Geothermal Energy as a Sustainable Energy Option in Promoting Growth in Indonesia: A Case Study from Geothermal Producer Countries

GEOTHERMAL ENERGY AS A SUSTAINABLE ENERGY OPTION IN PROMOTING GROWTH IN INDONESIA: A CASE STUDY FROM GEOTHERMAL

PRODUCER COUNTRIES

Paper to be presented at Indonesian College Students’ International Conference (TIIMI)

December 2011

Authors:

Arisyi F. Raz (University of Manchester)

Randy Remigius (Lund University)

Tamarind P. K. Indra (University of Melbourne)

Renan Raimundus (Tokyo University)

Indonesian College Students’ International Conference (TIIMI)

i

ABSTRACT

As countries around the world keep developing culturally and economically, the availability of

energy resources is one of the crucial factors to underpin economic development and maintain

the survival of civilization. However, since the beginning of industrial revolution until today,

energy consumption around the world has been followed by significant environmental

degradations. This is mainly due to the world’s dependence on non-renewable energy, which

may harm the sustainability of the environment. Nowadays, the impacts of environmental

deterioration and climate change have become more visible in our daily life. Fortunately, this

was accompanied by world’s growing awareness of these issues, leading to the consumption

and development of renewable energy, which is more environmentally sound.

Geothermal energy is an option amongst many types of renewable energy that has potentials

for future energy resource, especially in some geographically strategic countries such as

Indonesia. Despite of these potentials, current development of geothermal energy in Indonesia

is still new and has not reached its optimal utilisation to support economic development. In this

paper, the effect of optimal utilisation of geothermal energy to economic development in

Indonesia will be discussed.

The aim of this paper is to make comparative analysis and policy suggestions for maximisation

of geothermal energy use in purpose of economic development in Indonesia. In this paper

conducts case study using both quantitative and qualitative methods. The quantitative analysis

is performed through economic models to describe the possible economic impact that can be

achieved if Indonesia utilise its geothermal energy potentials to the optimum level. The

qualitative method previews and compares the geothermal energy potentials, industry

environment, current development, challenges and supporting government policies in Indonesia

and Iceland. Based on the comparative analysis of the two countries, policy recommendations

for a better development and utilisation of geothermal energy in Indonesia will be given.


ii

TABLE OF CONTENTS

Abstract ........................................................................................................................................ i

List of Figures............................................................................................................................ iii

List of Tables ............................................................................................................................. iv

1. Introduction.......................................................................................................................... 1

2. Geothermal Energy in Indonesia: Potentials and Development ..................................... 6

3. Quantitative Analysis .......................................................................................................... 9

Methodology ......................................................................................................................... 9

Research Findings .............................................................................................................. 10

4. Qualitative Analysis .......................................................................................................... 14

Case Study: Philippines Renewable Energy Development and Policy............................... 14

5. Geothermal Energy in Indonesia: Policy Implications and Recommendations .......... 17

6. Conclusions ....................................................................................................................... 19

Reference .................................................................................................................................. 20

Appendices ............................................................................................................................... 24

Republic Acts 6957 ............................................................................................................. 24

Republic Act 9513 or Renewable Energy Act 2008 ............................................................ 24

Presidential Decree No. 1442 ............................................................................................. 25

Word Counts: 5,827


iii

LIST OF FIGURES

Figure 1. World’s energy use 1

Figure 2. Conceptual framework of the influences of the renewable energies on GDP 2

Figure 3. Worldwide geothermal installation 4


iv

LIST OF TABLES

Table 1. Distribution of geothermal generating capacities in the world 4

Table 2. Geothermal power capacity in Indonesia 7

Table 3. Pooled cross-section regression output with corrected standard errors. 11

Table 4. Country level Granger-causality test 12

Table 5. Geothermal fields in Philippines 14


1

1. INTRODUCTION

Energy is the driving force of all life systems. Most societies today, in both developed and

developing nations are heavily reliant on the use of fossil fuels, and the world’s reliance on fossil

fuel energy sources is highly unsustainable (Balat, 2007). Figure 1 show that about 76% of

world’s energy resources come from oil, coal, and natural gas, and the rest comes from the

other non-renewable energy which is nuclear power, and renewable energy such as geothermal,

solar, wind, hydro, and biomass power (Miller, Spoolman, 2010). Until now, the usages of

renewable and clean energy have not yet reached their full potential. Moriarty, P et all (2010)

stated that the world is currently facing energy crisis because of global warming which is caused,

among other things, by the excessive amount of CO2 emission from burning fossil fuel. Thus

the development of renewable energy and energy efficiency has been a focus in the whole

energy industry.

Figure 1. World's energy use

Source: Miller, G.T, Spoolman, S.E (2010)

In his study, Krewit (2007) suggests that optimal renewable energy consumption can supply as

much as 50% of world’s total energy demand by the year 2050. With the increasing prices of oil

and the issue of climate change, it is expected that renewable energies have a great potential to

solve global energy sustainability. Another study by Domac et al. (2005) suggests that

renewable energy consumption will increase macroeconomic efficiency through the following

facets: 1) business expansion and new employment created by the renewable energy industry

result in economic growth and improve living standard, and 2) the import substitution of energy

has both direct and indirect effects on the countries’ or areas’ GDP and trade balance. Moreover,

Chien and Hu (2008) develop a simple framework that aims to relate the role of renewable

22% 33%

21% 6%

2% 5%

11%

Coal

Oil

Natural Gas

Nuclear

Geothermal, solar, wind

Hydropower

Biomass


2

energies in affecting GDP. This framework is developed from the “expenditure approach”

estimation of GDP.1 From this equation, they develop the following framework:

Source: Chien and Hu (2008:3046)

The framework predicts that renewable energy consumption will have direct positive effects on

capital formation and trade balance by the substitution of energy imports. However, the study by

Chien and Hu (2008) shows the result that renewable energies only give a significant positive

effect to capital formation, where the relation with trade balance is not significant. One possible

reason is because an economy will increase both exploitation of renewable energy and

importing energy will increase together in a great energy demand situation. The ceteris paribus

analysis also indicates that renewable energies do not have an import substitution effect (Chien

and Hu, 2008). Renewable energies have an indirect positive impact on the GDP through

capital formation. Thus, energy policy that is related to increasing capital formation would be

more effective and efficient to promote economic development.

Given the rationale above, geothermal energy as one of the renewable energy sources has a

potential to promote sustainable development. The term geothermal energy refers to the source

of heat energy located beneath the earth’s surface originated from the core, trapped inside

underground rocks and fluid, and moves from the deeper layer of Earth’s interior to the surface.

Geothermal energy comes to the surface in the form of hot water or steam that can be used for

two main purposes, direct heating and electricity generation. Direct heating purpose is carried

1 According to “expenditure approach”, GDP is calculated through the following formula: GDP = C + I + G + (X – M), where C is consumption, I is investment, G is government expenditure and (X – M) is the difference between exports and imports.

Figure 2. Conceptual framework of the influences of renewable energies on GDP


3

out by transferring heat from hot water or steam through pipelines to buildings and spaces,

where a more complex power plant and turbine are required for electricity generation purpose.

The commercial use of geothermal energy has been developed since early of 20th century, with

Italy considered as the first pioneer of geothermal power plant. In 1913, Italy built the first

geothermal power plant with a capacity of 250 KWe in Larderello, Tuscany (Barbier, 2002). This

development was the continuation step of the first experiment by Prince Piero Ginori Conti who

had successfully light five bulbs using electricity generated from geothermal steam-engine. After

decades of research and development, geothermal energy utilisation became more

comprehensive and spread worldwide (Barbier, 2002). Currently, geothermal energy sources

are being used in more than 20 countries such as USA, Italy, New Zealand, Philippines, and

Indonesia. Moreover, countries around the world are putting more efforts to develop this source

of energy to the more advance level, ultimately to sustain and expand their economy (Saptadji,

N.A.). As shown in figure 3, since 1975, the installation of geothermal energy power plant has

been increasing more than eight times by year 2010. In year 2000, the total capacity installed

was 7972 MWe with the generation in that year of 49.3 billion kWh.

Figure 2. Worldwide geothermal installation

Source: Barbier, E (2002:39)

Despite this significant development, the total amount of electricity generated from geothermal

power plant was still relatively small compared to the worldwide total electricity generation. In

2000, the total worldwide electricity generation was 15,342 billion kWh (Barbier, 2002). It means

only less than 1% of the worldwide electricity generated came from geothermal energy source.

In the developing countries, with less energy demand and more geothermal potentials,

electricity generation from geothermal energy can give a significant contribution to the total

0

2000

4000

6000

8000

10000

12000

1975 1985 1995 2005

1300

3887 4764

5832 6833

7972 8933

10815

Inst

alle

d C

apac

ity

(MW

e)

Year


4

energy supply in the countries. Further, as shown in figure 2 before, an efficient utilisation of

geothermal energy could give incentives to increase capital and in turn leads to higher GDP. For

instance, in the table 1, it is shown that Philippines generate 21% of its electricity from

geothermal energy, where 20% in El Salvador, 17% in Nicaragua, 10% in Costa Rica and 8% in

Kenya.

Table 1. Distribution of geothermal generating capacities in the world (year 2000) Country Installed MWe GWh generated % of national

capacity % of national

energy Australia 0.17 0.9 n/a n/a China 29.17 100 n/a n/a Costa Rica 142.5 592 7.77 10.21 El Savador 161 800 15.39 20 Ethiopia 8.52 30.05 1.93 1.85 France 4.2 24.6 n/a 2 Guatemala 33.4 215.9 3.68 3.69 Iceland 170 1138 13.04 14.73 Indonesia 589.5 4575 3.04 5.12 Italy 785 4403 1.03 1.68 Japan 546.9 3532 0.23 0.36 Kenya 45 366.47 5.29 8.41 Mexico 755 5681 2.11 3.16 New Zealand 437 2268 5.11 6.08 Nicaragua 70 583 16.99 17.22 Philippines 1909 9181 n/a 21.52 Portugal 16 94 0.21 n/a Russia 23 85 0.01 0.01 Thailand 0.3 1.8 n/a n/a Turkey 20.4 119.73 n/a n/a USA 2228 15470 0.25 0.4

Source: Huttrer (2001:2)

Similar to the relationship between renewable energy consumption and GDP explained earlier,

scholars believe that geothermal energy utilisation will also bring sustainable economic

development to a country or an area (see e.g. Mariita, 2002; Lesser, 1994). A study by Mariita

(2002) shows that geothermal energy utilisation in Olkaria, Kenya has successfully improved the

living standard of the local people to some extent. He further points out that, since geothermal


5

project has been developed in Olkaria, the local community can get many benefits through to

electricity, clean sanitation, shops, hospital, schools, and employment.

In case of Indonesia, despite of the potentials the country has in geothermal energy, the

industry’s development is still much behind other countries with similar potentials (see table 1).

Given these facts and arguments, the purpose of this paper is: 1) to provide evidence that

geothermal energy gives positive effects on economic growth and 2) to present policy

recommendations for Indonesian government regarding the economic benefits that can be

contributed by the development of industry of geothermal energy. Regarding the former, there is

already a plenty of quantitative measurements regarding the impact of renewable energy on

economic growth. Most studies conclude that the development of renewable energy in general

has a positive correlation with growth (see e.g. Chien and Hu, 2008; Apergis and Payne, 2010a;

2010b). Nevertheless, studies that examine the role exclusive role geothermal energy in

contributing growth of are very limited. Hence, the finding of this study is hoped to fill the gap in

the literature regarding the relationship between geothermal energy and growth. On the other

hand, the latter is focused on the policy analysis and implication. To accomplish this purpose,

this study presents a case study about the development of geothermal energy in Philippines.

Based on this analysis, hopefully, this paper can give policy recommendations for Indonesian

government in order to develop geothermal energy effectively and efficiently.

The structure of this paper is organised as follows: the next section describes the brief

geothermal development in Indonesia, the third and fourth sections present quantitative and

qualitative studies respectively, the fifth section explains policy implication and

recommendations, whereas the last section concludes the findings of this study.


6

2. GEOTHERMAL ENERGY IN INDONESIA: POTENTIALS AND

DEVELOPMENT

As an archipelago, Indonesia is endowed with high volcanic activities and is among countries

with the highest geothermal energy potential. High volcanic activities as source of geothermal

energy was formed by geotectonic situation of the country, where different tectonic plates meet

hence formed mountain ranges (Carranza et al., 2008). Indonesia is known to have the biggest

share of geothermal energy in the world, in total 40% of world’s geothermal energy resources

are located in the country (Holm et al., 2010). Military observations estimated that there are

more than 200 geothermal resource bases scattered around Indonesia, of which less than half

were not yet been explored by year 2000 (Hochstein and Sudarman, 2008). Saptadji (2010)

further specifies that there are approximately 265 areas with geothermal energy potential.

These resources are located in Java, Sulawesi, Sumatera, Kalimantan, Papua, and Nusa

Tenggara (Saptadji, 2010).

Nevertheless, referring to Ministry of Energy and Mineral Resources data, up to 2009 the

amount of explored resource bases are merely less than half the estimated available resource

bases. Hochstein and Sudarman (2008) also suggest that chances of success of deep

exploration drilling in the unexplored geothermal bases in Indonesia between 1970s and 2000

was 3 to 4, which means 75% of exploration confirmed the availability of the energy resources.

Out of the total resource bases available in Indonesia, most of them are predicted to have

temperature above 225 degree Celsius while the remaining fall have average temperature of

125-225 degree Celcius. This means geothermal energy resources available in Indonesia are

suitable for generating electricity (Saptadji, 2010). In total, these resource bases are producing

approximately 28,180 MW of geothermal energy, which equivalent to 9 billion barrels of oil. For

comparison, Indonesian total oil reserves in 2009 is 8 billion barrels, where availability of 46% of

it still yet to be explored (Ministry of Energy and Mineral Resources, 2010). It is possible to infer

that Indonesia has higher potential of geothermal energy than oil. Thus, maximization of

geothermal energy utilization may become a tool to shift Indonesia dependence on the non-

renewable oil, coal, and gas.

As set out in preceding paragraph geothermal resources in Indonesia is widely scattered around

the country. Out of Indonesian five main Islands, Sumatera has the most geothermal energy

potential. Until recently, however, most of geothermal power plant installed is located in Java


7

therefore making the island the biggest geothermal energy producer in the country. The

following is the list of geothermal power plants that currently operating in Indonesia.

Table 2. Geothermal Power Capacity in Indonesia (year 2009) Field Location Installed Capacity PLTP Darajat West Java 255MWe PLTP Dieng Central Java 60MWe PLTP Kamojang West Java 200MWe PLTP Lahendong North Sulawesi 60MWe PLTP Salak West Java 375MWe PLTP Wayang-Windu West Java 227MWe PLTP Sibayak North Sumatra 12MWe

Source: Ministry of Energy and Mineral Resources (2010)

As we can see from the table above, until 2009 Indonesia has in total 1,189 MWe installed

capacity of geothermal power plant. This amount shows that considering the country’s potential,

Indonesia is currently producing much lower than its maximum capability. Despite high potential

of geothermal energy resources available in the country, Indonesia is still relying heavily on the

non-renewable resources such as oil, coal and gas. Huttrer (2001, as cited in Fridleiffson)

indicates that in 2001, Indonesia utilized 3.04% of its national geothermal energy capacity.

Comparing to 2009 where 4.06% of geothermal energy capacity is being utilized, it is possible to

infer that there has not been ample development in geothermal energy sector. Increasing

geothermal energy utilisation for electricity production as reflected by geothermal power

capacity, although increasing every year, has not yet shown significant contribution to total

electricity production. While in 2009 Indonesia used up 495,710,478 Barrel Oil Equivalent (BOE)

supplies of crude oil and its products as the main source of energy, only 14,973,198 BOE

geothermal energy supplies was used to generate power (Ministry of Energy and Mineral

Resources, 2010). Although crude oil and its products are still the main energy supply

resources in Indonesia, however, there has been a much higher increase in the percentage of

geothermal energy supply. In one decade, from 2000 to 2009, geothermal energy utilization

increased by 56% whereas crude oil and its products utilization increased by only 14%.

Indeed, there has been an increased geothermal energy production in Indonesia from year to

year starting from 2001 to 2009 (Ministry of Energy and Mineral Resources, 2010). This

increase is in line with Indonesian government plan to increase utilization of renewable

resources. Moreover, with current rate of economic development the government is starting to

anticipate future increase in energy consumption therefore trying to increase capacity of


8

alternative energy resources. In the energy plants development framework of PT. Perusahaan

Listrik Negara, Indonesian government owned electricity company, 39% of the development is

to be allocated to build new geothermal energy plants (Enerdata, 2009). Indonesian government

has set out a target of 9,500 MWe installed capacity of geothermal energy for 2025 (Saptadji,

2010). Specifically, Indonesian government is scheduled to finish the construction of six

geothermal power plants between 2011-2014 and four others are under development process

(Enerdata, 2010).


9

3. QUANTITATIVE ANALYSIS

In this section, this paper presents the quantitative part of this study by performing regression

analysis. First, it shows the data collection, econometric modelling and variables description.

Second, it presents the estimation output and further discussion regarding the results. The

purpose of this section is to show that the development of geothermal energy could bring

economic benefits to the country.

Methodology

The attempt to find the relationship between renewable energy roots to the works of Beaudreau

(2005), Ghali and El-Sakka (2004), Lee and Chiang, (2008), Lee et al., (2008), Narayan and

Smyth, (2008), Oh and Lee, (2004), Sari and Soytas, (2007), Soytas and Sari, (2006), Stern,

(2000), Yuan et al., (2008) and Wolde-Rufael, (2008), which try to explicitly put energy

consumption, Et, into the production function in addition to capital and labour, hence

Yt = f (Kt, Lt, Et) (1)

These studies are in contrast with other studies suggesting that energy consumption variable is

too small in cost compared with other variable that it should not be put in production function (for

instance, see Ghali and El-Sakka, 2004; and Lee et al., 2008).

This paper also assumes that all of the variables are linear in logarithmic form. In many previous

studies, analysis was focused on the growth and aggregate renewable energy

production/consumption. In this paper, however, the focus of the estimation is to explore the

effect of geothermal energy specifically, rather than renewable energy in general, to GDP. Thus,

variable geothermal energy production is used as a proxy for renewable energy production.

Through this model, the paper intends to explore whether geothermal energy production has a

direct and/or an indirect effect(s) on GDP. Indirect effect of geothermal energy production can

happen through capital formation; that is business expansion in geothermal energy leads to

higher investment in the sector. Another possible indirect effect is through an increase in

employment (labour force), which leads directly to GDP. Thus, this rationale yields the following

linear econometric model:

ln (GDP) = β1 ln(G) + β2 ln(C) + β3 ln(L) + u (2)


10

where,

• GDP : Gross Domestic Product

• G : Geothermal energy production

• C : Gross capital formation

• L : Labor force

• U : Error terms

From Equation (2), the paper expects that β1 have a significant positive sign, suggesting that

geothermal energy production has direct impact on GDP. It is also expected that β2 and β3 have

significant positive sign since capital and labour are two necessary inputs for output growth. If β1

turned to be insignificant, while β2 and β3 are significant, it is suspected that geothermal energy

has indirect impact on GDP through either capital formation or labour force.

In addition to regression analysis, this paper also employs Granger-causality test for each

individual country. This test examines the causality between geothermal production and other

variables. The aim of this test is to inspect the presence of indirect effect of geothermal energy

on capital formation and labour. The null of this test implies that there is no causality between

the tested variables. Hence, the strong rejection of the null suggests that one variable Granger-

cause the other variable.

The data used in this analysis ranges from 1990 to 2008, and across ten major geothermal

energy producing nations; Costa Rica, El Salvador, Iceland, Italy, Japan, Kenya, Mexico,

Nicaragua, Philippines, and United States. The multivariate panel data framework includes

natural log forms of Gross domestic Product (constant 2000 US$), Gross capital formation

(constant 2000 US$), annual geothermal energy production (kilowatt per hour), and labour force.

The data for GDP, gross capital formation, and labour force are taken from World Development

Indicator (WDI), while data on geothermal energy production is taken from Energy Statistics

Database. For Granger-causality test, however, this paper only uses the data of Costa Rica, El

Salvador, Iceland, Nicaragua and Philippines

Research Findings

Table 3 shows the pooled cross-section estimation results of equation (2) in three period of time.

The first three columns present the results of estimation between 1991-1996, 1997-2002 and

2003-2008 respectively. Further, the fourth column shows the estimation for the whole period,


11

between 1991-2008. Moreover, in the presence of heteroscedasticity and/or serial correlation,

this paper employs the corrected standard errors in order to avoid inefficient results.

Table 3. Pooled cross-section regression output with corrected standard errors. Variable 1991-1996 1997-2002 2003-2008 1991-2008 Constant 1.06 ***

(2.66) 0.57

(0.49) −0.66

(−1.72) 0.64

(0.70)

ln(G) 0.08 ** (2.46)

0.10 (1.33)

0.14 *** (0.02)

0.08 (1.54)

ln(C) 0.97 *** (58.78)

0.93 *** (27.12)

0.90 *** (84.51)

0.93 *** (41.19)

ln(L) −0.03 (−1.33)

0.04 (1.23)

0.10 *** (5.85)

0.05 ** (2.34)

R2 0.996 0.996 0.996 0.995 F – Statistic 4937.53 2232.42 7290.07 2157.86 Obs. 57 60 60 177 Note: ***, **, and * denote 1%, 5%, and 10% level significance respectively. The numbers in parentheses are the t-statistics. Due to the difference of observed years and missing values, numbers of observations are not constant.

As shown in table 3, Geothermal is significant in two out of four regressions. In the first column,

it is significant at 5% level with magnitude of 0.08. It means that 1% increase in geothermal

production will lead to 0.08% increase of growth. The second column shows that, despite of the

positive magnitude, geothermal production is not statistically significant. It is suspected that the

insignificance during this period is related to Asian Financial Crisis that hit almost all Asian

countries and countries in other region to some extent. Variables that might have hindered

growth rates during this period are excluded from this model, thus the partial effect of

geothermal energy production during these years cannot be captured precisely. Further in the

third column, the coefficient of geothermal energy is statistically significant with a magnitude

higher than those of the first column and second column. In other words, between 2003-2008,

1% increase in geothermal production leads to 0.14% increase in economic growth. These

results imply that the impact of geothermal energy on growth is growing in the last two decades.

The steady increase of magnitude of geothermal energy from time to time represents two

phenomena that occurred between 1999-2009. First, it is due to the increasing energy demand,

particularly in the developing countries. Sadorsky (2009) mentions that energy demand in

developing countries grow much faster than that in developed countries. The growing demand


12

causes an economy to grow and thus leads to higher GPD. In addition to this, the development

of geothermal industry is also growing rapidly. As shown in figure 3, the installation of

geothermal energy has been increasing steadily from 1980s. Hence, as the industry grows, the

law of economies of scale becomes applicable, which improves the overall efficiency of the

industry. As efficiency increases, the impact of geothermal production on economic growth

becomes more feasible.

Further, the coefficient of capital is positive and statistically significant in all regressions. In

addition, the magnitude is also consistent with previous studies (see e.g. Yao and Wei, 2007). It

shows that 1% increase in capital causes an economy to grow around 0.9% in all periods,

implying a diminishing return to scale economy. On the other hand, the role of labour is only

significant in two out of four regressions. Surprisingly, labour has a negative relationship with

growth between 1991-1996, even though the result is not statistically significant.

From the elasticity point of view, particularly between 2003-2008 and between 1991-2008, the

sum of the values of labour elasticity and capital elasticity is close to unity, implying a constant

return to scale economy. Hence, in the presence of geothermal energy, the elasticity of these

variables becomes slightly higher than one. In other words, if geothermal energy has a

significant impact on growth, combined with labour and capital formation, it could create an

increasing return to scale economy.

Table 4. Country level Granger-causality test Country G → GDP GDP → G G → C C → G G → L L → G Costa Rica 2.423 0.505 0.686 0.019 0.114 0.647 El Salvador 1.770 3.250 * 1.582 2.810 * 1.540 4.566 ** Iceland 0.598 1.200 1.992 1.929 2.013 0.427 Nicaragua 0.825 0.068 3.650 * 1.037 0.817 10.539 *** Philippines 0.294 5.280 ** 0.121 4.900 ** 0.281 2.566

Note: The numbers are the F-statistics. ***, **, and * denote 1%, 5%, and 10% level significance respectively.

So far, the analysis of this paper suggests that there is an evidence of a significant direct effect

of geothermal energy production to the GDP growth. Nevertheless, the analysis of the existence

of the indirect effect is still not clear. As mentioned earlier, the Granger-causality test is

performed to examine this indirect effect. The result is shown in table 4 above. This table shows

that geothermal energy production only significantly Granger-causes capital in Nicaragua.

Furthermore, in its relation with labour, geothermal energy Granger does not cause labour force


13

in any of the tested countries. From this result, it can be concluded that there is no statistically

significant indirect effect of geothermal energy to GDP growth through the channelling of capital

formation and labour.

In short the part of quantitative analysis of this paper shows that geothermal energy production,

together with labour force and capital formation have a significant impact on economic growth. A

closer look, however, suggests that the effect of geothermal energy production on growth is only

applicable directly and not indirectly. Nevertheless, this analysis still argues that the role of

geothermal has become much more important in the era of globalisation due to its growing

importance in explaining economic growth.


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4. QUALITATIVE ANALYSIS

In addition to quantitative analysis, this paper also provides qualitative analysis by using a case

study of Philippines. The purpose of this analysis is to present policy comparison that cannot be

captured by mere regression estimations. The selection of Philippines as a case study country

is due to a lot of similarities between Philippines and Indonesia in terms of level of economic

development, geographic condition, etc.

Case Study: Philippines Renewable Energy Development and Policy

Renewable energy has been a prime focus to the Philippines’ Department of Energy (DOE) and

it is the government’s policy to support the energy sector transition from conventional source of

energy to sustainable system of renewable energy. Renewable energy is projected by the

Department of Energy to provide up to 40% of the country’s energy by 2013. According to the

Philippines Department of Energy (2005), to promote the development and use of renewable

energy, the Department of Energy has identified several long term goals, as follows: (1) to

increase renewable energy capacity by 100% by 2013; and (2) to increase non-power

contribution of renewable energy to the energy mix by 10 million barrels of fuel equivalent

(MMBFOE) in the next ten years. Moreover, to support these general goals, the government

aims to: (1) be the number one geothermal energy producer in the world; (2) be the number one

wind energy producer in Southeast Asia; (3) double hydro power capacity by 2013; and (4)

expand contribution of biomass, solar, and ocean energy by about 131 MW (Department of

Energy, 2005).

Table 5. Geothermal fields in Philippines (year 2005) Field Location Installed Capacity

(MWe) Number of Units

Tongonan Leyte 723 21 Mak-Ban Luzon 426 16

Tiwi Luzon 330 6 Palinpinon Negros 192 7 Bac-Man Luzon 151 5 Mt. Apo Mindanao 108 2 Total 1930 57

Source: Bertani (2005:676)


15

The history of geothermal energy development in the Philippines dated back in 1962. It was

initiated by geothermal studies by Commission of Volcanology and has been developing since

then (Sussman, 1993). With an installed capacity of 1930 MWe (shown by table 5) and a

running capacity of 1938 MWe in 2005, The Philippines is the second largest geothermal

producer country after USA (Bertani, 2005). This number accounts for 17.5% of the country’s

total energy supply. Currently there are six geothermal energy fields that have been developed

in the Philippines with a total capacity of 1930 MWe in 2005.

The Department of Energy (2010), supported by investments by private sector, aims to add

another 1200 MW of geothermal capacity installation within the next ten years. Besides

providing the country a substantial amount of electricity, geothermal energy also help the

country to save a huge amount of foreign exchange as a substitute of a large portion of

imported fuels (approximately 25 MMBFOE per year).

Despite the numerous potentials and current development of geothermal energy industry in

Philippines, there are still challenges and gaps that prevent the country to reach its optimal

development and utilisation of geothermal industry. First, the lack of private sector awareness

and interest in geothermal industry investment has been limiting the optimal exploitation of

geothermal source (The Department of Energy, 2010). Up to this date, there are only two

private geothermal developers in the country, namely PNOC-EDC and Philippine Geothermal

Incorporated (PGI). The second issue is regarding technological limitation. The development of

some geothermal potential areas has been put aside waiting for a technological breakthrough to

handle acidic wells.

The Philippines has successfully achieved the current state of geothermal utilisation not only

because of the source potential but also because of the governmental policies that were set up

to support the industry. The main policy to develop renewable energy in Philippines is to open

the industry to the private sector. According to Republic Acts 6957 (Department of Energy,

1990), Philippines are enabling their geothermal energy industry (and other renewable energy

industries) to be financed, constructed, and operated by the private sector. The country believes

that privatisation will promote the development of renewable energy industry since it will exploit

and develop the source as much as they can so they can get the maximum profit. Moreover,

unlike the conventional fossil fuel exploitation, exploitation of renewable energy will do no harm

to the environment, thus optimal exploitation will give much more benefit to the economy and

the society (see appendix).


16

To support the privatisation of renewable energy sector, the government created economic

policies that are called “General Incentives” which was stated in the Republic Act 9513 or

Renewable Energy Act 2008 (Department of Energy, 2008, see appendix). The incentives allow

private developers and companies to make investments, establish facilities, operate renewable

energy industry and generate profits from the industry. Moreover, specifically for geothermal

energy industry development, the incentives are stated in more details under Presidential

Decree No. 1442 or known as “An Act to Promote the Exploration and Development of

Geothermal Resources” (Department of Energy, 2010, see appendix). The Philippines also

implement rural electrification program, which means utilisation of indigenous source of energy

such as biofuel, geothermal, water, etc to generate electricity in small scale on each region or

rural region (Sathaye, 1987). The programme allows the diversification of energy source in the

country, especially renewable energy source, and the decreasing of the country’s dependency

on imported oil.

Through these policies and vision of the future of renewable energy industry, Philippines had

made difference from Indonesia, another geothermal energy potential country, which has not

developed the industry to the optimal level.


17

5. GEOTHERMAL ENERGY IN INDONESIA: POLICY IMPLICATIONS

AND RECOMMENDATIONS

Increasing global and national awareness upon the importance of sustainability has led to the

search of alternative energy in the form of renewable resources. The development of

geothermal energy is the part of Indonesian government policy to reduce the dependence on

non-renewable resources. In addition, as shown in the analysis in chapter 3, the promotion of

geothermal production can have a positive impact on economic growth. For many years,

Indonesia has been employing geothermal energy as one among many options of energy

resources. However, as a country with the highest geothermal potential, development and

utilisation of geothermal energy is still lagged behind, even if compared to countries with lower

geothermal energy potentials.

It is not until 2003 that Indonesia has a set of regulations designated specifically for geothermal

energy (Sukhyar and Danar, 2011). In line with government’s determination to promote

geothermal energy development, new policies are continually developed and improvements

have been made to the old ones to attract private local and foreign investors. Indeed, there has

been an increase private investors involvement in geothermal energy development. This can be

seen from the involvement of Sumitomo, Chevron Geothermal, Medco Energy, and Itochu in

several power plants currently under development (Holm et al., 2010). However, despite the

increasing number of private investors participating in Indonesia’s geothermal energy

development, there are still apparent problems that hampered development thus making it

difficult for the country to produce geothermal energy at the optimum level.

Among many things, one of the biggest challenges facing geothermal development in Indonesia

is unclear policy and regulation. Sukhyar and Danar (2011) mention policy and regulation

incompatibility between national and regional government as well as the lack of cooperation

between government bodies as problems that need to be tackled for geothermal energy

development in Indonesia to be successful. These incompatibility and lack of cooperation has

led to confusion over the role of individual institutions and also a mismatch between policies

made by one government institution and the other. This results in inefficiency and obscurity that

discourage private investment and also decelerate growth in Indonesian geothermal energy

utilisation.


18

As seen in preceding sections, the Philippines have imposed policies that provide incentives

such as tax break and tax reduction to induce private investment. Nevertheless, it can be

inferred that Indonesia has been more successful in terms of attracting private investors. Yet,

Indonesia production of geothermal energy is much below the Philippines. Thus, it can be

inferred that the Philippines have a more sophisticated set of policy and better policy

implementation compared to Indonesia.

Beside the creation of a reliable and clear policy and improvement in policy implementation, this

paper recommend the removal if fossil fuel subsidy currently given by Indonesian government.

According to International Energy Review (2008), Indonesian renewable energy production

remains a small fraction of total energy production due to inefficient subsidies to fossil fuel.

Subsidies for fossil fuel should instead be allocated to renewable energy development, including

geothermal energy production. Removal of fossil fuel subsidies should not be done in one big

cut because it might create a negative shock to the economy. Instead, it should be done in an

incremental way to lessen the negative impact of energy price increase. The price increase

should also be communicated to public effectively, thus public (businesses and households) will

have sufficient preparation for the price increase, lessening the impact of the shock.

In conclusion, impeded geothermal energy development in Indonesia is not caused by the

absent of government intention, but rather the problem of inadequate policy and problems in the

implementation process of existing regulations. Indeed, recent geothermal energy development

in Indonesia has been rapid and private investors have started to take part in the process. To

further development, nonetheless, government should carefully assess the problems that still

exist in the field and find a way to make geothermal energy development more appealing to

investors. Hence, more emphasis is needed on the necessity of policy that can support

development and also improvement in implementation process to create a sound investing and

operating environment. If the government can overcome these drawbacks, the role of

geothermal might become more efficient and significant in promoting economic growth in

Indonesia.


19

6. CONCLUSIONS

The era globalisation has made the role of renewable energy more important than before.

Several empirical studies have attempted to find a linkage between geothermal energy and

economic growth. Most of these studies conclude that there is a positive relationship between

the two.

First, this paper has investigated the impact of geothermal energy development on economic

growth. The results show that, in addition to capital formation and labour force, geothermal

energy is also a significant factor of economic growth, even though the magnitude is still

relatively small. Nevertheless, there is evidence that the magnitude of geothermal energy is

getting bigger from time to time as its production increases. Further, it also has presented the

geothermal development process in Philippines as a case study. The purpose of this case study

is to provide a comparative policy analysis in promoting geothermal energy between Philippines

and Indonesia. The case study suggests that the role of government’s incentives is crucial in

addition to high investment in private sector.

By considering both of these analyses, this paper comes up with a number of policy

recommendations for Indonesian government. First, the development of geothermal energy

production is necessary to be supported by the government in order to promote economic

growth. Second, even though there are a number of private investors interested in geothermal

energy development in Indonesia, the role of government incentives is still very limited.

Therefore, a more serious incentives and intentions by the government may improve the

development process of geothermal production in Indonesia and thus increase the growth rate

of the economy.

Despite of these results, this study has several limitations. In the quantitative analysis, the main

limitation is the lack of data of geothermal energy production. The data on geothermal energy

production is limited only from 1990 onwards. Lack of data leads to small observation number,

and subsequently leads to not asymptotically efficient analysis. In the qualitative analysis, the

main limitation is the limited availability of literature in terms of geothermal policy in Philippines.

Therefore, further research should be facilitated by a more sophisticated availability of the data

and literature in order to obtain more efficient results.


20

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24

APPENDICES

Republic Acts 6957

According to Republic Acts 6957, Philippines are enabling their geothermal energy industry (and

other renewable energy industries) to be financed, constructed, and operated by the private

sector. The country believes that privatisation will promote the development of renewable

energy industry since it will exploit and develop the source as much as they can so they can get

the maximum profit. Moreover, unlike conventional fossil fuel exploitation, exploitation of

renewable energy will do no harm to the environment, thus optimal exploitation will give much

more benefit to the economy and the society.

source: Philippines Department of energy, 2010b

Republic Act 9513 or Renewable Energy Act 2008

Privatisation of renewable energy also supported by “General Incentives” which was stated in

the Republic Act 9513 or Renewable Energy Act 2008. According to Renewable Energy Act

2008, The “General Incentives” include:

• Income Tax Holiday - For the first seven operational years, the developer shall be exempted

from income taxes levied by the government.

Duty-free Importation of Renewable energy Machinery – for the first 10 years of its operation,

the renewable energy machineries imported by the developer shall not be subject to tariff

duties.

• Corporate Tax Rate – after seven years of operation, developers shall pay a 10% corporate

tax of its net taxable income.

• Zero Percent Value-Added Tax Rate – The sale of fuel or power generated from renewable

energy sources shall be a subject to zero-percent value added

• Tax Exemption of Carbon Credits – All proceeds from the sale of carbon emission credits

shall be exempt from all taxes.

source: Philippines Department of energy, 2008


25

Presidential Decree No. 1442

In case of geothermal energy, the incentives are enumerated in more details under Presidential

Decree No. 1442 or known as “An Act to Promote the Exploration and Development of

Geothermal Resources”. It states the following incentives:

• Recovery of operating expenses not exceeding 90 percent of the gross value in any year

with carry -forward of unrecovered cost.

• Service fee of up to 40 percent of the net proceeds

• Exemption from all taxes except income tax

• Exemption from payment of tariff duties and compensating tax on the importation of

machinery, equipment, spare parts and all materials for geothermal operations

• Depreciation of capital equipment over a ten (10) year period

• Easy repatriation of capital investments and remittance of earnings

• Entry of alien technical and specialized personnel (including members of immediate family

source: Philippines Department of energy, 2010c

Documents

Geothermal Energy as a Sustainable Energy Option in Promoting Growth in Indonesia: A Case Study from Geothermal Producer Countries