Other risks
Besides the risks specific to geothermal or any other grid-connected power generation there are other,
market-wide risks that a geothermal project investor should also keep in mind. These include the
foreign exchange risk, interest rate risk, and commodity price risk.
73
C h a p t e r 2
B O x 2 . 4
Indonesia’s Limited Success in Tendering Geothermal Concessions
In 2003, the Government of Indonesia issued Geothermal Law No. 27/2003, which required all new
geothermal concessions to be competitively tendered for development. To be consistent with the country’s
law on decentralization, the authority to carry out most geothermal tenders rested with the local or provincial
governments.
However, most subnational institutions lacked the capacity and experience to carry out multimillion dollar
international tenders. Equally important, many public institutions faced capacity constraints in planning and
managing geothermal developments. The result was a number of poorly structured geothermal development
opportunities being tendered and none achieving financial closure.
With a lack of preliminary information regarding the field and the credibility of the information offered being
questioned (despite Indonesia having a vast database of mapped geothermal fields and related information), many
top geothermal developers did not participate in the tenders. Those that did participate proceeded to renegotiate
the terms after the concession was awarded. Since the tenders did not include a “bankable” PPA with Perusahaan
Listrik Negara (PLN), the national power company and primary off-taker, the financial prospects of the offer were
undermined. If Indonesia is to carry out successful, competitive concession tenders to develop its geothermal
resources, it will be necessary to strengthen the capacity of Indonesia’s public institutions to plan and manage
geothermal developments, to clarify the policy and regulatory frameworks to eliminate several key barriers to
investments, and to structure bankable transactions.
Source | Migara Jayawardena and Authors, based on Ibrahim and Artono (2010).
The disruption caused by these macroeconomic risks to any infrastructure project investment may be
profound. The impact of macroeconomic risks on geothermal project investments was illustrated by the
experience of Indonesia following the Asian crisis of 1997 (Box 2.5).
B O x 2 . 5
Indonesia’s Currency Devaluation Triggered Renegotiation of PPAs in the
1990s
The 1997 Asian financial crisis resulted in an unprecedented devaluation of Indonesia’s national currency, making
dollar-denominated PPAs unaffordable for the state-owned power utility. The government was compelled to
suspend and renegotiate the PPA contracts. These renegotiations took years to complete and resulted in electricity
prices almost 50 percent below pre-crisis contracts—an average of US$ 0.0452/kWh.
These lower prices created a disincentive for future developers. The geothermal industry practically ground
to a halt, and no greenfield geothermal projects have come on-line since 1997. In an effort to rejuvenate the
geothermal industry, the Indonesian government is now considering schemes to provide more incentives by
purchasing geothermal power at higher prices.
Source | Migara Jayawardena and Authors, based on Schlumberger Business Consulting 2009.
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