Indonesia is a geothermal energy hotspot. Asian Development Bank investments are helping build market experience and open the sector to more partners and financing.
Indonesia has an estimated potential of 29,000 megawatts (MW) of geothermal energy resources—the largest in the world. In 2017, installed geothermal power capacity was 1,800 MW.
Indonesian President Joko Widodo wants to change that. By 2025, the country targets geothermal production capacity to reach 5,000 MW. Hydropower and geothermal power should account for 25% of the nation's power supply.
The Asian Development Bank (ADB) is working with the government and the private sector to help develop this clean energy potential. In recent years, ADB has financed the Sarulla, Muara Laboh, and Rantau Dedap geothermal projects. Michael Barrow, Director General of ADB’s Private Sector Operations Department, explains how the bank supports development of the geothermal power market.
What role does geothermal power play in Indonesia?
Indonesia has the world’s largest geothermal resources, by far. Any of us who have travelled around Indonesia and been up in the mountains have seen that out of every crack there is some steam pouring – you can boil your eggs out of a geothermal vent.
That’s the resource that is under the ground in Indonesia. It hasn’t been tapped in a major way, but the government has enormous ambitions and we’ve been part of getting those ambitions off the ground with the first three projects that we’ve already helped to finance.
The government has enormous ambitions and we’ve been part of getting those ambitions off the ground with the first three projects that we’ve already helped to finance.
Why is geothermal power attractive for ADB?
One of our most important focus areas is climate change-related financing and a lot of that is renewable energy related. Geothermal, as I said, is one of the most important resources that Indonesia has for renewable power generation. We are also working on wind projects and solar projects in Indonesia. So we will be doing a whole range of renewable energy project financing.
But one of the advantages that geothermal has, not only is it plentiful, but for wind power you rely on the wind blowing; for solar power you rely on the sun being up. Geothermal is a constant resource, it’s always there. It’s a perfect replacement for coal or for gas, but with a very different climate profile. It’s completely renewable but it can act as a reliable, dependable baseload power generating contribution to the grid. And that’s a very important facet of geothermal, it complements beautifully other renewable energy sources and it can directly replace some of the less clean forms of power generation.
What limits development of geothermal resources?
One of the jokes in the industry is that doing a geothermal project combines the worst risks of mining and of power generation because you’re looking for a deep underground resource, and you have to find that resource. You can do a lot of mapping and you can use predictive models to believe what might be under the ground. But until you actually drill you don’t know exactly where those resources are, exactly how powerful they are, or how long they will last.
Geothermal is a constant resource, it’s always there. It’s a perfect replacement for coal or for gas, but with a very different climate profile.
And so there’s a lot of upfront cost and uncertainty that goes into geothermal until you are absolutely sure that that resource is there and it will power your station for years to come. And also it needs long-term financing, and there has been a scarcity of long-term financing for projects generally in Indonesia and for this kind of project as well.
What role does ADB play in these private transactions?
These are enormous projects, they need a combination of financing from developers and from the banking market. The financing needs are well beyond what any one party could bring. What we can do is come in and take some of the early risk that the banks and some of the developers are particularly uncomfortable taking. That’s not just us but that’s particularly where the Climate Investment Funds (CIF) money comes in. That money is provided by donors to take a higher level of risk to allow projects to happen that might otherwise not happen. And so by mobilizing that financing ADB can help get projects off the ground, prove the resource, make them possible, and then they become somewhat more attractive to the market.
And then the other role we play is we go to the market. We bring our own financing, so we are a direct financier. But the fact that we are coming into the project and providing our financing gives comfort to the rest of the market that allows them to consider going into these long-term ventures.
So it’s proof of concept, filling a funding gap, and also getting things off the ground through the powerful instrument of the CIF.
This is how ADB uses blended finance?
By blending the commercial money in the market—and our money as the private sector arm of ADB is commercial in its expectations—with this [donor] money that has a much higher tolerance for risk and that doesn’t expect the same commercial reward, that blended finance piece can fill a gap, a bankability gap, a viability gap in a transaction, and then it can help crowd in the other investment and commercial financing that the project will need to scale up and be a complete project.
What is ADB’s value add in these very large projects?
The first deals are always the most difficult deals. When you do the first geothermal, the first couple of geothermal deals in a market that hasn’t really seen a lot of geothermal financing the investors and the commercial banks are going to be conservative.
Once you’ve proven it by bringing in this powerful CIF money, by having an ADB provide financing, our hope is that by the time we get to the fourth, fifth, sixth project, our role should become less. Hopefully by that time the commercial market has got comfortable with that risk and can take over.
Now there are still some constraints for these very large projects, they need to get financing from a number of sources. But that’s the critical role that we can play: We show that it’s possible, we can make these projects happen on the financing front and then the market becomes familiar, happy taking these risks, and Indonesia ultimately can realize its full potential for geothermal and that full potential is absolutely enormous if they can get these first projects successfully across the line.