By Nathan Patrash

The Kamojang Geothermal Power Plant in West Java is one of the relatively few geothermal plants operating in Indonesia. Source: Geothermal Resources Council, used under a creative commons license.

For years observers have decried that Indonesia possesses 40 percent of the world’s potential geothermal reserves but utilizes only 5 percent of that renewable energy potential. With domestic energy demand increasing rapidly and a new reform-oriented administration in power, Indonesia may finally have the pieces coming together to take its rightful place as a geothermal powerhouse.

Today Indonesia generates 48,000 megawatts of electric power. The government plans to add an additional 35,000 megawatts by 2019. This increase in generation capacity is necessary because Indonesia’s electricity demand is expected to double in the next eight years under pressure from economic development, urbanization, and population growth.

Power generation capacity has not been able to keep pace with Indonesia’s 8 percent annual growth in demand. Even large cities can still experience close to three blackouts per week on average. On top of shortages, more than 20 percent of the Indonesian population lacks access to electricity, accounting for almost half of all of those living in the ASEAN region without electrification.

In 2012 oil and natural gas accounted for 34 percent of Indonesia’s power generation. This was partially due to inexpensive costs created by Indonesia’s fuel subsidies under then-president Susilo Bambang Yudhoyono. The new Joko “Jokowi” Widodo administration’s policy of reducing fuel subsidies and Indonesia’s declining oil and gas reserves will help propel a shift to other energy sources. Much of the shift away from oil and gas is expected to be made up by coal, but geothermal could make large gains as well.

Most estimates put Indonesia’s potential geothermal reserves at 28,000 megawatts. As an energy source geothermal is very clean, emitting a fraction of the carbon produced by fossil fuel driven plants. Geothermal is also a reliable energy source, capable of running 24 hours a day every day with no reliance on volatile markets or unpredictable weather events.

While initial costs are high—drilling just one geothermal well can cost $8-9 million and constructing a geothermal plant can take more than five years—variable costs, including maintenance, are very low. Overall the average cost of electricity from a geothermal plant over the course of its lifetime is half of that from a conventional coal plant and 28 percent lower than from a natural gas fired plant.

Prior to this year, regulatory barriers and inefficient policy made investment unpalatable to those with the capital resources to cover the upfront costs of geothermal power production in Indonesia, but investment conditions have started to shift. The passage of a new Geothermal Law in August simplified the processes for constructing geothermal plants by no longer classifying their construction as a mining activity, and legislating that geothermal project tenders go through the central government instead of confusingly being handled by both local and central governments as in the past. Beginning this year, Indonesia’s Investment Coordinating Board will take over the issuance of licenses for companies looking to operate in the electricity sector as part of the government’s program to transform the board into a “one-stop licensing service.”

Plans to promote geothermal energy production also have support from the top of the government. During newly-appointed presidential chief of staff Luhut Binsar Panjaitan’s speech at CSIS’s Banyan Tree Leadership Forum in December, he outlined how the government wants to pragmatically encourage geothermal resource development. He recognized that price and regulatory road blocks were the primary limits on geothermal usage. Earlier price agreements with geothermal developers set the price per kilowatt hour of power at around 6 cents regardless of the amount of time it would take for a project to pay back investors at that price. Those price agreements also took two years to arrange. According to Luhut, Jokowi wants to bring price negotiations and government approval of agreements down to 6 months. He also wants to target prices that will allow for investments to be paid back in eight to nine years with a 14-15 percent rate of return.

The barrier between Indonesia and investment in clean, cheap, renewable geothermal energy has traditionally been confusing, restrictive government policy. As the Jokowi administration streamlines the bureaucracy in pursuit of foreign investment, Indonesia can capitalize on its natural advantage as a volcanic nation and supplement the power needed for continued development with its plentiful and underutilized geothermal reserves.

Mr. Nathan Patrash is a researcher with the Sumitro Chair for Southeast Asia Studies at CSIS.