Geothermal handbook: PlanninG and Financing power Generation t e c h n I c a L r e p o r t 2 / 2

regulatory risk, Institutional Capacity Constraints, and Information Barriers
Regulatory risk is a general term for all risks resulting from a government‘s holding of discretionary 
power over factors affecting the project developer’s (or investor’s) commercial success. Policies 
related to issues such as pricing and taxation, natural resource (geothermal) use, procurement 
procedures, environmental concerns and land usage permitting can all affect the eventual outcome. 
Therefore, clarity and certainty in relation to regulatory risk is an important factor that informs investor 
decisions.
Capacity constraints on the part of public institutions often constitute a deterrent to private investment 
in geothermal energy development. In addition to providing a clear and sound regulatory framework, it 
is important that the public institutions responsible for planning and managing the development of the 
sector and for engaging private developers are sufficiently capable and seen as credible by investors. 
An example in which government institutions need to be seen as capable and credible would be the 
offering of geothermal concessions for private development, which often takes place through a public 
procurement or tender process. In such cases, it is critical that good quality information regarding the 
development (such as surface level surveys, pre-feasibility studies, etc.) is provided to bidders and 
potential investors. Moreover, the ability to structure a transaction to be “bankable” to developers is 
essential if the tenders are to lead to financial closure and the development of geothermal resources. 
Indonesia provides an example in which, due to limited domestic capacity, poorly executed 
transactions have led to many concessions being tendered but almost none of them achieving 
financial closure. Such shortcomings, among others, have contributed to the prolonged stagnation 
of Indonesia’s geothermal development. As a result, only a handful of existing geothermal operations 
(brownfields) in Indonesia have expanded production over the past decade, while none of the newly 
tendered, private, greenfield concessions that carry greater risks have been developed. Box 2.4 
illustrates this in more detail.
Allocation of concession rights to multiple developers within the same geothermal field creates 
additional challenges. The allocation of withdrawal quotas for a natural resource of this kind is almost 
as difficult as for classic “open access” resources (such as ocean fish), due to the uncertain quantity 
or capacity of the resource. From the perspective of the owner of the resource (e.g., the state), there 
is a risk of resource degradation or even depletion due to overexploitation. From the developer’s 
perspective, the risk is that the owner may fail to safeguard the resource from overexploitation by 
others (or by the owner itself) or to secure the exclusivity of the developer’s right to his contractually 
allocated share of the resource. Other challenges in managing the concession rights of multiple 
developers within the same field include the prevention of negative externalities from reinjection, which 
may happen if reinjected fluids from one developer cool down the production wells of another.