state agencies such PT SMI to de-risk green infrastructure projects and help make them bankable for the private sector. In financial inclusion, ADB provides policy advice on increasing access and supervision of fintech companies for consumer protection and supports financial literacy initiatives.
What important energy developments has ADB been a part of and what strategy will it take in the coming years?
ADB has a substantial footprint in the energy sector in Indonesia, with about USD 1.5 billion in loans under implementation and another USD 3 billion in loans under preparation. For instance, on the private-sector side, we are a direct lender to BP’s Tangguh LNG Train 3 and to Jawa-1, the largest combined-cycle gas power plant in Indonesia, among other projects.
The bulk of our sovereign operations is focused on electricity grid strengthening, which is critical for better access to and reliability of electricity supplies, as well as achieving Indonesia’s goal of promoting renewable energy. In the area of renewable energy, we are supporting a proposed new geothermal project in Java, which will help reduce emissions in the electricity sector. We are also working with PLN on a project involving small-scale gas-fired power plants in Eastern Indonesia.
Looking ahead, we are confident to see a strengthened commitment to sustainable energy including renewables in the government’s forthcoming new medium-term development plan.
Do you anticipate hurdles in reaching the 23% renewable energy benchmark set for the year 2025?
We commend the Indonesian government for setting ambitious goals for the development of renewable energy. Towards this end, there are a number of policies, pricing, and regulatory issues that need to be addressed. An important measure that would send a clear signal to the market would be to provide a level playing field for renewables vis-à-vis other energy sources – coal, oil and gas – in terms of subsidies and pricing. Moreover, technical regulations, grid capacity and management, and availability of land are other important ingredients to make change happen.
The switch to renewables for transport fuels will be even more challenging than in the electricity sector. The government already issued regulations on biofuels and electric cars, which is an excellent start, and supporting policies, regulations and pricing will need to be developed soon as well.
What are some of the major trends you identify in Indonesia’s hydrocarbons industry moving forwards?
Oil demand will continue to increase in Indonesia in the near to medium term as the country grows in terms of population and economic output. While Indonesia still has recoverable, proven and unproven oil reserves, larger investments in uncertain exploration activities may be challenging at low oil prices.
The outlook for gas seems brighter. Recent exploration findings suggest there is significant potential of exploitable gas held in Indonesia’s basins. There are sizeable gasfields that remain unexploited in part due to their location, high cost of development and issues around the regulatory environment.
We are confident that some of these issues can be resolved, and production and investments will materialise, as the government has prioritised natural gas as a key pillar for the country’s energy future. Towards this end, a comprehensive and reliable legal and policy framework for oil and gas development would probably be much welcomed by the industry and translate into additional sector growth.
What measures could be taken to improve Indonesia’s LNG industry?
We see a lot of potential for small-scale LNG (SLNG) in Indonesia. SLNG is well suited to help replace diesel and possibly coal, especially in Eastern Indonesia. However, to make SLNG competitive vis-à-vis other fuels, such as coal and even diesel, an improvement in the gas procurement environment would be required, specifically through an increase in scale and competition.
Currently, the industry is prioritising price over sustainability. Indonesia’s LNG and gas will have to be [priced] lower to be able to compete with coal and sometimes even diesel. This is partly linked to subsidies and preferential treatment for domestic coal and diesel. In addition, expanding gas consumption would necessitate considerable midstream investments to bring gas to market. Expanding gas consumption would not only need a level playing field for gas, but arguably also government-led infrastructure investments.
What push do we see in the area of geothermal and how is the banking sector supporting its development moving forwards?
Geothermal is a very important resource for Indonesia as it provides reliable renewable energy. Given its volcanic geology, Indonesia is among the richest countries in geothermal potential and it should claim a leadership position. However, geothermal is a relatively complex sector. Exploration is uncertain and expensive, and domestic generation prices are currently capped.
ADB has supported the geothermal sector by funding projects such as the 330-MW Sarulla plant; the 80-MW Muara Laboh plant; and the 90-MW Rantau Dedap project, which was approved last year. We are also working with state-owned companies to ensure that Indonesia can develop all designated working areas as soon and effectively as possible.
Despite the general push for non-conventional energy, the geothermal sector has slowed down in the last 12-18 months. Here, pricing may be an important factor. Depending on location, current electricity pricing caps linked to the average generation cost would impact the financial viability of projects, especially in the renewable energy space.
However, we are seeing some promising developments on the financing front. For instance, PT SMI, with support from the World Bank and the Green Climate Fund, has launched a de-risking mechanism for geothermal projects which should help mitigate exploration risks.
In what ways is ADB aiming to grow in Indonesia and the region?
The needs of Indonesia are evolving rapidly, and ADB is providing comprehensive financial support and technical assistance to respond to those changing needs. ADB’s Strategy 2030 sets out how to respond to these in the next decade.
In Indonesia, ADB aims to support the government’s new set of development priorities until 2025. Here, we will continue to focus on infrastructure development and connectivity, expand our interventions in human capital development and help address climate change mitigation by enhancing environmental sustainability. In doing so, we will work with the government and the private sector and apply ADB’s full suite of support modalities including finance, knowledge solutions and capacity building.
To remain relevant to our clients in Indonesia in a rapidly changing development context, we will put a premium on applying cutting-edge approaches – including innovation and new technologies – drawing from our knowledge and experience in Asia and the Pacific, and mobilising financial resources for innovative sovereign and non-sovereign investments. We see great potential for Indonesia to grow rapidly, inclusively and sustainably, and we look forward to supporting the country toward this end.