open_jicareport.jica.go.jp › pdf › 12043469.pdf · Study on Promotion Policies for Geothermal Power Development by Independent …2011-12-16 · The Republic of Indonesia. The

The Republic of Indonesia

The Republic of Indonesia

Study on Promotion Policies for Geothermal Power Development

by Independent Power Producers

FINAL REPORT

May 2011

JAPAN INTERNATIONAL COOPERATION AGENCY WEST JAPAN ENGINEERING CONSULTANTS, INC.

JAPAN ECONOMIC RESEARCH INSTITUTE INC.

11-027 JR

SAP

Study on Promotion Policies for Geothermal Power Development by IPPs Final Report

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Table of Contents Executive Summary Chapter 1 Introduction ......................................................................................................... 1

1.1 Background of the Study ............................................................................................ 11.2 Objectives of the Study .............................................................................................. 11.3 Contents of the Study ................................................................................................. 1

(1) Study of Risk Mitigation Measures for Geothermal IPP Development and Recommendations ................................................................................................. 2

(2) Issues Related to the Current Regulatory Framework for Geothermal Development and Suggested Options for Policy Reform ........................................ 2

1.4 Implementation Framework of the Study .................................................................... 2Chapter 2 Present Status and Issues of Geothermal Power Development in Indonesia ...... 4

2.1 Expectations for and Recent Status of Geothermal Development ................................ 42.2 Issues in the Promotion of Geothermal Development .................................................. 5

(1) Risks in Geothermal Resource Development .......................................................... 5(2) Issues in the Current Regulatory Framework for Geothermal Development ............ 5

Chapter 3 Recommendations for Risk Mitigation Measures in Geothermal Resource Development .......................................................................................................................... 6

3.1 Necessity of Risk Mitigation Measures ....................................................................... 6(1) Risks in Geothermal Resource Development .......................................................... 6(2) Recognition by Private Companies of Geothermal Resource Risks ......................... 7(3) Scheme of Risk Mitigation Measures for Green Fields ......................................... 10

3.2 Basic Scheme of Governmental Exploration ............................................................. 14(1) The Objective and the Content of Governmental Exploration ............................... 14(2) Cost Estimation and the Schedule of Governmental Exploration ........................... 16(3) Executing Agent of Governmental Exploration .................................................... 19(4) How to Set a Price for the Governmental Exploration Results (Bid System of

IUP) .................................................................................................................... 233.3 Basic Scheme of the Fund ........................................................................................ 27

(1) The Cost Recovery Scheme for Governmental Exploration .................................. 27(2) Quantitative Simulation of the Cash Flow to the Fund .......................................... 32(3) Revolvability of the Fund ..................................................................................... 52

3.4 Socio-economic Effects of the Fund ......................................................................... 67(1) Approach to Calculation of Socio-economic Effects ............................................. 67(2) Results of Calculation .......................................................................................... 69

3.5 Candidate Fields for Fund Support ........................................................................... 75(1) The Current Situation of Geothermal Fields in Indonesia ...................................... 75


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(2) Support for the Post-Tender Fields ....................................................................... 75(3) Candidate Fields for Fund Support ....................................................................... 79

3.6 Fund Management Structure ..................................................................................... 81(1) Original option ..................................................................................................... 81(2) Option 1 .............................................................................................................. 82(3) Option 2 .............................................................................................................. 83(4) Option 3 .............................................................................................................. 85

3.7 Selection of Contractors for Governmental Exploration ............................................ 89(1) Categorization of Governmental Exploration ........................................................ 89(2) Selection Method ................................................................................................. 89(3) Evaluation ........................................................................................................... 90

3.8 Selection Criteria of Sites for Governmental Exploration .......................................... 92(1) Geothermal Resource Potential Criteria (Listed in order of Priority) ..................... 92(2) Social and Environmental Criteria (No Order of Priority, and Comprehensive

Examination is Necessary) .................................................................................. 94(3) Comprehensive judgment ..................................................................................... 96

3.9 Required Studies for Governmental Exploration ....................................................... 97(1) The Current Status of the Survey for Determination of Work Area ........................ 97(2) Review of the Criteria of Work Area Preparation ................................................ 100(3) Required Studies for Governmental Exploration (Proposal) ................................ 101(4) Proposal for the Contents of the Report on Governmental Exploration ............... 112

3.10 Socio-Environmental Study for Governmental Exploration ..................................... 118(1) Environmental Protection and Management Study for Governmental

Exploration ....................................................................................................... 118(2) Governmental Exploration in Forestry Areas ...................................................... 120(3) Summary pf permits and licenses ....................................................................... 123(4) Recommendations .............................................................................................. 124

Chapter 4 Issues Related to the Current Regulatory Framework for Geothermal Development and Suggested Options for Policy Reform ................................................... 125

4.1 Regulatory Framework for the WKP (Mining Work Area) Bidding Procedures, Challenges and Suggestions ................................................................................... 125

(1) Legal Frameworks for Geothermal Development ............................................... 125(2) WKP (Work Area) Tender Methods .................................................................... 126(3) Major Issues and Suggested Reforms ................................................................. 133

4.2 Concluding Remarks .............................................................................................. 145Chapter 5 A Proposal for a Yen Loan to the Fund ........................................................... 146

5.1 Formulation of a Project for a Yen Loan to the Fund ............................................... 1465.2 Calculation Results ................................................................................................ 1515.3 Feasibility of a Project for Yen Loan to the Fund .................................................... 158

Chapter 6 Proposals for Further Acceleration of Geothermal Development in


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Indonesia ...................................................................................................................... 162 6.1 Combination of Energy Conversion by Private Sector and Steam Development by

Public Sector .......................................................................................................... 1626.2 Measures to Procure Drilling Rigs .......................................................................... 166

Chapter 7 Concluding Summary ...................................................................................... 168 Acknowledgments References Annex-I Characteristics of each Financial Scheme Annex-II Recommendations concerning the Standard PPA (Draft)


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List of Figures Fig.-1.5-1 Implementation system of the study ..................................................................... 3Fig.-3.1-1 The significance of Governmental Exploration as Risk Mitigation Measure ....... 13Fig.-3.1-2 Basic scheme of the Fund and the mechanism for recovery of the Governmental

Exploration costs ............................................................................................ 13Fig.-3.2-1 Two types of Bid System ................................................................................... 25Fig.-3.2-2 Cost recovery expectation in a Bid system of energy selling price (Option A) ..... 26Fig.-3.2-3 Cost recovery expectation in a Bid system of purchasing exploration results price

(Option B) ...................................................................................................... 26Fig.-3.3-1 Development process in a model geothermal IPP project .................................... 33Fig.-3.3-2 Cash flow of each year in Debt (15yrs) (nominal value) .................................. 34Fig.-3.3-3 Cumulative cash flow of Debt (15yrs) (nominal value) ....................................... 35Fig.-3.3-4 Cumulative cash flow of Debt (15yrs) (net present value) ................................... 35Fig.-3.3-5 Cash flow of each year in Debt (Upfront) (nominal value) ............................... 36Fig.-3.3-6 Cumulative cash flow of Debt (Upfront) (nominal value) ................................... 37Fig.-3.3-7 Cumulative cash flow of Debt (Upfront) (net present value) ............................... 37Fig.-3.3-8 Cumulative cash flow of Debt-type scheme with different repayment periods

(nominal value) .............................................................................................. 39Fig.-3.3-9 Cumulative cash flow of Debt-type scheme with different repayment periods (net

present value) ................................................................................................. 39Fig.-3.3-10 Profitability of geothermal project (IRR) in Debt-type scheme with different

repayment periods (IRR when the selling price is USD 9.7 ¢/kWh) ................. 41Fig.-3.3-11 Selling price of geothermal power in Debt-type scheme with different repayment

periods (The selling price that attains an IRR of 16.0%) .................................. 41Fig.-3.3-12 Cumulative cash flow of Debt-type scheme with different markups (nominal

value) ............................................................................................................. 41Fig.-3.3-13 Cumulative cash flow of Debt-type scheme with different markups (net present

value) ............................................................................................................. 41Fig.-3.3-14 Profitability of geothermal project (IRR) in Debt-type scheme with different

markups (IRR when the selling price is USD 9.7 ¢/kWh) ................................ 42Fig.-3.3-15 Selling price of geothermal power in Debt-type scheme with different markups

(The selling price that attains an IRR of 16.0%) .............................................. 42Fig.-3.3-16 Total repayment amount in sensitivity analysis of Debt (15yrs) ......................... 44Fig.-3.3-17 Cash flow of each year in Equity (Div) scheme (nominal value) ....................... 45Fig.-3.3-18 Cumulative cash flow of Equity (Div) scheme (nominal value) ........................ 46Fig.-3.3-19 Cumulative cash flow of Equity (Div) scheme (net present value) .................... 46Fig.-3.3-20 Cumulative cash flow of Equity (Div) scheme with different project capacities

(Nominal Value) ............................................................................................. 47Fig.-3.3-21 Cumulative cash flow of Equity (Div) scheme with different project capacities


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(Net Present Value) ......................................................................................... 47 Fig.-3.3-22 Total dividend amount over 30 years in sensitivity analysis of Equity (Div)

scheme ........................................................................................................... 49Fig.-3.3-23 Changes of the balance of the Fund in the Debt (15yrs) case (net present value)

...................................................................................................................... 53Fig.-3.3-24 Changes of the balance of the Fund in Debt (upfront) case (net present value) .. 54Fig.-3.3-25 Changes of the balance of the Fund in the Equity (Div) case (net present value)

...................................................................................................................... 55Fig.-3.3-26 Changes of the balance of the Fund in Equity (Sales) case (net present value) .. 56Fig.-3.3-27 Changes of the balance of the Fund in the case of a mixture of Debt (15yrs)

(50%) and Equity (Div) (50%) (net present value) ....................................... 56Fig.-3.3-28 Changes of the balance of the Fund for a 50 - 50 mixture of the Debt (Upfront)

and Equity (Div) schemes (net present value) .............................................. 57Fig.-3.3-29 Changes of the balance of the Fund for a 50 - 50 mixture of the Debt (15yrs) and

the Equity (Sales) schemes (net present value) ................................................ 58Fig.-3.3-30 Changes of the balance of the Fund for a 50 - 50 mixture of the Debt (upfront)

and the Equity (Sales) schemes (net present value) ......................................... 59Fig.-3.4-1 Socio-economic Effects of the Fund ................................................................... 67Fig.-3.4-2 EIRR of the Fund (For a 55 MW Geothermal Power Plant) ................................ 72Fig.-3.4-3 EIRR of the Fund (For a 20 MW Geothermal Power Plant) ................................ 74Fig.-3.6-1 Original option of Fund management structure ................................................... 81Fig.-3.6-2 Option 1 of Fund management structure ............................................................. 82Fig.-3.6-3 Option 2 of Fund management structure ............................................................. 84Fig.-3.6-4 Option 3 of Fund management structure ............................................................. 86Fig.-3.6-5 Decision steps of Fund management structure .................................................... 88Fig.-3.9-1 Procedure of Well Completion Test .................................................................. 108Fig.-3.10-1 UKL-UPL or AMDAL for Geothermal Development ..................................... 119Fig.-3.10-2 Flow Chart for obtaining a Borrow-to-Use Permit for Governmental Exploration

.................................................................................................................... 123Fig.-5.1-1 Cash Flow to and from the Fund in case of Yen Loan ....................................... 147Fig.-5.1-2 Detailed schedule of project of Yen Loan to the Fund ....................................... 150Fig.-5.2-1 Annual cash flow to and from the Fund and year-end balance of the Fund ........ 155Fig.-5.2-2 Year-end balance of the Fund (re-posted) ......................................................... 155Fig.-5.2-3 Year-end balance of the Fund for various Success Rates ................................... 156Fig.-5.2-4 Year-end balance of the Fund for various development delays (Success Rate is

50%) ............................................................................................................ 156Fig.-5.2-5 Socio-economic effects of the Fund (EIRR) ..................................................... 158Fig.-6.1-1 Components of selling price of energy ............................................................. 164Fig.-6.1-2 Relation between selling price and expected rate of return ................................ 164


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List of Tables Table-3.1-1 Outline of Risk Mitigation Measures for Geothermal Exploration Wells offered

by International Institutions ............................................................................ 12Table-3.2-1 Cost estimation of Governmental Exploration .................................................. 17Table-3.2-2 Schedule estimation for Governmental Exploration (in the case of a 55

MW-class geothermal power plant) ................................................................ 18Table-3.2-3 Assessment on Executing Agent of Governmental Exploration ........................ 22Table-3.2-4 Pros and cons of a Bid system of energy selling price (Option A) ..................... 25Table-3.2-5 Pros and cons of a Bid system of purchasing exploration results price (Option B)

...................................................................................................................... 26Table-3.3-1 The Cost Recovery Schemes for Governmental Exploration ............................ 31Table-3.3-2 Specifications of a model geothermal IPP project ............................................. 32Table-3.3-3 Model development process ............................................................................. 32Table-3.3-4 Finance procument conditions ......................................................................... 33Table-3.3-5 Assumptions of Debt (15yrs) Simulation ......................................................... 34Table-3.3-6 Results of Debt (15yrs) simulation ................................................................... 35Table-3.3-7 Assumptions of Debt (Upfront) Simulation ...................................................... 36Table-3.3-8 Results of Debt (Upfront) simulation ............................................................... 37Table-3.3-9 Simulation results for Debt-type scheme with different repayment periods ....... 40Table-3.3-10 Simulation results of Debt-type scheme with different markups ..................... 42Table-3.3-11 Assumptions in sensitivity analysis of Debt (15yrs) ........................................ 44Table-3.3-12 Assumptions of Equity (Div) Simulation ........................................................ 45Table-3.3-13 Result of Equity (Div) simulation .................................................................. 46Table-3.3-14 Simulation results of Equity (Div) type scheme with different project capacities

(m$: USD million) ......................................................................................... 48Table-3.3-15 Revolvability of the Fund and necessary period to recover (For USD 9.7¢/kWh

Selling Price and 20% Markup) ...................................................................... 60Table-3.3-16 Revolvability of the Fund and necessary period to recover (For USD 9.7¢/kWh

Selling Price and No Markup) ........................................................................ 61Table-3.3.17 Profit and Loss Table of Model Geothermal Power Plant (55 MW; Debt-type

15-year repayment) ........................................................................................ 63Table-3.3.18 Cash Flow Table of Model Geothermal Power Plant (55 MW; Debt-type

15-year repayment) ........................................................................................ 64Table-3.3.19 Profit and Loss Table of Model Geothermal Power Plant (55 MW; Equity-type)

...................................................................................................................... 65Table-3.3.20 Cash Flow Table of Model Geothermal Power Plant (55 MW; Equity-type) .... 66Table-3.4-1 Prospects of Future Energy Prices in IEA World Energy Outlook (WEO) ......... 68Table-3.4-2 Assumption of Future Energy Prices and CO2 Prices (2009 USD) .................... 69Table-3.4-3 Technical Specification of Alternative Power Plants ......................................... 69


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Table-3.4-4 Calculation Table of EIRR of the Fund (For a 55 MW Geothermal Power Plant) ...................................................................................................................... 71

Table-3.4-5 The Socio-economic Effect of the Fund (EIRR and Savings of Fuel and CO2) (For a 55 MW Geothermal Power Plant) ......................................................... 72

Table-3.4-6 Calculation Table of EIRR of the Fund (For a 20 MW Geothermal Power Plant) ...................................................................................................................... 73

Table-3.4-7 The Socio-economic Effect of the Fund (EIRR and Savings of Fuel and CO2) (For a 20 MW Geothermal Power Plant) ......................................................... 74

Table-3.5-1 Current Situation of Geothermal Fields for IPPs in Crash Program II ............... 75Table-3.5-2 Geothermal Fields for PLN in Crash Program II .............................................. 77Table-3.5-3 Geothermal Fields for IPP in Crash Program II ................................................ 78Table-3.5-4 Candidate Fields for Governmental Exploration and Financial Support of the

Fund ............................................................................................................... 80Table-3.10-1 Evaluation Authority of UKP-UPLs for Governmental Exploration .............. 120Table-3.10-2 Compensation for Borrow-to-Use Permit for the utilization of forest area for

commercial purposes .................................................................................... 122Table-3.10-3 Permits and licenses for Governmental Exploration ..................................... 124Table-4.1-1 Geothermal Energy Development in Indonesia before the issuance of the

Geothermal Law ........................................................................................... 126Table-5.1-1 Outline of Fund activities and cash flow ........................................................ 148Table-5.1-2 Conditions of cash flow simulation ................................................................ 148Table-5.1-3 Cost estimation of MT survey (including Technical Assistance) ..................... 149Table-5.2-1 Basic data of cash flow to and from the Fund for a Debt-type (15yr) scheme .. 153Table-5.2-2 Cash flow to and from the Fund for Debt-type (15yr) scheme ........................ 154Table-5.2-3 Final balance of the Fund and FIRR for various Success Rates ....................... 156Table-5.2-4 Final balance of the Fund and FIRR for various development delays (Success

Rate is 50%） .............................................................................................. 156Table-5.2-5 Table for Economic Internal Rate of Return of the Fund ................................. 157Table-5.3-1 Cash flow to and from the Fund for Debt-type (15yr) scheme at 37.5% of

Success Rate ................................................................................................ 160Table-5.3-2 Table for Economic Internal Rate of Return of the Fund at 37.5% of Success

Rate ............................................................................................................. 161


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Abbreviations AMOSEAS subsidiary of CHEVRON TEXACO BANI The Indonesia National Board of Arbitration BAU Business as Usual BOT Build, Operate and Transfer BPPT National Agency for Assessment and Application Technology BUMD participation of regional government owned companies CA Contract Area CAPM Capital Asset Price Model CC Corporate Company / Constitutional Court / Capacity Charge CDM Clean Development Mechanism CDO Curtailed Delivery Output CERs Certified Emission Reductions CG Central Government CGPI Corporate Goods Price Index; CGR Center of Geological Resource CICB Capital Investment Coordinating Board CKD Complete Knock-Down CO2 Carbon Dioxide COD Commercial Operation Date COP Conference of Parties COW Contract of Works CPI Consumer Price Index CRIEPIR Central Research Institute of Electric Power Industry Review DCIL Domestic Capital Investment Law DDI Domestic Direct Investment DFO Date of First Operation DGEEU Directorate General of Electricity and Energy Utilization DGGMR Directorate General of Geology and Mineral Resources DGMCG Directorate General of Mineral, Coal and Geothermal DGT Directorate General of Tax DNA Designated National Authority DNPI Dewan Nasional Perubahan Iklim (National Council of Climate Change) DOE Designated Operational Entity DTO District Tax Office DTT Double Tax Treaties EB Executive Board EIA Energy Information Agency (USA)


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EL Electricity Law EPC Engineering, procurement and Construction EIRR Economic Internal Rate of Return EqIRR Equity Internal Rate of Return EqIRRc Equity Internal Rate of Return Criteria ESC Energy Sales Contract FBL Financial Balance Law FCIL Foreign Capital Investment Law FDI Foreign Direct Investment FEED Front-End Engineering and Design FF Fixed Fees FIL Foreign Investment Law FIRR Financial Internal Rate of Return FIT Feed-in Tariff FOM Fixed O&M Fee FPL Florida Power & Light FSA Fuel Supply Agreement GBP Geothermal Business Permit GC Generation Component GDP Gross Domestic Production GDPS Geothermal Development Promotion Survey GHG Green-house Gas GL Geothermal Law GOI Government of Indonesia GR Government Regulation GRC Generation and Resource Components GSS Geothermal Sector Survey GWA Geothermal Work Area HCE Himpurna California Energy Limited HPP/BPP Harga/Biaya Pokok Produksi (Basic Production Price/Cost) HRSG Heat Recovery Steam Generator IDR Indonesian Rupiah IEA International Energy Agency IIGF Indonesia Infrastructure Guarantee Fund IMEMR Indonesian Ministry of Energy and Mineral Resources IOCs International Oil Companies IPP Independent Power Producer ITL Income Tax Law IUP Geothermal Energy Business Permit JAMALI Java, Madura and Bali


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JBIC Japan Bank for International Cooperation JERI Japan Economic Research Institute Inc. JICA Japan International Cooperation Agency JOC Joint Operation Contract KBC Karaha Bodas Company LLC KfW Deutsche Wiederbau Bank KNMPB Komite Nasional Mekanisme Pembangunan Bersih (National Commission

for CDM) LCOE Levelized Cost of Electricity LNG Liquefied Natural Gas MEMR Minister of Energy and Mineral Resources MEMRD Minister of Energy and Mineral Resources Decree METI Ministry of Economy, Trade and Industry (Japan) MITI Ministry of International Trade and Industry (Japan) MME Ministry of Mines and Energy MOF Minister of Finance MOFD Ministry of Finance Decision MOU Minutes of Understanding MT Magneto-telluric (MT survey = Magneto-telluric survey) NEDO New Energy and Industrial Technology Development Organization (Japan) NEF New Energy Foundation (Japan) NEO Net Electrical Output NGO Non-Governmental Organization NOI Net Operating Income NOｘ Nitrogen Oxides NPV Net Present Value O&M Operation and Maintenance ODA Official Development Assistance OECD Organization for Economic Cooperation and Development OLS Ordinary Least Square OPIC Overseas Private Investment Corporation OPTRES Optimization of Renewable Energy Support Schemes PD Presidential Decrees PDD Project Design Document Perpres Presidential Regulation PF Production Fees PG Provincial Government PGE Pertamina Geothermal Energy PIP Pusat Investasi Pemerintah (Government Investment Unit, Ministry of

Finance, Indonesia)


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PMDN Penanaman Model Dalam Negeri PNOC-EDC Philippine National Oil Company - Energy Development Corporation PP Power Plant PPA Power Purchase Agreement PPP Purchase Power Parity / Public Private Partnership PQ Prequalification PR Presidential Regulation PrIRR Project Internal Rate of Return PrIRRc Project Internal Rate of Return Criteria PSC Production Sharing Contract PSRP Power Sector Restructuring Policy PT PLN PT Perusahaan Listrik Negara (National Electric Company) PV Present Value / Photo Voltaic QCD Quality, Cost and Delivery R&D Research and Development RAL Regional Autonomy Law RC Resource Component RE Renewable Energy RG Regional Government RMc Commercial Risk Margin RMr Resource Risk Margin RMt Technical Risk Margin RPS Renewable Energy Portfolio Standard RUKD General Plan for Regional Electricity RUKN General Plan for National Electricity RUPTL Power Development Program of PT PLN SME Small and Medium size Enterprise SOE State Owned Enterprise SOP Share of Proceeds SOx Sulfur Dioxides SPC Special Purpose Company T/D Transmission/Distribution TAL Tax Administration Law TDL Tarif Dasar Listrik (Basic Electricity Price) TGC Tradable Green Certificate TI Taxable Income TOE Ton of Oil Equivalent TOP Take-or-Pay TOR Terms of Reference UCRF Uniform Capital Recovery Factor


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UNCITRAL The United Nations Commission on International Trade Law UNFCCC United Nations Framework Convention on Climate Change URC Unit Rated Capacity VAT Value Added Tax VE Value Engineering VOM Variable O&M Fee WACC Weighted Average of Capital Cost WASP Wien Automatic System Planning WB World Bank WJEC West Japan Engineering Consultants, Inc. WKP Wilayah Kerja Pertambangan (Mining Work Area) WTO World Trade Organization


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Executive Summary 1. Objectives and Contents of the Study Following on JICA’s “Geothermal Master Plan Study“ in 2007 and its “Study on Fiscal and Non-fiscal Incentives to Accelerate Private Sector Geothermal Energy Development in the Republic of Indonesia” in 2009, the objectives of this study are to review and propose improvements in the current framework of geothermal power development by IPPs, to organize a detailed outline of financing mechanisms, and to build consensus among stakeholders to implement the proposed improvements. The Study consists of the following two main parts:

(1) Study of risk mitigation measures for geothermal IPP development and recommendations. (2) Issues related to the current regulatory framework for geothermal development and

suggested options for policy reform. 2. Present Status and Issues of Geothermal Power Development in Indonesia

Starting from the year 2000, the Government of Indonesia has set some political targets to promote geothermal development. Further geothermal development has been expected with start of the second term of President Yudhoyono’s administration. The Government officially started Crash Program II in January 2010, with MEMR Regulation No. 02/2010, and issued Presidential Decree No. 04/2010. The plan is to develop 9,516 MW of power generation capacity by 2014, with 3,967 MW (41.7 %) to be produced utilizing geothermal energy. As mentioned above, expectations are currently high for geothermal development in Indonesia.

Expectations for and Recent Status of Geothermal Development

There are two main issues in the promotion of geothermal development. One is the risks in geothermal resource development and the other is the issue of the current regulatory framework for geothermal development. The risk mitigation measures and scheme of the fund are discussed in Chapter 3. The current regulatory framework is reviewed and improvements are discussed in Chapter 4.

Issues in the Promotion of Geothermal Development

3. Recommendations for Risk Mitigation Measures in Geothermal Resource

Development

Geothermal energy harnesses steam and hot water stored in reservoirs 1,500 - 3,000 meters underground. Therefore geothermal development has various difficulties similar to exploration of petroleum, natural gas and mineral resources in terms of high risks of failure and high initial costs of development. While oil, gas or minerals, if they are successfully explored, are tradable in the global market at market prices, geothermal energy is site-specific energy and is only

Necessity of Risk Mitigation Measures



tradable on site as a form of electricity at a local market price. This means that exploration risks of geothermal energy are deemed as much higher than those of oil, gas or minerals, if the reward of challenging the risks is considered. Although advanced exploration technology has been developed and the accuracy of exploration has been enhanced, the development risks and large initial funds required for exploration remain big barriers to geothermal power development. In order to accelerate participation of private Independent Power Producers (IPPs) in geothermal power development in Indonesia, therefore, it is of great importance to reduce these geothermal resource development risks. In this Study, the Study Team proposed a Risk Mitigation package consisting of two components; Governmental Exploration and a special Fund to financially support the Governmental Exploration. (Fig.-3.1-1 and Fig.-3.1-2)

(1) The Objective and the Content of Governmental Exploration Basic Scheme of Governmental Exploration

Although there is some desire of IPPs for the drilling as many wells as possible in Governmental Exploration, the Study Team is of the opinion that the number of wells drilled in Governmental Exploration should be around three (3). This is because the objective of Governmental Exploration is to provide private investors with information regarding whether the field deserves further exploration by them. Since this objective can be achieved through the drilling of three (3) wells, Governmental Exploration should comprise three (3) standard-size exploratory wells including necessary ground survey and other work. (2) Cost Estimation and the Schedule of Governmental Exploration When Governmental Exploration includes three (3) exploratory wells, the costs are estimated to be around USD 25 million. The Exploration period is around three years including the preparation period and tender period for Geothermal Energy Business Permit (IUP; Izin Usaha Pertambangan Panas Bumi) (Table-3.2-2). (3) Executing Agent of Governmental Exploration There are three possible options regarding who executes Governmental Exploration:

(a) A governmental Agency (b) A private company that is allowed to continue geothermal development in the area

(Allowed to participate in Tender for IUP afterwards) (c) A private company that is not allowed to continue geothermal development in the area

(Not allowed to participate in Tender for IUP afterwards) The Study Team considers that the Executing Agent of Governmental Exploration should basically be a governmental agency such as the Geological Agency or MEMR. In consideration of the actual situation of Indonesia, however, the Study Team proposes that a private company is appropriate as the Executing Agent of Governmental Exploration based on an assessment of each option as Table-3.2-3 shows. It is also appropriate for the company to be allowed to



participate in tender for IUP and to continue geothermal development in the same field. The justification of this proposal is that (i) a private company is most appropriate because it already has enough technical capacity for the exploration, and (ii) such a company has an eagerness to carry out effective and enthusiastic exploration if it has a desire to continue the development. Regarding concerns as to whether this option is fair in the tender for IUP, the Study Team considers that this concern would be addressed (i) if the selection process for the Executing Agent is fair and transparent and (ii) if the exploration report is fully and widely made available to the public prior to the tender.

(1) The Cost Recovery Scheme for Governmental Exploration Basic Scheme of the Fund

There are two major kinds of scheme through which the Fund can recover the costs of Governmental Exploration: (i) a Debt-type cost recovery scheme and (ii) an Equity-type cost recovery scheme. A Debt-type scheme is a scheme in which the Fund recovers the costs of Governmental Exploration on the installment plan. An Equity-type scheme is a scheme in which the Fund acquires stock in the Special Purpose Company (SPC) which continues geothermal power development in exchange for the costs of the Government Exploration results. The Fund recovers the costs in dividends from the SPC’s profits during its operation period or recovers the costs by strategic sales of the stocks at any time, such as upon inception of operations at the power plant, for example. (2) Quantitative Simulation of the Cash Flow to the Fund 1) Conditions of the Simulation

In this Study, quantitative cash flow is simulated to evaluate each sub-type of Cost Recovery Scheme. The simulation is done by using an economic evaluation simulator for geothermal power generation made by the Study Team, and the main assumptions of the simulation are as shown in Table-3.3-2, Table-3.3-3 and Table-3.3-4.

2) Cash Flow in the Debt-type Long-term Repayment Scheme (Debt (15yrs)) The capital flow of the debt-type long-term repayment scheme is simulated for the example of a 15-year repayment (Debt (15yrs)). The assumptions of the simulation are as shown in Table-3.3-5. The simulation results are shown in Fig.-3.3-4 and Table-3.3-6. In the case of Debt (15yrs), the Fund receives interest revenue during the construction period until power plant operation, and after that, it receives the revenue of principle repayments and interest during 15 years. The revenue decreases gradually as the loan balance decreases. The total amount of the repayment is USD 52.5 million in nominal value terms and is USD 33.8 million in the net present value at -4th year before operation. (The net present value in terms of the -4th year price is converted from the nominal value using a discount rate of 6.0%. Hereinafter, the same conversion is used to calculate the net present value.)

3) Characteristics of the Debt-type Scheme A sensitivity analysis of the Debt-type Scheme shows that the total repayment amount is the



same regardless of project capacity (MW) or operation conditions (plant factor). This means that the Fund can expect stable revenue from the repayment when it uses a Debt-type scheme (subject to the condition that the SPC does not fall in default.) However, the repayment amount is limited to USD 33.8 million in net present value terms. Since the cost of Governmental Exploration is USD 25 million, this scheme has limited ability to recover the costs of Governmental Exploration. It is anticipated that most of the costs for failed fields (where no private companies emerge to continue development after Governmental Exploration) would not be fully recovered under this scheme. (Fig.3.3-16)

4) Cash Flow in Equity-type Scheme (Equity (Div)) The capital flow of the Equity-type scheme (Equity (Div)) is simulated. The assumptions of the simulation are as shown in Table-3.3-12. The simulation results are shown in Fig.-3.3-19 and Table-3.3-13. In the case of an Equity (Div) scheme, there is no revenue to the Fund during the construction period. After the inception of power plant operation, the Fund receives dividend revenue from the SPC. The profit available for dividends is divided in proportion to the investment ratio between the Fund and the SPC. The Fund can take its own portion of the dividends. If the capacity of the project is 55 MW and the dividend ratio of the SPC profits remains at 100%, the total amount of the dividends is USD 170.5 million in nominal value terms and is USD 64.0 million in net present value terms at -4th year price. This is about 2.6 times the cost of Governmental Exploration (USD 25 million). That is to say that this Equity (Div) scheme has strong ability to recover costs.

5) Characteristics of the Equity-type Scheme A sensitivity analysis of the Equity-type Scheme shows that the total amount of dividends over 30 years is easily affected by many factors such as project capacity (MW) or operation conditions (plant factor). Fig.-3.3-22 shows that the capacity of the project has a large influence over the total amount of dividends, and other factors also affect the total amount as well.

6) Summary of the Cost Recovery Scheme The Cost Recovery Scheme is summarized as follows:

i) Debt-type scheme The Debt-type scheme is a scheme from which the Fund can expect reliable repayment revenue regardless of the capacity or the business performance of the geothermal power plant. However, the expected total repayment amount is not as large as the equity scheme.

ii) Equity type scheme The Equity-type scheme is a scheme that has strong cost recovery ability when the power-generating capacity of the geothermal power plant is large. However, the cost recovery ability is greatly influenced by the capacity of the geothermal power plant that is ultimately constructed. In addition, it is also influenced by many other factors of the SPC business performance. It is also affected by the SPC’s dividend policies.



Therefore this scheme poses a greater risk for the Fund than the Debt-type scheme. iii) Portfolio of Debt-type and Equity–type schemes

As above-described, the Debt-type scheme is less risky scheme for the Fund but its cost recovery ability is also less than the Equity-type scheme. On the other hand, the Equity-type scheme has larger cost recovery ability while the SPC’s business performance is satisfactory but it is more risky than the Debt-type scheme because its cost recovery ability totally depends on the SPC’s business performance. Therefore, as for a selection of either type for a project, it is desirable to choose properly between the Debt-type and the Equity-type scheme according to the economic viability of the geothermal project to be developed. In addition, as for the Fund portfolio, it is important to create a portfolio with an appropriate mixture of Debt-type and Equity-type schemes in order to maximize revenue while reducing the risks of the Equity-type scheme.

iv) Markup in the sales price of the Governmental Exploration results It is justifiable to add a certain level (around 10% - 20%) of markup to the sales price of Governmental Exploration results in order to sustain the Fund because the Government carries risks of failure by using the Fund instead of private developers. Different from individual private investors, the Fund has a large financial base and therefore, can bear the costs of the Governmental Exploration in several fields simultaneously. Even though explorations in some fields of them might fail, explorations in other fields will succeed. Thus the Fund can reduce the risks of explorations from high level of being explored individually to low level of being explored collectively. This is called “the portfolio effects”. Therefore the Fund plays a role of not only providing financial supports but also reducing risks of explorations. In return of these important functions, it is justifiable for the Fund to charge some markup in the sales price of the Governmental Exploration results. From the private developers’ viewpoints, the exploration risks of the field is reduced to a certain level enough to make a management decision whether they invest in the geothermal development in the field or not. It is worthwhile purchasing the Governmental Exploration results for them even though the markup is added in prices when compared with doing the exploration by themselves from scratch.

(3) Revolvability of the Fund 1) Basic Approach

The revolvability (the ability to restore the original balance) of the Fund is examined by the following method. First, a Fund with initial capital of USD 100 million is assumed. This Fund is then used to cover the costs of Governmental Exploration in four (4) fields (the cost for each field is USD 25 million.). The sales price of the Exploration results is assumed to be USD 30 million (USD 25 million + 20% markup) in order to enhance the revolvability of the Fund. Thus the Fund can recover the Exploration costs through sales of its results at a certain



success probability (Success Rate). 2) The Debt (15yrs) Case

In the Debt (15yrs) case where 20 MW geothermal plants are developed1

(a) If the Success Rate is 100%, the balance of the Fund returns to the original balance in five (5) years.

(Fig.-3.3-23):

(b) If the Success Rate is 75%, the balance of the Fund returns to the original balance in nine (9) years.

(c) If the Success Rate is less than 50%, the balance of the Fund does not return to the original balance even in 30 years. This means the Fund cannot recover the costs of Governmental Exploration.

3) The Equity (Div) Case In the Equity type case, if 55 MW geothermal plants are developed2

(a) If the Success Rate is 100%, the balance of the Fund returns to the original balance in six (6) years.

:

(b) If the Success Rate is 75%, the balance of the Fund returns to the original balance in eight (8) years.

(c) If the Success Rate is 50%, the balance of the Fund returns to the original balance in 16 years.

(d) If the Success Rate is 25%, the balance of the Fund does not return to the original balance even in 30 years (Fig.-3.3-25).

4) Mixture of the Debt (15yrs) and the Equity (Div) Schemes When the Fund consists of equal 50% components of the Debt (15yrs) and Equity (Div) schemes (with the capacity assumed as 55 MW), the balance of the Fund evolves as shown in Fig.-3.3-26. This figure shows that:

(a) If the Success Rate is 100%, the balance of the Fund returns to the original balance in five (5) years. (There is no benefit to the mixture.)



(d) If the Success Rate is 25%, the balance of the Fund does not return to the original balance.

5) The Revolvability of the Fund The revolvability of the Fund is summarized as follows (Table-3.3-14):

(a) When the Success Rate is more than 75%, it is possible for the Fund to be composed of

1 The capacity of the power plant has no effect on the results in the Debt-type scheme as mentioned in 3.3, (2), 3). Herein, 20 MW is taken as an example of the Debt-type case. 2 As described in 3.3, (2), 5), an Equity-type scheme is suitable for a large-scale project. Herein, 55 MW case is taken as an example of Equity-type case.



Debt-type schemes alone. In this case, the Fund returns to the original balance in the middle term (within 9 years).

(b) When the Success Rate is 50%, it is anticipated that the balance of the Fund could not recover if it is composed of Debt-type schemes alone. However, if the Fund includes Equity-type schemes in its portfolio, the balance is expected to be restored in the long-term (about 21 years).

(c) When the Success Rate is 25%, the Fund cannot recover the original balance. 6) Summary of the Basic Scheme of the Fund (i) In order to attain revolvability of the Fund, it is important to raise the Success Rate as high

as possible. For this purpose, it is necessary to select proper fields for Governmental Exploration and to procure appropriate Executing Agents for successful exploration.

(ii) When the Success Rate is high (more than 75%), it is possible to compose the Fund of Debt–type schemes alone. In this case, the Fund returns to the original balance in the middle term. In addition, if Equity-types are also included in the portfolio and if they can be strategically sold, it is possible for the Fund to recover its balance in the short-term (at the time of the sales).

(iii) When the Success Rate is 50%, it is recommended to include Equity-type schemes, or large-scale projects, in the Fund portfolio. As a result, it is expected that the Fund will recover the original balance in the long-term (21 years).

(iv) Therefore, it is recommended for the Fund to support fields where a large-scale geothermal power plant can be developed. (e.g. geothermal fields in Java or Sumatra) It is necessary to develop Equity-type projects aggressively to increase the flow of revenue to the Fund.

(v) It takes a long period of time for the Fund to recover the original balance in many cases. Such long-term Fund management is beyond the capacity of private companies since there are no short-term returns. Moreover it is necessary to use low-cost money such as ODA finance for the seed money of the Fund. From these viewpoints, a governmental agency is most appropriate for managing the Fund.

(vi) There might be much worse cases than those discussed in this report, such as where the Success Rate is less than 50%. In addition, there are cases in which Equity-type schemes do not produce the anticipated revenue because of poor performance of the project. Therefore, there may be cases that the Fund cannot recover its original balance. Even in such cases, however, the Fund has played an important role in demonstrating the real underground situation of geothermal fields that are thought as promising before exploration but are not suitable for development in fact. Thus, from a long-term perspective, the Fund can contribute to avoid wasting time and money of exploration in the future. In addition, the Fund can collect the underground information and analyses of failure cases, which might not be disclosed by private developers if the exploration is performed by each developer, to improve the preliminary exploration process and to enhance the exploration technology. Therefore, the money spent on the exploration will



contribute to knowledge accumulation and management and the exploration technology development in Indonesia.

(vii) In managing the Fund, the ability of the Fund Manager is very important in trying to sustain the Fund since manager will have to determine which fields the Fund supports, who the Fund appoints as the Executing Agent of the Exploration, which type of scheme the Fund applies to each explored field, how the Fund portfolio is composed, when and whether the Fund carries out strategic sales of equity and so on.

The justification of the Fund is examined by calculating the socio-economic effects of the Fund. The Fund provides financing to Governmental Exploration, of which the cost is USD 25 million per field. Private developers will continue development following Governmental Exploration and if they construct geothermal power plants in the fields, the geothermal plants will substitute for coal-fired power plants or diesel power plants that would be constructed otherwise. This means that the geothermal power plants will save coal or diesel fuel that would have been burnt in fossil fuel power plants. Moreover, geothermal plants reduce the emission of CO2, compared to from the coal-fired or diesel plants. This is the effect of the expenditures of the Fund. Taking into consideration the fact that not all fields can be developed successfully by private developers, it is necessary to multiply the effect by the probability of success (the Success Rate). Making certain assumptions about future energy prices and CO2 prices, the value of the socio-economic impact of the Fund can be calculated and compared with its expenditures.

Socio-economic Effects of the Fund

The calculation results are shown in Table-3.4-5 and Fig.-3.4-2. The 55 MW geothermal plant will substitute for a coal-fired power plant and save a total of 4.8 million tons of coal over 30 years when the Success Rate is 100%. As for CO2 emissions, the geothermal plant will avoid 11.6 million tons of CO2 emissions from the coal-fired plant over 30 years when the Success Rate is 100%. If the geothermal plant substitutes for a diesel power plant, it will save 3.1 million liters of diesel fuel over 30 years when the Success Rate is 100%. As for CO2 emissions, a total amount of 8.9 million tons of CO2 emissions will be avoided. These amounts of saved fuel and avoided CO2 emissions are converted into monetary terms and are compared with the total expense of the Fund. The Economic Internal Rate of Return (EIRR) of the expenditure of the Fund is calculated in terms of the socio-economic effects of the Fund expenditure. The EIRR of the Fund expenditure is calculated to be 20.3% when substituting for a coal-fired plant and is 34.9% in the case of a diesel plant substitution. If the Success Rate falls to 50%, the amount of saved fuel and CO2 emissions also falls to 50% of the figures mentioned above. Namely, the amount of coal saved becomes 2.4 million tons and the CO2 emissions avoided is 5.8 million tons over 30 years. When substituting for a diesel power plant, 1.6 million liters of diesel fuel is saved and 4.4 million tons of CO2 emissions are avoided over 30 years. The EIRR of the Fund is calculated as 16.3% when substituting for a coal-fired plant and 28.9% when substituting for a diesel plant. In general the EIRR of a certain policy is judged by the opportunity cost of capital, usually



12%3

. In this case, the Fund has a socio-economic significance until the Success Rate goes down to 30% for coal-fired plant substitution and 10% for diesel power substitution.

There are reportedly more than 250 promising geothermal fields in Indonesia, and the total potential of these fields is estimated to be 27 GW or more. The Indonesian government has a strong intention of developing this huge source of domestic energy and issued the Presidential Decree of Crash Program II (PP No. 04/2010) in 2010. The Regulation of Minister of Energy and Mineral Resources (No. 15/2010) issued in view of the above-mentioned PP listed a total of 3,967 MW of geothermal fields to be promoted in Crash Program II. They are 43 geothermal fields and 6 of them are to be developed by PT. PLN (including a joint project with PGE) and 37 are to be developed by private IPPs.

Candidate Fields for Fund Support

In the 37 fields allocated for IPPs, 14 fields are the working areas of PGE. In the other fields, developers are to be decided based on the tender process specified in the Geothermal Law. The tenders have already been conducted in 15 fields, and the developers are already decided there (as of January, 2011). Besides this, tenders are in process in five (5) fields. This means that only three (3) fields remain as Pre-Tender fields in the Crash Program II list. (Table-3.5-1) Given this situation, the candidate fields for Governmental Exploration in the Crash Program II list are limited. However, there are a number of promising geothermal fields in Indonesia besides the fields listed in Crash Program II. For instance, geothermal development is expected in the fields shown in Table-3.5-4 that are listed in the latest Long-term Electric Power Development Plan (RUPTL 2010 - 2019) of PT. PLN. These fields are considered as candidates for Governmental Exploration and financial support from the Fund.

Three main options are under consideration for the management structure of the Fund. Fund management structure

In Option (1), PIP (Pusat Investasi Permerintah, The Indonesian Government Investment Unit) will conduct the whole process, including the selection of sites, Exploration-related activities (e.g. procurement of Executing Agent) and their financing. In order to materialize this option, MEMR must entrust Governmental Exploration to MOF/PIP, compliance with PIP’s establishment law must be ensured, and PIP’s technical capability must be fostered. This option has the advantage of lower transaction costs, but raises concerns in terms of PIP’s technical capability. In addition, the agreement between MEMR and MOF/PIP will be needed regarding responsibility for Governmental Exploration, and this process may take time since it requires the negotiation between the different Ministries and institutions. In Option (2), PLN or PT. Geo Dipa4

3 See “Guidelines for the Economic Analysis of Projects”, Asian Development Bank.

(Geo Dipa) will be the party that procures companies for Exploration and supervise their work and at the same time receives money for Exploration from PIP. In order to materialize this option, responsibility for Exploration must be directly assigned

4 Indonesian state-owned company specializing in the geothermal sector



to PLN or Geo Dipa, and compliance must be ensured with government regulation 01/2008 in terms of the funding to PLN or Geo Dipa (i.e. the cash flow to PLN from the Fund will be interpreted by the legal department of MOF as “finance for the business activities”, but not “finance for the government’s assignments”). In addition, the procurement capability of PLN or Geo Dipa for Exploration needs to be ensured. This option has the advantage that entrustment of Governmental Exploration from MEMR to MOF/PIP is not necessary and PLN has an incentive to produce a higher quality of Exploration results. However, the procurement law in Indonesia allows the direct appointment process only if a project satisfies the certain requirements, and the chances to satisfy these requirements are rare. In Option (3), MEMR will procure a company for Exploration and supervise its work. PIP will fund for this work and obtain the Exploration results in return. PIP will recover the costs of the exploration work through repayment from the IUP winner. In order to materialize this option, compliance with PIP’s establishment law and compliance with government regulation 01/2008 in its interpretation of funding are necessary. This means, the transaction in Option (3) is interpreted as follows in order to comply with PP No. 01/2008, 8 of Article 1 and Article 3. PIP is permitted to provide funds to an Executing Agent first as a part of due diligence process and recover these expenses by providing finance to IUP winners for obtaining Exploration results (not “selling” the Exploration results to IUP winners). In other words, the procurement of companies for Exploration is not violating PIP’s establishment low (i.e. PP No. 01/2008). In addition, in order to comply with PP No. 01/2008, 3 of Article 1 and Article 3 (1) b, the funding for Exploration work contract will be regarded as the finance to a private company, not to public works. This option has the advantage of requiring less coordination between relevant ministries, though it causes unclear responsibility on the Exploration results. In this option, as illustrated below, MEMR is in charge of procurement/supervision of the Exploration, whereas PIP has to cover the losses even if the unreliable Exploration results lead to the losses. Therefore, the incentive mechanism to ensure the good quality of Exploration results may be hard to function in this option. However, this concern will be addressed if a company to conduct Exploration will be qualified for WKP bid. Any of the above three options have prerequisites to be satisfied and there are advantages and disadvantages. Therefore, the discussions among the relevant parties will be necessary to decide the Fund Management scheme. For this purpose, the following steps need to be mainly taken: (i) to confirm if the prerequisites are satisfied in terms of the legal interpretation, (ii) to agree on their roles and responsibilities in the scheme, such as the prerequisite mentioned in the earlier discussion and (iii) to confirm the capability of the implementing entities and necessary technical assistance.

As discussed in the previous section, the study team proposes that Governmental Exploration will be carried out by a private developer who is also able to participate in a tender for development of the geothermal area. The selection procedure for contractors will follow Presidential Regulation No. 54/2010 regarding government procurement of goods and services.

Selection of Contractors for Governmental Exploration



The service provided by the contractor is categorized under “Consultancy Services”, and the contractor will be selected by the “General Selection” method. The evaluation will be carried out using the Quality and Cost-Based Selection (QCBS) method, considering the features of Governmental Exploration. Some criteria in this regulation are not suitable in the selection of a contractor for Governmental Exploration. They are,

• The contractor should have obtained at least one contract as a Goods or Services provider within the last 4 years.

• The short list of 5 - 7 contractors shall be prepared in General Selection method. This is because Governmental Exploration is in its initial phase, and there are not a sufficient number of private developers to satisfy these requirements. Thus the criteria is too strict. A flexible application of the regulation is required.

The existence of the geothermal resource is absolutely imperative for the development of geothermal power plant. Therefore the site should be selected considering the potential resource of geothermal energy. The social and/or environmental issues should also be considered in the appropriate selection of the area for Governmental Exploration. Thus, the selection criteria for sites for Governmental Exploration could be divided into two main sets; criteria concerning the geothermal resource potential and those concerning environmental issues.

Selection Criteria of Sites for Governmental Exploration

Regarding the geothermal resource potential, the criteria can be summarized in the following order of priority: 1. Actual geothermal fluid

discharge from well There is (are) geothermal well(s) at the site, and geothermal fluid (steam and/or hot water) which can be expected to be used for power generation has been discharged from the well(s).

2. Active geothermal manifestation

Though a geothermal well has not been drilled yet at the site, active geothermal manifestations (fumaroles and hot springs) can be observed over a wide area. The presence of a high-enthalpy geothermal reservoir with a temperature higher than 200 oC can be expected.

3. Past geothermal manifestation

A geothermal well has not been drilled yet and active geothermal manifestations are not observed, but hydrothermally-altered zones and low to medium-temperature springs can be observed at the site. The preliminary survey results indicate the possibility of the presence of hot geothermal fluid.

4. Geophysical exploration data

Geophysical anomaly distributions indicating the presence of a geothermal reservoir have been detected in the preliminary geophysical exploration survey.



Regarding the environmental aspect, the criteria can be summarized as follows without any priority order. Land There are no significant issues of forest protection, land

acquisition, or other development restrictions at the site. It is also required that there should not be opposition from the local residents which will give rise to resistance to future development.

Access and topography There is sufficient space for the power plant construction at the site. Large-scale civil work to construct an access road is not necessary and the necessary civil work does not have much impact on the project cost.

Transmission line Construction of a long transmission line is not necessary, and there is no environmental issue on the route of the transmission line. Also, significant capacity expansion of the transmission line and substation is not necessary.

Demand and relation to the other power source

The demand for power is strong due to the lack of a power plant around the site, or it is necessary to decrease the cost of fueling an existing diesel power plant.

Others Availability of water for drilling, and possibility of suitable protective measures for precious flora and fauna

The procedure for determination of a geothermal Mining Work Area (WKP) is laid down in the regulation of Minister of Energy and Mineral Resources No. 11/2008 dated 21st April 2008.

Required Studies for Governmental Exploration

The “Criteria of Review and Processing of Data of Work Area Preparation”, which is attached to the regulation, has been reviewed from a technical point of view. The Study Team’s main comments are as follows. • In general, the criteria cover all the survey items necessary to define the most promising

area in the preliminary survey area, and thus it can be concluded the criteria are reasonable. • The objective of the geophysical survey mentioned in the criteria is to estimate the extent of

the geothermal reservoir and the depth of the cap rock from the analysis of resistivity data obtained by MT survey, for example. This approach is very reasonable. It would be good to also include a description of the indication of the intervals of measuring point.

• The survey area for geologic, geophysical and geochemical study is extensive, and the Work Area should be extracted within this extensive area. The requirement to prepare the map with 1:50,000 scale makes it possible because the map scale of 1:50,000 is sufficient to provide the information to mark out the promising area for Work Area.

• It is better that the “Temperature Survey” and “Exploration Drilling” not be “optional” but obligatory. Even a thermal gradient hole can provide underground geological data and temperature information. The understanding of the geothermal system based only on surface survey data will be much improved through consideration of these downhole data. The level



of confidence concerning the existence of a geothermal reservoir will be improved. • The estimation of the geothermal reservoir temperature depends on the geochemical

information, if only surface surveys are carried out. However, temperature logging data will contribute to the level of confidence concerning the existence of a geothermal reservoir. Contrasting the resistivity information from the geophysical survey with well geology results can help with the estimation of the depth of the cap rock.

The objective of the Governmental Exploration is not to determine the Work Area but to obtain more information about geothermal resource in the Work Area and to confirm the existence of a geothermal reservoir. Governmental Exploration consists of surface surveys (MT survey, etc.) in the Work Area, selection of drilling targets, drilling of 2 - 3 exploration wells, well logging, discharge tests, chemical analysis of discharged geothermal fluid, and so on. Since the number of exploration wells is not sufficient for detailed resource evaluation, the reliability of the resource potential evaluation will be limited at this point. In consideration of the above technical review of the procedure, the Study Team proposes the contents of Governmental Exploration as described below.

Surface survey (supplemental and detailed in Work Area) • Geology • Geophysics (MT survey) • Geochemistry (for surface manifestations)

Drilling and Testing • Selection of Drilling Target • Exploration Drilling • Well Data Analysis

- Well Geology (Cuttings analysis) - PT(S) Logging - Well Completion Test

• Discharge Test - Mass Flow Measurement - Fluid Sampling and Chemical Analysis - Well Characteristics Test - Dynamic PT(S) logging - Pressure Interference Test (Optional) - Tracer Test (Optional)

• Integrated Interpretation

(1) Environmental Protection and Management Study for Governmental Exploration Socio-Environmental Study for Governmental Exploration

According to Article 22 of Law Number 32 of 2009 regarding Environmental Protection and



Management (“Law No.32/2009”) and the State Minister of the Environment Regulation Number 11 of 2006 regarding Types of Business Required to have an AMDAL (Environment Regulation No.11/2006), when Exploration is implemented under the Government initiative, the Government (or its Executing Agent) must have an Environmental Management Effort and Environmental Monitoring Effort document (UKL-UPL) prior to undertaking Exploration for geothermal energy in a geothermal work field. (2) Governmental Exploration in Forestry Areas According to Article 38 of the Forestry Law (Law No.41 of 1999 as amended by Law No.19 of 2004), Government Regulation No. 24 of 2010 regarding the Use of Forest Areas (Government Regulation No. 24/2010) and the State Minister of Forestry Regulation Number 43 of 2008 regarding Guidelines for Borrow-to-Use Forest Areas (Forestry Regulation No. 43/2008), development activities, including Governmental Exploration, may be conducted in protected forest or production forest areas, by obtain a “Borrow-to-Use Permit (“Ijin Pinjam Pakai”) for a forestry area”, without changing the status, purposes or functions of the relevant forest area. A Borrow-to-Use Permit is required for each phase of mining activities to be conducted in the forestry area, namely the Exploration and Exploitation phases, in conjunction with the geothermal working permit (IUP) for Exploration or Exploitation to be issued by the MEMR. Though, under Article 6 paragraph (2) letter c point 2 of Government Regulation No. 24/2010, neither compensation in the form of land nor compensation by payment of a non-tax government charge should be required if, in the case of exploration, no excessive sampling is conducted as part of mining tests to establish commercial feasibility, however, if Governmental Exploration is carried out under the conditions of a Fund Cost Recovery Scheme, that Governmental Exploration might possibly be regarded as part of a mining test to establish commercial feasibility and subject to compensation for the Borrow-to-Use Permit by taking the form of (i) a cash payment or (ii) exchange for another plot of land, in accordance with the conditions of the forest area. If Governmental Exploration is carried out in a WKP and no IPP developer is awarded an IUP for Exploitation, then the Government will be obliged to carry out a reclamation and replanting program in the forest area explored. (3) Summary of permits and licenses The necessary permits and licenses to be obtained prior to the Governmental Exploration are shown in Table-3.10-3. The permits and licenses as described in (1) and (2) of this section are the most important and the integral factors, from the view point of, not only (i) the environmental protection management and greenhouse gas reduction, but also (ii) the long term geothermal development business. The long term geothermal development will be carried out by the geothermal power developers of the respective WKPs following to the Governmental Exploration.



(4) Recommendations When a geothermal power developer enters into a geothermal power business in a WKP for long term scheme under the Geothermal Law and PPA with PLN, the geothermal power developer shall take over the socio-environmental permits and licenses from the Government or its Executing Agent of the Governmental Exploration. The developer is also liable to maintain such permits and licenses. Normally, when the geothermal power developer is another entity than the Executing Agent of the Governmental Exploration, the geothermal power developer will conduct legal due diligence, inclusive, but not limited to, the socio-environmental permits and licenses and it takes long time with high cost to carry out such legal due diligence. However, if the Executing Agent of the Governmental Exploration will be the same entity with the geothermal power developer to be selected through IUP tender, then the geothermal power developer will not require to carry out the legal due diligence and can be confident to the long-term validation of the related socio-environmental permits and licenses to backup the eligibility of their project. Therefore, the Study Team recommends that the Executing Agent of the Governmental Exploration shall be the potential geothermal power developer who has an interest to enter into a long-term development of such respective WKP. The reason is to minimize the unnecessary procedures in relation to potential change in ownership of or transferring the socio-environmental permits and licenses in future when the geothermal power developer win the IUP tender and commence development of Exploitation. 4. Issues Related to the Current Regulatory Framework for Geothermal

Development and Suggested Options for Policy Reform

The Geothermal Law (Law No 27/2003) was issued in 2003 as a new geothermal registration scheme. The Law governs the upstream side of geothermal development, transfers PERTAMINA’s regulatory authority to MEMR and requires that future geothermal fields (New Work Areas or New WKPs) be defined by the Minister of the Energy and Mineral Resources based on preliminary surveys. It is also stipulated that the new WKPs are to be tendered transparently and competitively by a Tender Committee headed by the respective government authority depending on the location of the WKP.

Legal Frameworks

WKP tender evaluations are carried out in two phases by a Tender Committee. The first phase is the pre-qualification selection which covers administrative formalities as well as technical and financial capabilities. The candidates who meet the pre-qualification criteria will be short-listed to proceed to the second phase, which is price bidding. The winner of the WKP will be the bidder who offered the lowest electric power price. Previously, the WKP winner had to wait a long time while the feasibility study was completed before starting PPA negotiations with PLN. As the final power selling price to PLN was finally determined at that point, IPPs could only confirm the economics of the project at that later stage. This caused IPPs to hesitate to



participate in tenders for geothermal projects in Indonesia. To cope with this issue, a new regulation was issued by MEMR (MEMR 02/2011) which mandates PLN to purchase power for the price quoted by the winning bidder of the WKP, if the price is below the ceiling price (9.7 USD ¢/kWh) for projects within the Crash Program II. The winning bidder of the WKP becomes the holder of the geothermal mining permit (Izin Usaha Pertambangan Panas Bumi or IUP) for the Work Area, and is entitled to conduct geothermal business activities (i.e. exploration, feasibility studies and exploitation) within their work area, utilizing all government data and information related to their respective work area during the term of validity (maximum 35 years) of their IUP. IUP holders are entitled to enjoy certain tax and fiscal incentives, too. The WKP tender is administered by the national authority (MEMR), the provincial authority (governor), the regency or the municipal authority (local regent or mayor) by establishing a Tender Committee, depending on the location of the WKP. In case the WKP is located across provincial boundaries, the MEMR is in charge of the tender. If the WKP located in a province or cross regency/city boundaries, a provincial authority is responsible for the tender. For the WKP located in a regency or municipality, a regency or a municipal authority (local regent or mayor) is responsible for the tender. The Tender Committee shall be comprised of odd numbers of members and consist of at least five persons, comprised of representatives of the Department of Energy and Mineral Resources, relevant agencies, Regional Government, and representatives of the relevant area. The Tender Committee may assign experts as resource agents, who may come from academia, or be geothermal professionals or practitioners. The main task of the Tender Committee is to develop a schedule, prepare tender documents, carry out the tenders (including tender evaluation), and propose the prospective awardees.

In order to promote geothermal development by IPPs, it is crucial for the WKP tender process to be conducted fairly and effectively. Based on the interview survey of IPPs, the Study Team has analysed the issues which make the tender process inefficient and opaque, and suggests possible reforms as follows.

Major Issues and Suggested Reforms

(1) Structural and Procedural Issues The WKP tenders are administered by the Tender Committee, which is set up for each WKP on an ad-hoc basis, so that the administrative capacity of the Tender Committee is solely dependent on the capacity of the local government officials. As a result, the time required for tender process varies by case. In addition, the quality and quantity of the information of the tender documents including the geothermal resource information vary by case No standardized tender guidelines are offered by the central government, as there is no entity in



the central government in charge of supervising every tender process to ensure the fairness and effectiveness of the tender. As local governments don’t have that many opportunities to build up the experience and expertise needed to conduct WKP tenders, it might be practical to assign an entity at the Central Government to undertake the tender process on behalf of and at the request of local governments, or to prepare uniform guidelines in addition to providing capacity building opportunities for local government officials. The Study Team suggests improving the tender evaluation framework by ・ Involving PLN as a member of each Tender Committee with a clear mandate to ensure

that draft PPAs will be provided as a part of the tender documents, and to speed up PPA negotiation process access to the relevant information from the beginning of the tender process, and

・ Strengthening the function of the Geothermal Department at MEMR, which would become an apex organization for geothermal development by extending support for the tender process to local governments, through establishing and thoroughly implementing the standardized tender guidelines, and supervising tenders to ensure an effective and fair tender process.

(2) Tender Procedure Regarding Pre-Qualification (P/Q), each Tender Committee defines its own set of P/Q items for administrative, technical and financial assessment, which includes the mandatory items as defined in MEMR 11/2009. According to investors, there were some cases in which the bidding requirements, or the requirements set for P/Q assessment, were not necessarily strict enough to exclude unqualified bidders who do not have enough geothermal experience, or who do not have a strong intention to develop the WKP and are merely placing low bids with the intention of reselling the IUP. In addition, as a part of the financial assessment, bidders are required to submit a proof of deposit of a security fund in the amount of USD 10 million at a Government Bank. For IPPs, this is one of the most significant entry barriers, since arranging that much cash imposes a huge financial burden on IPPs, even as the bidders have not yet been ensured of the terms and conditions (and thus the profitability) of the project. Some investors hesitate to deposit that money with a bank which has little business experiences with the non-Indonesian companies. In the current legal framework, bidders should place their bid without having a draft PPA, and they only start PPA negotiations with PLN after they complete the feasibility study. Given these issues, the Study Team proposes improving P/Q requirements by ・ Preparing more detailed and concrete technical requirements, to select only qualified

bidders who have sufficient technical capacity to carry out the project in an efficient and



effective way. ・ Allowing the substitution of a performance bond for a cash deposit as proof of a security

fund in the amount of USD 10 million, and also allowing the bond to be issued by any creditworthy banks, including foreign banks, instead of the current requirement, in order to encourage IPP entry.

The Study Team also proposes changing the PPA negotiation process by ・ Including a Conditional PPA(*), that is to be signed between PLN and the winning bidder

right after the issuance of IUP which stipulates PLN’s basic and important commitments and obligations including power purchase price, power purchasing mechanism and the construction of a transmission line. (*) The contents of the Conditional PPA specifies the basic and important commitments from PLN, including the power purchase price (the same as the bid price, if it is less than USD 9.7 ¢/kWh, PLN’s other obligations relating to the power purchasing mechanism (e.g. purchasing all the electricity generated from the plant to be built in the WKP under the take-or-pay clause) and the construction of a transmission line (specifying the operator’s and PLN’s obligations).

(3) Contents of Tender Documents The tender documents are prepared by the Tender Committee for WKPs, usually in the Indonesian language. It is said that the quality of the tender documents varies depending on the capacity of the local government officials, which is generally not perceived as sufficient by investors. On top of this, the IPP must place their bid without knowing the full details of the project, as there is no draft PPA provided to the bidders. It is also said that the definitions of the provisions are not always clear, so that the WKP winner might have to engage in further discussion in order to clarify certain clauses and unclear items such as royalty stipulation before they proceed to the arrangements for IUP issuance. Given these issues, the Study Team suggests improving the tender documents through the following engagements on the Geothermal Department, i.e. Department of Geothermal Enterprise Supervision and Groundwater Management. ・ Active participation to improve the quality of tender documents. As previously explained,

the Geothermal Department is expected to play a major role by improving the quality and quantity of the tender documents and providing guidelines to maintain their quality, and by ensuring that all clauses are clearly articulated. If requested by the local government, the Geothermal Department may also help prepare the tender documents for a given WKP.

・ Preparation of an English-language version of the guidelines for the preparation of the tender documents, so that the Tender Committee can produce the documents and relevant formats in English easily. By having English tender documents, non-Indonesian investors are able to directly access the genuine tender documents, so that they are able to avoid the risk of misunderstanding of their contents.

・ Uniform inclusion of a provision for royalties in all future tender documents. Until the



Government issues relevant regulations, it is suggested that the Geothermal Department specify royalties as 2.5% (or other rate clearly specified in the relevant document) of net income to avoid confusing possible tender participants.

(4) Required modifications due to the introduction of the Fund In order to select the form of investment from the Fund and the method of cost recovery by the Fund (in the form of debt or equity / upfront, long-term or short-term repayments), the Study Team recommends that a Fund Manager participates in preparation of WKP tender documents and one of the following options is to be selected on a WKP-by-WKP basis. The first option is that the Fund Manager decides the form (debt, equity / upfront, long or short term repayment) on a WKP-by-WKP basis and stipulates it in the tender document. The second option is that the bidder proposes the repayment form (debt, equity / upfront, long or short term repayment). Following the first option, in principle, a Fund Manager will make the decision to increase the Fund’s profit. However, this Fund Manager’s decision may be against potential investors’ preference and may not be able to attract any bidders. When a Fund Manager has this concern or uncertainty, it can choose the second option. This flexibility will help to balance the impact on the profitability of the Fund with the attractiveness for the investors. (5) Issues and Proposals for Improvement in PPAs ・ Tariffs

- To ensure that the tariff offered by the WKP winner will be the final price in the PPA: After MEMR 02/2011 comes into effect, PPA negotiations for projects under the Crash Program II are expected to get started. However, MEMR 02/2011 does not apply to projects not implemented under the Crash Program II. Hence, the Study Team strongly recommends that this regulation also be applied to projects which are not under the Crash Program II, unless a new tariff mechanism, such as a Feed-in-Tariff, is implemented.

- Ceiling of USD 9.7 ¢/kWh: Currently, the electricity price is restricted to a maximum of USD 9.7 ¢/kWh for all WKPs, as defined in MEMR 02/2011. However, the profitability of geothermal projects varies depending on the location. Therefore, a uniform ceiling price is not appropriate given the variable profitability of geothermal projects. Hence, the Study Team would like to suggest abolishing the ceiling price provisions for small-scale projects which are proven to be not profitable enough for IPPs to operate even with support from Governmental Exploration as suggested in this Study.

・ Government Guarantee for Off-Taker (PLN) Risk: For projects under the Crash Program II, Presidential Regulation 04/2010 stipulates government supports for the business viability of PLN. The details are to be provided in an MOF regulation which is in preparation, and which investors are eagerly awaiting, as this regulation is one of the critical conditions for receiving bank financing. Projects not under the Crash Program II



may also be able to receive guarantees from Indonesia Infrastructure Guarantee Fund (IIGF)5

・ Flexibility in PPAs: Compared with coal-fired power generation projects, there is more uncertainty for geothermal power projects at the time a PPA is signed. Hence, it is preferable to allow flexibilities in PPAs, to accommodate such eventualities as expansion of power generation and/or change in the tariff when the interest cost is increased.

in the case of PLN’s failure to fulfill its payment obligations, if a project is considered as a PPP project. In this regard, it is recommended that the all geothermal projects are categorized either under the Crash Program II or as PPP projects. However, IIGF’s guarantee capacity is limited. Therefore, if IIGF’s guarantee is chosen to cover non Crash Program II, the IIGF’s guarantee capacity needs to be confirmed whether it will be sufficient to cover high potential non Crash Program II and if necessary, its capacity needs to be expanded (i.e. IIGF’s capital is increased) though this will not be a easy process.

As described above, the Study Team suggests improving the current WKP tender process through i) the enhancement of administrative capacity (including tender evaluation), ii) the revision of the tender procedures, iii) improvement of the contents of the tender documents and, iv) appointing a Fund Manager to be a member of the Tender Committee as a mean of risk mitigation measure.

Concluding Remarks of this section

The suggestion which directly affects the current WKP tender process is to introduce Conditional PPA. Besides that, rather than changing the existing process, the Study Team suggests strengthening the existing frameworks through the enhancement of Tender Committees. In addition to that, involvement of the Fund Manager to the Tender Committee to ensure the cost recovery of the Fund is also suggested. The Study Team also suggests strengthening the function of the Geothermal Department at MEMR to provide the standardized tender guidelines to make every process done by any Tender Committees in a transparent and uniformed manner, and to monitor the progress of the tender to avoid undue processing delay. The Geothermal Department is also expected to improve the contents of the tender documents, which are to be well scrutinized, and the articles are to be well clarified by liaising with relevant government agencies, technical experts, PLN and private sector entities including IPPs. In addition to that, the Study Team also expects the Geothermal Department to extend the tender process support to the local government. As these process requires significant coordination, assigning the Geothermal Department to be an apex organization for the geothermal development is very crucial to carry out the WKP tender in efficient and effective way. 5. A Proposal for a Yen Loan to the Fund This chapter discusses the possibility of a project for a Yen Loan to the Fund. The example case 5 A state-owned company that was established in December 2009 in order to guarantee risks for infrastructure PPP projects in Indonesia.



selected for discussion is a Yen Loan project that provides a source of financing that will enable the Fund to carry out Governmental Exploration in eight (8) fields. The activities enabled will include: MT surveying of 12 fields to select eight (8) fields for Exploration, and the Exploration of the eight (8) fields selected at a cost of USD 25 million per field. The MT surveying is to be done prior to the selection of the Exploration fields, and six (6) fields are to be surveyed in one year. The estimated cost of these activities is USD 208 million (USD 200 million for Governmental Exploration of eight (8) fields and USD 8.4 million for MT surveys in 12 fields). Therefore, the viability of a Yen Loan project amounting to USD 210 million is examined in this Chapter (Fig.5.1-1). The assumptions of the simulation are: (a) the Fund performs Exploration in eight (8) fields using a Yen Loan from JICA, (b) private developers will continue geothermal development after Exploration in a certain number of fields (The ratio of the number of fields where private developers continue development to the number of fields where Exploration is performed is referred to as the Success Rate), (c) in order to continue the development, the private companies purchase the results of the Exploration at a price of USD 30 million (with 20% Markup) per field, (d) the Fund is repaid in installments over a period of 15 years and a 10% interest rate is charged, (e) private developers construct geothermal power plants, and (f) the Fund makes repayment to JICA of its Yen Loan in installments over a period of 40 years with a 0.3% rate of interest (Table-5.1-2). Based on these assumptions, cash flow to and from the Fund is simulated. When the Success Rate is 50%, the final balance of the Fund after Yen Loan repayment turns out to be USD 5.9 million (Table-5.2-2). In this case, the Financial Internal Rate of Return (FIRR) of this activity is calculated as 0.98%. The profitability of the Fund business is very low. However, it is important to note that geothermal development is stimulated even though the profitability of the Fund is very low. The annual cash flow and the year-end balance of the Fund are shown in Fig.-5.2-1. Regarding the socio-economic evaluation of the Fund, the Economic Internal Rate of Return (EIRR) is calculated. The expenditure of the Fund is USD 208 million for MT surveying, the first and the second batch of Governmental Exploration and so on. As a result of this expenditure, society obtains geothermal power plants and can save coal that would be burnt and avoid CO2 emissions that would be produced by the alternative coal-fired plant if geothermal was not developed. If diesel power plants are built instead of geothermal ones, the diesel oil saved and CO2 emissions avoided are part of the value of the geothermal plant. These are socio-economic effects of the Fund. Fig.-5.2-5 shows the change in EIRR when the Success Rate varies from 100% to 10%. This figure shows that the EIRR is 12.2% when compared with a coal-fired plant and 13.1% when compared with a diesel plant, even when the Success Rate falls to 30%. These EIRRs are larger than the minimum acceptable 12% criterion and show that



the Fund is significant from the socio-economic point of view. The financial performance of the Fund depends on how many geothermal power plants will ultimately be constructed by private developers in fields where Governmental Exploration has been carried out (the Success Rate). When the Success Rate is 48.8% or more, the final balance of the Fund is positive (in the black). This means that the Fund business can produce a surplus even after carrying out Governmental Exploration and repaying the Yen Loan, although the numbers are in nominal monetary terms. If the Success Rate is less than 48.8%, the final balance will be negative (in the red). This means the Fund will need a bridging loan to make repayments of the Yen Loan when the balance becomes negative. However, even if the Fund ends up in the red, it is important to emphasize the positive benefits of having Governmental Exploration effectively performed at a very small cost. These positive benefits are confirmed by the result that the socio-economic effect (EIRR) of the Fund is larger than 12% when the Success Rate is 30% or more. Therefore, the Fund project is justifiable as a Yen Loan project. 6. Proposals for Further Acceleration of Geothermal Development in Indonesia This Study proposes a plan to attract private developers to participate in geothermal development in Indonesia through mitigation of their resource risks on a short-term basis. This chapter proposes further recommendations to accelerate geothermal development on a middle and long-term basis. In this Study, the Study Team has conducted a series of interviews with private companies that are thought to have an interest in geothermal development in Indonesia. Among the many useful opinions from the interviewees, we frequently heard that they are positively interested in participating in the energy conversion of geothermal steam into electric power, if other developers could supply geothermal steam to them, rather than developing geothermal steam in a Green Field from scratch by themselves. This attitude follows naturally from the fact that the risks of the energy conversion business are small enough for many private companies to take, unlike the large risks of geothermal steam development in a Green Field. In the 1990s, the Philippines had adopted a system where a government-run geothermal development company (PNOC-EDC) developed geothermal steam and private companies undertook the business of converting the geothermal steam into electric power. As a result, geothermal development advanced rapidly in the Philippines in the 1990s. The system of "energy conversion by private companies of the geothermal steam supplied by a state-run development company" has attracted wide attention among private companies and drew a large amount of private capital into the geothermal development market in the Philippines. Nowadays, Kenya is keen to introduce this system to accelerate geothermal development there. There are two advantages to this system: one is in controlling costs and the other is in



controlling risk. On the cost side, government-run companies can mobilize low-cost capital that can lower geothermal energy costs. On the risk side, government-run companies can afford to develop several fields in parallel using their strong financial base and large technological capacity. This development of multiple fields reduces development risks through the portfolio effect. The policy of enabling a government-run developer to undertake development in many fields will also lead to an accumulation of experience, knowledge and technology in the developer. The result will be the operation of a positive “learning effect” in the development of geothermal, and a consequent reduction in development costs can be expected. Therefore, the fostering of a government-run geothermal company to undertake steam development in various fields in Indonesia is highly desirable. It is also preferable to use this government-run geothermal company to perform Governmental Exploration. Currently, an appropriate government-run geothermal development company does not exist in Indonesia. However, many private companies are awaiting geothermal steam supply from a reliable geothermal company. For this purpose, the promotion and establishment of a government-run geothermal company is necessary. It is hoped to establish a government-run geothermal company that performs geothermal steam development across the country. This company can be fostered as a center of geothermal development in Indonesia. It is also hoped to utilize this company to undertake initial Governmental Exploration in the fields where private companies are hesitant to start development.


JICA 1 West JEC and JERI

Chapter 1 Introduction

1.1 Background of the Study

The National Electricity Provision Plan 2010 (RUPTL 2010 - 2019) estimated that the peak power demand of the country would increase at an average annual rate of 9.5% and would reach 59,863 MW in 2019. In order to secure a stable energy supply, the development of power plants to meet these demands is one of the urgent issues confronting the Indonesian power sector. In 2007, the Indonesian government launched a large-scale electricity generation development plan called “Crash Program” to cope with the incessantly growing power demand. The first Crash Program was planned to develop 10,000 MW of power generation capacity mostly by coal-fired thermal power by 2013. The recently announced “Crash Program II” was also aimed at generating an additional 10,000 MW mainly with renewable energy sources. Of the target 10,000 MW of power, this Program includes the development of about 4,000 MW of geothermal power through the use of the abundant reserves of geothermal energy in Indonesia. About 3,700 MW of this total is expected to be developed by Independent Power Producers (IPPs). The geothermal resource potential of Indonesia is estimated at 27,000 MW, which is the world’s largest potential. Though there are high expectations for the future utilization of this resource, the current developed Indonesian geothermal capacity is only about 1,200 MW in total. Accelerated geothermal power development is essential in achieving the goals of Crash Program II. Geothermal energy is attractive also from the viewpoint of climate change mitigation, because the emissions of CO2 from geothermal power plants are much lower those that from coal-fired thermal power plants. There are high expectations for the promotion of geothermal development by IPPs, although some issues, such as the large amount of initial investment required, still remain unsolved. 1.2 Objectives of the Study

Following on JICA’s “Geothermal Master Plan Study“ in 2007 and its “Study on Fiscal and Non-fiscal Incentives to Accelerate Private Sector Geothermal Energy Development in the Republic of Indonesia” in 2009, the objectives of this study are to review and propose improvements in the current framework of geothermal power development by IPPs, to organize a detailed outline of potential needs for foreign financing, and to build consensus among stakeholders to implement the proposed improvements. 1.3 Contents of the Study

The Study consists of the following two main parts: (1) Study of risk mitigation measures for geothermal IPP development and recommendations. (2) Issues related to the current regulatory framework for geothermal development and



suggested options for policy reform.

(1) Study of Risk Mitigation Measures for Geothermal IPP Development and Recommendations

In this area of the Study, the risk mitigation measures are studied. In addition, the possibility of Fund formation is studied. The contents are as follows.

1. Necessity of Risk Mitigation Measures 2. Basic Scheme of Governmental Exploration 3. Basic Scheme of the Fund 4. Socio-economic Effects of the Fund 5. Candidate Fields for Fund Support 6. Fund Management Structure 7. Selection of Contractors for Governmental Exploration 8. Selection Criteria of Sites for Governmental Exploration 9. Required Studies for Governmental Exploration 10. Socio-Environmental Study for Governmental Exploration

(2) Issues Related to the Current Regulatory Framework for Geothermal Development

and Suggested Options for Policy Reform

In this area of the Study, the issues related to the current regulatory framework for geothermal development are studied and then options for policy reform are suggested. Furthermore, current Power Purchase Agreement (PPA) conditions are reviewed and improvements are proposed. The contents are as follows.

1. Legal framework for geothermal development 2. Mining Work Area (WKP; Wilayah Kerja Pertambangan) tender methods (review,

extraction of issues, and suggested reforms) 3. Major issues and suggested reforms

1.4 Implementation Framework of the Study

This Study is carried out as a joint study between the Indonesian side, collecting input from and consulting with Ministry of Energy and Mineral Resources (MEMR), National Development Planning Agency (BAPPENAS) and Ministry of Finance (MOF), and Japan International Cooperation Agency (JICA).



Fig.-1.5-1 Implementation system of the study

MEMR, BAPPENAS, MOF JICA

JICA Study Team

West JEC

JERI

IPPs Financial Institutions Development Institutions Power Companies PLN etc.



Chapter 2 Present Status and Issues of Geothermal Power Development in Indonesia

2.1 Expectations for and Recent Status of Geothermal Development

The Republic of Indonesia is endowed with the world largest geothermal potential, or 40% of the geothermal potential of the entire world. The development of geothermal power has a very promising role to play in coping with the increasing electric power demand by making utmost use of this indigenous energy. So far, geothermal power has been generated at seven (7) fields, namely Kamojang, Darajat, Wayang-Windu, Salak, Dieng, Sibayak, and Lahendong. The generation capacity has reached 1,196 MW as of the end of 2009. Although Indonesia is the third largest producer of geothermal power in the world, the country has not yet made effective use of its huge geothermal energy potential. Starting from the year 2000, the Government of Indonesia has set some political targets to promote geothermal development and has set forth some geothermal-related laws and regulations. In 2002, the Government formulated a “National Energy Program” that specified a target of supplying 5% of the total energy demand from renewable energy. In 2006, the “Presidential Decree on National Energy Development Policy” (PD 05/2006) was issued and superseded the preceding program. This PD specified that geothermal power alone should furnish more than 5 % of the total energy supply by 2025. In parallel, a new Geothermal Law (Law No. 27/2003) was enacted in 2003. This is the first law relating to geothermal energy in Indonesia. The law made the procedures for geothermal development clear and enabled not only the government-owned companies (PERTAMINA and PLN) but also IPPs to participate in geothermal power development. MEMR formulated a Geothermal Road Map in 2004 aimed at realizing geothermal development of 6,000 MW in total by 2020. This was then updated in 2005 to target the development of 9,500 MW by 2025. Meanwhile, the government agencies and state corporations relevant to geothermal development were modified or re-organized. In the MEMR re-organization, the “Directorate General of Mineral, Coal and Geothermal” was established in 2005. PERTAMINA, a special governmental corporation until then, became a state corporation in 2001 and was spun off into four companies (a holding company, and oil, gas and geothermal companies). Pertamina Geothermal Energy (PGE) was established in 2006 as a subsidiary of PERTAMINA. In 2008, PLN also established “PT PLN geothermal” as its own subsidiary to conduct geothermal development. Further geothermal development has been expected with start of the second term of President Yudhoyono’s administration. The Government officially started Crash Program II in January 2010, with MEMR Regulation No. 02/2010, and issued Presidential Decree No. 04/2010. The plan is to develop 9,516 MW of power generation capacity by 2014, with 3,967 MW (41.7 %) to be produced utilizing geothermal energy. As mentioned above, expectations are currently high



for geothermal development in Indonesia. 2.2 Issues in the Promotion of Geothermal Development

There are two main issues in the promotion of geothermal development. One is the risks in geothermal resource development and the other is the issue of the current regulatory framework for geothermal development. (1) Risks in Geothermal Resource Development

Although exploration technology has been developed and the accuracy of exploration has been enhanced, still the development risks and large initial funds required for exploration, especially for the drilling of exploration wells, remain big barriers for Independent Power Producers (IPPs) who are interested in geothermal power development. In order to accelerate participation of IPPs in geothermal power development in Indonesia, it is of great importance to reduce the initial risk of geothermal resource development. The risk mitigation measures and scheme of the Fund are discussed in Chapter 3. (2) Issues in the Current Regulatory Framework for Geothermal Development

The Geothermal Law (27/2003) was established in 2003, and several regulations have been issued in relation to the Geothermal Law since then in order to provide detailed guidelines for the conduct of geothermal business activities. However, it has been pointed out that there are some issues with the current regulatory framework for geothermal development, for example, the issues of the WKP tender process and PPAs. This current regulatory framework is reviewed and improvements are discussed in Chapter 4.



Chapter 3 Recommendations for Risk Mitigation Measures in Geothermal Resource Development

3.1 Necessity of Risk Mitigation Measures

(1) Risks in Geothermal Resource Development

Geothermal energy harnesses steam and hot water stored in reservoirs 1,500 - 3,000 meters underground. Therefore geothermal development has various difficulties similar to exploration of petroleum, natural gas and minerals, in terms of high risks of failure and high initial costs of development. While oil, gas or minerals, if they are successfully explored, are tradable in the global market at market prices, geothermal energy is site-specific energy and is only tradable on site as a form of electricity at a local market price. This means that exploration risks of geothermal energy are deemed as much higher than those of oil, gas or minerals, if the reward of challenging the risks is considered. Although the exploration technology has been developed and the accuracy of exploration has been enhanced, still the development risks and large initial funds required for exploration remain big barriers to geothermal power development. For this reason, the worldwide utilization of geothermal energy has not progressed sufficiently, given the tremendous geothermal energy potential that is available. Indonesia is not an exception in this respect. However, when it is properly developed, geothermal energy turns out to be excellent energy, available in large quantities with little seasonal and/or daily fluctuation. It is also environmentally-friendly and shows good economic performance over the long-term among other desirable characteristics. In order to benefit from these characteristics of geothermal energy it is important to overcome the resource development risks in geothermal projects. The geothermal resource development risks stem from the fact that the technical aspects are different from site to site since geothermal energy is site-specific energy. There are no standard technical designs in geothermal projects, and the technical data can be obtained only after expensive test wells are drilled. Therefore, there is always a possibility that explored fields will turn to be inappropriate for development and have to be abandoned, even after huge exploration costs have been borne. These are the resource development risks in geothermal development process. The factors constituting resource development risks are as follows: (a) Exploration stage

― Cost overrun due to difficulties in construction of access roads and other facilities ― Cost overrun due to difficulties in geological conditions ― Cost overrun due to insufficient Success Rate of exploration wells ― Cost overrun due to depth of the reservoir ― Cost overrun due to rising prices of construction materials



― Cost overrun due to low productivity of the reservoir ― Cost overrun due to quality of geothermal fluid ― Cost overrun due to unexpectedly high concentration of non-condensable gasses ― Cost overrun due to low success ratio of production/reinjection wells, and so on

(b) Operation stage ― Revenue shortfall due to unexpectedly high decrease in available steam ― Revenue shortfall due to unexpected damages to the plant

― Revenue shortfall due to unexpected deterioration of plant performance, and so on. In order to accelerate participation of private Independent Power Producers (IPPs) in geothermal power development in Indonesia, it is of great importance to reduce these geothermal resource development risks. (2) Recognition by Private Companies of Geothermal Resource Risks

1) General Recognition In order to grasp how strongly private companies feel about geothermal resource development risks, the Study Team interviewed eleven (11) international companies interested in investing in geothermal power development in Indonesia. They include major trading companies, geothermal developers, and so on. Their opinions are considered to represent those of international investors. The first question was: Q: In considering investment as geothermal IPPs in Indonesia, are Risk Mitigation Measures

necessary? Option A : If there is good Pricing Policy (FIT), Risk Mitigation Measures are not

necessary. Option B : Pricing Policy and Risk Mitigation Measures are necessary.

(Results) Option A 0 votes Option B 11 votes

(Main Comments)

(a) Since it seems difficult to raise the selling price of geothermal power up to a level that sufficiently takes PLN’s financial situation into consideration, a risk mitigation facility is of great importance.

(b) Raising the selling price of geothermal power will merely make the geothermal business more of a gamble. Since IPPs prefer less risky business, risks should be reduced as much as possible. Therefore, risk mitigation measures are needed. The most desirable geothermal business is to generate power from geothermal steam that is supplied by



other developers (energy conversion business). From this point of view, a risk mitigation facility is necessary.

(c) In order to obtain an approval from the managing directors of a company to start a new overseas IPP business, the risk level should be equivalent to that for a coal-fired IPP business. For this purpose, the steam development role should be undertaken by state-run geothermal developers of Indonesia.

(d) The fact that the geothermal IPP business requires expensive exploration that has a high risk of failure is a deterrent to the management of any private company contemplating involvement.

<Summary>

(a) All interviewees expressed the need for risk mitigation measures. (b) The main reasons for this opinion are: (i) to undertake exploration of geothermal

resources in the areas where there are no test wells is too risky, (ii) therefore, there are large difficulties in persuading management to start such a highly risky business, (iii) a policy of purchasing geothermal energy at a high price seems politically difficult under the current situation, (iv) therefore risk mitigation measures are necessary.

The results show that the potential investors are demanding some risk mitigation measures when they consider investment in geothermal IPPs in Indonesia. 2) Risk Mitigation Measures for Post-tender Fields According to the Indonesian Geothermal Law (No. 27/2003), any private companies are required to obtain a geothermal working permit (IUP) before geothermal exploration. In this regard, several promising geothermal fields have been tendered already, and IUPs have been issued in such fields to the winning bidders. In this report, the fields that have not yet been tendered are called “Pre-tender fields” and the fields that have already been tendered are referred to as “Post-tender fields.” As little time has passed since the Geothermal Law was enacted in Indonesia, no exploration wells have been drilled yet, not only in the Pre-tender fields but also in the Post-tender fields. These geothermal fields that have no exploration wells are called “Green fields” in this report. Green fields in Pre-tender fields and in Post-tender fields both face large resource development risks. The questions in Section (1) are intended for acquiring information about Pre-tender fields. In regard to the necessity of risk mitigation measures, there is a basic question as to whether Post-tender fields require risk mitigation measures or not. This question comes from the fact that the Post-tender fields have already been tendered with the understanding that there would be no such support. When the risk mitigation measures are extended to the Post-tender fields



where the IUP holder has already been decided, the support is for the already-decided private company. However, there is an opposite opinion that such risk mitigation measures are necessary even for the Post-tender fields, in order to facilitate the attainment of the challenging geothermal development target of Indonesia. Therefore there are divergent views of this question. The interview results on this point are as follows: Q. The necessity of risk mitigation measures for the Post-tender fields

The IUP holders had participated in the tender of WKP under the condition that they would develop the fields without governmental risk mitigation measures. Therefore it is unnecessary for the government to extend risk mitigation measures for them. What do you think about this question?

Option A : No need of support Option B : Support is necessary to attain geothermal target

(Results) Option A 7 votes Option B 4 votes

(Main Comments in support of Option A)

(a) If the Government supports Post-tender fields, it is problem because it seems to alter bidding conditions after the fact. The bidders said they would develop the field without any assistance from the Government. They should be responsible for said that commitment. If they cannot develop the fields for some reason, they should return the IUP to the Government. If there is some assistance from the Government, the bid prices should be adjusted.

(b) There are not many developers who have good experience in geothermal development among the IUP holders in the Post-tender fields. Therefore even if the Government extends its support to them, the development is unlikely to proceed smoothly.

(c) If there are some unexpected changes in the preconditions of the tender, the support might be justified. But if there is no change there, justification is difficult.

(Main Comments in support of Option B) (a) The Post-tender fields are very promising fields. The support to these fields is necessary

to achieve the goals of the Crash Program II (b) The decision is up to the Government. If the Government believes that the support to

these fields is necessary to achieve the goals of the Crash Program II, the Government can do it.



<Summary> (a) The majority opinion was that supports to the Post-tender fields are hardly justified, because

if there are going to be such supports, the fields should be re-tendered. Or if such supports are introduced, there is a need to adjust bid prices. This will create a great deal of confusion in the market.

(b) On the other hand, the minority opinion holds that supports to Post-tender fields are necessary to attain the goals of the Crash Program II, because there have been no progresses in the Post-tender fields although the fields are promising fields and IUP holders have been decided.

Moreover, many opinions were presented by the participants in the first stakeholders meeting for this Study in October 2010. Majority opinion regarding this question was that risk mitigation supports to the Post-tender fields are undesirable because such supports are tantamount to the post-bid. The Indonesian government also has a concern of post-bid for the use of the risk-mitigation fund for post-tender fields. Therefore, this study focuses on the use of the risk mitigation measures for pre-tender fields. Considering these opinions, risk mitigation measures for the Post-tender fields are not discussed in this Study. (3) Scheme of Risk Mitigation Measures for Green Fields

There are various kinds of risk mitigation measures that are being implemented or considered in the world. Table-3.1-1 shows some examples. Among risk mitigation measures listed in Table-3.1-1, Governmental Exploration-type (NEDO) is most suitable for Pre-Tender fields because private developers who have a right of exploration are not yet decided in the Pre-Tender fields. Other measures listed in the table are suitable to promote exploration of private developers in the Post-Tender fields. Therefore, the Study Team decided to concentrate on Governmental Exploration-type measures in this Study and to work out a design for a Governmental Exploration scheme in depth. In this respect, the Government of Indonesia has already decided to start Governmental Exploration as a risk mitigation measure for promising geothermal fields (Governmental Exploration-type). The Ministry of Finance has allocated IDR 1.16 trillion for this measure in the budget of fiscal year 2011. Therefore this Study is a timely study to support the government to work out a detail design for a Governmental Exploration in depth. In order to start a Governmental Exploration scheme, it is necessary to establish a special fund that provides necessary finance to the Governmental Exploration activities. The Study Team also considered the design of this special fund (hereinafter called “the Fund"). Along with the



principle of “beneficiaries should pay,” it is appropriate to charge the costs of the Governmental Exploration to the IUP holders of WKP who takes over the geothermal development of the field. By charging the Governmental Exploration costs to the IUP holders, the Fund can raise fund and there is a possibility to make the Fund a “Revolving Fund” (a fund of which balance returns to the original balance again after a certain period of time), if the cost recovery is quick and enough. If the Fund could be a Revolving Fund, the GOI can utilize the Fund money effectively for risk mitigation measures in the next promising fields. (Fig.-3.1-1 and Fig.-3.1-2) A scheme for such Governmental Exploration and Fund was examined in this Study.



Table-3.1-1 Outline of Risk Mitigation Measures for Geothermal Exploration Wells offered by International Institutions Type Agency Outline Budget Objective Start Year Remarks Governmental Exploration

NEDO, Japan Geo Promo Survey

・ Initial survey under government responsibility ・ 3 survey scales: The largest scale (C-survey) of

4 years operation includes some well drilling ・ Outcomes are sold to a developer proposing

continuous development.

A part of ¥1,945 M of geothermal measures (2010 FY)

Within Japan

1980 ・Survey implementation agency is necessary. (Entrusted to a private developer)

Repayment-type Subsidy

NEDO, Japan Exploratory well subsidy

・ Objective: Private developers ・ Subsidy to 50% of exploratory well cost ・ Subsidy amount will be repaid over 5 years after

completion of the geothermal PP.

A part of ¥1,945 M of geothermal measures (2010 FY)

Within Japan

1980 ・ Because of repayment after completion of the geothermal PP, a longer management period with extra administration costs is necessary.

Bonus-type Subsidy

KfW, Germany (RMF)

・ Objective: Government or private developers ・ 40% subsidy for exploratory well drilling (Initial

2 wells of standard size or 5 wells of smaller size)

・ Additional 30% subsidy on success ・ Success criteria: (i) Start of continuous

development by developer itself (Self development) (ii) Geothermal applicability is objectively justified with FS, the FS is made public and the concession is returned to the Government (third party development).

€50 M (Planned)

KfW: €20 M、

EIB: €30 M

East Africa Under study (Planned to start in 2011)

・ Possible to manage in shorter period (quick processing)

Debt Waiver Finance

European Union (GEORiMi)

・ Objective: Government or private developers ・ The bank finances 60% of the developer’s

exploratory well costs and 67% of production well costs.

・ Interest is a commercial interest rate. ・ On failure, GEORiMi repays the finance so

developers’ repayment is forgiven.

€450 M (Planned)

Within Europe

Under study. (The BRGM

will make a proposal at the end of 2010


・ Failure bail-out type ・ Similar system in Germany

Insurance World Bank （ARGeo）（GeoFund）

・ Objective: Government or private developers ・ On failure of exploratory wells, 75% to 25% of

costs are granted. (The percentage decreases according to the order of drilling.)

・ GeoFund has been terminated

ARGeo: $17 M

GeoFund: $10 M

ARGeo for East Africa GeoFund for Europe and Central Asia

ARGeo: 2010 GeoFund: 2006 to 2011


・ Failure bail-out type ・ Necessary to procure a total

drilling cost



COST RECOVERY MECHANISM

Year -7 -6 -5 -4 -3 -2 -1 1 2 3 4 5 …..

Selection of IPP (Tender)

Sales of Survey results

Expenditure for Governmental Repayment of Interest to Fund Repayment of Principal to Fund Exploration from Fund during development period after some period

Development & Construction Operation

GovernmentalSurvey

Dev'tby IPP

Const.by IPP

Geothermal Power Plant Operationby IPP

GOVERNMENT / REVOLVING FUND

・・・・・・・・・

Private IPP Repayment after some period

Fund

Exploration by Gov't

Fig.-3.1-1 The significance of Governmental Exploration as Risk Mitigation Measure

Fig.-3.1-2 Basic scheme of the Fund and the mechanism for recovery of the Governmental Exploration costs

CURRENT

PROPOSAL

PRELIMINARY SURVEY

EXPLORATION

CONSTRUCTION

STEAM SUPPLY

ELECTRICITY GENERATION

GEOTHERMALENERGY

RESOURCES

GEOTHERMALENERGY

UTILIZATION

BYCENTRAL ORREGIONALGOVERNMENT

ELECT.BIZ.PERMIT

TENDERING

BY COMPANY

(LAW NO. 27/2003)

GOV'TALEXPLORATION

TENDERING

GOVERNMENTALSURFACE SURVEY

GOVERNMENTALEXPLORATION

BY COMPANY

TENDER

Green Field

Risk MitigationMeasures is necessary

Effects of Governmental Exploration

RiskReduction

CostsReduction

TimeReduction

Risk Mitigation Measures are necessary

Cost



In considering a basic scheme of Governmental Exploration and the Fund, the following fundamental questions need to be addressed.

Basic Questions in designing Risk Mitigation Measures Governmental Exploration Scheme

- What is the objective of Governmental Exploration? - What kind of exploratory work should be done? - How much does Governmental Exploration cost? - How long a period does Governmental Exploration take? - Who executes Governmental Exploration? - How are the results of Governmental Exploration priced?

Fund Scheme - What is the cost collection scheme? - Is cost collection possible? (Does the Fund revolve?) - How long a period is necessary to collect the costs? - What scale is necessary to initiate the Fund? - Who manages the Fund under what system?

These questions are discussed in the following sections. 3.2 Basic Scheme of Governmental Exploration

(1) The Objective and the Content of Governmental Exploration

1) Possible Options Regarding the objective of Governmental Exploration and how extensive it should be, the following three options are possible:

(a) The objective is to confirm the existence of steam and one (1) exploratory well is enough as a minimum requirement.

(b) The objective is to confirm the existence of steam and three (3) exploratory wells are necessary to obtain at least one successful well.

(c) The objective is to evaluate the capacity of the reservoir and five (5) exploratory wells are necessary for this purpose.

Regarding this question, the results of the interviews are as follows: Q. What scale of Governmental Exploration is necessary?

Option A : One (1) exploratory well Option B : Three (3) exploratory wells (1-2 successful wells) Option C : Five (5) exploratory wells (3 successful wells)



(Results) Option A 0 votes Option B 3 votes (note: one vote is either Option B or Option C) Option C 5 votes Other Option or Failure to Respond 3 votes

(Main Comments in support of Option C)

(a) Exploration up to estimation of reservoir capacity is highly appreciated. If there is such a full exploration, the project would be bankable. Otherwise the exploration risks are too large for IPPs.

(b) It would be better for Governmental Exploration to drill as many test wells as possible. Otherwise, it is too risky to start geothermal development activities in Green field. .

(Main Comments in support of Option B)

(a) Basically, we agree with the opinion that as many test wells as possible would be better in Governmental Exploration. However, extensive exploration will weaken the role of private developers. It is true that five (5) exploratory wells are helpful and may make the project bankable, but it would be excessive if we take governmental costs into consideration.

(Other Option and Comments)

(a) We wish that the government would establish a scheme to support the private sector more directly. We need a support for pre-feasibility study in which private companies drill exploration wells. We would like to see such a support scheme instead. The reason is that Governmental Exploration activities are likely to take a long time. As for the scale of the Governmental Exploration, five (5) well drillings seems appropriate because this number of wells will reduce resource risks to a certain level. As for the support scheme, either an insurance scheme or a drilling-cost subsidy scheme such as that of KfW might be good.

<Summary>

(a) The majority opinion was that the government should conduct exploration with five (5) exploratory wells that enable an estimation of geothermal reservoir capacity.

(b) There is a minority opinion that three (3) exploration wells are appropriate when the governmental costs are considered.

(c) There is also another opinion that requests direct support to the private sector rather than Governmental Exploration.

2) Proposal of the Study Team Although many of the interviewees desire five (5) exploratory wells, the Study Team is of the opinion that the number of wells drilled in Governmental Exploration should be around three



(3). This proposal comes because it is better to separate Governmental Exploration and the investor’s activities, as the former is intended to confirm the existence of steam and the latter is necessary to evaluate the reservoir capacity. That is to say that the objective of Governmental Exploration is to provide private investors with information regarding whether the field deserves further exploration by them. The second reason is that the drilling of more exploratory wells makes greater budget demands on the government. Less drilling is desirable to extend Governmental Exploration to a greater number of Green fields. Therefore, the Study Team proposes the following:

Proposal-1 The objective and the content of Governmental Exploration Objective: The objective of Governmental Exploration is to provide private investors with

information regarding whether the field deserves further exploration by them. For this purpose, Exploration is to be done to confirm the existence of geothermal steam, including its temperature and properties.

Content: Three (3) standard size exploratory wells including necessary ground survey and other work.

(2) Cost Estimation and the Schedule of Governmental Exploration

1) Cost Estimation When Governmental Exploration includes three (3) exploratory wells, the costs are estimated to be around USD 25 million (Table-3.2-1). 2) Schedule Estimation The schedule assumption is as follows. (Table-3.2-2)

Governmental Exploration: 2.5 years (Selection of Fields and Selection of Executing Agent: 0.5 years) (Actual work of Governmental Exploration: 2.0 years)

Tender Process: 0.5 years Feasibility Study by IPP: 1.3-0.8 year Finance by IPP: 0.4-0.2 years Construction by IPP: 2.3-2.0 years Total: 7.0-6.0 years

(From the start of Governmental Exploration to power plant operation (55 MW - 20 MW))



Item Estimated Costs (m$)

1. Reconnaissance 0.5Data Review

2. Geoscientific Studies 1.3Geochemical & Geophysical Detailed GeologySelection of Drilling sites

3. Environmental Study 0.24. Public Consensus 0.25. Drillings

Preparation Works (road, water) 1.0Drilling 1 6.0Drilling 2 6.0Drilling 3 6.0Well Test 0.5

6. Evaluation and Compiling Report 0.57. Field Office 0.5

Sub Total 22.7Contingency 2.3

Grand Total 25.0

(10%)

Table-3.2-1 Cost estimation of Governmental Exploration Therefore, the Study Team proposes the following:

Proposal-2 The cost estimation for and the period of Governmental Exploration Cost estimation: Approximately USD 25 million Period: Three years including preparation period and tender period for IUP.



Governmental Exploration Schedule

Year

Development Stage

Preparation by FUNDSelection of Field by FUNDSelection of Executing Company

Preparation by Executing Company Reconnaissance

Data ReviewGeoscientific Studies

Geochemical & Geophysical Detailed GeologySelection of Drilling sites

Environmental StudyPublic ConsensusDrillings

Preparation Works (road, water) Drilling 1Drilling 2Drilling 3Well Test

Evaluation and Compiling Report

Tender ProcessPreparationAnnouncementBiddingBid EvaluationAwardIssue of IUPNegotiation of PPA Signing of PPA

Development by IUP HolderEvaluation of Exploratory ReportAdditional surveyDrilling site selectionPreparation for drillingAppraisal Drilling 1Appraisal Drilling 2Appraisal Drilling 3Development Plan FinancingFinance Close

Construction by IUP HolderDrilling of Production WellsConstruction Work (Steam Field)Construction Work (Power Plant)Commissioning

Operation by IUP HolderOperation

Governmental Exploration Drilling Tendering Development Construction Preparation

Operation

Year-1 Year-7Year-6Year-5Year-4Year-3Year-2 Year-8

Table-3.2-2 Schedule estimation for Governmental Exploration (in the case of a 55 MW-class geothermal power plant)



(3) Executing Agent of Governmental Exploration

1) Possible Options There are three possible options regarding who executes Governmental Exploration:

(a) A governmental Agency (b) A private company that is allowed to continue geothermal development in the area

(Allowed to participate in Tender for IUP afterwards) (c) A private company that is not allowed to continue geothermal development in the area

(Not allowed to participate in Tender for IUP afterwards) Regarding this question, the results of the interviews are as follows: Q: Who should execute Governmental Exploration?

Option A： Governmental agency (for ex. MEMR-GA) Fair, but insufficient technical capacity?

Option B： Private company that desires to continue development Effective, but unfair? Option C： Neutral private company that is not allowed to continue development

Fair, but effective? (Results) Option A 3 votes

Option B 4 votes Option C 2 votes Other Option, or Failure to Respond 2 votes


(a) The ideal Executing Agent might be a governmental agency, but this would be difficult if the limitations in manpower or the technical level of the agency are considered. On the other hand, if a private company that wishes to continue development in the area is assigned to the exploratory work, it will have incentives for efficient and effective exploration. Such speedy development is necessary to attain the target of the Crash Program II. A concern about unfairness in the tender process can be resolved if the selection process for the assignment is fair and transparent, and all data collected from the survey is made publicly available.

(b) If a private company that wishes to continue the development is allowed to carry out the exploration, it will do the task in an effective and efficient manner.

(c) It is feared that government agencies are slow in development. A private company that wishes to continue development will be proactive. There may be a problem that exploration results obtained by another party are difficult to trust.

(d) Since a governmental agency is unlikely to have a strong commitment to construct geothermal power plants, there is a danger that the agency will do the exploration just



for the sake of exploration and not for the sake of development. (Main Comments in support of Option A)

(a) Since exploration of initial stage is a kind of inventory study, such work should be done by a governmental agency.

(b) This questionnaire does not incorporate a philosophy of fostering a Center of Excellence (COE) for geothermal power in Indonesia. If we intend to promote geothermal development in Indonesia, we need to foster an Indonesian geothermal COE through as great an accumulation of information and experience as possible, and to avoid dependence on overseas IPPs. The Philippines National Oil Company was fostered by this method, and Philippine geothermal development was in turn promoted by PNOC. Essentially, Pertamina is in a similar position and should take such a duty, but it is devoted to development in its own working areas as one of the developers.

(c) Since the number of developers is small, Option B and Option C seem unrealistic. Option A is fair from this viewpoint.


(a) It is unfair to allow a private company that was assigned to the exploration to participate in the tender process because the company has more information than others. Such a private company should be excluded from the tender process and should support the tender evaluation instead.

<Summary>

(a) The majority answer was option B that assigns exploration to a private company that wishes to continue development in the area. The main reason for supporting this option was that this will enable speedy and efficient development.

(b) However, there was also nearly the same amount of support for the opposing options, Option A and Option C. Supporters of Option A say the executing agency should fundamentally be the government, and supporters of Option C say it is unfair to allow the executing agency to participate in the tender process. The total support for these two options is greater than for Option B.

(c) There is a notable suggestion that a strategic approach to fostering a core institution, by accumulation of information and technology in the institution, is necessary to promote geothermal development.

2) Proposal of the Study Team The Study Team considers that the Executing Agent of Governmental Exploration should be a governmental agency such as the Geological Agency or MEMR. In consideration of the actual situation of Indonesia, however, the Study Team evaluates each option as in Table-3.2-3.



As the table shows, the Study Team proposes that a private company is appropriate as the Executing Agent of Governmental Exploration. It is also appropriate for the company to be allowed to participate in tender for IUP and to continue geothermal development in the same field. The justification of this proposal is that (i) a private company is most appropriate because it already has enough technical capacity for the exploration, and (ii) such a company has an eagerness to carry out effective and enthusiastic exploration if it has a desire to continue the development. By appointing such a company, the moral hazard may be avoided that governmental work is often haunted by. Regarding concerns as to whether this option is fair in the tender for IUP, the Study Team considers that this concern would be addressed (i) if the selection process for the Executing Agent is fair and transparent and (ii) if the exploration report is fully and widely made available to the public prior to the tender. The Study Team is aware of the argument against this proposal that the private company should be precluded from the tender of IUP in the field. However, the Study Team opposes this opinion because it may be impossible to preclude the executing company. Even if the company is precluded, detecting whether the company has any hidden connections with the executing company and participates in the tender on behalf of the executing company is extremely difficult. Therefore such a restriction has too many possible loopholes to work.

Proposal-3 Executing Agent of Governmental Exploration Executing Agent: Private companies under contract of government’s assignment. They are allowed to participate in tender of IUP in the field afterwards.



Table-3.2-3 Assessment on Executing Agent of Governmental Exploration

Views Governmental Agency Private Company

(Tender participation is allowed) Private Company

(Tender participation is NOT allowed)

Technical Capacity

Low

Limitation in manpower and technical capacity compared with international developers

High

Excellent technical capacity. A highly motivated exploration can be expected

Middle

Excellent technical capacity. An effective exploration can be expected.

Quality of Exploration

Low

Necessity of advice from international technical experts

High

Necessity of third-party experts’ review and advice to satisfy governmental requirements

High

Necessity of third-party experts’ review and advise to satisfy governmental requirements

Relationship with Host Community

Middle

Creating short-term relations necessary for exploration period alone

High

Creating long-term relations necessary not only for exploration period but also for operation period

Middle

Creating short-term relations necessary for exploration period alone

Fairness in IUP Tender

High

Fair competition

Low

Advantage of the Executing Agent in IUP Tender

Low

No guarantee of the fairness. A secretly related company’s participation cannot be excluded.

Selection Process

High

High transparency

Middle

Possibility of low transparency

Middle

Possibility of low transparency

Legality

Middle

Allowed by the Geothermal Law

Middle

Allowed by the Geothermal Law (The exploration is done on behalf of the government)

Middle

Allowed by the Geothermal Law (The exploration is done on behalf of the government)



(4) How to Set a Price for the Governmental Exploration Results (Bid System of IUP)

1) Possible Options How to decide the price of the Governmental Exploration results relates to the bidding system in the tender of IUP for the field. The following three methods are considered relevant as methods of deciding the price of Government Exploration results. The interview results for this issue are as follows.

Q: How should the tender of IUP be done and how should the price of the Governmental Exploration results be decided?

Option A： The government sets the price of the Governmental Exploration results in advance, and bidders bid on the selling price of geothermal power.

Option B： The government sets the selling price of geothermal power, and bidders bid on the price of the Governmental Exploration results.

Option C： Mixture of A and B (Results) Option A 7 votes

Option B 1 votes Option C 0 votes

(Main comments in support of Option A)

(a) In Indonesia many people are familiar with a bidding system focused on the energy selling price. Therefore Option A is better than Option B. In this Option A bidding system, the risks of steam development are the same for all the bidders. The main focus of competition is on constructing a low-cost power plant. This is the traditional competition system and many bidders are used to this system. In the tender of coal-fired power plants, the price of coal is given and the selling price of energy is negotiated through bidding. Option A is the same system as for coal-fired plant bidding.

(b) All Options are substantially the same. If the purchase price of the Governmental Exploration results is high, then the selling price of geothermal energy will accordingly also be high. If we see this question from the viewpoint of geothermal development, a bidding system focused on the selling price is better, because it will result in lower geothermal selling prices.

(c) In order to implement Option B, the Government needs to decide the geothermal selling price prior to the tender.

(d) In order to prevent too much investment, it would be better if the investment amount is predetermined in advance.


(a) Since the question is how to decide the price of Governmental Exploration results, Option B is natural.



(Other comments)

(a) We would like to propose a new scheme that is not included in this questionnaire. It is a scheme in which the Government acquires stock in the investing company in exchange for its exploration results. There is a possibility that the Government could sell the stock at a good price at anytime. If the price of the Governmental Exploration results is decided through bidding, the price would not be high enough to compensate for the costs of failed fields. But this scheme may achieve good prices. The value of the stocks would be highest at the onset of commercial operation of the power plant. With careful timing the Government should be able to sell the stock and obtain a good return. Or the Government can hold the stock to obtain dividends for a longer period.

<Summary>

(a) The majority supports Option A. That is to say that many people support the current tender system in which the selling price of geothermal power is bid given a pre-fixed purchase price for exploration results, because they are familiar with bidding on the selling price of power.

(b) Many interviewees pointed out that the two options (A & B) are substantially the same scheme. If the purchase price of exploration results is high, the selling price of power becomes high as well. If the purchase price of the results is low, the selling price of power drops accordingly. Since either choice is possible, the preferable choice is the option that maintains energy prices at a low level.

(c) There was a notable proposal in which the government provides the developer with the exploratory results in kind in return for equity and the government sells the equity when the power plant begins operation. The intention of this scheme is to sell the equity at better price than could be realized by selling the results at the time of tender. There is a possibility for the government to offset the costs of failed exploration fields by this scheme. The government may hold the equity for a longer time, instead of selling it, and may obtain dividends from the equity.

2) Proposal of the Study Team Option A is a current bid system where the government sets the price of the Governmental Exploration results in advance and bidders bid on the selling price of geothermal power (Left of Fig. 3.2-1). The pros and cons of this Option are shown in Table 3.2-4 and Fig.3.2-2. Option B is a newly proposed bid system where the government sets the selling price of geothermal power and bidders bid on the price of the Governmental Exploration results (Right of Fig. 3.2-1). The pros and cons of this Option are shown in Table 3.2-5 and Fig.3.2-3.



Bid System of Energy Selling Price Bid System of Purchasing Exploration Results Price(Option A: Current bid system) (Option B: New bid system)

(1) GOI decides the selling price ofGovernmental Exploration.

(2) Bidders bid the selling price (cents/kWh)of geothermal power under the condition of

purchasing the Exploration results.

(3) The lowest bidder is awarded.

(1) Based on the Exploration results, GOI &PLN decide the selling price of geothermal

power.

(2) Bidders bid the purchasing price (m$) ofthe Governmental Exploration results underthe condition of the above-mentioned selling

price of geothermal power.

(3) The highest bidder is awarded.

(4) Issue of IUP

(4) Issue of IUP

Fig.-3.2-1 Two types of Bid System

Table-3.2-4 Pros and cons of a Bid system of energy selling price (Option A) Bid System of Energy Selling Price Pros - It is the same procedure as the current biding system. Cons - To set different prices on the results of Governmental Exploration

is difficult, because to evaluate market values of each result is difficult. As a result, a uniform invariant price will be set on all the Governmental Exploration results.

(It is desirable to set different prices according to the extent of success in Exploration so that the prices reflect market value of exploration results. But the results differ from field to field, and it is very difficult to evaluate exactly the value of the results. Therefore there is no alternative to setting a uniform invariant price such as a price reflecting the cost of exploration (USD 25 million). )

- When a uniform invariant price is set, there may be fields for which the data are sold and fields for which they are not sold. As a result, the Cost Recovery Ratio will be only five kinds of discrete numbers; 100%, 75%, 50%, 25% or 0% when four fields are tendered.



Field A Field B Field C Field D

Survey Totalresult Excellent Good Fair Failed

Cost 25 m$ 25 m$ 25 m$ 25 m$ 100 m$(Example)Sales 50 m$ 30 m$ 20 m$ - 100 m$

Cost Recovery Ratio 100%

Field A Field B Field C Field D

Survey Totalresult Excellent Good Fair Failed

Cost 25 m$ 25 m$ 25 m$ 25 m$ 100 m$(Example)Price 25 m$ 25 m$ 25 m$ 25 m$Result Sold Sold Unsold Unsold 50 m$

Cost Recovery Ratio 50%

Fig.-3.2-2 Cost recovery expectation in a Bid system of energy selling price (Option A) Table-3.2-5 Pros and cons of a Bid system of purchasing exploration results price (Option B)

Bid System of Purchasing Exploration Results Price Pros - There is no need to set a price on the Governmental Exploration

results. - The Cost Recovery Ratio could be higher than that in the Bid

system of energy selling price. (The ratio could take on a greater variety of values than under the bid system of Energy Selling Price)

Cons - It involves the difficult task of deciding the selling price of energy based on the results of the Governmental Exploration.

- It is a different system from the current bidding system.

Fig.-3.2-3 Cost recovery expectation in a Bid system of purchasing exploration results price

(Option B)



Considering the evaluation of the two bidding systems, the Study Team considers that the “Bid system of purchasing exploration results price (Option B)” is better because this system offers the possibility of achieving higher cost recovery ratios than the “Bid system of energy selling price (Option A)”, although there will be some difficulties in deciding the selling price of geothermal energy. However, this system would be a big change from the current bid system. Since the Ministry Decree (MR No. 02/2011) that directs PT. PLN to conclude PPAs based on bided energy selling price was just issued in February 2011, a big change from the current bid system would cause great confusion. Therefore, the Study Team proposes that the “Bid system of energy selling price (Option A)” be used for the time being and that the “Bid system of purchasing exploration results price (Option B)” be introduced when the government introduces a new system such as a Feed-in-Tariff system for geothermal energy in the future.

Proposal-4 How to set a price on the Governmental Exploration results and how to perform Bid system of IUP

The current “Bid system of energy selling price (Option A)” is to be used for the time being in tender process of IUP. In this current bid system, the price of the Governmental Exploration results should be fixed in advance. If it is difficult to set different market prices according to the extent of success in explorations, the same price could be set on exploration results based on the costs of explorations. When the government introduces a new system such as a Feed-in-Tariff system in the future, it is recommended that the “Bid system of purchasing exploration results price (Option B)” be introduced instead of the current “Bidding system of the energy selling price (Option A)”.

3.3 Basic Scheme of the Fund

(1) The Cost Recovery Scheme for Governmental Exploration

1) Possible Options There are two major kinds of scheme through which the Fund can recover the costs of Governmental Exploration: (i) a Debt-type cost recovery scheme and (ii) an Equity-type cost recovery scheme. These two schemes can be subdivided into the several distinct schemes shown in Table3.3-1. In this Study the following types are discussed with cash flow simulation:

(a) Debt-type schemes (i) Long-term repayment (subordinated loan style) scheme (15-year repayment)



(hereinafter referred to as “Debt (15 yrs)”) (ii) Upfront repayment scheme (hereinafter referred to as “Debt (Upfront)”)

(b) Equity-type schemes (iii) Ordinary stock scheme (hereinafter referred to as “Equity (Div)”) (iv) Strategic sales of stock scheme (hereinafter referred to as “Debt (Sales)”) 2) Characteristics of Debt-type Schemes Debt-type scheme is a cost recovery scheme in which the Fund recovers the costs of Governmental Exploration on the installment plan in a certain period. The following characteristics can be noted for this scheme:

(a) Low volatility The debt repayment is a fixed obligation for Special Purpose Companies (SPCs) regardless of the success of the project; therefore, the volatility of returns to the Fund is low.

(b) Freedom to design debt structure The debt can be structured in various ways in terms of (i) repayment schedule, (ii) priority between creditors, and (iii) the Fund’s right of recourse to the SPC’s parent companies, etc, assuming the project’s construction cost is financed by non (or limited)-recourse finance basis . <Repayment schedule> As for repayment schedule, there are two options; long-term repayment and short-term repayment. In a long-term repayment scheme, the cost recovery for the Fund will take a long time and the revolvability of the Fund becomes low. In addition, the Fund will bear SPC’s default risks during repayment period. A 15-year repayment case (Debt (15 yrs)) is discussed in this report as an example of long-term repayment. In a short-term repayment scheme, substantial flow of cash comes back to the Fund upon financial closure or upon start of the operation. This rapid cash flow makes it easier for the Fund to revolve. As an example of short-term repayment, repayment after the financial close of the SPC’s main loan6

< Attractive debt structure for the investors> is discussed in this report (Debt (Upfront)).

The repayment to the Fund will be made by SPC in parallel with the main loan from the lenders. Therefore, various kinds of coordination with the main loan will be required. The coordination includes specifying the priority of creditors’ rights regarding their loans. If the debt from the Fund is subordinated to the main loan from the lenders, it will work as a mitigation against SPC’s default risk for the main lenders (i.e. the repayment to the main lenders will be made before the repayment to the Fund; In case that there is no sufficient cash to repay to the main lenders and the Fund, the main lenders will have higher probability for repayment compared with the Fund.) and it will make it easier for them to

6 The loan which covers most of the SPC’s initial project costs by non-recourse project finance from financial institutions is called the “main loan” in this report.



offer financing; this will be of great help for investors. In addition to such subordination, another attractive structure for investors is the accrual repayment. If this accrual repayment is stipulated in a loan agreement, the Fund will bear some resource depletion risk. One concern about this structure is that it may negatively affect the behavior of SPCs such as encouraging excessive repayment delay. In order to discourage such behavior, step-up interest rates on payments to the Fund can be applied to the accrued amount. <The Fund’s right of recourse to the SPC’s parent companies> Recourse of debt (repayment) from the Fund may be obligated to various parties. For example, the debt can be designed with full recourse to the SPC’s parent companies. This means that if the SPC fails to fulfill its financial obligation to the Fund, the SPC’s parent companies must make repayment in place of the SPC. This design looks attractive for the Fund, since it decreases the probability of repayment failure. However, this is not attractive for IPPs at all.

3) Characteristics of Equity-type Schemes Equity-type scheme is a cost recovery scheme in which the Fund acquires stock of SPC in exchange for the amount of investment by the Fund (the costs of Governmental Exploration and some markup) and the Fund recovers its costs in dividends from the SPC after the SPC starts operation of the power plant. The following characteristics can be noted for this scheme: (a) Possibility of high volatility

It is possible for the value of this equity to fluctuate, and this possible fluctuation means that returns to the Fund may also fluctuate. Furthermore, depending on the performance of a project, the amount of dividends paid to the Fund might fluctuate and this possibility means that the returns to the Fund might fluctuate. These fluctuations could be in either direction, enhancing cost recovery or inhibiting it, and the extent of these fluctuations is uncertain.

(b) Favorable effects to receive non-recourse project finance Unlike Debt-type scheme, an SPC will not have a fixed repayment obligation to the Fund in this scheme. This means that the negative impact on SPC’s cash flow is likely to be less than it would be for Debt-type scheme; therefore Equity-type scheme will be a relatively favorable scheme to obtain non-recourse project finance for SPCs compared with Debt-type one.

(c) Concern of intervention into management of SPC When the stock held by the Fund increases, there is a possibility that the management of the SPC or lenders might feel a concern on potential governmental intervention in the management of the project. When lenders assess the ownership of the SPC’s stock by the Fund negatively, some additional conditions might be required by the lenders depending on the lenders’ assessment toward the ownership by the government. For example, (i) the portion of shares held by the Fund may not include voting rights, or (ii) the lenders may request to stipulate the criteria for the potential buyer of the Fund’s share. Such



requirements are more likely to take place when the Fund obtains a substantial portion of SPC’s shares.

(d) Freedom of stock disposal The Fund has a choice of either it holds the stock to obtain the dividends for a long term period or it sells the stock to obtain capital gain at any time. It is the discretion of the Fund how it deals with stock to recover the costs of Governmental Exploration. In case that the Fund holds stock for a long term, the cost recovery for the Fund will take a long time and the revolvability of the Fund becomes low. Since the dividends will depend on the level of success of a project, dividends from the SPC may fluctuate and this will affect the returns to the Fund. In this report, an example case of holding stock in a long-term (30 years) is discussed as Equity (Div). On the contrary, in case that the Fund holds stock in a short time period and sells it strategically at the start of power plant operation to obtain capital gain is discussed as Equity (Sales). In sales case, theoretically, the Fund can sell stock at a price that reflects the net present value of the total dividend revenue during operation period of the project. In a strategically sales case, substantial flow of cash comes back to the Fund at a sale and it makes the Fund easier to revolve. However, the value of the stock has possibility to differ from what the Fund expects, based on project valuation by the buyers of the shares. (i.e. the return to the Fund is uncertain until the equity is actually sold.) Also it is important to take note that there is a risk that no buyers will appear even though the Fund intends to sell its stock.

Detail of the characteristics of each cost recovery scheme is described in ANNEX-I.

Proposal-5 Cost Recovery Scheme There are two types of Cost Recovery Scheme. (a) Debt-type scheme:

The Fund recovers the costs of Governmental Exploration on the installment plan. During the repayment period, interest is charged.

(b) Equity-type scheme: The Fund acquires stock in the Special Purpose Company which continues geothermal power development in exchange for the costs of the Government Exploration results. The Fund recovers the costs in dividends from the SPC’s profits during its operation period or recovers the costs by strategic sales of the stocks at any time, such as upon inception of operations at the power plant, for example.



Table-3.3-1 The Cost Recovery Schemes for Governmental Exploration

Type Basic Mechanism Scheme Characteristics Reference in this report

Debt-type The Fund recovers the costs of Governmental Exploration on the installment plan. During the repayment period, interest is charged.

(D-1) Long-term repayment (Subordinated loan style)

The Repayment is done over a long-term period. The repayment is subordinated to the main loans. The interest is set higher than that of the main loans.

Referred as “Debt (15yrs)”

(D-2) Long-term repayment (Preferential loan style)

The Repayment is done over a long-term period. The repayment is prioritized over the main loans. The interest is set lower than that of the main loans.

(D-3) Upfront repayment The repayment is done in a lump sum at the first disbursement of the main loans. The amount of the repayment is consolidated into the main loans. The Fund can recover its costs in a short time.

Referred as “Debt (Upfront)”

Equity-type

The Fund acquires the stock of the Special Purpose Company which continues geothermal power development in exchange for the costs of the Governmental Exploration results. The Fund recovers the costs in dividends from the SPC’s profits during its operation period. Or the Fund recovers the costs by strategic sales of the stocks.

(E-1) Preferential stocks The Fund receives dividends prior to other stockholders. The yield is fixed and is likely to be set near the interest rate of a long-term loan.

(E-2) Ordinary stocks The Fund receives dividends on the same basis as other stockholders. The yield is likely to be higher than the interest rate of a long-term loan. However, there is a large risk of fluctuating dividends depending on the profitability of the SPC’s business performance.

Referred as “Equity (Div)”

(E-3) Strategic sales In the case of (E-1) and (E-2), the Fund sells the stocks strategically at a point in time. The Fund can recover its costs in a short time.

Referred as “Equity (Sales)”



(2) Quantitative Simulation of the Cash Flow to the Fund

1) Conditions of the Simulation In this section, quantitative cash flow is simulated to evaluate each sub-type of Cost Recovery Scheme. The simulation is done by using an economic evaluation simulator for geothermal power generation made by the Study Team, and the main assumptions of the simulation are as shown in Table-3.3-2, Table-3.3-3, Table-3.3-4 and Fig.3.3-1.

Table-3.3-2 Specifications of a model geothermal IPP project Items Specification Remarks

Capacity 55 MW 1 unit Construction costs USD 183 million (*) USD 192 million (**) Construction costs per kW 3,320 USD/kW (*) 3,480 USD/kW (**) Construction period 6 years Depth of production wells 2,000 meters deep Production well average output 8 MW/well Generation efficiency 7.0 t/h/MW Operation period 30 years Economic evaluation period: 30 years Steam output rate of decline 3% annual (Note) IDC: Interest during construction, (*): without IDC, (**) with IDC

Table-3.3-3 Model development process Stage Content Well-Drilling Years Costs (*)

Resource Confirmation

To confirm existence of steam by surface survey and exploration drillings.

3 wells (1 successful well)

2 yrs USD 25 million (@6 m$/well)

Reservoir Evaluation

To evaluate the reservoir capacity by drilling additional exploration wells. Feasibility Study report is compiled.

3 wells (2 successful wells)

2 yrs USD 25 million

Construction To drill production/reinjection wells, and construct steam pipelines, power plant etc. with loans.

7 production wells (5 successful wells)

2 yrs Steam Field USD 62 million Power Plant USD 71 million

Total 15wells (9 successful wells)

6 yrs USD 183 million

Operation Power plant operates for 30 years.

6 make-up wells

30 yrs O&M Make-up wells

(Note) (*): without IDC



Lead Time Development Stage Activity Finance

2 Years

2 Years

2 Years

30 Years

Surface Survey Stage

Resource Confirmation Stage

Construction Stage

Development Stage(Reservoir Evaluation Stage)

Operation Stage

Development Process of 55 MW Model Case

Surface survey (Geology,Geochemical, Geophysics MT, etc)

To Find steam (Approximately 10%)Drilling 3 wells →　1 well success

To confirm 40% of steam,Drilling 3 wells →　2 well success

To obtain 100% steam,Drilling 7 wells →　5 well success

Equity 100% Debt 0%

Equity 30% Debt 70%

Equity 100% Debt 0%

Equity 100% Debt 0%

Operation & Maintenance Expenditure

Table-3.3-4 Finance procument conditions Stages Equity Loans Resource Confirmation 100% ― Reservoir Evaluation 100% ― Construction 30% 70%

Interest rate 6.5% (*2) Repayment period (*1) 15 yrs Grace period 3 yrs

(Note) (*1) includes Grace Period (*2) On the assumption that IPP partially utilizes officially supported export

credit, of which current interest rate was 6.43% as of October, 2008. This report used the same interest rate considering that this report might be compared with the former JICA report (JICA 2009).

Fig.-3.3-1 Development process in a model geothermal IPP project



Debt (15yrs)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

-4 -2 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

Year

Cas

h flo

w (m

$)

2) Cash Flow in the Debt-type Long-term Repayment Scheme (Debt (15yrs)) The capital flow of the debt-type long-term repayment scheme is simulated for the example of a 15-year repayment (Debt (15yrs)). The assumptions of the simulation are as shown in Table-3.3-5. The simulation results are shown in Fig.-3.3-2, Fig.-3.3-3, Fig.-3.3-4, and Table-3.3-6.

Table-3.3-5 Assumptions of Debt (15yrs) Simulation Items Specification Type Debt type Plant capacity 55 MW Selling price of energy USD 9.7 ¢/kWh Purchase price of Governmental Exploration results

USD 25 million

Purchase year -4 years (4 years before operation) Repayment period (Grace period)

1 to 15 years after operation (4 years until operation)

Repayment method Equal payment of principal Interest rate during repayment 10.0% (Senior interest rate +3.5%) Discount rate for NPV 6.0% (referring to the US dollar base 10

year Indonesian Government Bond7

Base year for NPV )

Price of -4th year (purchase year) (Note) NPV: Net Present Value

Fig.-3.3-2 Cash flow of each year in Debt (15yrs) (nominal value)

7 The yield of US dollar base 10 year Indonesian Government Bond issued in January 2010 is 5.875%.



Debt (15yrs)

0

25

50

75

100

-4 -3 -2 -1 1 2 3 4 5 6 7 8 910 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30Year

Cas

h Fl

ow (c

umul

ativ

e) (m

$)

Debt (15yrs)

0

5

10

15

20

25

30

35

40

-4 -2 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

YearC

ash

Flow

NPV

(cum

ulat

ive)

(m$)

Fig.-3.3-3 Cumulative cash flow of Debt (15yrs) Fig.3.3-4 Cumulative cash flow of Debt (15yrs) (nominal value) (net present value)

Fig.-3.3-3 Cumulative cash flow of Debt (15yrs) (nominal value) Fig.-3.3-4 Cumulative cash flow of Debt (15yrs) (net present value)

Table-3.3-6 Results of Debt (15yrs) simulation Items Simulation result Nominal Value

Total repayment in 15 years USD 52.5 million Total repayment in 30years USD 52.5 million

Net Present Value Price of -4th year (the 4th year prior to operation)

Total repayment in 15 years USD 33.8 million Total repayment in 30 years USD 33.8 million

In the case of Debt (15yrs), the Fund receives interest revenue during the construction period until power plant operation, and after that, it receives the revenue of principle repayments and interest during 15 years. The revenue decreases gradually as the loan balance decreases. The total amount of the repayment is USD 52.5 million in nominal value terms and is USD 33.8 million in the net present value at -4th year before operation. (The net present value in terms of the -4th year price is converted from the nominal value using a discount rate of 6.0%. Hereinafter, the same conversion is used to calculate the net present value.) 3) Cash Flow in Debt-type Upfront Repayment Scheme (Debt (Upfront)) The capital flow of the Debt-type Upfront Repayment scheme is simulated (Debt (Upfront)).



Debt (Upfront)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

-4 -2 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

Year

Cas

h flo

w (m

$)

The assumptions of the simulation are as shown in Table-3.3-7. The simulation results are shown in Fig.-3.3-5, Fig.-3.3-6, Fig.-3.3-7, and Table-3.3-8.

Table-3.3-7 Assumptions of Debt (Upfront) Simulation Items Specification Type Debt type Plant capacity 55 MW Selling price of energy USD 9.7 ¢/kWh Purchase price of Governmental Exploration results

USD 25 million

Purchase year -4 years (4 years before operation) Repayment period (Grace period)

Upfront repayment at the finance close (2 years until finance close)

Repayment method Lump sum Interest rate during repayment 10.0% (Senior interest rate +3.5%) Discount rate for NPV 6.0% (referring to the Indonesian 10

yr Government Bond in USD) Base year for NPV Price of -4th year (purchase year)

(Note) NPV: Net Present Value

Fig.-3.3-5 Cash flow of each year in Debt (Upfront) (nominal value)



Debt (Upfront)

0

25

50

75

100

-4 -3 -2 -1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Year

Cas

h Fl

ow (c

umul

ativ

e) (m

$)

Debt (lUpfront)

0

5

10

15

20

25

30

-4 -3 -2 -1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Year

Cas

h Fl

ow N

PV (c

umul

ativ

e) (m

$)

Fig.-3.3-6 Cumulative cash flow of Debt (Upfront) Fig.-3.3-7 Cumulative cash flow of Debt (Upfront) (nominal value) (net present value)

Fig.-3.3-6 Cumulative cash flow of Debt (Upfront) (nominal value) Fig.-3.3-7 Cumulative cash flow of Debt (Upfront) (net present value)

Table-3.3-8 Results of Debt (Upfront) simulation

Items Simulation result Nominal Value




In the case of Debt (Upfront), the Fund receives the revenue of upfront repayment (USD 25 million) when the SPC obtains the first disbursement of construction cost loans. The SPC consolidates this repayment into the main loans for the construction costs from commercial banks. Since the SPC usually has this finance close before it starts construction, it is likely to take place in the -2nd year before power plant’s operation (two years prior to operation). The Fund receives interest revenue until the upfront repayment (for about two years). The total amount of the repayment is USD 30.0 million in nominal value terms and is USD 27.1 million in the net present value at -4th year before operation. In this scheme, the Fund can recover its costs in a short period (within two years). On the other hand, however, the total



revenue amount is smaller because of the very small amount of interest. 4) Repayment Conditions in Debt-type Long-term Repayment Scheme In the case of the Debt-type Long-term Repayment scheme, the length of the repayment period influences the economic viability of the geothermal project. The following are the results of interviews addressing this question:

Q: How to pay the price? Option A： Immediately/ over a short term Option B： over a middle term Option C： over a long term

（Results） Option A 0 votes Option B 2 votes Option C 7 votes Others, or Failure to Respond 2 votes


(a) It would be better to make repayments after the cash flow comes in after the inception of commercial operation. The Investors have no money for repayments while they are engaged in the development.

(b) Long-term repayment will improve the economy of the project. (c) It would be better if the repayment period is longer. It would be much better if the

repayment is subordinated to the repayment of the main loans. (d) From the view of private developers, the best scheme is a loan with indemnification if

the developer fails to be able to develop the field. We feel that we need some insurance system for the failure when we trust the results of the Government Exploration and fail anyway.

(e) Option A is better because the cash flow is smooth. But bankers might say Option B is better for them because the two loans are consolidated into one loan. We can make repayment when we get the first disbursement of the main loan. The repayment can be consolidated into the construction costs.

(f) We would like to make repayments over a period of 10 years or more after the inception of operations.


(a) Once financial close is reached, developers can expect cash inflow. This is one of the opportunities for the Fund to obtain repayment. Option C might require the Fund to wait too long to recover its costs. The best way for developers is to make two schemes available for the developer to choose from.



(b) The first disbursement is a chance to make repayment.

<Summary> (a) The major opinion was that a long-term repayment is preferable for private investors

because it will reduce the burden of repayment and improve the economy of the project.

(b) In addition, there was a voice calling for subordinated loan treatment. Moreover, there was an opinion that it would be better to forgive repayments if the developer fails in development afterwards. Moreover, there was a voice calling for some guarantee systems when the cause of the failure is attributable to the quality of the Governmental Exploration.

(c) On the other hand, there is a minority opinion that the private sector can make repayment when it receives the first disbursement of loans. By making repayment at that time, the purchase expenditure can be consolidated into the construction costs.

On the other hand, the simulation of cash flow for different repayment periods yields the results shown in Fig.-3.3-8, Fig.-3.3-9 and Table-3.3-9.

Fig.-3.3-8 Cumulative cash flow of Debt-type scheme with different repayment periods (nominal value)

Fig.-3.3-9 Cumulative cash flow of Debt-type scheme with different repayment periods (net present value)

Fig.-3.3-8 Cumulative cash flow of Debt-type Fig.-3.3-9 Cumulative cash flow of Debt-type scheme with different repayment periods scheme with different repayment periods

(nominal value) (net present value) According to these results,

(a) The total repayment amount in nominal value terms increases as the repayment period becomes longer.

(b) However, the total repayment amount in net present value terms turns out to be USD 31 million - USD 36 million with small differences. (This is because the NPV conversion

Cash Flow (NPV)

0

10

20

30

40

-4 -3 -2 -1 1 2 3 4 5 6 7 8 9 10 11 12 1314 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30Year

Cas

h Fl

ow N

PV

(cum

ulat

ive)

(m$)

Debt (Upfront) Debt (5yrs)Debt (10yrs) Debt (15yrs)Debt (20yrs) Debt (25yrs)

Cash Flow

0

25

50

75

-4 -3 -2 -1 1 2 3 4 5 6 7 8 9 10 11 12 1314 15 16 17 18 19 20 21 22 23 2425 26 27 28 29 30

Year

Cas

h Fl

ow (c

umul

ativ

e) (m

$)

Debt (Upfront) Debt (5yrs)Debt (10yrs) Debt (15yrs)Debt (20yrs) Debt (25yrs)



is done with a discount rate of 6.0% from the nominal value that is expanded by an interest rate of 10.0%)

(c) The cash flow to the Fund is more rapid for a short-term repayment period. Table-3.3-9 Simulation results for Debt-type scheme with different repayment periods

(m$: USD million) Items Simulation results Repayment period Upfront 5 years 10 years 15 years 20 years 25 years Nominal Value

Total repayment in 15 yrs 30.0 m$ 40.0 m$ 46.3 m$ 52.5 m$ 51.3 m$ 50.5 m$ Total repayment in 30 yrs 30.0 m$ 40.0 m$ 46.3 m$ 52.5 m$ 58.8 m$ 65.5 m$

Net Present Value Price of -4th year (the 4th year prior to operation) Total repayment in 15 yrs 27.1 m$ 30.6 m$ 32.3 m$ 33.8 m$ 32.7 m$ 32.1 m$ Total repayment in 30 yrs 27.1 m$ 30.6 m$ 32.3 m$ 33.8 m$ 34.9 m$ 35.9 m$ On the other hand, the short repayment period adversely affects the economy of the geothermal project. Fig.-3.3-10 shows the rate of return of the geothermal project when the selling price of power is USD 9.7 ¢/kWh. Fig.-3.3-11 shows how high the selling price of power needs to be for the geothermal project to acquire a 16.0% of rate of return8

. The “Base” case in both figures refers to the case where the SPC executes the project from the exploration stage by itself.

The two figures show that (a) In Long-term repayment scheme from Debt (5yrs) to Debt (25yrs), the economy of the

geothermal project improves as the repayment period becomes longer. However, the effect of the improvement becomes smaller and smaller as the period increases.

(b) The economy of the geothermal project in the Upfront Repayment scheme (Debt (Upfront)) is also improved compared with the Base case, which is the case where the SPC executes the project from the exploration stage by itself. This improvement is attributed to the fact that the cash outflow from the SPC in the exploration stage is avoided if the Government carries out the exploration and the SPC can buy the results later. (This means that the development period of the SPC effectively becomes shorter and the profitability of the project improves accordingly.)

8 Calculation of the selling price needs to assume a certain rate of return. 16.0% is used in this report as an example.



Fig.-3.3-10 Profitability of geothermal project (IRR) in Debt-type scheme with different

repayment periods (IRR when the selling price is USD 9.7 ¢/kWh) Fig.-3.3-11 Selling price of geothermal power in Debt-type scheme with different repayment

periods (The selling price that attains an IRR of 16.0%)

Fig.-3.3-10 Profitability of geothermal project (IRR) in Debt-type scheme with different repayment periods (IRR when the selling price is USD 9.7 ¢/kWh)

Fig.-3.3-11 Selling price of geothermal power in Debt-type scheme with different repayment periods (The selling price that attains an IRR of 16.0%)

These discussions are based on a price of USD 25 million for the price of the Governmental Exploration results, which is the same amount of the actual Exploration costs. However, some markup could be added to the price of the Exploration results. The cumulative cash flow is shown in Fig.-3.3-12, Fig.-3.3-13 and Table-3.3-10 when different markups are added to the price of the Exploration results.

Fig.-3.3-12 Cumulative cash flow of Debt-type scheme with different markups (nominal value)

Fig.-3.3-13 Cumulative cash flow of Debt-type scheme with different markups (net present value)

Fig.-3.3-12 Cumulative cash flow of Debt-type Fig.-3.3-13 Cumulative cash flow of Debt-type scheme with different markups (nominal value) scheme with different markups (net present value)

13.1%14.3% 14.0% 14.2% 14.3% 14.3% 14.3%

15.9%

20.3%18.3% 18.7% 18.8% 19.0% 19.0%

0%

5%

10%

15%

20%

25%

Base

Debt (U

pfron

t)

Debt (5

yrs)

Debt (1

0yrs)

Debt (1

5yrs)

Debt (2

0yrs)

Debt (2

5yrs)

IRR

(%)

PrIRR EqIRRIn the case that Price is 9.7 cents/kWh.

12.0

10.7 10.9 10.8 10.7 10.7 10.7

8

9

10

11

12

13

Base

Debt (U

pfron

t)

Debt (5

yrs)

Debt (1

0yrs)

Debt (1

5yrs)

Debt (2

0yrs)

Debt (2

5yrs)

Sellin

g Pr

ice

(￠/k

Wh)

In the case that PrIRR is 16%.

0

20

40

60

80

Cas

h Fl

ow (c

umul

ativ

e) (m

$)

Year

Cash Flow

Markup 0% Markup 5% Markup 10%


Markup 30%

0

20

40

60

Cas

h Fl

ow N

PV (c

umul

ativ

e) (m

$)

Year

Cash Flow (NPV)



Markup 30%



Table-3.3-10 Simulation results of Debt-type scheme with different markups Items Simulation results Markup 0% 5% 10% 15% 20% 25% 30% Nominal Value

Total repayment in 15 yrs 52.5m$ 55.1m$ 57.8m$ 60.4m$ 63.0m$ 65.6m$ 68.3m$ Total repayment in 30 yrs 52.5m$ 55.1m$ 57.8m$ 60.4m$ 63.0m$ 65.6m$ 68.3m$

Net Present Value Price of -4th year (the 4th year prior to operation) Total repayment in 15 yrs 33.8m$ 35.4m$ 37.1m$ 38.8m$ 40.5m$ 42.2m$ 43.9m$ Total repayment in 30 yrs 33.8m$ 35.4m$ 37.1m$ 38.8m$ 40.5m$ 42.2m$ 43.9m$ On the other hand, the addition of a markup adversely affects the economy of the geothermal project. Fig.-3.3-14 and Fig.-3.3-15 show the sensitivity of the geothermal project when different markups are added to the price of the Governmental Exploration results. Fig.-3.3-14 shows the rate of return of the geothermal project when the selling price of power is USD 9.7 ¢/kWh. Fig.-3.3-15 shows how high the selling price of power needs to be for the geothermal project to acquire a rate of return of 16.0%. The Base case in both figures refers to the case where the SPC executes the project from the exploration stage by itself. The two figures show that

(a) The economy of the geothermal project deteriorates as the markup becomes larger. (b) Even when a markup of 30% is added, however, the economy of the geothermal project

is improved compared with the Base case, where the SPC executes the project without government exploration. This improvement is attributed to the effect Governmental Exploration has of shortening the development period9

.

Fig.-3.3-14 Profitability of geothermal project (IRR) in Debt-type scheme with different markups (IRR when the selling price is USD 9.7 ¢/kWh)

Fig.-3.3-15 Selling price of geothermal power in Debt-type scheme with different markups (The selling price that attains an IRR of 16.0%)

Fig.-3.3-14 Profitability of geothermal project (IRR) Fig.-3.3-15 Selling price of geothermal power

in Debt-type scheme with different markups in Debt-type scheme with different markups (IRR when the selling price is USD 9.7 ¢/kWh) (The selling price that attains an IRR of 16%)

9 The private company takeovers the Governmental Exploration and can shorten the development period compared with the case that the company starts development from scratch. The shortened development period improves the economy of the project.

13.1%14.3% 14.1% 14.0% 13.9% 13.8% 13.7% 13.6%

15.9%

18.8% 18.6% 18.4% 18.2% 17.9% 17.7% 17.5%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Base Markup 0%

Markup 5%

Markup 10%

Markup 15%

Markup 20%

Markup 25%

Markup 30%

IRR

(%)

PrIRR EqIRR

12.0

10.4 10.4 10.5 10.5 10.6 10.6 10.7

8

9

10

11

12

13

Base Markup 0%

Markup 5%

Markup 10%

Markup 15%

Markup 20%

Markup 25%

Markup 30%

Sellin

g Pr

ice

(￠/k

Wh)

In the case that PrIRR is 16%.

(m$: USD million)



By the way, Governmental Exploration has a financial cost. The financial cost of the Exploration is an interest on the governmental fund during the two-year exploration period. The interest is roughly estimated as about 9% of the total Exploration costs, if the interest rate is 6%10

. Therefore, it is justifiable for the Fund to add around a 10% markup to the sales price of the Exploration results. The above-mentioned discussion supports a certain level of markup (around 10% - 20%) because private developers gain an advantage by purchasing the Governmental Exploration results, compared with carrying out the development themselves from scratch.

Based on these considerations, the Study Team proposes a 15-year repayment period for Long-term Repayment in a Debt-type scheme. Moreover, it recommends that the repayment be subordinated to the main loans (senior loans) so that the subordinated repayments bear some of long-term business risk during operation. Under this treatment, the interest rate of the repayment is higher than that of the main loans (senior loans). Regarding the markup in the price, the Study team considers that a certain level of markup (around 10% - 20%) in the sales price of the Exploration results is justifiable.

Proposal-6 Repayment period for Debt-type Long-term Repayment Scheme (a) A 15-year repayment period is appropriate for the debt-type Long-term Repayment

scheme. (b) It is appropriate to subordinate the repayment to the senior loans.

(c) The interest rate of the repayment could be set higher than that of the main loans (senior loans).

(d) The selling price of the Governmental Exploration results is to be pre-determined. It could be based on the cost of the Exploration, but it is justifiable to add a certain level of markup (around 10%-20%) to the sales price.

5) Characteristics of the Debt-type Scheme In this sub-section, the assumptions in the cash flow simulation of the Debt-type scheme are changed to analyze the sensitivity of the simulation. The assumptions changed are plant capacity (from 55 MW (base case) to 20 MW) and plant factor (from 90% (base case) to 70%), as shown in Table-3.3-11.

10 According to the rough calculation of: 12.5m$×6%×2years＋12.5m$×6%×1year = 25m$×9%



CaseDebt(55MW,PF=90%)

Debt(50MW,PF=90%)

Debt(40MW,PF=90%)

Debt(30MW,PF=90%)

Debt(20MW,PF=90%)

Debt(20MW,PF=80%)

Debt(20MW,PF=70%)

Type Debt Debt Debt Debt Debt Debt DebtRepayment Yea (Yrs) 15 15 15 15 15 15 15Interest rate (%) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%

Plant Capacity (MW) 55 50 40 30 20 20 20Plant Factor (%) 90% 90% 90% 90% 90% 80% 70%Selling Price (￠/kWh) 9.7 9.7 9.7 9.7 9.7 9.7 9.7

0

10

20

30

40

50

60

Nominal Net Present Value

Cum

ulat

ive

repa

ymen

t am

ount

(m$)

Debt (55MW, PF=90%) Debt (50MW, PF=90%)Debt (40MW, PF=90%) Debt (30MW, PF=90%)Debt (20MW, PF=90%) Debt (20MW, PF=80%)Debt (20MW, PF=70%)

Table-3.3-11 Assumptions in sensitivity analysis of Debt (15yrs)

Fig.-3.3-16 Total repayment amount in sensitivity analysis of Debt (15yrs) Fig.3.3-16 shows the results of sensitivity analysis. This figure shows that the total repayment amounts in all cases are same regardless of project capacity (MW) or operation conditions (plant factor). This means that the Fund can expect stable revenue from the repayment when it uses a Debt-type scheme (subject to the condition that the SPC does not default.) However, the repayment amount is limited to USD 33.8 million in net present value terms. Since the cost of Governmental Exploration is USD 25 million, this scheme has limited ability to recover the costs of failed Governmental Explorations. It is anticipated that most of the costs for failed fields (where no private companies emerge to continue development after Governmental Exploration) would not be fully recovered under this scheme. 6) Cash Flow in Equity-type Scheme (Equity (Div)) Next, the capital flow of the Equity-type scheme (Equity (Div)) is simulated. The assumptions of the simulation are as shown in Table-3.3-12. The simulation results are shown in Fig.-3.3-17, Fig.-3.3-18, Fig.-3.3-19 and Table-3.3-13.



Equity

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

-4 -2 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

Year

Cas

h flo

w (m

$)

Table-3.3-12 Assumptions of Equity (Div) Simulation Items Specification Type Equity type Plant capacity 55 MW Selling price of energy USD 9.7 ¢/kWh Purchase price of Governmental Exploration results

USD 25 million

Purchase year -4 years (4 years before operation) Repayment method Dividends from SPC Percentage of investment by Fund 27.6% (=USD 25.0m/USD 90.5m) (*) Rate of dividend 100 % Discount rate for NPV 6.0% (referring to the Indonesian 10 yr

Government Bond in USD) Base year for NPV Price of -4th year (purchase year)

(Note) NPV: Net Present Value (*)Total initial costs necessary to exploration and construction are USD 90.5

million in this model case11

.

Fig.-3.3-17 Cash flow of each year in Equity (Div) scheme (nominal value)

11 Exploration costs between -6th year and -3rd year are USD 50.0 million, and construction costs of own expenditure between -2nd year and -1st year are USD 40.5 million (USD 62 million + USD 71 million) x 30% + interest during construction).



Fig.-3.3-18 Cumulative cash flow of Equity (Div) scheme (nominal value) Fig.-3.3-19 Cumulative cash flow of Equity (Div) scheme (net present value)

Fig.-3.3-18 Cumulative cash flow of Equity (Div) Fig.-3.3-19 Cumulative cash flow of Equity (Div) scheme (nominal value) scheme (net present value)

Table-3.3-13 Result of Equity (Div) simulation Items Simulation result Nominal Value




In the case of an Equity (Div) scheme, there is no revenue to the Fund during the construction period. After the inception of power plant operation, the Fund receives dividend revenue from the SPC. The profit available for dividends is divided in proportion to the investment ratio between the Fund and the SPC. The Fund can take its own portion of the dividends. The cash flow of the dividends is not large during the first 15 years of operation because there are repayments of the loans to the banks. However, the cash flow of the next 15 years increases because the profit grows after loan repayment ends. If the capacity of the project is 55 MW and the dividend ratio of the SPC profits remains at 100%, the total amount of the dividends is USD 170.5 million in nominal value terms and is USD 64.0 million in net present value terms at -4th year price. This is about 2.6 times the cost of Governmental Exploration (USD 25 million). That is to say that this Equity (Div) scheme has strong ability to recover costs, including the loss from other exploration sites.

Equity

0

10

20

30

40

50

60

-4 -2 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

Year

Cas

h Fl

ow N

PV (c

umul

ativ

e) (m

$)

Equity

0

25

50

75

100

125

150

175

-4 -3 -2 -1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30Year

Cas

h Fl

ow (c

umul

ativ

e) (m

$)



Cash Flow (NPV)

0

10

20

30

40

50

60

70

-4 -3 -2 -1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

Year

Cas

h Fl

ow N

PV (c

umul

ativ

e) (m

$)

Equity (55MW) Equity (50MW) Equity (40MW)Equity (30MW) Equity (20MW)

Cash Flow

0

25

50

75

100

125

150

175

-1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

Year

Cas

h Fl

ow (c

umul

ativ

e) (

m$)

Equity (55MW) Equity (50MW) Equity (40MW)Equity (30MW) Equity (20MW)

It should be noted that when the dividend ratio of the SPC profits is less that 100%, the reserved profits in the SPC are to be released to the stockholders when the SPC is dissolved at the end of the operation, for example in the 30th year. The amount of reserved profit for the Fund is the same as the total dividend amount in net present value terms. However, it is important to note that the cash flow takes place in later years than when the dividend ratio is 100%. 7) Characteristics of the Equity-type Scheme In this sub-section, the plant capacity of the project is changed from 55 MW to 20 MW in the cash flow simulation of an Equity-type (Equity (Div)) scheme. The results are shown in Fig.3.3-20, Fig.-3.3-21 and Table-3.3-14. These results show that the total amount of dividends during 30 years falls to USD 31.6 million (net present value) if the capacity is reduced to 20 MW. Fig.-3.3-22 shows a sensitivity analysis of the total amount of dividends over 30 years when the other factors than plant capacity differ. This figure shows that not only the plant capacity has a large influence over the total amount of dividends but also other factors such as well output and selling price affect the total amount as well. This means that the total amount of dividends is affected largely by the capacity of geothermal power plant the SPC will build or how well the SPC operates the plant.

Fig.-3.3-20 Cumulative cash flow of Equity (Div) Fig.-3.3-21 Cumulative cash flow of Equity (Div) scheme with different project capacities with different project capacities

(Nominal Value) (Net Present Value)

Fig.-3.3-20 Cumulative cash flow of Equity (Div) scheme with different project capacities (Nominal Value) Fig.-3.3-21 Cumulative cash flow of Equity (Div) scheme with different project capacities (Net Present Value)



Table-3.3-14 Simulation results of Equity (Div) type scheme with different project capacities (m$: USD million)

Items Simulation results Plant Capacity 55 MW 50 MW 40 MW 30 MW 20 MW Nominal Value

Total repayment in 15 yrs 74.8 m$ 69.9 m$ 57.9 m$ 47.2 m$ 31.8 m$ Total repayment in 30 yrs 170.5 m$ 158.8 m$ 136.4 m$ 112.2 m$ 89.4 m$

Net Present Value Price of -4th year (the 4th year prior to operation） Total repayment in 15 yrs 42.3 m$ 39.7 m$ 32.7 m$ 26.6 m$ 18.4 m$ Total repayment in 30 yrs 64.0 m$ 59.8 m$ 50.6 m$ 41.2 m$ 31.6 m$



0 50 100 150 200 250 300 350

Well Cost <6m$-5m$-4m$>

Well Output <6MW-8MW-10MW>

Prod. Well Success Rate <50%-70%-90%>

Steam Decline rate <5%-3%-1%>

Plant Capacity <20MW-55MW-110MW>

Selling Price <9.0-9.7-10.4 cnt/kWh>

Cash Flow in 30 years (cumulative) (m$)

0 25 50 75 100 125 150

Well Cost <6m$-5m$-4m$>

Well Output <6MW-8MW-10MW>

Prod. Well Success Rate <50%-70%-90%>

Steam Decline rate <5%-3%-1%>

Plant Capacity <20MW-55MW-110MW>

Selling Price <9.0-9.7-10.4 cnt/kWh>

Cash Flow in 30 years NPV (cumulative) (m$)

(Nominal Value) (Net Present Value)

Fig.-3.3-22 Total dividend amount over 30 years in sensitivity analysis of Equity (Div) scheme



8) Operation of the Cost Recovery Scheme (a) Choice of two schemes Regarding the choice between a Debt-type scheme and an Equity-type scheme, the characteristics of two types should be taken into consideration. As Table-3.3-14 shows, when the power plant capacity is small, large dividend revenue cannot be expected from Equity-type scheme. For instance, the total amount of revenue from dividends of Equity-type scheme (40 MW case) over 15 years is almost the same as that of the revenue from repayment in the Debt-type (15 year repayment case); USD 32.7 million in Equity-type 40MW (Table-3.3-14) vs. USD 33.8 million in 15 year repayment Debt-type (Table 3.3-9). Therefore, the Equity-type scheme is preferable only for a project of 40 MW or larger when it is evaluated over a 15-year time span. However, when it can be evaluated over a 30-year time span, the advantage of Equity-type scheme expands. For instance, the Equity-type scheme for a project with 30 MW or larger can expect more amount of total revenue over 30 years than the total revenue from Debt-type scheme. Therefore, when the Fund considers which choice it takes between a Debt–type and an Equity-type, it is important to evaluate the exploration results carefully and to estimate how large a power plant could be constructed or how much profit the power plant could earn in the future. Based on these estimations, the choice between a Debt-type and an Equity-type can be made appropriately. (b) Port folio of two schemes As mentioned earlier, the Debt-type scheme is less risky scheme for the Fund but its cost recovery ability is also less than the Equity-type scheme. On the other hand, the Equity-type scheme has larger cost recovery ability while the SPC’s business performance is satisfactory but it is more risky than the Debt-type scheme because its cost recovery ability totally depends on the SPC’s business performance. Therefore, when the Fund extends its supports to several geothermal projects, it is desirable to create a portfolio with an appropriate mixture of Debt-type and Equity-type schemes in order to maximize revenue while reducing the risks of the Equity-type scheme.

(c) Markup in the sales price of the Governmental Exploration results It is justifiable to add a certain level (around 10% - 20%) of markup to the sales price of Governmental Exploration results so that the Fund collects some portion of the Exploration costs. Different from individual private investors, the Fund has a large financial base and, therefore, can bear the costs of the Governmental Exploration in several fields simultaneously. Even though explorations in some fields of them might fail, explorations in other fields will succeed. As a result, the Success Rate of explorations as a whole can remain at a certain level. Thus the Fund can reduce the risks of explorations from high level of being explored individually to low level of being explored collectively. Therefore the Fund plays a role of not



only providing financial supports but also reducing risks of explorations. In return of these important functions, it is justifiable for the Fund to charge some markup in the sales price of the Governmental Exploration results. From the private developers’ viewpoints, the exploration risks of the field is reduced to a certain level enough for the developers to make a management decision whether they invest in the geothermal development in the field or not. It is worth while purchasing the Governmental Exploration results for them even though the markup is added in the sales price when compared with doing the exploration by themselves from scratch. Based on these discussions, the Study Team makes the following proposals:

Proposal-7 Operation of Cost Recovery Scheme (i) Debt-type scheme

(a) Advantage: The Debt-type scheme is a scheme from which the Fund can expect reliable repayment revenue regardless of the capacity or the business performance of the geothermal power plant.

(b) Disadvantage: The total repayment amount is not so large. (c) Repayment period: In a long-term repayment scheme, a 15-year repayment period is

most recommendable, considering the repayment period for the main loans and the influence on the economy of the geothermal project.

(d) Repayment condition: In a long-term repayment scheme, it is also recommendable to make the repayments subordinate to the repayments of the main loans. In this way, the Fund takes on part of the long-term business risks of the geothermal project.

(e) Upfront repayment: There is a possibility of upfront repayment at the first disbursement of the main loan when the SPC can borrow a large sum of money. In this case, it is necessary to note that the cash returns to the Fund early, but fails to earn the Fund interest.

(ii) Equity-type scheme

(a) Advantage: The Equity-type scheme is a scheme that has a large cost recovery ability when the capacity of the geothermal power plant is large.

(b) Disadvantage: The cost recovery ability is greatly influenced by the capacity of the geothermal power plant. In addition, it is also influenced by many other factors of the SPC business performance. It is also affected by the SPC’s dividend policies. Therefore this scheme poses greater risks for the Fund than Debt-type scheme.

(iii) Portfolio of Debt-type and Equity–type schemes

It is desirable to choose properly between a Debt-type and an Equity-type scheme according to the economy of the geothermal project to be developed. In addition, it is also desirable to create a portfolio with an appropriate mixture of Debt-type and Equity-type schemes in order to maximize revenue while reducing the risks of the



Equity-type scheme.

(iv) Markup in the sales price of the Governmental Exploration results It is justifiable to add a certain level (around 10%-20%) of markup to the sales price of Governmental Exploration results.

(3) Revolvability of the Fund

1) Basic Approach The revolvability of the Fund is examined by the following method. First, a Fund with initial capital of USD 100 million is assumed. This Fund is then used to cover the cost of Governmental Exploration in four (4) fields (the cost for each field is USD 25 million.). The revenue and expenses of the Fund becomes as follows: (Base of simulation)

(a) The Fund disburses the costs of Governmental Exploration (USD 25 million x 4 fields) in the -5th year and in the -6th year (in 5 years and 6 years prior to the operation of the geothermal power plant).

(b) The Government decides the sales price of the Exploration results. (c) In the case of a Debt-type (Debt (15yrs)) scheme, the repayment is to be done on an

installment plan over 15 years from the inception of operation of the power plant. During the construction period, interest is paid to the Fund. Therefore, the Fund has interest revenue from the -4th year and revenue of repayments from the 1st year until the 15th year of operation.

(d) In an Equity-type (Equity (Div)) scheme the Fund has dividend revenue from the 1st year until the last year (the 30th year) of operation. If necessary, the Fund can sell its stock and can obtain that sales revenue at any time (strategic sales).

Here the Study Team used two additional assumptions in the discussion of the Fund revolvability (the ability to restore the original balance of the Fund). One is regarding the sales price of the Governmental Exploration results. We assume the cost of a government exploration to be USD 25 million. With 20% markup, the price investors pay would be USD 30 million. Another assumption concerns the Success Rate. The Fund will not be able to sell all of the Exploration results since some fields may turn out to be less promising than initially expected. Also, the Fund cannot expect all private developers to succeed in geothermal development after purchasing the Exploration results. Therefore it is necessary to consider the probability of success of geothermal development after Governmental Exploration (namely, the Success Rate). In the discussions in this section, the Success Rate is assumed to be 100%, 75%, 50% and 25%. The balance of the Fund is simulated for each Success Rate assumed to study the revolvability of the Fund. Note that this simulation is done in net present value terms (the price of the -4th



Balance of Fund NPV (Debt type)

0

50

100

150

200

-7 -5 -3 -1 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30Year

Bal

ance o

f Fund

(m$)

Success Rate100%

Success Rate 75%

Success Rate 50%

Success Rate 25%

D ebt type20 MWR epayment =15 yr

year). (Additional assumptions of simulation)

(a) Sales price of the Governmental Exploration results: USD 30 million (20% markup is added.)

(b) Success Rate: 100%, 75%, 50% and 25%. 2) The Debt (15yrs) case The changes of the balance of the Fund in the Debt (15yrs) case where 20MW geothermal plants are developed12


are shown in Fig.-3.3-23. This figure shows that:

(b) If the Success Rate is 75%, the balance of the Fund returns to the original balance in nine (9) years.

(c) If the Success Rate is less than 50%, the balance of the Fund does not return to the original balance even in 30 years. This means the Fund cannot recover the costs of Governmental Exploration.

Fig.-3.3-23 Changes of the balance of the Fund in the Debt (15yrs) case (net present value)

3) The Debt (Upfront) case In some cases there is a possibility that the SPC would choose upfront repayment at the first disbursement of its main loans because there is a difference in the interest rates involved in 12 The capacity of the power plant has no effect on the results in the Debt-type scheme as mentioned in 3.3, (2), 3). Herein, 20 MW is taken as an example of the Debt-type case.



Balance of Fund NPV (Debt type)

0

50

100

150

200

-7 -5 -3 -1 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30Year

Bal

ance o

f Fund

(m$)

Success Rate 100%

Success Rate 75%

Success Rate 50%

Success Rate 25%

D ebt type20 MWR epayment =Upfront

repaying the Fund and repaying the main loans. When upfront repayment is chosen, the money comes back quickly to the Fund, but the interest revenue during the repayment period decreases. The changes of the balance of the Fund in the Debt (Upfront) case are shown in Fig.-3.3-24. This figure shows that:

(a) If the Success Rate is 100%, the balance of the Fund returns to the original balance at the point of upfront repayment (in the -2nd year).

(b) However, if the Success Rate is less than 75%, the balance of the Fund does not return to the original balance.

Fig.-3.3-24 Changes of the balance of the Fund in Debt (upfront) case (net present value)

4) The Equity (Div) case The Equity-type scheme has a potential for generating large revenues. Therefore, if the Fund portfolio consists exclusively of Equity-type (Equity (Div)) schemes and if the project capacity is 55 MW, the changes of the balance of the Fund are as shown in Fig.-3.3-25. This figure shows that:

(a) If the Success Rate is 100%, the balance of the Fund returns to the original balance in six (6) years.



(d) If the Success Rate is 25%, the balance of the Fund does not return to the original balance even in 30 years.

Therefore, it is important to leverage the revenue-generating ability of Equity-type schemes by



Balance of Fund NPV (Equity type)

0

50

100

150

200

-7 -5 -3 -1 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30Year

Bal

ance o

f Fund

(m$)

Success Rate100%

Success Rate 75%

Success Rate 50%

Success Rate 25%

E quity type55 MW

creating a mixture of Debt-type schemes and Equity-type schemes in the portfolio.

Fig.-3.3-25 Changes of the balance of the Fund in the Equity (Div) case (net present value)

5) The Equity (Sales) case Under the Equity-type scheme, the Fund can sell its stocks at any time to obtain sales revenue. If the Fund carries out strategic sales at the start of power plant operation, the sales price will theoretically be equal to the net present value of the total dividend revenue over the operation period (30 years). However, in reality, there is a risk that no buyers will appear even though the Fund intends to sell its stock. Or there is a possibility that the sales price would not be that high because information on the profitability of the power plant is not well disseminated among the public in reality. Therefore, in this discussion, the sales price is assumed to be 75% of the theoretical price. The changes of the balance of a Fund that is composed of Equity-type schemes alone and that sells all stocks at the start of power plant operation are shown in Fig.-3.3-26. This figure shows that:

(a) If the Success Rate is 100%, the balance of the Fund returns to the original balance at the time of sales.

(b) If the Success Rate is 75% or less, the balance of the Fund does not return to the original balance.



Balance of Fund NPV (Mixture of Debt type 50% and Equity type 50%)

0

50

100

150

200

-7 -5 -3 -1 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30Year

Bal

ance o

f Fund

(m$)

Success Rate100%

Success Rate 75%

Success Rate 50%

Success Rate 25%


E quity type55 MW

Balance of Fund NPV (Equity type)

0

50

100

150

200

-7 -5 -3 -1 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30Year

Bal

ance o

f Fund

(m$)

Success Rate 100%

Success Rate 75%

Success Rate 50%

Success Rate 25%

E quity type55 MW

S ales P rice ratio=75%

Fig.-3.3-26 Changes of the balance of the Fund in Equity (Sales) case (net present value) 6) Mixture of the Debt (15yrs) and the Equity (Div) schemes When the Fund consists of 50% Debt (15yrs) and 50% Equity (Div) schemes (with the capacity of 20 MW for Debt (15yrs) and 55 MW for Equity (Div)), the balance of the Fund changes as shown in Fig.-3.3-27. This figure shows that:




(d) If the Success Rate is 25%, the balance of the Fund does not return to the original balance.

Fig.-3.3-27 Changes of the balance of the Fund in the case of a mixture of Debt (15yrs) (50%) and Equity (Div) (50%) (net present value)



Balance of Fund NPV (Mixture of Debt type 50% and Equity type 50%)

0

50

100

150

200

-7 -5 -3 -1 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30Year

Bal

ance o

f Fund

(m$)

Success Rate 100%

Success Rate 75%

Success Rate 50%

Success Rate 25%


E quity type55 MW

7) Mixture of the Debt (Upfront) and the Equity (Div) schemes When an upfront repayment is made under the Debt (Upfront) scheme, the money comes back quickly, but the total return is smaller. In order to investigate this effect, a 50 - 50 mixture of Debt (Upfront) and Equity (Div) schemes was simulated (with the capacity assumed to be 20MW for Debt (Upfront) and 55 MW for Equity (Div)). The changes of the balance of the Fund are as shown in Fig.-3.3-28. This figure shows that:

Fig.-3.3-28 Changes of the balance of the Fund for a 50 - 50 mixture of the Debt (Upfront) and Equity (Div) schemes (net present value)

(a) If the Success Rate is 100%, the balance of the Fund returns to the original balance in

four (4) years. (b) If the Success Rate is 75%, the balance of the Fund returns to the original balance in

nine (9) years. (c) If the Success Rate is 50%, the balance of the Fund returns to the original balance in 27

years. (d) If the Success Rate is 25%, the balance of the Fund does return to the original balance

in 30 years. This means that the Fund revolvability is secured in nine (9) years (with a 75% Success Rate) or in 27 years (with a 50% Success Rate) even though all developers of Equity scheme make upfront repayments. 8) Mixture of the Debt (15yrs) and the Equity (Sales) schemes When the Fund is composed of a 50 - 50 mixture of the Debt (15yrs) and Equity-type schemes



Balance of Fund NPV (Debt 15yr type 50% and Equity Sales type 50%)

0

50

100

150

200

-7 -5 -3 -1 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30Year

Bal

ance o

f Fund

(m$)

Success Rate 100%

Success Rate 75%

Success Rate 50%

Success Rate 25%


E quity type55 MWS ales P rice ratio =75%

(with the capacity assumed to be 20 MW for Debt (15 yrs) and 55 MW for Equity-type) and when the equity is strategically sold at the inception of the operation of the plant, i.e. Equity (Sales), the balance of the Fund changes as shown in Fig.-3.3-29. This figure shows that:

(a) If the Success Rate is 100%, the balance of the Fund returns to the original balance immediately at the time the stock is sold.

(b) If the Success Rate is 75%, the balance of the Fund also returns immediately to the original balance at the time the stock is sold.

(c) If the Success Rate is less than 50%, the balance of the Fund does not return to the original balance.

Fig.-3.3-29 Changes of the balance of the Fund for a 50 - 50 mixture of the Debt (15yrs) and

the Equity (Sales) schemes (net present value) 9) Mixture of the Debt (Upfront) and Equity (Sales) schemes In order to accelerate the cost recovery, the Fund can combine the upfront repayment of the Debt-type scheme and the strategic sales of the Equity-type scheme. When the Fund is composed of a 50 - 50 mixture of the Debt (15yrs) and Equity-type schemes (with the capacity assumed to be 20 MW for Debt (15 yrs) and 55 MW for Equity-type) and when the Debt (15yrs) scheme undergoes upfront repayment and the Equity-type is sold strategically at the operation of the plant, i.e. Equity (sales), the balance of the Fund changes as shown in Fig.-3.3-30. This figure shows that:

(a) If the Success Rate is higher than 75%, the balance of the Fund returns to the original balance immediately at the sales time.

(b) If the Success Rate is less than 50%, the balance of the Fund does not return to the original balance.



Balance of Fund NPV Mixture of Debt type 50% and Equity type 50%)

0

50

100

150

200

-7 -5 -3 -1 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30Year

Bal

ance o

f Fund

(m$)

Success Rate 100%

Success Rate 75%

Success Rate 50%

Success Rate 25%


E quity type55 MWS ales P rice ratio =75%

Fig.-3.3-30 Changes of the balance of the Fund for a 50 - 50 mixture of the Debt (upfront) and the Equity (Sales) schemes (net present value)

10) The Revolvability of the Fund Based on these simulations, Table-3.3-15 summarizes the periods when the balance of the Fund returns to the original balance. This table shows the following:

(a) When the Success Rate is 100%, it is possible for the Fund to be composed of

Debt-type schemes alone. In this case, the Fund returns to the original balance in the medium term (5 years). In addition, if Equity-type schemes are included in the portfolio and if they can be strategically sold, it is possible for the Fund to recover its balance in the short term (at the time that the stock is sold).

(b) When the Success Rate is 75%, it is possible for the Fund to be composed of Debt-type schemes alone, too. In this case, the Fund returns to the original balance in the medium term (9 years). However, if the SPC makes upfront repayment, the balance does not recover. In order to cope with such a development, it is recommended that the Fund include Equity-type schemes in the portfolio. As a result, it is expected that the Fund will recover the original balance in the middle term (about 14 years).

(c) When the Success Rate is 50%, it is anticipated that the balance of the Fund could not be recovered if it is composed of Debt-type schemes alone. However, if the Fund includes Equity-type schemes in its portfolio, the balance is expected to be restored in the long-term (about 21 years).

(d) When the Success Rate is 25%, the Fund cannot recover the original balance.



Table-3.3-15 Revolvability of the Fund and necessary period to recover

(For USD 9.7¢/kWh Selling Price and 20% Markup) Success Rate

Basic Handling Effect of splitting the Fund 50 - 50 between Equity-type and Debt-type

Effect of strategic sales of the Equity

Debt-type (15-year repayment)

Effect

100% Debt type (15-year repayment)

○ 5 years ○ 5 years ○ 1 year (at COD)

In case of upfront repayment

○ -2 years ○ 6 years ○ 1 year (at COD)


○ 9 years ○ 8 years ○ 1 year (at COD)


× ○ 14 years ○ 1 year (at COD)


× ○ 21 years ×


× × ×


× × ×


× × ×

(Note) 1. A 55 MW capacity project is assumed for the Equity-type scheme. 2. The price of strategic sales is assumed to be 75% of the theoretical price (Net

present value of the total dividend revenue). 3. COD: Commercial Operation Date

As a sensitivity analysis, a similar simulation was carried out for the case in which the sales price does not include a markup. Table-3.3-16 shows the results with zero markup. (Underlining shows the difference.)



Table-3.3-16 Revolvability of the Fund and necessary period to recover

(For USD 9.7¢/kWh Selling Price and No Markup) Success Rate

Basic Handling Effect of splitting the Fund 50 - 50 between Equity-type and Debt-type

Effect of strategic sales of the Equity

Debt type (15-year repayment)

Effect


○ ○ 7 years ○ 1 year 7 years (at COD)


○ -2 years ○ 6 years ○ 1 year (at COD)


○ ○ 14 years × 12 years


× ○ 14 years ×


× × × but it reaches close to the original balance


× × ×


× × ×


× × ×

(Note) 1. A 55 MW capacity project is assumed for the Equity-type scheme. 2. The price of strategic sales is assumed to be 75% of the theoretical price (Net

present value of the total dividend revenue). 3. COD: Commercial Operation Date

11) Summary of the Basic Scheme of the Fund Based on these discussions, the Study Team proposes the following:

Proposal-8 Operation of the Fund (1) In order to attain revolvability of the Fund, it is important to raise the Success Rate as

high as possible. For this purpose, it is necessary to select proper fields for Governmental Exploration and to procure appropriate Executing Agents for successful exploration.



(2) When the Success Rate is high (more than 75%), it is possible to compose the Fund of Debt-type schemes alone. In this case, the Fund recovers the original balance in the medium term. In addition, if Equity-type projects are also included in the portfolio and if they can be strategically sold off at once, it is possible for the Fund to recover its balance in the short-term (at the time of the sales).

(3) When the Success Rate is 50%, it is recommended to include Equity-type schemes with large generation capacity in the Fund portfolio. As a result, it is expected that the Fund will recover the original balance in the long-term (21 years).

(4) Therefore, it is recommended for the Fund to support fields where a large-scale geothermal power plant can be developed. (geothermal fields in Java or Sumatra) It is necessary to develop Equity-type projects aggressively to increase the flow of revenue to the Fund.

(5) It takes a long period of time for the Fund to recover the original balance in many cases. Such long-term Fund management is beyond the capacity of private companies since there are no short-term returns. Moreover it is necessary to use low-cost money such as ODA finance for the seed money of the Fund. From these viewpoints, a governmental agency is most appropriate for managing the Fund.

(6) There might be much worse cases than those discussed in this report, such as where the Success Rate is less than 50%. In addition, there are cases in which Equity-type schemes do not produce the anticipated revenue because of poor performance of the project. Therefore, there may be cases that the Fund cannot recover its original balance. Even in such cases, however, the Fund has played an important role in demonstrating the real underground situation of geothermal fields that are thought as promising before exploration but are not suitable for development in fact. Thus, from a long-term perspective, the Fund can contribute to avoid wasting time and money of exploration in the future. In addition, the Fund can collect the underground information and analysis of failure cases, which might not be disclosed by private developers if the exploration is performed by each developer, to improve the preliminary exploration process and to enhance the exploration technology. Therefore, the money spent on the exploration will contribute to knowledge accumulation and management and the exploration technology development in Indonesia.

(7) In managing the Fund, the ability of the Fund Manager is very important in trying to sustain the Fund since manager will have to determine which fields the Fund supports, who the Fund appoints as the Executing Agent of the Exploration, which type of scheme the Fund applies to each explored field, how the Fund portfolio is composed, when and whether the Fund carries out strategic sales of equity and so on.



Basic Conditions

Output 55 MWＣａｐａｃｉｔｙＦａｃｔｏｒ: 90% Tax General 33%

Ｈｏｕｓｅ Use Rate: 6.0% Tax Incective 15%T&D Loss: 0.0% Tax Hldy Yrs 0

Energy Price: 9.70 ￠/kWhTax　Rate: 32.5%

O&M　Costs: 0.70 ￠/kWh Fixed Asset Tax Rate 0.10% Project IRR (aft. tax)Make-up Well Cost: 6.00 m$/well 14.2%

CDM　Price 0 $/tEmission Factor 0.861 Ton/MWh

　Table Profit & Loss and FIRR of Total Development Project [Million US$]

OUTPUT SALES NET INCOME INTEREST TAX NET INCOME CASH FLOW

by NEW PLANT No. of No. Year MW GWH SALE Supplem. SUPPLM. TOTAL SALES Other CDM TOTAL OPER INT. INV. SUP. WELL Survey Fixed Asset Royalty TOTAL NET [After Tax & Int] FREE

Total Total Wells INVEST. INVEST. REVENUE Revenue REVENUE REVENUE COST DEPN. DEPN. Fee Tax EXPENSES INCOME CASH FLOW1 2 3 4 5 6 7 8 　 9 10 11 12 14 15

　 [2+3] 5.1 5.2 　 [6+7+8] [5-9] [10-11-12] [-4+7+8+10-12][GWh] 　 [6 M$/well] 9.7 $/kWh [0.7 ￠/kWh] 　　　 [32.5 %]

1 # 　　　　　　　　　　　　　　　　　 0.002 # 　　　　　　　　　　　　　　　　 0.003 # 　　　　　　　　　　　　　　　　 0.004 # 　 11.13 　　 11.13 　　　　　　　 2.50 2.50 -2.50 　　 -2.50 -13.63 5 # 　 13.87 　　 13.87 　　　　　　　 2.50 2.50 -2.50 　　 -2.50 -16.37 6 # 　 64.45 　　 64.45 　　　　　　　 2.50 2.50 -2.50 3.12 　 -5.62 -66.95 7 # 　 68.12 　　 68.12 　　　　　　　 2.50 2.50 -2.50 6.61 　 -9.11 -70.62 8 1 55 407.60 　　　　 39.54 　　 39.54 3.04 26.91 　 4.00 0.12 0.99 35.05 4.49 6.61 　 -2.12 31.409 2 55 407.60 　　　　 39.54 　　 39.54 3.04 20.21 　 3.83 0.10 0.99 28.17 11.37 6.35 　 5.01 31.58

10 3 55 407.60 　　　　 39.54 　　 39.54 3.04 17.98 　 3.67 0.08 0.99 25.75 13.79 5.80 　 7.99 31.7711 4 55 407.60 　 1.00 6.00 6.00 39.54 　　 39.54 3.04 17.96 　 3.50 0.07 0.99 25.56 13.98 5.25 　 8.73 25.9512 5 55 407.60 　　　　 39.54 　　 39.54 3.04 17.95 0.75 3.33 0.05 0.99 26.11 13.43 4.70 　 8.73 32.1313 6 55 407.60 　　　　 39.54 　　 39.54 3.04 17.94 0.75 3.17 0.03 0.99 25.92 13.62 4.15 1.29 8.18 31.0214 7 55 407.60 　　　　 39.54 　　 39.54 3.04 17.94 0.75 3.00 0.01 0.99 25.72 13.82 3.60 3.32 6.90 29.1815 8 55 407.60 　　　　 39.54 　　 39.54 3.04 6.79 0.75 2.83 0.00 0.99 14.41 25.13 3.05 7.18 14.91 25.5016 9 55 407.60 　 1.00 6.00 6.00 39.54 　　 39.54 3.04 0.11 0.75 2.67 0.01 0.99 7.56 31.98 2.50 9.58 19.90 17.2517 10 55 407.60 　　　　 39.54 　　 39.54 3.04 0.10 1.50 2.50 0.01 0.99 8.13 31.41 1.94 9.57 19.89 23.4318 11 55 407.60 　　　　 39.54 　　 39.54 3.04 0.10 1.50 2.33 0.01 0.99 7.96 31.57 1.39 9.81 20.37 23.3719 12 55 407.60 　　　　 39.54 　　 39.54 3.04 0.10 1.50 2.17 0.01 0.99 7.80 31.74 0.84 10.04 20.86 23.3020 13 55 407.60 　 2.00 9.00 9.00 39.54 　　 39.54 3.04 0.10 0.75 2.00 0.01 0.99 6.88 32.65 0.29 10.52 21.84 13.9921 14 55 407.60 　　　　 39.54 　　 39.54 3.04 0.10 1.88 1.83 0.01 0.99 7.84 31.70 　 10.30 21.40 23.3722 15 55 407.60 　　　　 39.54 　　 39.54 3.04 0.10 1.88 1.67 0.01 0.99 7.67 31.86 　 10.36 21.51 23.4823 16 55 407.60 　　　　 39.54 　　 39.54 3.04 0.10 1.88 　 0.01 0.99 6.00 33.53 　 10.90 22.63 24.6124 17 55 407.60 　　　　 39.54 　　 39.54 3.04 0.10 1.88 　 0.00 0.99 6.00 33.53 　 10.90 22.64 24.6125 18 55 407.60 　 1.00 6.00 6.00 39.54 　　 39.54 3.04 0.10 1.13 　 0.01 0.99 5.26 34.28 　 11.14 23.14 18.3626 19 55 407.60 　　　　 39.54 　　 39.54 3.04 0.10 1.88 　 0.01 0.99 6.01 33.53 　 10.90 22.63 24.6127 20 55 407.60 　　　　 39.54 　　 39.54 3.04 0.10 1.88 　 0.01 0.99 6.00 33.53 　 10.90 22.63 24.6128 21 55 407.60 　　　　 39.54 　　 39.54 3.04 0.10 1.88 　 0.00 0.99 6.00 33.53 　 10.90 22.64 24.6129 22 55 407.60 　 1.00 6.00 6.00 39.54 　　 39.54 3.04 0.10 0.75 　 0.01 0.99 4.88 34.65 　 11.26 23.39 18.2430 23 55 407.60 　　　　 39.54 　　 39.54 3.04 0.10 1.50 　 0.01 0.99 5.63 33.91 　 11.02 22.89 24.4931 24 55 407.60 　　　　 39.54 　　 39.54 3.04 0.10 1.50 　 0.01 0.99 5.63 33.91 　 11.02 22.89 24.4932 25 55 407.60 　　　　 39.54 　　 39.54 3.04 0.10 1.50 　 0.00 0.99 5.63 33.91 　 11.02 22.89 24.4933 26 55 407.60 　 2.00 9.00 9.00 39.54 　　 39.54 3.04 0.10 1.50 　 0.01 0.99 5.63 33.90 　 11.02 22.89 15.4934 27 55 407.60 　　　　 39.54 　　 39.54 3.04 0.00 1.88 　 0.01 0.99 5.91 33.63 　 10.93 22.70 24.5835 28 55 407.60 　　　　 39.54 　　 39.54 3.04 　 1.88 　 0.01 0.99 5.90 33.63 　 10.93 22.70 24.58 36 29 55 407.60 　　　　 39.54 　　 39.54 3.04 　 1.88 　 0.00 0.99 5.90 33.63 　 10.93 22.70 24.58 37 30 55 407.60 　　　　 39.54 　　 39.54 3.04 　 1.88 　 0.00 0.99 5.90 33.64 　 10.93 22.70 24.58

999 　　　　　　　　　　　　　　　　　　

Total 12,228.08 157.57 8 42.00 199.57 1,186.12 0.00 0.00 1,186.12 91.06 145.50 37.50 52.50 0.61 29.65 356.83 829.30 56.22 246.67 526.40 566.06

Electricity Price 9.70 （￠/kWh） WACC of Project: Power Plant Project F.I.R.R. 14.2%

INVESTMENT

INVESTMENT

REVENUE COSTS

Table-3.3.17 Profit and Loss Table of Model Geothermal Power Plant (55 MW; Debt-type 15-year repayment)



Project Name Output： 55 MW

Tax Rate: 33% 33%

Equity-type CaseIRR on Equity Devidend ratio IRR on Equity (aft Tax, aft Int) (aft Tax, aft Int)

18.8% 100% 18.8%

Table Cash flow of Total Development Project [Million US$]Cash Inflow Cash Outflow Balance

No. Initial Additional Repayment Per Internal Devidend to Shareholders

Total Year EBIT Interest Tax Profit Initial Inv.Add'nal

Inv. InvestmentInvestment Capital Total Year Cumulative DSCR Reserve Total Fund IPP

1 2 3 4 5 6 7 8 9 10 11 12 13 14 8/(3+11) 15 16[32.5 %] [2-3-4] [1+5+6+7] [9+10+11] [8-12]

1 　　　　　　　　　　　 2 　　　　　　　　　　　 3 　　　　　　　　　　　 4 　 -2.50 　　 -2.50 　　 -2.50 11.13 　　 11.13 -13.63 -13.63 -13.63 -13.635 　 -2.50 　　 -2.50 　　 -2.50 13.87 　　 13.87 -16.37 -30.00 -16.37 -16.376 48.05 -2.50 3.12 　 -5.62 　　 42.42 64.45 　　 64.45 -22.03 -52.03 -22.03 -22.037 53.72 -2.50 6.61 　 -9.11 　　 44.60 68.12 　　 68.12 -23.52 -75.55 -23.52 -23.528 1 　 4.49 6.61 　 -2.12 26.91 　 24.78 　　　　 24.78 -50.77 3.75 0.00 24.78 　 24.789 2 　 11.37 6.35 　 5.01 20.21 　 25.23 　　 4.00 4.00 21.22 -29.54 2.44 0.00 21.22 　 21.22

10 3 　 13.79 5.80 　 7.99 17.98 　 25.96 　　 8.48 8.48 17.48 -12.06 1.82 0.00 17.48 　 17.4811 4 　 13.98 5.25 　 8.73 17.96 　 26.69 　 6.00 8.48 14.48 12.21 0.15 1.94 0.00 12.21 　 12.2112 5 　 13.43 4.70 　 8.73 17.95 0.75 27.43 　　 8.48 8.48 18.95 19.10 2.08 0.00 18.95 　 18.9513 6 　 13.62 4.15 1.29 8.18 17.94 0.75 26.88 　　 8.48 8.48 18.40 37.50 2.13 0.00 18.40 　 18.4014 7 　 13.82 3.60 3.32 6.90 17.94 0.75 25.58 　　 8.48 8.48 17.10 54.60 2.12 0.00 17.10 　 17.1015 8 　 25.13 3.05 7.18 14.91 6.79 0.75 22.45 　　 8.48 8.48 13.97 68.57 1.95 0.00 13.97 　 13.9716 9 　 31.98 2.50 9.58 19.90 0.11 0.75 20.76 　 6.00 8.48 14.48 6.28 74.85 1.89 0.00 6.28 　 6.2817 10 　 31.41 1.94 9.57 19.89 0.10 1.50 21.49 　　 8.48 8.48 13.01 87.86 2.06 0.00 13.01 　 13.0118 11 　 31.57 1.39 9.81 20.37 0.10 1.50 21.97 　　 8.48 8.48 13.49 101.35 2.23 0.00 13.49 　 13.4919 12 　 31.74 0.84 10.04 20.86 0.10 1.50 22.46 　　 8.48 8.48 13.98 115.32 2.41 0.00 13.98 　 13.9820 13 　 32.65 0.29 10.52 21.84 0.10 0.75 22.69 　 9.00 8.48 17.48 5.21 120.54 2.59 0.00 5.21 　 5.2121 14 　 31.70 　 10.30 21.40 0.10 1.88 23.37 　　 4.48 4.48 18.89 139.43 5.22 0.00 18.89 　 18.8922 15 　 31.86 　 10.36 21.51 0.10 1.88 23.48 　　　　 23.48 162.92 - 0.00 23.48 　 23.4823 16 　 33.53 　 10.90 22.63 0.10 1.88 24.61 　　　　 24.61 187.53 - 0.00 24.61 　 24.6124 17 　 33.53 　 10.90 22.64 0.10 1.88 24.61 　　　　 24.61 212.14 - 0.00 24.61 　 24.6125 18 　 34.28 　 11.14 23.14 0.10 1.13 24.36 　 6.00 　 6.00 18.36 230.50 - 0.00 18.36 　 18.3626 19 　 33.53 　 10.90 22.63 0.10 1.88 24.61 　　　　 24.61 255.11 - 0.00 24.61 　 24.6127 20 　 33.53 　 10.90 22.63 0.10 1.88 24.61 　　　　 24.61 279.72 - 0.00 24.61 　 24.6128 21 　 33.53 　 10.90 22.64 0.10 1.88 24.61 　　　　 24.61 304.33 - 0.00 24.61 　 24.6129 22 　 34.65 　 11.26 23.39 0.10 0.75 24.24 　 6.00 　 6.00 18.24 322.57 - 0.00 18.24 　 18.2430 23 　 33.91 　 11.02 22.89 0.10 1.50 24.49 　　　　 24.49 347.06 - 0.00 24.49 　 24.4931 24 　 33.91 　 11.02 22.89 0.10 1.50 24.49 　　　　 24.49 371.54 - 0.00 24.49 　 24.4932 25 　 33.91 　 11.02 22.89 0.10 1.50 24.49 　　　　 24.49 396.03 - 0.00 24.49 　 24.4933 26 　 33.90 　 11.02 22.89 0.10 1.50 24.49 　 9.00 　 9.00 15.49 411.52 - 0.00 15.49 　 15.4934 27 　 33.63 　 10.93 22.70 0.00 1.88 24.58 　　　　 24.58 436.10 - 0.00 24.58 　 24.5835 28 　 33.63 　 10.93 22.70 　 1.88 24.58 　　　　 24.58 460.67 - 0.00 24.58 　 24.5836 29 　 33.63 　 10.93 22.70 　 1.88 24.58 　　　　 24.58 485.25 - 0.00 24.58 　 24.5837 30 　 33.64 　 10.93 22.70 　 1.88 24.58 　　　　 24.58 509.83 - 0.00 24.58 　 24.58

　 101.76 829.30 56.22 246.67 526.40 145.50 37.50 811.17 157.57 42.00 101.76 301.34 509.83 1.82 0.0 509.8 0.0 509.8

Borrowing

Cash Flow from Operating Activities DepreciationFREE CASH FLOW

Total

Table-3.3.18 Cash Flow Table of Model Geothermal Power Plant (55 MW; Debt-type 15-year repayment)



Basic Conditions

Output 55 MWＣａｐａｃｉｔｙＦａｃｔｏｒ: 90% Tax General 33%

Ｈｏｕｓｅ Use Rate: 6.0% Tax Incective 15%T&D Loss: 0.0% Tax Hldy Yrs 0

Energy Price: 9.70 ￠/kWhTax　Rate: 32.5%

O&M　Costs: 0.70 ￠/kWh Fixed Asset Tax Rate 0.10% Project IRR (aft. tax)Make-up Well Cost: 6.00 m$/well 13.2%

CDM　Price 0 $/tEmission Factor 0.861 Ton/MWh

　Table Profit & Loss and FIRR of Total Development Project [Million US$]

OUTPUT SALES NET INCOME INTEREST TAX NET INCOME CASH FLOW

by NEW PLANT No. of No. Year MW GWH SALE Supplem. SUPPLM. TOTAL SALES Other CDM TOTAL OPER INT. INV. SUP. WELL Survey Fixed Asset Royalty TOTAL NET [After Tax & Int] FREE

Total Total Wells INVEST. INVEST. REVENUE Revenue REVENUE REVENUE COST DEPN. DEPN. Fee Tax EXPENSES INCOME CASH FLOW1 2 3 4 5 6 7 8 　 9 10 11 12 14 15

　 [2+3] 5.1 5.2 　 [6+7+8] [5-9] [10-11-12] [-4+7+8+10-12][GWh] 　 [6 M$/well] 9.7 $/kWh [0.7 ￠/kWh] 　　　 [32.5 %]

1 # 　　　　　　　　　　　　　　　　　 0.002 # 　 5.91 　　 5.91 　　　　　　　　　　　 -5.91 3 # 　 19.08 　　 19.08 　　　　　　　　　　　 -19.08 4 # 　 11.13 　　 11.13 　　　　　　　　　　　 0.00 -11.13 5 # 　 13.87 　　 13.87 　　　　　　　　　　　 0.00 -13.87 6 # 　 64.45 　　 64.45 　　　　　　　　　 3.12 　 -3.12 -64.45 7 # 　 68.12 　　 68.12 　　　　　　　　　 6.61 　 -6.61 -68.12 8 1 55 407.60 　　　　 39.54 　　 39.54 3.04 26.91 　　 0.12 0.99 31.05 8.49 6.61 　 1.88 35.409 2 55 407.60 　　　　 39.54 　　 39.54 3.04 20.21 　　 0.10 0.99 24.34 15.20 6.35 　 8.85 35.42

10 3 55 407.60 　　　　 39.54 　　 39.54 3.04 17.98 　　 0.08 0.99 22.08 17.46 5.80 0.30 11.35 35.1311 4 55 407.60 　 1.00 6.00 6.00 39.54 　　 39.54 3.04 17.96 　　 0.07 0.99 22.06 17.48 5.25 1.98 10.25 27.4612 5 55 407.60 　　　　 39.54 　　 39.54 3.04 17.95 0.75 　 0.05 0.99 22.78 16.76 4.70 1.83 10.23 33.6413 6 55 407.60 　　　　 39.54 　　 39.54 3.04 17.94 0.75 　 0.03 0.99 22.75 16.79 4.15 1.91 10.72 33.5714 7 55 407.60 　　　　 39.54 　　 39.54 3.04 17.94 0.75 　 0.01 0.99 22.72 16.82 3.60 4.30 8.92 31.2115 8 55 407.60 　　　　 39.54 　　 39.54 3.04 6.79 0.75 　 0.00 0.99 11.57 27.96 3.05 8.10 16.82 27.4116 9 55 407.60 　 1.00 6.00 6.00 39.54 　　 39.54 3.04 0.11 0.75 　 0.01 0.99 4.89 34.65 2.50 10.45 21.70 19.0517 10 55 407.60 　　　　 39.54 　　 39.54 3.04 0.10 1.50 　 0.01 0.99 5.63 33.91 1.94 10.39 21.57 25.1218 11 55 407.60 　　　　 39.54 　　 39.54 3.04 0.10 1.50 　 0.01 0.99 5.63 33.91 1.39 10.57 21.95 24.9419 12 55 407.60 　　　　 39.54 　　 39.54 3.04 0.10 1.50 　 0.01 0.99 5.63 33.91 0.84 10.75 22.32 24.7620 13 55 407.60 　 2.00 9.00 9.00 39.54 　　 39.54 3.04 0.10 0.75 　 0.01 0.99 4.88 34.65 0.29 11.17 23.19 15.3421 14 55 407.60 　　　　 39.54 　　 39.54 3.04 0.10 1.88 　 0.01 0.99 6.01 33.53 　 10.90 22.63 24.6122 15 55 407.60 　　　　 39.54 　　 39.54 3.04 0.10 1.88 　 0.01 0.99 6.01 33.53 　 10.90 22.63 24.6123 16 55 407.60 　　　　 39.54 　　 39.54 3.04 0.10 1.88 　 0.01 0.99 6.00 33.53 　 10.90 22.63 24.6124 17 55 407.60 　　　　 39.54 　　 39.54 3.04 0.10 1.88 　 0.00 0.99 6.00 33.53 　 10.90 22.64 24.6125 18 55 407.60 　 1.00 6.00 6.00 39.54 　　 39.54 3.04 0.10 1.13 　 0.01 0.99 5.26 34.28 　 11.14 23.14 18.3626 19 55 407.60 　　　　 39.54 　　 39.54 3.04 0.10 1.88 　 0.01 0.99 6.01 33.53 　 10.90 22.63 24.6127 20 55 407.60 　　　　 39.54 　　 39.54 3.04 0.10 1.88 　 0.01 0.99 6.00 33.53 　 10.90 22.63 24.6128 21 55 407.60 　　　　 39.54 　　 39.54 3.04 0.10 1.88 　 0.00 0.99 6.00 33.53 　 10.90 22.64 24.6129 22 55 407.60 　 1.00 6.00 6.00 39.54 　　 39.54 3.04 0.10 0.75 　 0.01 0.99 4.88 34.65 　 11.26 23.39 18.2430 23 55 407.60 　　　　 39.54 　　 39.54 3.04 0.10 1.50 　 0.01 0.99 5.63 33.91 　 11.02 22.89 24.4931 24 55 407.60 　　　　 39.54 　　 39.54 3.04 0.10 1.50 　 0.01 0.99 5.63 33.91 　 11.02 22.89 24.4932 25 55 407.60 　　　　 39.54 　　 39.54 3.04 0.10 1.50 　 0.00 0.99 5.63 33.91 　 11.02 22.89 24.4933 26 55 407.60 　 2.00 9.00 9.00 39.54 　　 39.54 3.04 0.10 1.50 　 0.01 0.99 5.63 33.90 　 11.02 22.89 15.4934 27 55 407.60 　　　　 39.54 　　 39.54 3.04 0.00 1.88 　 0.01 0.99 5.91 33.63 　 10.93 22.70 24.5835 28 55 407.60 　　　　 39.54 　　 39.54 3.04 　 1.88 　 0.01 0.99 5.90 33.63 　 10.93 22.70 24.58 36 29 55 407.60 　　　　 39.54 　　 39.54 3.04 　 1.88 　 0.00 0.99 5.90 33.63 　 10.93 22.70 24.58 37 30 55 407.60 　　　　 39.54 　　 39.54 3.04 　 1.88 　 0.00 0.99 5.90 33.64 　 10.93 22.70 24.58

999 　　　　　　　　　　　　　　　　　　

Total 12,228.08 182.57 8 42.00 224.57 1,186.12 0.00 0.00 1,186.12 91.06 145.50 37.50 0.00 0.61 29.65 304.33 881.80 56.22 258.23 567.34 582.00

Electricity Price 9.70 （￠/kWh） WACC of Project: Power Plant Project F.I.R.R. 13.2%

INVESTMENT

INVESTMENT

REVENUE COSTS

Table-3.3.19 Profit and Loss Table of Model Geothermal Power Plant (55 MW; Equity-type)



Project Name Output： 55 MW

Tax Rate: 33% 33%

Equity-type CaseIRR on Equity Devidend ratio IRR on Equity (aft Tax, aft Int) (aft Tax, aft Int)

15.9% 100% 18.0%

Table Cash flow of Total Development Project [Million US$]Cash Inflow Cash Outflow Balance

No. Initial Additional Repayment Per Internal Devidend to Shareholders

Total Year EBIT Interest Tax Profit Initial Inv.Add'nal

Inv. InvestmentInvestment Capital Total Year Cumulative DSCR Reserve Total Fund IPP

1 2 3 4 5 6 7 8 9 10 11 12 13 14 8/(3+11) 15 16[32.5 %] [2-3-4] [1+5+6+7] [9+10+11] [8-12]

1 　　　　　　　　　　　 2 　　　　　　　 5.91 　　 5.91 -5.91 -5.91 -5.91 -5.913 　　　　　　　 19.08 　　 19.08 -19.08 -24.99 -19.08 -19.084 　　　　　 11.13 　　 11.13 -11.13 -36.12 -11.13 -11.135 　　　　　 13.87 　　 13.87 -13.87 -50.00 -13.87 -13.876 48.05 3.12 　 -3.12 　　 44.92 64.45 　　 64.45 -19.53 -69.52 -19.53 -19.537 53.72 6.61 　 -6.61 　　 47.10 68.12 　　 68.12 -21.02 -90.54 -21.02 -21.028 1 　 8.49 6.61 　 1.88 26.91 　 28.78 　　　　 28.78 -61.76 4.35 0.00 28.78 7.95 20.839 2 　 15.20 6.35 　 8.85 20.21 　 29.06 　　 4.00 4.00 25.06 -36.70 2.81 0.00 25.06 6.92 18.14

10 3 　 17.46 5.80 0.30 11.35 17.98 　 29.33 　　 8.48 8.48 20.85 -15.86 2.05 0.00 20.85 5.76 15.0911 4 　 17.48 5.25 1.98 10.25 17.96 　 28.21 　 6.00 8.48 14.48 13.73 -2.13 2.05 0.00 13.73 3.79 9.9412 5 　 16.76 4.70 1.83 10.23 17.95 0.75 28.94 　　 8.48 8.48 20.46 18.33 2.20 0.00 20.46 5.65 14.8113 6 　 16.79 4.15 1.91 10.72 17.94 0.75 29.42 　　 8.48 8.48 20.94 39.27 2.33 0.00 20.94 5.78 15.1614 7 　 16.82 3.60 4.30 8.92 17.94 0.75 27.61 　　 8.48 8.48 19.13 58.40 2.29 0.00 19.13 5.28 13.8515 8 　 27.96 3.05 8.10 16.82 6.79 0.75 24.36 　　 8.48 8.48 15.88 74.28 2.11 0.00 15.88 4.39 11.5016 9 　 34.65 2.50 10.45 21.70 0.11 0.75 22.56 　 6.00 8.48 14.48 8.08 82.36 2.06 0.00 8.08 2.23 5.8517 10 　 33.91 1.94 10.39 21.57 0.10 1.50 23.17 　　 8.48 8.48 14.69 97.05 2.22 0.00 14.69 4.06 10.6418 11 　 33.91 1.39 10.57 21.95 0.10 1.50 23.55 　　 8.48 8.48 15.07 112.12 2.38 0.00 15.07 4.16 10.9119 12 　 33.91 0.84 10.75 22.32 0.10 1.50 23.92 　　 8.48 8.48 15.44 127.56 2.57 0.00 15.44 4.26 11.1820 13 　 34.65 0.29 11.17 23.19 0.10 0.75 24.04 　 9.00 8.48 17.48 6.56 134.12 2.74 0.00 6.56 1.81 4.7521 14 　 33.53 　 10.90 22.63 0.10 1.88 24.61 　　 4.48 4.48 20.13 154.25 5.50 0.00 20.13 5.56 14.5722 15 　 33.53 　 10.90 22.63 0.10 1.88 24.61 　　　　 24.61 178.86 - 0.00 24.61 6.79 17.8123 16 　 33.53 　 10.90 22.63 0.10 1.88 24.61 　　　　 24.61 203.47 - 0.00 24.61 6.79 17.8224 17 　 33.53 　 10.90 22.64 0.10 1.88 24.61 　　　　 24.61 228.08 - 0.00 24.61 6.80 17.8225 18 　 34.28 　 11.14 23.14 0.10 1.13 24.36 　 6.00 　 6.00 18.36 246.45 - 0.00 18.36 5.07 13.2926 19 　 33.53 　 10.90 22.63 0.10 1.88 24.61 　　　　 24.61 271.06 - 0.00 24.61 6.79 17.8127 20 　 33.53 　 10.90 22.63 0.10 1.88 24.61 　　　　 24.61 295.67 - 0.00 24.61 6.79 17.8128 21 　 33.53 　 10.90 22.64 0.10 1.88 24.61 　　　　 24.61 320.28 - 0.00 24.61 6.79 17.8229 22 　 34.65 　 11.26 23.39 0.10 0.75 24.24 　 6.00 　 6.00 18.24 338.52 - 0.00 18.24 5.04 13.2130 23 　 33.91 　 11.02 22.89 0.10 1.50 24.49 　　　　 24.49 363.00 - 0.00 24.49 6.76 17.7331 24 　 33.91 　 11.02 22.89 0.10 1.50 24.49 　　　　 24.49 387.49 - 0.00 24.49 6.76 17.7332 25 　 33.91 　 11.02 22.89 0.10 1.50 24.49 　　　　 24.49 411.98 - 0.00 24.49 6.76 17.7333 26 　 33.90 　 11.02 22.89 0.10 1.50 24.49 　 9.00 　 9.00 15.49 427.47 - 0.00 15.49 4.28 11.2134 27 　 33.63 　 10.93 22.70 0.00 1.88 24.58 　　　　 24.58 452.04 - 0.00 24.58 6.79 17.7935 28 　 33.63 　 10.93 22.70 　 1.88 24.58 　　　　 24.58 476.62 - 0.00 24.58 6.79 17.7936 29 　 33.63 　 10.93 22.70 　 1.88 24.58 　　　　 24.58 501.20 - 0.00 24.58 6.79 17.7937 30 　 33.64 　 10.93 22.70 　 1.88 24.58 　　　　 24.58 525.78 - 0.00 24.58 6.79 17.79

　 101.76 881.80 56.22 258.23 567.34 145.50 37.50 852.11 182.57 42.00 101.76 326.33 525.78 2.05 0.0 525.8 145.2 380.6

Borrowing

Cash Flow from Operating Activities DepreciationFREE CASH FLOW

Total

Table-3.3.20 Cash Flow Table of Model Geothermal Power Plant (55 MW; Equity-type)



<A>

Expenditure 25 m$

(Success rate 50%) <Alternative thermal power plant (either Coal-fired PP or Diesel PP)>

<B> <C> <D>

(Realized)

(Saved by Geothermal PP) (Saved by Geothermal PP)

FUND

Geothermal Power Plant Diesel Power PlantCoal-fired Power Plant

Investment O&M cost Investment O&M cost

Fuel cost

CO2 cost

Investment O&M cost

Fuel cost

CO2 cost

3.4 Socio-economic Effects of the Fund

(1) Approach to Calculation of Socio-economic Effects

This chapter discusses the justification of the Fund by calculating the socio-economic effects of the Fund. The basic approach is as follows. As seen in the previous section, the Fund provides financing to Governmental Exploration, of which the cost is USD 25 million per field. Private developers will continue development following Governmental Exploration, if the exploration results are promising. When private developers construct geothermal power plants in the fields, the geothermal plants will substitute for coal-fired power plants or diesel power plants that would be needed to fulfill electricity demand otherwise. This means that the geothermal power plants will save coal or diesel fuel that would have been burnt in fossil fuel power plants. The geothermal plants also save the operation and maintenance costs of each power plant as well as their investment costs. Moreover, geothermal plants reduce the emission of CO2, compared to coal-fired or diesel plants that would otherwise have been built. On the other hand, geothermal plants have their own investment costs and O&M costs. Therefore, the effect of the construction of the geothermal plants is the difference between the expenditures listed in part <C> (or in part <D>) and in part <B> of Fig.-3.4-1. This is the effect of the expenditures of the Fund shown in part <A> in Fig.-3.4-1. Taking into consideration the fact that not all fields can be developed successfully by private developers, it is necessary to multiply the effect (<C>-<B>) by the probability of success (the Success Rate).

Fig.-3.4-1 Socio-economic Effects of the Fund



The value of the reduction of CO2 emissions by the development of geothermal power plants, compared to coal-fired or diesel power plants, is calculated by multiplying the avoided amount of CO2 emissions by the unit price of carbon credits. Regarding the pricing of CO2 emissions as well as the prices of coal and oil, this study references the prospective future values in the IEA World Energy Outlook (shown in Table-3.4-1) and assumes them as shown in Table-3.4-2. According to IEA World Energy Outlook, the crude oil price is assumed as 100 USD/bbl in the middle of 2010’s, and will reach 135 USD/bbl in the middle of 2030’s. The middle of 2010’s means the year when the geothermal power plant that are supported by the Fund is expected to start operation. In the calculation of the effects, therefore, the crude oil price is set as 100 USD/bbl in the first operation year and is assumed to rise by 1.5% annually afterwards. Regarding the coal price, it is assumed as 100 USD/ton in the middle of 2010’s, and will reach 115 USD/ton in the middle of 2030’s. Similarly as oil case, the coal price is considered as 100 USD/ton in the first operation year and is assumed to rise by 0.7% annually afterwards. Regarding the CO2 price, it is assumed as 30 USD/ton in the middle of 2010’s, and will reach 40 USD/ton in the middle of 2030’s. Similarly as oil case, the CO2 price is considered as 30 USD/ton in the first operation year and is assumed to rise by 1.4% annually afterwards. The technical specification of the coal-fired power plant and diesel power plant that would be substituted by geothermal plant is assumed as shown in Table-3.4-3.

Table-3.4-1 Prospects of Future Energy Prices in IEA World Energy Outlook (WEO) Item WEO 2007 2008 2009 2010 2015 2020 2025 2030 2035 Crude Oil (USD/bbl)

WEO 2008 69.3 100 100 110 116 122 WEO 2009 97.2 86.7 100.0 107.5 115.0 WEO 2010 60.4 94 110 120 130 135

Coal (USD/ton)

WEO 2008 72.8 120 120 116.7 113.3 110.0 WEO 2009 120.6 91.1 104.2 107.1 109.4 WEO 2010 97.7 97.8 105.8 109.5 112.5 115.0

CO2 (USD/ton)

WEO 2009 43 54 WEO 2010 30 37 42

(Note) 1. Prices are real term. 2. WEO 2010 is from Current Policies Scenario.

(Source) IEA “World Energy Outlook” (2008, 2009, 2010)



Table-3.4-2 Assumption of Future Energy Prices and CO2 Prices (2009 USD)

Items Unit

1st operation year of Geothermal Plant (middle of 2010s)

20th operation year of Geothermal Plant (middle of 2030s)

Averaged Annual Growth

Crude Oil USD/bbl 100 135 1.5% Coal USD/ton 100 115 0.7% CO2 USD/ton 30 40 1.4%

Table-3.4-3 Technical Specification of Alternative Power Plants Item Geothermal PP Coal-fired PP Diesel PP

Capacity 55 MW 55 MW 55 MW Unit Construction Cost 3,320 USD/kW 1,400 USD/kW 1,000 USD/kW Plant Factor 90.0% 89.1% 87.2% Own Use Rate 6% 5% 3% Power Generation (annual) 407.6 GWh 407.6 GWh 407.6 GWh Fuel - Bituminous High Speed

Diesel Heat Rate - 2,350 kcal/kWh 2,250 kcal/kWh Heat Value of Fuel - 6,000 kcal/kg 9,100 kcal/L Fuel Price at the 1st operation year - 100 USD/ton 100 USD/bbl Fuel Price Increase - 0.7%/yr 1.5%/yr CO2 Emission Coefficient - 0.957 kg/kWh 0.702 kg/kWh CO2 Price - 30 USD/ton 30 USD/ton CO2 Price Increase - 1.4%/yr 1.4% /yr

(2) Results of Calculation

The calculation process of the effect of a 55 MW geothermal plant is shown in Table-3.4-4, and the calculation results are shown in Table-3.4-5 and Fig.-3.4-2. According to these tables and figures, the 55 MW geothermal plant will substitute for a coal-fired power plant and save a total of 4.8 million tons of coal over 30 years when the Success Rate is 100%. As for CO2 emissions, the geothermal plant will avoid 11.6 million tons of CO2 emissions from the coal-fired plant over 30 years when the Success Rate is 100%. If the geothermal plant substitutes for a diesel power plant, it will save 3.1 million liters of diesel fuel over 30 years when the Success Rate is 100%. As for CO2 emissions, a total amount of 8.9 million tons of CO2 emissions will be avoided. These amounts of saved fuel and avoided CO2 emissions are converted into monetary terms and are compared with the total expense of the Fund. The Economic Internal Rate of



Return (EIRR) of the expenditure of the Fund is calculated in terms of the socio-economic effects of the Fund expenditure. The EIRR of the Fund expenditure is calculated to be 20.3% when substituting for a coal-fired plant and is 34.9% in the case of a diesel plant substitution. If the Success Rate falls to 50%, the amount of saved fuel and CO2 emissions also falls to 50% of the figures mentioned above. Namely, the amount of coal saved becomes 2.4 million tons and the CO2 emissions avoided is 5.8 million tons over 30 years. When substituting for a diesel power plant, 1.6 million liters of diesel fuel is saved and 4.4 million tons of CO2 emissions are avoided over 30 years. The EIRR of the Fund is calculated as 16.3% when substituting for a coal-fired plant and 28.9% when substituting for a diesel plant. In general the EIRR of a certain policy is judged by the opportunity cost of capital. This opportunity cost of capital is often assumed to be 12% in many countries13

. Therefore this Study uses 12% as a criterion for judging the EIRR. In this case, the Fund has a socio-economic significance until the Success Rate goes down to 30% for coal-fired plant substitution and 10% for diesel power substitution as shown in Table-3.4-4 and Fig.-3.4-2.

The above-mentioned calculation is a calculation of the effects when a 55 MW geothermal power plant is constructed on the basis of Governmental Exploration that received financial support from the Fund. On the other hand, when a small geothermal power plant, such as one of 20 MW is constructed, the effects of the geothermal plant are accordingly smaller. In a calculation of effects of 20 MW geothermal plants, it is suitable to assume that the geothermal plant will substitute for a 20 MW diesel power plant and not a 20 MW coal-fired plant. This is because construction of a small coal-fired plant such as one in the 20 MW class is technically difficult and is less cost-competitive with diesel power plants.

The calculation process of the effect of a 20 MW geothermal plant is shown in Table-3.4-6, and the calculation results are shown in Table-3.4-7 and Fig.-3.4-3. According to these tables and figure, the 20 MW geothermal plant will save a total of 1.1 million liters of diesel oil over 30 years when the Success Rate is 100%. As for CO2 emissions, the geothermal plant will avoid 3.2 million tons of CO2 emissions from the diesel plant over 30 years when the Success Rate is 100%. The EIRR of the Fund is calculated as 22.8%. When the Success Rate is 50%, 0.6 million liters of diesel fuel are saved and 1.6 million tons of CO2 emissions are avoided over 30 years, and the socio-economic effects (EIRR) of the Fund are 17.8%. Table-3.4.7 and Fig.-3.4-3 show that the Fund has a socio-economic significance until Success Rate falls to 30%.

13 See “Guidelines for the Economic Analysis of Projects”, Asian Development Bank.



Effect of FundGeothermal Power Plant Coal-fired Power Plant Diesel Power Plant

Geothermal Power Plant 55 MW Coal Power Plant 55 MW Coal Power Plant 55 MWConstruction Cost 3,320 $/kW (183 m$) Construction Cost 1,400 $/kW (77 m$) Construction Cost 1,000 $/kW (55 m$)

Plant Factor 90.0 % Plant Factor 89.1 % Plant Factor 87.2 %Heat Rate 2,350 kcal/kWh (36.6%) Heat Rate 2,250 kcal/kWh (38.2%)

Gov. Exploration 25 m$ Coal Heat Value 6,000 kcal/kg HSD Heat Value 9,100 kcal/LSuccess Rate 50 % Coal Price 100 $/ton Oil Price 100 $/bbl (110 $/bbl)

Price Increase 0.7 % annual Price Increase 1.5 % annualCO2 Emission Factor (Coal) 0.957 kg/kWh CO2 Emission Factor (Diesel) 0.702 kg/kWh

CO2 Price 30 $/ton CO2 Price 30 $/ton CO2 Price Increase 1.4 % annual CO2 Price Increase 1.4 % annual

Cash Flow Fund Success v.s. Coal v.s. DieselExpenditure Rate Investment O&M Cost Total Cost Generation Investment O&M Cost Fuel Cost CO2 Cost Total Cost Coal saved CO2 saved Diff. Investment O&M Cost Fuel Cost CO2 Cost Total Cost DSL saved CO2 saved Diff.

(m$) (%) (m$) (m$) (m$) (GWh) (m$) (m$) (m$) (m$) (m$) ('000 ton) ('000 ton) (m$) (m$) (m$) (m$) (m$) (m$) ('000 kL) ('000 ton) (m$)No Year a b1 b2 b=Σbi c1 c2 c3 c4 c=Σci d=c-(a+b) e1 e2 e3 e4 e=Σei f=e-(a+b)

1 -6 5.9 -5.9 -5.92 -5 19.1 -19.1 -19.13 -4 50 5.6 5.6 -5.6 -5.64 -3 50 6.9 6.9 9.6 9.6 2.7 -6.95 -2 50 32.2 32.2 15.4 15.4 -16.8 12.4 12.4 -19.86 -1 50 34.1 34.1 13.5 13.5 -20.6 15.1 15.1 -18.97 1 50 　 1.5 1.5 203.8 1.2 9.5 5.8 16.4 79.8 192.8 14.9 0.7 35.9 4.4 41.1 51.9 147.5 39.58 2 50 　 1.5 1.5 203.8 1.2 9.6 5.9 16.6 79.8 192.8 15.1 0.7 36.5 4.4 41.6 51.9 147.5 40.19 3 50 　 1.5 1.5 203.8 1.2 9.6 5.9 16.7 79.8 192.8 15.2 0.7 37.0 4.4 42.1 51.9 147.5 40.6

10 4 50 3.0 1.5 4.5 203.8 1.2 9.7 6.0 16.9 79.8 192.8 12.4 0.7 37.6 4.4 42.7 51.9 147.5 38.211 5 50 　 1.5 1.5 203.8 1.2 9.8 6.1 17.0 79.8 192.8 15.5 0.7 38.1 4.4 43.3 51.9 147.5 41.712 6 50 　 1.5 1.5 203.8 1.2 9.8 6.2 17.2 79.8 192.8 15.7 0.7 38.7 4.4 43.8 51.9 147.5 42.313 7 50 　 1.5 1.5 203.8 1.2 9.9 6.3 17.3 79.8 192.8 15.8 0.7 39.3 4.4 44.4 51.9 147.5 42.914 8 50 　 1.5 1.5 203.8 1.2 10.0 6.4 17.5 79.8 192.8 16.0 0.7 39.9 4.4 45.0 51.9 147.5 43.515 9 50 3.0 1.5 4.5 203.8 1.2 10.0 6.5 17.7 79.8 192.8 13.1 0.7 40.5 4.4 45.6 51.9 147.5 41.116 10 50 　 1.5 1.5 203.8 1.2 10.1 6.6 17.8 79.8 192.8 16.3 0.7 41.1 4.4 46.2 51.9 147.5 44.717 11 50 　 1.5 1.5 203.8 1.2 10.2 6.6 18.0 79.8 192.8 16.5 0.7 41.7 4.4 46.8 51.9 147.5 45.318 12 50 　 1.5 1.5 203.8 1.2 10.3 6.7 18.2 79.8 192.8 16.6 0.7 42.3 4.4 47.4 51.9 147.5 45.919 13 50 4.5 1.5 6.0 203.8 1.2 10.3 6.8 18.3 79.8 192.8 12.3 0.7 43.0 4.4 48.1 51.9 147.5 42.120 14 50 　 1.5 1.5 203.8 1.2 10.4 6.9 18.5 79.8 192.8 17.0 0.7 43.6 4.4 48.7 51.9 147.5 47.221 15 50 　 1.5 1.5 203.8 1.2 10.5 7.0 18.7 79.8 192.8 17.1 0.7 44.3 4.4 49.4 51.9 147.5 47.922 16 50 　 1.5 1.5 203.8 1.2 10.5 7.1 18.8 79.8 192.8 17.3 0.7 44.9 4.4 50.0 51.9 147.5 48.523 17 50 　 1.5 1.5 203.8 1.2 10.6 7.2 19.0 79.8 192.8 17.5 0.7 45.6 4.4 50.7 51.9 147.5 49.224 18 50 3.0 1.5 4.5 203.8 1.2 10.7 7.3 19.2 79.8 192.8 14.7 0.7 46.3 4.4 51.4 51.9 147.5 46.925 19 50 　 1.5 1.5 203.8 1.2 10.8 7.4 19.4 79.8 192.8 17.8 0.7 47.0 4.4 52.1 51.9 147.5 50.626 20 50 　 1.5 1.5 203.8 1.2 10.8 7.5 19.5 79.8 192.8 18.0 0.7 47.7 4.4 52.8 51.9 147.5 51.327 21 50 　 1.5 1.5 203.8 1.2 10.9 7.6 19.7 79.8 192.8 18.2 0.7 48.4 4.4 53.5 51.9 147.5 52.028 22 50 3.0 1.5 4.5 203.8 1.2 11.0 7.7 19.9 79.8 192.8 15.4 0.7 49.1 4.4 54.2 51.9 147.5 49.729 23 50 　 1.5 1.5 203.8 1.2 11.1 7.9 20.1 79.8 192.8 18.6 0.7 49.9 4.4 55.0 51.9 147.5 53.530 24 50 　 1.5 1.5 203.8 1.2 11.2 8.0 20.3 79.8 192.8 18.8 0.7 50.6 4.4 55.7 51.9 147.5 54.231 25 50 　 1.5 1.5 203.8 1.2 11.2 8.1 20.5 79.8 192.8 18.9 0.7 51.4 4.4 56.5 51.9 147.5 55.032 26 50 4.5 1.5 6.0 203.8 1.2 11.3 8.2 20.7 79.8 192.8 14.6 0.7 52.1 4.4 57.3 51.9 147.5 51.233 27 50 　 1.5 1.5 203.8 1.2 11.4 8.3 20.8 79.8 192.8 19.3 0.7 52.9 4.4 58.0 51.9 147.5 56.534 28 50 　 1.5 1.5 203.8 1.2 11.5 8.4 21.0 79.8 192.8 19.5 0.7 53.7 4.4 58.8 51.9 147.5 57.335 29 50 　 1.5 1.5 203.8 1.2 11.5 8.5 21.2 79.8 192.8 19.7 0.7 54.5 4.4 59.6 51.9 147.5 58.136 30 50 　 1.5 1.5 203.8 1.2 11.6 8.7 21.4 79.8 192.8 19.9 0.7 55.3 4.4 60.5 51.9 147.5 58.9

Total 25.0 99.8 45.5 145.3 6,114.0 38.5 34.7 315.9 213.8 602.8 2,394.7 5,783.0 432.5 27.5 20.6 1349.1 132.7 1530.0 1,558.5 4,424.8 1,359.7

EIRR 16.3% EIRR 28.9%

Geothermal Power Plant Coal-fired Power Plant Diesel Power Plant

Table-3.4-4 Calculation Table of EIRR of the Fund (For a 55 MW Geothermal Power Plant)



0%

5%

10%

15%

20%

25%

30%

35%

40%

100 90 80 70 60 50 40 30 20 10

Success Rate (%)

EIR

R (%

)

EIRR (v.s. Coal Power Plant) EIRR (v.s. Diesel Power Plant)

Coal saved CO2 saved DSL saved CO2 saved(%) ('000ton) ('000ton) ('000ton) ('000ton)100 20.3% 4,789 11,566 34.9% 3,117 8,85090 19.8% 4,310 10,409 34.0% 2,805 7,96580 19.1% 3,831 9,253 33.0% 2,494 7,08070 18.3% 3,353 8,096 31.9% 2,182 6,19560 17.4% 2,874 6,940 30.6% 1,870 5,31050 16.3% 2,395 5,783 28.9% 1,558 4,42540 14.9% 1,916 4,626 26.9% 1,247 3,54030 13.1% 1,437 3,470 24.3% 935 2,65520 10.6% 958 2,313 20.6% 623 1,77010 6.6% 479 1,157 14.8% 312 8850 - 0 0 - 0 0

v.s. Coal-fired Power Plant v.s. Diesel Power Plant

EIRR EIRRSuccess Rate

Table-3.4-5 The Socio-economic Effect of the Fund (EIRR and Savings of Fuel and CO2) (For a 55 MW Geothermal Power Plant)

(Note) The amount of fuel saving and CO2 saving is the cumulative amount over 30 years.

Fig.-3.4-2 EIRR of the Fund (For a 55 MW Geothermal Power Plant)



Effect of FundGeothermal Power Plant Diesel Power Plant

Geothermal Power Plant 20 MW Coal Power Plant 20 MWConstruction Cost 5,440 $/kW (109 m$) Construction Cost 1,000 $/kW (20 m$)

Plant Factor 90.0 % Plant Factor 87.2 %Heat Rate 2,250 kcal/kWh (38.2%)

Gov. Exploration 25 m$ HSD Heat Value 9,100 kcal/LSuccess Rate 50 % Oil Price 100 $/bbl (110 $/bbl)

Price Increase 1.5 % annualCO2 Emission Factor (Diesel) 0.702 kg/kWh

CO2 Price 30 $/ton CO2 Price Increase 1.4 % annual

Cash Flow Fund Success v.s. DieselExpenditure Rate Investment O&M Cost Total Cost Generation Investment O&M Cost Fuel Cost CO2 Cost Total Cost DSL saved CO2 saved Diff.

(m$) (%) (m$) (m$) (m$) (GWh) (m$) (m$) (m$) (m$) (m$) ('000 kL) ('000 ton) (m$)No Year a b1 b2 b=Σbi e1 e2 e3 e4 e=Σei f=e-(a+b)

1 -6 5.9 -5.92 -5 19.1 -19.13 -4 50 0.8 0.8 -0.84 -3 50 2.2 2.2 -2.25 -2 50 18.9 18.9 4.5 4.5 -14.46 -1 50 20.0 20.0 5.5 5.5 -14.57 1 50 　 0.6 0.6 74.1 0.3 13.1 1.6 14.9 18.9 53.6 14.48 2 50 　 0.6 0.6 74.1 0.3 13.3 1.6 15.1 18.9 53.6 14.69 3 50 　 0.6 0.6 74.1 0.3 13.5 1.6 15.3 18.9 53.6 14.8

10 4 50 　 0.6 0.6 74.1 0.3 13.7 1.6 15.5 18.9 53.6 15.011 5 50 　 0.6 0.6 74.1 0.3 13.9 1.6 15.7 18.9 53.6 15.212 6 50 　 0.6 0.6 74.1 0.3 14.1 1.6 15.9 18.9 53.6 15.413 7 50 　 0.6 0.6 74.1 0.3 14.3 1.6 16.1 18.9 53.6 15.614 8 50 　 0.6 0.6 74.1 0.3 14.5 1.6 16.4 18.9 53.6 15.815 9 50 　 0.6 0.6 74.1 0.3 14.7 1.6 16.6 18.9 53.6 16.016 10 50 　 0.6 0.6 74.1 0.3 14.9 1.6 16.8 18.9 53.6 16.317 11 50 　 0.6 0.6 74.1 0.3 15.2 1.6 17.0 18.9 53.6 16.518 12 50 　 0.6 0.6 74.1 0.3 15.4 1.6 17.3 18.9 53.6 16.719 13 50 　 0.6 0.6 74.1 0.3 15.6 1.6 17.5 18.9 53.6 16.920 14 50 　 0.6 0.6 74.1 0.3 15.9 1.6 17.7 18.9 53.6 17.221 15 50 3.0 0.6 3.6 74.1 0.3 16.1 1.6 18.0 18.9 53.6 14.422 16 50 　 0.6 0.6 74.1 0.3 16.3 1.6 18.2 18.9 53.6 17.623 17 50 　 0.6 0.6 74.1 0.3 16.6 1.6 18.4 18.9 53.6 17.924 18 50 　 0.6 0.6 74.1 0.3 16.8 1.6 18.7 18.9 53.6 18.125 19 50 　 0.6 0.6 74.1 0.3 17.1 1.6 18.9 18.9 53.6 18.426 20 50 　 0.6 0.6 74.1 0.3 17.3 1.6 19.2 18.9 53.6 18.627 21 50 　 0.6 0.6 74.1 0.3 17.6 1.6 19.5 18.9 53.6 18.928 22 50 1.5 0.6 2.1 74.1 0.3 17.9 1.6 19.7 18.9 53.6 17.729 23 50 　 0.6 0.6 74.1 0.3 18.1 1.6 20.0 18.9 53.6 19.430 24 50 　 0.6 0.6 74.1 0.3 18.4 1.6 20.3 18.9 53.6 19.731 25 50 　 0.6 0.6 74.1 0.3 18.7 1.6 20.5 18.9 53.6 20.032 26 50 3.0 0.6 3.6 74.1 0.3 19.0 1.6 20.8 18.9 53.6 17.333 27 50 　 0.6 0.6 74.1 0.3 19.2 1.6 21.1 18.9 53.6 20.634 28 50 　 0.6 0.6 74.1 0.3 19.5 1.6 21.4 18.9 53.6 20.835 29 50 　 0.6 0.6 74.1 0.3 19.8 1.6 21.7 18.9 53.6 21.136 30 50 　 0.6 0.6 74.1 0.3 20.1 1.6 22.0 18.9 53.6 21.4

Total 25.0 49.3 16.6 65.9 2,223.3 10.0 7.5 490.6 48.3 556.4 566.7 1,609.0 465.5

EIRR 17.8%

Geothermal Power Plant Diesel Power Plant

Table-3.4-6 Calculation Table of EIRR of the Fund (For a 20 MW Geothermal Power Plant)



DSL saved CO2 saved(%) ('000ton) ('000ton)100 22.8% 1,133 3,21890 22.0% 1,020 2,89680 21.2% 907 2,57470 20.3% 793 2,25360 19.2% 680 1,93150 17.8% 567 1,60940 16.2% 453 1,28730 14.2% 340 96520 11.5% 227 64410 7.1% 113 3220 - 0 0

v.s. Diesel Power Plant

EIRRSuccess Rate

0%

5%

10%

15%

20%

25%

30%

35%

40%

100 90 80 70 60 50 40 30 20 10

Success Rate (%)

EIR

R (%

)

EIRR (v.s. Diesel Power Plant)

Table-3.4-7 The Socio-economic Effect of the Fund (EIRR and Savings of Fuel and CO2) (For a 20 MW Geothermal Power Plant)

(Note) The amount of fuel saving and CO2 saving is the cumulative amount over 30 years.

Fig.-3.4-3 EIRR of the Fund (For a 20 MW Geothermal Power Plant)



Table-3.5-1 Current Situation of Geothermal Fields for IPPs in Crash Program II

3.5 Candidate Fields for Fund Support

(1) The Current Situation of Geothermal Fields in Indonesia

There are reportedly more than 250 promising geothermal fields in Indonesia, and the total potential of these fields is estimated to be 27 GW or more. The Indonesian government has a strong intention of developing this huge source of domestic energy and issued the Presidential Decree of Crash Program II (PP No. 04/2010) in 2010. The Regulation of Minister of Energy and Mineral Resources (No. 15/2010) issued in view of the PP listed a total of 3,967 MW of geothermal fields to be promoted in Crash Program II. They are 43 geothermal fields and 6 of them are to be developed by PT. PLN (including a joint project with PGE) and 37 are to be developed by IPPs (Table-3.5-1 to Table-3.5-3). In the 37 fields allocated for IPPs, 14 fields are the working areas of PGE. In the other fields, developers are to be decided based on the tender process specified in the Geothermal Law. The tenders have already been conducted in 15 fields, and the developers are already decided there (as of January, 2011). Besides this, tenders are in process in five (5) fields. This means that only three (3) fields remain as Pre-Tender fields in the Crash Program II list (Table-3.5-1).

Table-3.5-1 Current Situation of Geothermal Fields for IPPs in Crash Program II (2) Support for the Post-Tender Fields

According to the Geothermal Law of Indonesia, the Minister for Energy and Mineral Resources or a governor or regent/mayor, according to the location of the geothermal resource, issues a Geothermal Business Permit (IUP) to the winner of the tender, who, as the IUP holder, has the following obligations:

a) The IUP holder shall start operation not later than six (6) months after the granting of an IUP. (Article 28 of PP No. 59/2007)

b) The period of validity of the IUP shall consist of: i) The Exploration period for a maximum of three (3) years from the date of issue of the

IUP, which may be extended a maximum of two (2) times for one (1) year each time. ii) The Feasibility Study period for a maximum of two (2) years from the end of the

Exploration period. iii) The Exploitation period for a maximum of thirty (30) years from the end of the

exploration period which may be extended. (Article 22 of Law No. 27/2003, Article 29 - 32 of GR)

Developer Fields Capacity PGE 14 1,800 MW Post-Tender 15 1,137 MW Tender in process 5 660 MW Pre-Tender 3 30 MW

Total 37 3,627 MW



c) The Minister, a governor or a regent/mayor may withdraw an IUP if the IUP holder i) commits a violation of one of the requirements stated in the IUP,

ii) fails to fulfill the requirements stipulated in the law. iii) fails to perform Exploration within six (6) months after the issue of the IUP. iv) fails to carry out a Feasibility Study within six (6) months after the issue of the IUP

in the event of Exploration being carried out by the Minister. v) fails to perform Exploitation within two (2) years of the expiry of Exploration term. vi) fails to perform utilization within one (1) year after obtaining a geothermal

utilization permit. (Article 25 of Law, Article 45 of GR)

These rules are also stipulated in the IUP as well. The IUP for Tampomas geothermal field states that at least two exploration wells should be drilled within three (3) years (Condition No. 4). However, exploration by IUP holders is stagnating in many fields. The main reason for this stagnation is reportedly that the negotiation of a Power Purchase Agreement (PPA) between PT. PLN and the IUP holder is not well advanced because PT. PLN does not accept the bid power-selling price. The reason why PT. PLN does not accept the price is that the price is higher than the price of coal-fired power and that PT. PLN does not have legal obligation to accept the bided price. To cope with this situation, the Ministry of Energy and Mineral Resources issued a ministerial regulation (Permen No. 02/2011) on February 16, 2011. This Ministry Regulation orders PT. PLN to conclude PPAs with IUP holders at the tendered power price. The issuance of this Ministry Regulation is expected to accelerate geothermal development in many fields where IUPs have been issued. Given this situation, the Study Team considers that it is not necessarily appropriate to include the Post-Tender fields in the candidate list for Governmental Exploration. This is partly because the Ministry Regulation may be sufficient to promote geothermal development by IUP holders and partly because the support of the Fund becomes support for a certain individual company which holds the IUP. In the Post-tender fields, the most appropriate method to accelerate geothermal development is to apply the Geothermal Law and its regulations strictly. For example, it is better for the authorities to request IUP holders to finish exploration within three (3) years of the issue of an IUP, and it is also better to refuse an extension of IUP terms if exploration has not yet begun than to perform Governmental Exploration in the Post-Tender fields. If necessary, the authorities should withdraw an IUP if the IUP holder doesn’t respond to their requests or fails to fulfill the requirements under the regulations. When these fields return to “Green Field” status again following the withdrawal of an IUP, Governmental Exploration with the financial support of the Fund becomes appropriate once again.



WKP Tender RUPTELNO POWER PROVINCE Status Status 2010-2019

1 PLTP Sungai Penuh Jambi 2 x 55 110 PGE - 2013, 2014

2 PLTP Hululais Bengkulu 2 x 55 110 PGE - 2013, 2014

3 PLTP Kotamobagu 1& 2 NorthSulaw 2 x 20 40 PGE - 2014

4 PLTP Kotamobagu 3&4 North 2 x 20 40 PGE - 2014

5 PLTP Sembalun West 2 x 10 20 PLN - 2013

6 PLTP Tulehu Maluku 2 x 10 20 PLN - 2013, 2014

Geothermal TOTAL 340

EstimatedCapacity（MW)

GENERATION PROJECTNAME

Table-3.5-2 Geothermal Fields for PLN in Crash Program II



（As of March 11, 2011)WKP Tender Remarks Price RUPTEL

NO POWER GENERATION PROJECT NAME PROVINCE Status Status (Rp/kWh) 2010-20191 PLTP Tangkuban Prahu I West Java 2 x 55 110 Determined Tendered PT Tangkuban Perahu Geothermal Power 533.6 20142 PLTP Kamojang 5 and 6 West Java 100 Determined PGE 20133 PLTP Ijen East Java 2 x 55 110 Determined Tendered PT Cahaya Ijen Energy (Medco) 8.58 cent/kWh 20144 PLTP Iyang Argopuro East Java 1 x 55 55 Determined PGE 2014, 2016-20175 PLTP Wilis / Ngebel East Java 3 x 55 165 Determined Tendered PT Bakrie Power 7.55 cent/kWh 2013, 20146 PLTP Rawa Dano Banten 2 x 55 110 Determined Progress 20147 PLTP Cibuni West Java 1 x 10 10 Determined PGE 20148 PLTP Cisolok Cisukarame West Java 1 x 50 50 Determined Tendered PT Jabar Halimun Geothermal 630 2014, 2017, 20189 PLTP Darajat West Java 2 x 55 110 Determined PGE CHEVRON 2012, 2013

10 PLTP Karaha Bodas West Java 140 Determined PGE 1x30MW:8.25ce 2013, 201411 PLTP Patuha West Java 3 x 60 180 Determined PGE GeoDipa 2013-201412 PLTP Salak West Java 1 x 40 40 Determined PGE CHEVRON 201313 PLTP Tampomas West Java 1 x 45 45 Determined Tendered PT Wika Jabar Geothermal Power 598 201414 PLTP Tangkuban Parahu II West Java 2 x 30 60 Determined Tendered PT Tangkuban Perahu Geothermal Power 533.615 PLTP Wayang Windu West Java 2 x 120 240 Determined PGE STAR ENERGY 2012, 2014, 201816 PLTP Baturaden Central Java 2 x 110 220 Determined Progress 201417 PLTP Dieng Central Java 115 Determined PGE GeoDipa 2013, 2014, 2018-201918 PLTP Guci Central Java 1 x 55 55 Determined Progress 2014, 201719 PLTP Ungaran Central Java 1 x 55 55 Determined Tendered PT Golden Spike Energy Indonesia 8.09 cent/kWh 2014,2015,2016-201720 PLTP Seulawah Agam Nanggor 1 x 55 55 Determined Progress <KfW> 201421 PLTP Jaboi N. Aceh 1 x 7 7 Determined Tendered 1. PT Bukaka Teknik Utama; 2. PT Dian Sakti Energi; 3. PT Global Energi Aliansi consortium 1,705 2017, 201322 PLTP Sarulla 1 North 3 x 110 330 Determined PGE Sarulla Operations Ltd (JV by Itochu, Kyuden, MEDCO and Ormat) 6.79 cent/kWh 2013, 201423 PLTP Sarulla 2 North 2 x 55 110 Determined PGE 201424 PLTP Sorik Merapi North 1 x 55 55 Determined Tendered Consortium PT. Supraco Indonesia - The Tata Power Company Ltd - Origin Energy Ltd. 8.10 cent/kWh 201425 PLTP Muaralaboh West 2 x 110 220 Determined Tendered PT Supreme Energy 9.4 c/kwh 201426 PLTP Lumut Balai South 4 x 55 220 Determined PGE 8.25cent/kWh 2013, 201427 PLTP Rantau Dedap South 2 x 110 220 Determined Progress 2014, 201628 PLTP Rajabasa Lampung 2 x 110 220 Determined Tendered PT Supreme Energy 9.5 c/kwh 201429 PLTP Ulubelu 3 and 4 Lampung 2 x 55 110 Determined PGE 7.53cent/kWh 2013, 201430 PLTP Lahendong 5 and 6 North 2 x 20 40 Determined PGE 8.25cent/kWh 2013, 201331 PLTP Bora Central 1 x 5 5 201432 PLTP Merana / Masaingi Central 2 x 10 20 201433 PLTP Hu’u West Nusa 2 x 10 20 Determined Tendered PT Pacific Geo Energy 9.65 cent/kWh 201434 PLTP Atadei East Nusa 2 x 2.5 5 Determined Tendered PT Westindo Utama Karya 9.00 cent/kwh 201435 PLTP Sukoria East Nusa 2 x 2.5 5 Determined Tendered PT Bakrie Power and PT EMI 1,250 201436 PLTP Jailolo North 2 x 5 10 Determined Tendered PT Star Energy Investment 1,727.54 201437 PLTP Songa Wayaua North 1 x 5 5 Determined 2014

Geothermal TOTAL 3,627

ESTIMATEDCAPACITY (MW)

1x40+1x60

1x30+2x55

1x55+1x60

Table-3.5-3 Geothermal Fields for IPP in Crash Program II



(3) Candidate Fields for Fund Support

From the above-mentioned considerations, it is clear that the candidate fields for Governmental Exploration in the Crash Program II list are limited. Only three (3) fields remain as Pre-Tender fields. However, there are a number of promising geothermal fields in Indonesia besides the fields listed in Crash Program II. For instance, geothermal development is expected in the fields shown in Table-3.5-4 that are listed in the latest Long-term Electric Power Development Plan (RUPTL 2010 - 2019) of PT. PLN. Therefore, the fields shown in Table-3.5-4 are considered as candidates for Governmental Exploration and financial support from the Fund.



RUPTELNO POWER GENERATION PROJECT NAME PROVINCE 2010-2019

31 PLTP Bora Central Sulawesi 1 x 5 5 201432 PLTP Merana / Masaingi Central Sulawesi 2 x 10 20 201437 PLTP Songa Wayaua North Maluku 1 x 5 5 2014

Geothermal TOTAL 30

RUPTELNO POWER GENERATION PROJECT NAME PROVINCE 2010-2019

1 PLTP Danau Ranau Lampung 2 x 55 110 2018, 20192 PLTP G. Talang West Sumatera 1 x 20 20 20183 PLTP Lainea South-East Sulawesi 2 x 10 20 20154 PLTP Mangolo South-East Sulawesi 2 x 5 10 20145 PLTP Pusuk Bukit North Sumatra 2 x 55 110 2018, 20196 PLTP Sipaholon North Sumatra 1 x 55 55 20197 PLTP Suok Sekincau Lampung 2 x 55 110 2018, 20198 PLTP Ulumbu East Nusa Tenggara 2 x 3 6 2011, 20129 PLTP Wai Ratai Lampung 1 x 55 55 2019

10 PLTP Bedugul Bali 1 x 10 10 2013Bedugul Bali 3 x 55 165 2016-2018

11 PLTP Batu Kuwung (not confirmed) 1 x 55 55 2018Batu Kuwung (not confirmed) 1 x 110 110 2020

12 PLTP Endut Banten 2 x 110 220 2019-202013 PLTP Mangunan Central Java 1 x 30 30 201914 PLTP Mangunan Central Java 1 x 55 55 202015 PLTP Arjuno Welirang (not confirmed) 2 x 55 110 2018-201916 PLTP Citaman Karang Banten 2 x 10 20 2018, 201917 PLTP Gn Papandayen West Java 2 x 55 110 2018-2019

Geothermal TOTAL 1,381

Geothermal Fields in RUPTL (2010-2019) other than CR-IIESTIMATED

CAPACITY (MW)

Geothermal Fields in IPP List of Second Crash Program (CR-II)ESTIMATED

CAPACITY (MW)

Table-3.5-4 Candidate Fields for Governmental Exploration and Financial Support of the Fund



3.6 Fund Management Structure

Another important issue to implement the Fund is that how the Fund will be managed. The Study Team started the examination of the management structure of the Fund based on the original option described below, but other options (Option 1 to 3 below) were developed considering the constrains specific to Indonesia such as the current responsibility of the institutions stipulated in the laws and regulations and its capacity. (1) Original option

(Numbers in the circles corresponds to the numbers in the diagram above)

Original IdeaFUND MANAGEMENT GOV'T EXPLORATION

　② ①　③

　⑦

④、⑤、⑥

⑧

⑨

①List of Candidate Fields for Exploration②Selection of Exploration Fields③Provide Funds for Exploration

④Procurement of Executing Agent⑤Supervision of Exploration⑥Announcement of Exploration Results⑦Transfer of Exploration Results (Ownership)

⑧ Sales of Exploration results (Loan or Share acquisition)⑨ Repayment or Dividend

MOF

PIP

MEMR

Dir. GeothermalTechnicalAdvisers

Technical Advisers

Executing AgentIUP Winner

Fig.-3.6-1 Original option of Fund management structure The Study Team first worked out the above structure (original option, Fig.-3.6-1). In this option, MEMR conducts exploration related activities (④-⑦) and PIP provides financing for the exploration service (③) and recovers this service’s expense (⑧-⑨). This option complies with Government Regulation (“PP” hereinafter) No. 59 of 2007 Article 13, which stipulates MEMR Minister can conduct exploration. However, this option is not viable, since it does not comply with PP No. 01/2008 on Government Investment, Article 3. This article stipulates that government investments should be in the form of purchasing equity and/or bonds, and direct investments ((a) Capital Participation or (b) Provision of Loan) and provision of funding to



MEMR is not included. Hence, the following three options are under consideration, paying attention to compliance with the existing laws and regulations and the actions required by relevant parties to establish a viable Fund management structure. (2) Option 1


This is an option in which all activities are controlled by one ministry so that the management system becomes as simple as possible. In this option, PIP will conduct the whole process; from selection of sites, exploration related activities (e.g. procurement of Executing Agents) and their finance (②-⑨). For this purpose, MEMR dedicates the rights for exploration to PIP in order to comply with PP No. 59 of 200714

Option-1FUND MANAGEMENT GOV'T EXPLORATION

　② ①

⑦ ③、④、⑤、⑥

⑧

⑨

①List of Candidate Fields for Exploration②Selection of Exploration Fields③Provide Funds for Exploration④Procurement of Executing Agent⑤Supervision of Exploration⑥Announcement of Exploration Results⑦Transfer of Exploration Results (Ownership)⑧ Sales of Exploration results (Loan or Share acquisition)⑨ Repayment or Dividend

MOF

PIP

MEMR


Technical Advisers

Executing Agent

IUP Winner

and PIP will procure a company for exploration, supervise exploration process and pay for exploration service (③-⑦). PIP will recover the expense for exploration service through the repayment from an IUP winner (⑨). Hence, an IUP winner will receive finance (either in debt or equity) for exploration results from PIP (⑧), after exploration service is completed and an IUP winner is selected. The diagram to show this process is as below:

Fig.-3.6-2 Option 1 of Fund management structure

14 For details, see (i) in the next page.



In order to materialize this option, the following prerequisites need to be satisfied among the relevant parties:

(i) MEMR entrusts government exploration to MOF and PIP following PP No. 59 of 2007, Article 1315

(ii) PIP is permitted to provide funds to an Executing Agent (i.e. the company to conduct exploration) first as a part of due diligence process and recover these expenses by providing finance to IUP winners for obtaining exploration results, in order to comply with PP No. 01 of 2008, 8 of Article 1 and Article 3

. (④-⑥)

16

(iii) PIP is willing to conduct this scheme and technical supports will be provided to PIP in order to acquire the knowledge about in the geothermal sector such as exploration risks.

. (③, ⑧)

This scheme has the following pros and cons.

(i) Pros: In this option, all operations will be completed within PIP; therefore the structure is simple and lower administrative costs can be expected since there are no transactions between various organizations.

(ii) Cons: PIP is a financial institution which does not necessarily have the technical expertise about geothermal power generation. This expertise will be needed when PIP procures a company for exploration service and supervise the service. In this regard, the technical assistance in this area will be required for PIP.

(3) Option 2


This is an option in which an SOE (State-Owned Company) is used as an organization that receives fund from PIP so that the fund flow from the PIP becomes loan or investment, since the fund flow to SOE is different from the fund flow to MEMR, which is interpreted as the budget allocation to MEMR like “Original option” mentioned above. In this option, PLN or other companies such as PT. Geo Dipa17

15 In PP No.59/2007, private companies or Minister (MEMR) are the specified parties who may conduct exploration. Since Article 13(1) stipulates that Minister (MEMR) may conduct exploration and the detailed regulation will be specified in another Ministerial regulation (Article 13 (3)), another regulation could be prepared to entrust government exploration to MOF/PIP by MEMR.

(Geo Dipa) will be a party, as SOE, to procure companies for exploration (④) and supervise its service (⑤) and at the same time, receive funds from PIP (⑥). PLN will initially pay for the exploration service from this fund and recover this expense by selling the exploration results to IUP winners (⑧,⑨). The party bearing the exploration failure risks is to be determined through negotiation between the relevant parties. The diagram to show this process is as below:

16 These Articles stipulates that Government Investment Unit (=PIP) is the entity to conduct government investment and types of government investments are specified. 17 Indonesian state-owned company specializing in the geothermal sector



Option-2

FUND MANAGEMENT GOV'T EXPLORATION

　②

①　③

⑩

⑧ ④、⑤、⑥

⑨


④Procurement of Executing Agent⑤Supervision of Exploration⑥Announcement of Exploration Results

⑧ Sales of Exploration results (Loan or Share acquisition)⑨ Repayment or Dividend⑩ Repayment to Fund

MOF

PIP

MEMR


Technical Advisers

SOE (PLN etc.)


Fig.-3.6-3 Option 2 of Fund management structure In order to materialize this option, the following prerequisites need to be satisfied among the relevant parties:

(i) Direct appointment (such as specified as Public Service Obligations (PSO)) will be given to PLN (or Geo Dipa) for exploration from MEMR.

(ii) In order to comply with PP No. 01/2008, 3. of Article 1 and Article 3 (1) b and (3)18

(iii) The implementing SOE is capable for procurement and supervision of companies for exploration. (④-⑥) Otherwise, the technical assistance will be necessary.

, funding for the contract of exploration service (④) will be interpreted as the finance to SOE, since the fund to government assignment from PIP is not allowed.

This scheme has the following pros and cons:

(i) Pros: In this option, it is not necessary to satisfy prerequisites like Option 1 above (e.g. entrustment of government exploration from MEMR to PIP, expansion of PIP’s capability for geothermal sector).

(ii) Pros: If PLN is the party involved, PLN who is the final buyer of electricity has the incentive to ensure the quality of exploration results.

18 These Articles specifies that direct investment by government investment is to finance “business activities”.



(iii) Cons: While the direct appointment to an SOE is the prerequisite to be satisfied to materialize this option as mentioned above, direct appointment process such as provision of public service obligations to an SOE for exploration service in geothermal development will be not easy in terms of procedure and justification. The procurement law in Indonesia restricts the direct appointment only to the cases where the detailed requirements are satisfied, the chances to satisfy these requirements are slim.

(iv) Cons: There are several candidates (PLN, Geo Dipa) from SOEs, and their articles of corporation are not necessarily for exploration in geothermal development. In addition, PLN on its own does not have experience in this field and there is the concern to implement this service by itself.

(4) Option 3


This is an option in which Executing Agent is employed jointly by MOF and MEMR. In this option, MEMR will procure a company for exploration and supervise its service (④－⑥). PIP will pay for this service (③) and obtain the exploration results in return (⑦ on the left side in the diagram). PIP will recover the expense for exploration service through the repayment from an IUP winner (⑨). Hence, an IUP winner will get finance (either in debt or equity) for exploration results from PIP (⑧, ⑨), after exploration service is completed and an IUP winner is selected. The system does not differ largely from the original option, but the difference lies in the party to contract to conduct the exploration service, with an executing agent. For the original option, this contract will be signed between MEMR and an executing agent, while it will be signed between PIP and an executing agent in case of option 3. Accordingly, the ownership of exploration belongs to MEMR or PIP in case of the original or option 3, respectively. The diagram to show this process is as below:



Option-3FUND MANAGEMENT GOV'T EXPLORATION

　② ①

　③ ④、⑤、⑥

⑧ ⑦

⑨ ⑦


④Procurement of Executing Agent⑤Supervision of Exploration⑥Announcement of Exploration Results⑦Transfer of Exploration Results (Ownership)

⑧ Sales of Exploration results (Loan or Share acquisition)⑨ Repayment or Dividend

MOF

PIP

MEMR


Technical Advisers


Fig.-3.6-4 Option 3 of Fund management structure In order to materialize this option, the following prerequisites need to be satisfied among the relevant parties:

(i) PIP is permitted to provide funds to an Executing Agent (i.e. the company to conduct exploration) first as a part of due diligence process and recover these expenses by providing finance to IUP winners for obtaining exploration results, in order to comply with PP No. 01 of 2008, 8 of Article 1 and Article 319

(ii) In order to comply with Government Regulation No. 01/2008, 3. of Article 1 and Article 3 (1) b, funding for exploration work contract (④) will be regarded as the finance to a private company, not to public works. This issue is common to Option 2.

. (③, ⑧) In other words, the procurement of companies for exploration is violating PIP’s establishment law (i.e. PP No. 01/2008). This issue is common to Option 1.

This scheme has the following pros and cons:

(i) Pros: Less coordination between relevant ministries is required. (ii) Cons: (A) A responsible party for procurement & monitoring of exploration works (④

-⑥) and (B) a party to incur the cost are different (③). (Unclear responsibility sharing)

(iii) Cons: Compared with Option 2, the incentive for high quality exploration results is limited if an Executing Agent may not bid for WKP. If an Executing Agent decides

19 These Articles stipulates that Government Investment Unit (=PIP) is the entity to conduct government investment and types of government investments are specified.



whether it bid for WKP based on the exploration results, the quality of exploration results is of its interest, as well. However, if the Executing Agent may not bid for WKP, this incentive mechanism cannot necessarily be expected.

Any of the above options have prerequisites to be satisfied and there are pros and cons. Therefore, the discussions among the relevant parties will be necessary to decide the fund management. In order to decide the fund management structure: Step1: The prerequisites related to the legal interpretation need to be confirmed with the legal departments in the relevant Ministries. (The examples of those prerequisites in each option are listed in the chart below. The number is corresponding to the prerequisites in each option in the discussions above.) Step2: For the options satisfying Step1, the relevant Ministries/institutions need to discuss and agree on their roles and responsibilities in the scheme, such as the prerequisite mentioned in the earlier discussion. (The examples of those prerequisites in each option are listed in the chart below. The number is corresponding to the prerequisites in each option in the discussions above.) Step3: For the options satisfying Step2 above, the implementing institution needs to assess itself whether it is capable to conduct the scheme on its own. The prerequisites needed to be satisfied are listed in the chart. The number is corresponding to the prerequisites in each option in the discussions above. Step4: Whether the shortage of the capability is possible to be covered by the technical assistance or not will be examined. The above steps are illustrated in the chart below. The numbers for the prerequisite are corresponding to the ones in the discussions of the options.



Option 1(iii)

Option 2(iii)

Option 3MEMR, PIP

Option 1(i), (iii)

Option 2(i)

Option 3MEMR, PLN,

PIP

Option 1(ii)

Option 2(ii)

Option 3(i), (ii)

The legal interpretation

in the prerequisites are satisfied?

Do the relevant

institutions agree?

Is the implementing

institution capable to

conduct this scheme?

Decided !

Is the shortage of the

capability can be covered by

technical assistance?

Decided !

Any alternative?

Option rejectedOption rejected

Step1 Step2 Step3 Step4

Prerequisites to be

satisfied

Yes

No

Yes

No

Yes

No

Yes

No

Fig.-3.6-5 Decision steps of Fund management structure



3.7 Selection of Contractors for Governmental Exploration

As discussed in the previous section, the Study Team proposes that Governmental Exploration will be carried out by a private developer who is also able to participate in a tender for development of the geothermal area. In this section, the categorization of Governmental Exploration and the selection method of the contractor in terms of procurement rule are discussed. Then, the evaluation method of the contractor is proposed with some comments to the criteria which are too strict for the selection of the contractor. (1) Categorization of Governmental Exploration

The selection procedure for contractors will follow Presidential Regulation No. 54/2010 regarding government procurement of goods and services. The methodology for selecting a contractor under PR No. 54/2010 is considered below. It should be noted that this regulation applies to procurement using government assets. The regulation states that it is possible to apply the procurement guidelines of the relevant donor nation, if the funding source is a foreign aid agency (Paragraph 4 of Article 2). The procurement of goods and services under the regulation includes the following (Article 4).

- Goods - Construction Work - Consultancy Services - Other Services

“Goods” means any tangible or intangible, movable or immovable object, which can be traded, worn, used or exploited by a User of Goods (Paragraph 14 of Article 1). Construction Work includes all jobs associated with building construction or making any other physical form (Paragraph 15 of Article 1). Consultancy Services are professional services that require particular expertise in various fields of science (Paragraph 16 of Article 1). Other Services covers anything that does not belong in the other three categories mentioned above. Considering the above definition, the study team deems that the selection of a contractor for Governmental Exploration should be categorized under Consultancy Services because it contains drilling of geothermal wells and evaluation of the geothermal resource which cannot be carried out without particular expertise of geothermal development. (2) Selection Method

According to the regulation, the contractor should be selected on the basis of technical competence and appropriate market price (Paragraph 2 of Article 41). The following four methods are laid out in the regulation (Paragraph 3 of Article 41).



- General Selection / Simple Selection - Direct Appointment - Direct procurement - Competition

Among these options, General Selection is the most basic selection method. In this method, information concerning the procurement should be announced to providers on the Internet, on official community notice boards, and through other means. A short list with 5 – 7 Consultancy Service providers shall be prepared for the procurement (Article 42). Direct Appointment can be made under certain circumstances. This will be the case for the procurement of services on emergency matters, national defense and public security, and so on, and for services for which there is only one provider. Simple Selection and Direct Procurement can be applied to services with a value of up to IDR 200 million and IDR 50 million, respectively (Article 43 – 47). Services which require a process involving ideas, creativity, innovation and specific implementation methods, and which cannot be determined based on a unit price will be procured by Competition (Article 46). Since Governmental Exploration is not a service under certain circumstances like emergency matters and so on as mentioned above, Direct Appointment is not applicable for the selection. Simple Selection and Direct Procurement are not applicable also because the value of the Governmental Exploration service is expected to be much higher than IDR 200 million. Thus, General Selection is suitable for the selection of a contractor for Governmental Exploration. (3) Evaluation

The evaluation of bids in the selection of a contractor can be done using one of the following methods (Paragraph 1 of Article 49).

(a) Evaluation method based on the quality (QBS) (b) Evaluation method based on the cost (CBS) (c) Evaluation method based on quality and cost (QCBS)

Method (a) is applied to procurement in which technical factors strongly affect the evaluation result, and/or where determination of the scope of the work is difficult. Method (b) is to evaluate the cost, and applies to simple and standardized service procurement. Method (c) applies to procurement in which the scope of the work, output, schedule and other factors can be defined clearly, and/or the cost can be determined easily, clearly and appropriately. The relative weighting of technical factors and cost is 0.60 - 0.80 and 0.20 - 0.40, respectively (Paragraph 2 - 6 of Article 49). In consideration of this regulation, it is deemed that method (c), the Evaluation method based on quality and cost (QCBS), will be applied to the selection of contractors for Governmental Exploration because the scope of the work, output, and schedule



etc. of Governmental Exploration can be defined clearly in the TOR and costs can be estimated from the unit costs. It is recommended to use a weighting of 0.80 for technical factors and 0.20 for cost because the technical capability of the contractor is most important in ensuring the good quality of Governmental Exploration results. It is necessary to maintain fairness and transparency in the contractor selection process. For this purpose, inviting independent international geothermal experts, who can provide the opinion on neutral ground, to participate in the selection committee is desirable. In addition, according to the regulation, the provider of the Goods or Services is required to some experience by having obtained at least one contract as a Goods or Services provider within the last 4 years (Paragraph 1 of Article 19). The selection procedure for contractors for Governmental Exploration is examined under the relevant regulation mentioned above. However, some criteria in this regulation are not suitable in the selection of a contractor for Governmental Exploration. They are:

- The contractor should have obtained at least one contract as a Goods or Services provider within the last 4 years.

- A short list of 5 - 7 contractors shall be prepared in the General Selection method. This is because Governmental Exploration is in its initial phase, and there are not a sufficient number of private developers to satisfy these requirements. Thus the criteria is too strict. A flexible application of the regulation is required.



3.8 Selection Criteria of Sites for Governmental Exploration

The existence of the geothermal resource is absolutely imperative for the development of geothermal power plant. Therefore the site should be selected considering the potential resource of geothermal energy. The social and/or environmental issues should also be considered in the appropriate selection of the area for Governmental Exploration. Thus, the selection criteria for sites for Governmental Exploration could be divided into two main sets: criteria concerning the geothermal resource potential and those concerning environmental issues. Governmental Exploration should be carried out first in sequence at sites which meet all of the following criteria. (1) Geothermal Resource Potential Criteria (Listed in order of Priority)

[Actual geothermal fluid discharge from well] CRITERION: There is (are) geothermal well(s) at the site, and geothermal fluid (steam and/or hot water) which can be expected to be used for power generation has been discharged from the well(s). Generally, the mass discharge rate from the well depends on the diameter of the well, pressure and temperature of the reservoir, and permeability around the well. The mass flow rate increases when the values of these parameters increase. It is supposed that mass flow measurement, well characteristics test, and well logging survey have been carried out for the well which has discharged. These data will be a good indicator of a promising geothermal field. On the other hand, a well will not discharge when the temperature is insufficient and/or permeability is poor. Poor permeability indicates that the well does not encounter a fault structure where geothermal fluid is expected to be present. If the well is a failure, the reasons should be investigated by examining all the available data. If the reason for the failure, that is to say the reason why the well has not discharged even though a high reservoir temperature has been confirmed, is due to poor permeability, it can be determined that the field is still promising. There is a possibility that the next well can tap to a reservoir with high temperature and good permeability, if the drilling target is properly decided based on the existing data. Once the next well confirms the existence of the geothermal reservoir, the development activity will be accelerated. The chemical characteristics of the discharged geothermal fluid are also an important factor. Some chemical conditions (dissolved components, concentration, temperature, pH, etc.) may cause the problem of scale deposition and material corrosion. Therefore, even if the well has discharged, it is necessary to check the chemical characteristics of the discharged geothermal fluid to avoid problems which might arise at a future stage of development. Thus, a geothermal field where a well has been drilled and geothermal fluid with good chemical characteristics has discharged will be the highest priority for Governmental Exploration. A field with a failed well could still be a good candidate for Governmental Exploration, if the information obtained from the well, such as well geology and downhole temperature, indicates



the existence of a geothermal reservoir near the well. [Active geothermal manifestations] CRITERION: Though a geothermal well has not been drilled yet at the site, active geothermal manifestations (fumaroles and hot springs) can be observed over a wide area. The presence of a high-enthalpy geothermal reservoir with a temperature higher than 200 oC can be expected. The temperature, chemical conditions, and the origin of the geothermal fluid in the reservoir can be estimated by analyzing the geochemical (and isotopic) data from the hot spring fluid. Since this data is directly relevant to the reservoir, the likelihood of the presence of a reservoir is high. The following conditions will be a strong indication of the presence of a high temperature reservoir with good chemical characteristics. - The origin of the fluid is circulating water (meteoric or sea water) - The fluid is neutral chloride-type water (with chloride ion content higher than a few

hundred ppm) - The geochemical (and isotopic) thermometers indicate a reservoir temperature higher than

200oC A field which meets the above conditions is a promising area for Governmental Exploration. [Past geothermal manifestation] CRITERION: A geothermal well has not been drilled yet and active geothermal manifestations are not observed, but hydrothermally-altered zones and low to medium-temperature springs can be observed at the site. The preliminary survey results indicate the possibility of the presence of hot geothermal fluid. If there is an indication of volcanic activity in the past, it might play the role of heat source, and the presence of a geothermal reservoir can be expected. The reference age of this volcanic activity should be younger than 0.6 million years. Also, the temperature and pH of the fluid, which has reacted with the surrounding rocks, can be estimated from the variations in the alteration minerals produced. For example, the presence of wairakite indicates an alkaline fluid condition and temperatures higher than 200oC. The criterion for the age of the hydrothermally altered rock is that it should be younger than 0.3 million years, as a reference. Thus, it is possible to estimate the temperature and the extension of the reservoir from the distribution of and variation in the hydrothermally altered rock. Also, a high anomaly of heat flow observed at the surface can be an indication of the presence of a deep geothermal reservoir. [Geophysical exploration data] CRITERION: Geophysical anomaly distributions indicating the presence of a geothermal reservoir have been detected in the preliminary geophysical exploration survey. A geological structure which can contain the geothermal fluid is necessary for the formation of a geothermal reservoir. Geological segments with high permeability, such as fracture zones or porous layers, play the role of “containers” of geothermal fluid. The containers should also be



furnished with “lids”. These are the so-called “cap rocks”, which are an impermeable layer preventing penetration of cold water into the hot reservoir. Layers argillized by hydrothermal alteration often function as cap rocks. The altered rock is electrically conductive, or, in other words, has low resistivity. Thus, magneto-telluric (MT) surveys can be employed as a method for delineating distinctive subsurface resistivity structure (especially distributions of conductive layers, and resistivity discontinuities). The fault structure can be detected as resistivity discontinuities by electrical exploration, and/or as discontinuities of density distribution revealed by gravity survey. These data will indicate the possible presence of geothermal structure. Though geochemical study will provide more direct information about the reservoir temperature, the relationship between resistivity and the formation temperatures of various alteration minerals will provide information on subsurface temperature distribution. (2) Social and Environmental Criteria (No Order of Priority, and Comprehensive

Examination is Necessary)

[Land] CRITERION: There is no serious forest protection, land acquisition, or restricted issue at the site. It is also required that there should not be opposition from the local residents which will give rise to resistance to future development. The Governmental Exploration cannot be conducted in Preservation Forest. If the area is located in Protected Forest, an environmental impact assessment and permission for land usage are necessary. Even if the area is outside of the Preservation/Protected Forest, it is necessary to check land ownership, land rights, and current land utilization (especially concerning historical places, religious buildings, etc.) because they may have a serious impact on the development of the field. The other important point is whether or not the geothermal exploitation project is understood and accepted by the local government and local residents. Thus it is necessary to confirm the land conditions prior to the selection of an area for Governmental Exploration. [Access and topography] CRITERION: There is sufficient space for the power plant construction at the site. Large-scale civil work to construct an access road is not necessary and the necessary civil work does not have much impact on the project cost. The necessary land space for the installation of a geothermal power plant depends on its output capacity. For example, roughly 200 m by 200 m of flat space is required for a 100 MW-scale geothermal power plant. In addition, land for drilling pads, separator stations, steam pipelines between separator stations and power plant, and brine pipelines to the reinjection wells, is required. The development of the field is possible if a reasonable level of civil work is required. However, if the area is very steep, it is impossible to exploit the geothermal resource, even if it is very promising. In addition, a sufficiently wide and robust road to the area is necessary to



mobilize the heavy equipment such as drilling rigs, steam turbines, and so on. Therefore, rough terrain is a negative factor for geothermal development. Thus access to the area and its topography should be considered in the selection of areas for Governmental Exploration. [Transmission line] CRITERION: Construction of a long transmission line is not necessary, and there is no environmental issue on the route of the transmission line. Also, significant capacity expansion of the transmission line and substation is not necessary. When a long transmission line has to be newly constructed for a new geothermal power plant (no matter who will bear the cost), it is a negative factor for geothermal development. The impact will be more severe for relatively small-scale geothermal power plants. Also, the route of the transmission line should be carefully checked because it might involve some of the above-mentioned land and environmental issues. In particular, a longer transmission line will make the acquisition of the necessary land more difficult. Since the capacity of existing transmission lines and substations is closely related to the viability of a new geothermal project, the transmission issue should be settled prior to Governmental Exploration, even though there is uncertainty at that stage about the geothermal resource potential. [Demand and relation to other power sources] CRITERION: The demand for power is strong due to the lack of a power plant around the site, or it is necessary to decrease the cost of fueling an existing diesel power plant. The electricity demand and supply around the area should be taken into account in the selection of areas for Governmental Exploration. An area which is isolated from the main transmission network and lacking a sufficient electricity supply is a good candidate for Governmental Exploration. It is also a high priority to carry out Governmental Exploration in areas where the electricity is provided by diesel power plants, since fuel cost reduction and global environmental protection can be achieved by replacing diesel power plants with geothermal power plants. For remote areas, a geothermal power plant may be able to produce electricity at a lower cost than a diesel power plant. Thus, it is necessary to consider the power development plan of the relevant district and preferable energy mix in the selection of areas. [Other environmental issues] CRITERION: Availability of water for drilling, and possibility of suitable protective measures for precious flora and fauna Plenty of water from a nearby river is used in drilling a geothermal well. Thus, securing a sufficient supply of water is necessary for geothermal development. Suitable means of mitigating harm to flora and fauna in the power plant and transmission line area are required.



(3) Comprehensive judgment

In principle, a geothermal power plant cannot be constructed at a site where the geothermal resource is insufficient. Therefore, sites with promising geothermal resources should be given priority as Governmental Exploration areas. However, the priority for a site which also has social and/or environmental issues should be lowered. Thus, comprehensive examination is required.



3.9 Required Studies for Governmental Exploration

In this section, the required studies for Governmental Exploration are proposed. For this purpose, firstly, the current status of the survey for determination of Mining Work Area is examined. Then, the criteria of Work Area preparation is reviewed from a technical point of view. Considering the study contents and the process for determination of Work Area, the Study Team proposed the supplemental and additional studies which should be included in Governmental Exploration. Since the Work Area is determined within the extensive preliminary survey area, the quantity of the geoscientific data in extracted Work Area is supposed to be insufficient for the decision of drilling target. Thus, to carry out the supplemental geoscientific survey is proposed to obtain additional information for the decision of drilling targets. Based on these survey results, drilling targets will be decided and 2 – 3 exploration wells will be drilled. After the drilling, the wells are subjected to several kinds of tests to evaluate their potential. The goal of Governmental Exploration is to confirm the existence of a geothermal reservoir. (1) The Current Status of the Survey for Determination of Work Area

The procedure for the determination of a geothermal Mining Work Area (WKP) is laid down in the regulation of Minister of Energy and Mineral Resources No. 11/2008 dated 21st April 2008 as follows.

• The Minister (of Energy and Mineral Resources) shall plan and prepare Work Areas (Article 2)

Determination of Work Area

• The Work Area shall be planned and prepared based on a report on preliminary survey activity and/or exploration conducted by the government, provincial government, regency/ municipal government, and/or other parties through preliminary survey assignment (Article 3). The Director-General shall establish a Work Area preparation team and shall conduct a review of data from preliminary surveys, exploration, feasibility studies and/or exploitation (Article 4).

• A Work Area preparation team can be composed of representatives from the Directorate General, Geological Agency, Secretariat General of the Ministry of Energy and Mineral Resources, Geological Agency and Energy and Mineral Resource Data and Information Center, representatives of related agencies, representatives of provincial government and/or representatives of local regency/municipal government (Article 4).

• The review and processing of data shall be carried out based on criteria as given in Attachment I (see below) (Article 5).

• The results of the review and processing shall be considered in the determination of Work Areas, including data base price in Work Area and/or amount of compensation of data



resulted from implementation of preliminary survey assignment (awarded compensation) (Article 5).

• Based on the report of the Work Area preparation team, the Directorate General shall make a recommendation to the Minister regarding the determination of the Work Area that will be offered to a Business Entity by way of tender (Article 10).

• A Work Area shall be specified using the coordinate system (Article 6).

Attachment I Criteria of Review and Processing of Data of Work Area Preparation

1-A. Geoscientific Data Preliminary survey Exploration a. Geological

Survey Activity Details 1) Geological survey at minimum map

scale of 1 : 100,000, including discussion of analysis of aerial/satellite images, types and distribution of rock units, geological structure, hydrogeology and geothermal energy manifestations.

2) Mapping for prioritized Quaternary volcanism using volcanostratigraphic method.

Outcome 1) Report on results of geological survey

including map and geological section at minimum scale of 1 : 100,000.

2) Heat source position can be estimated from related geothermal energy fields.

Activity Details 1) Detailed geological survey at minimum

map scale of 1 : 50,000, including discussion of analysis of aerial/satellite images, types and distribution of rock units, geological structure, hydrogeology and geothermal energy manifestations.

2) Mapping for prioritized Quaternary volcanism using volcanostratigraphic method.

Outcome 1) Report on results of detailed geological

survey including map and geological section at minimum scale of 1 : 50,000.

2) Heat source position can be estimated from related geothermal energy fields.

b. Geophysical Survey

Activity Details 1) Preliminary geophysical survey at

minimum map scale of 1 : 100,000 with minimum method of type of mapping and sounding.

2) Addition of geophysical data that can

determine the peak of the resistive layer, for example with magnetotelluric method.

Outcome 1) Report on results of geophysical survey

including geophysical map at minimum scale of 1 : 100,000 and showing geophysical sections.

2) Presenting conductive layer thickness (clay cap) or determining the top of the relevant geothermal reservoir.

Activity Details 1) Detailed preliminary geophysical survey

at minimum map scale of 1 : 50,000 with minimum method of type of mapping and sounding, including determination of area, conductive layer zone and resistive zone, as well as prospective area.

2) Addition of geophysical data from magnetotelluric method, gravity force and prioritized geomagnetic method.

Outcome 1) Report on results of detailed geophysical

survey including geophysical map at minimum scale of 1 : 50,000 and geophysical section.

2) Giving more accurate data on conductive layer thickness (clay cap) and the depth of the peak of the relevant geothermal reservoir.



c. Geochemical Survey

Activity Details 1) Geochemical survey at minimum map

scale of 1 : 100,000 including sampling and analysis of geothermal fluid (water/vapor/gas) and soil including discussion of physical and chemical characteristics and chemical composition of fluid (water/vapor/gas) and soil, as well as geothermometry.

Outcome 1) Report on results of geochemical survey

including geochemical diagrams. 2) Can determine geothermometry in the

relevant geothermal reservoir. 3) May be able to determine the

geothermal system.

Activity Details 1) Detailed geochemical investigation at

minimum map scale of 1 : 50,000 by way of sampling and analysis of geothermal fluid (water/vapor/gas) and soil limitedly including discussion of physical and chemical characteristics as well as chemical composition of fluid (water/vapor/gas) and soil, as well as geothermometry.

Outcome 1) Report on results of detailed

geochemical survey including geochemical map at minimum scale of 1 : 50,000, map of distribution of Hg and CO2 in soil, other chemical zonation and geochemical diagrams

2) Can determine geothermometry of water and/or gas indicating temperature of geothermal reservoir.

3) Confirming the geothermal reservoir system.

d. Temperature Logging Survey

Activity Details None

Outcome

None

Activity Details 1) Optional 2) Temperature logging survey to obtain

data concerning the temperature gradient through drilling, including discussion of physical characteristics and geological condition of well.

Outcome

Report on results of temperature logging survey, including log of well composite and gradient cross-section of well temperature.

e. Exploration Drilling

Activity Details None

Outcome

None

Activity Details 1) Optional 2) Exploration drilling to obtain

undersurface geological data, physical and chemical characteristics of well fluid and well potential.

3) Profile of undersurface/well pressure and temperature.

Outcome 1) Report on results of exploration drilling,

including log of well composite. 2) Potential of geothermal reserve,

minimally possible reserve.



Integrated geoscientific survey and/or exploration drilling

Activity Details The Preliminary survey is expected to describe the potential of geothermal source/geothermal reserve and geothermal system.

Outcome Estimation of minimum geothermal resource/reserve, inferred reserve and geothermal system.

Activity Details Integrated geoscientific study and/or exploration drilling is expected to give a description of geothermal reserve potential

Outcome Estimation of geothermal reserve and system.

1-B. Geothermal System

Preliminary survey Exploration Analysis of integrated geoscientific data

Activity Details Tentative modeling of geothermal system Outcome Tentative model of geothermal system

Activity Details Modeling of geothermal system Outcome Model of geothermal system

2. Land Status (spatial plan and land use)

Preliminary survey Exploration a. Mining Activity Details

Overlapping with other mining business permits (Contract of Work, Agreement of Work for Coal Mining Exploration, Mining Concession, Regional Mining License, People’s Mining Permit, and Working Area of natural oil and gas mining).

Activity Details No conservation area.

b. Forestry

Overlapping with status of Protected Forest (HL), Production Forest (HP), Limited Production Forest (HPT), Convertible Production Forest (HPK), Natural Forest Production Utilization Permit (IUPHHA) and Plant Forest Product Utilization Permit (IUPHHT).

c. Plantation/ Transmigration

Overlapping with cultivation or plantation and transmigration area.

d. Spatial Plan

Conformity with regional spatial plan.

(2) Review of the Criteria of Work Area Preparation

The “Criteria of Review and Processing of Data of Work Area Preparation” attached to the regulation of Minister of Energy and Mineral Resources No. 11/2008 is reviewed from a technical point of view. The comments are shown below.



• In general, the criteria cover all the survey items necessary to define the most promising area in the preliminary survey area, and thus it can be concluded the criteria are reasonable.

• It is mentioned that the objective of the geological survey is to estimate the position of heat source from the distribution of Quaternary volcanism, which is derived from the geological map and geological cross-section based on the geological field survey. The contents of the geological survey are sufficient for the determination of the Work Area.

• The objective of the geophysical survey mentioned in the criteria is to estimate the extent of the geothermal reservoir and the depth of the cap rock from the analysis of resistivity data obtained by MT survey, for example. This approach is very reasonable. It would be good to also include a description of the indication of the intervals of measuring point.

• The mentioned objective of the geochemical survey is to estimate the reservoir temperature based on the geothermometry obtained from the results of surface fluid sampling and analysis. The criteria for the geochemical survey are appropriate.

• The survey area for geologic, geophysical and geochemical study is extensive, and the Work Area should be extracted within this extensive area. The requirement to prepare the map with 1:50,000 scale makes it possible to extract the promising Work Area within the whole survey area because the map scale of 1:50,000 is sufficient to provide the information to mark out the promising area that is to be defined as Work Area.

• It is better that the “Temperature Survey” and “Exploration Drilling” not be “optional” but obligatory. Even a thermal gradient hole can provide underground geological data and temperature information. The understanding of the geothermal system based only on surface survey data will be much improved through consideration of these downhole data. The level of confidence concerning the existence of a geothermal reservoir will be improved.

• The estimation of the geothermal reservoir temperature depends on the geochemical information, if only surface surveys are carried out. However, temperature logging data will contribute a lot to the level of confidence concerning the existence of a geothermal reservoir. Contrasting the resistivity information from the geophysical survey with well geology results can help with the estimation of the depth of the cap rock.

• However, there is a risk that little temperature increase might be observed, even when a thermal gradient hole is drilled. In this case, several thermal gradient holes are required.

• One possible choice is to drill a thermal gradient hole only when the geothermal reservoir is assumed to exist at shallow depth.

(3) Required Studies for Governmental Exploration (Proposal)

The objective of Governmental Exploration is not to determine the Work Area, the process for which is described above. Governmental Exploration consists of surface surveys (MT survey, etc.) in the Work Area, selection of drilling targets, drilling of 2 - 3 exploration wells, well logging, discharge tests, chemical analysis of discharged geothermal fluid, and so on. Since the number of exploration wells is not sufficient for detailed resource evaluation, the reliability of



the resource potential evaluation will be limited at this stage. Thus, the ultimate goal of this Governmental Exploration is to confirm the existence of a geothermal reservoir, and it is totally different from the preliminary survey for the determination of Work Areas. The studies required for Governmental Exploration are proposed below. It should be noted that the study items described here are not definitive, but can be combined as necessary to achieve the objectives of Governmental Exploration. The detailed approach or methodology of each study which is proposed by the contractor should be discussed in a committee including experts in geothermal development projects. 1) Geology (i) Objective The purpose of the geological study is to detect geological features related to geothermal activity in the objective field. Data and information about stratigraphy, geological structures, surface hydrothermal manifestations, and volcanic activity will be reviewed and analyzed in the geological study. A field geological survey will be conducted to confirm stratigraphy, hydrothermal alteration and major geological fractures. (ii) Methodology Aerial photographs and satellite images will be utilized to detect topographic lineaments related with fault activity and hydrothermal manifestations such as hydrothermal alteration, hot springs, etc. These photographs and images are also useful in delineating lithological boundaries. A field geological survey will be conducted with the aim of obtaining geological information on the stratigraphy, hydrothermal alteration, fractures etc., and for the cross-checking of existing information. Rocks will be sampled in the field survey for analysis with such techniques as microscopic observation, X-ray diffraction analysis and chronometry of rocks. K/Ar, thermoluminescense (TL) and fission-track dating methods are common geochronologic methods in geothermal resource exploration. The methodology of microscopic observation and X-ray diffraction analysis will be described in part 6) of this section. (iii) Expected Outcome Reviewed geological data and collected geological information will be examined to understand following items. - Possible heat source will be examined through a consideration of stratigraphy and volcanic

activities. - Permeable zones in a geothermal system are generally related to the passage of geothermal

fluid and well productivity. An impermeable zone (the cap rock), which prevents cold groundwater from invading high temperature reservoirs, is one of the important constituent elements of a geothermal reservoir supporting sustainable power generation. Permeable zones and impermeable zones will be examined from the distribution of faults, strata, altered ground, and the results of geophysical survey.



- From these considerations together with the following geochemical and geophysical considerations, major geological structures controlling geothermal activity will be estimated and summarized in a geological model.

2) Geophysics (MT Surveys) (i) Objective Magneto-telluric (MT) surveys shall be employed as a method for delineating distinctive subsurface resistivity structure (especially resistivity discontinuities that are indications of fault structure, and distributions of conductive layers that correspond to hydrothermal alteration) for the purpose of detailed investigation of the geothermal structure in the survey area. (ii) Methodology

For a field acquisition of magnetotelluric observations, simultaneous observations at local sites and at a reference site are preferable because they reduce the effects of electromagnetic noise. The remote-reference site should be located in an electromagnetically quiet region. In principle, two orthogonal components in the electric field (Ex and Ey), and three components in the magnetic field (Hx, Hy, Hz) must be recorded at each single MT site. The length of dipoles for E-field measurement should be longer than 50m, and the frequency range from 0.001 to 300 Hz should be covered. The observation sites should be placed at intervals of 300 to 500m. Combined use of the TDEM (Time Domain ElectroMagnetic) method is strongly recommended in order to correct for so-called “static-shift” effects.

Field Operation / Measurements

Observed data should be processed by remote-reference method for noise reduction, and then edited by an interpreter. Then the data should be corrected for static shift (a bias effect on the electric field due to shallow and very small-scale resistivity anomaly). After the data processing, apparent resistivity and phase data are subjected to 2-D or 3-D inversion to delineate the resistivity structure from shallow to deeper regions beneath the survey area. Furthermore, the geothermal structure (fault systems, distribution of hydrothermal alteration) of the survey area will be interpreted with the aid of inverted resistivity sections or horizontal slices of resistivity structure.

Data Processing and Analysis

(iii) Expected Outcome Dense MT observations (at approximately 300 to 500m intervals) would enhance the continuity of observed resistivity data, and thus make possible the detailed analysis of subsurface resistivity structure. Also, the relationship between resistivity and the formation temperatures of various alteration minerals will provide information on subsurface temperature distribution. Such information will contribute to constructing a detailed conceptual model of the geothermal system, and also contribute to locating drilling targets for exploratory wells.



3) Geochemistry (for surface manifestations) (i) Objective Chemical analysis of hot springs, fumaroles and surface water will be carried out. Isotopic components will be analyzed as well as general chemical species, if possible. The origin of the fluid, the heating mechanism and the reservoir temperature will be revealed by this chemistry. (ii) Items to be Analysed Major items for hot spring analysis are as follows:

atmospheric temperature, temperature of fluid, pH, electric conductivity, turbidity, Cl, T-SiO2, Na, K, Ca, Mg, SO4, B, HCO3, Li, δD(H2O), δ18O(H2O)

(iii) Expected Outcome Consideration of the origin of the fluid, heating mechanism and reservoir temperature will contribute to the elaboration of geothermal structural model. 4) Selection of Drilling Targets The geothermal conceptual model shall be constructed based on an integrated interpretation of all the surface exploration results. Then the drilling targets and configuration of the exploration wells will be decided considering the geothermal structure and assumed temperature distribution, and also the location of drilling pads and the capability of the drilling rig. Since the likely drilling target will be the fault structure, directional drilling is recommended. In this case, the direction of drilling, KOP (Kick-Off-Point; the depth at which declination starts) and trajectory should also be decided. 5) Exploration Drilling Exploration drilling shall be conducted according to the drilling plan. The contractor has to monitor the progress of the drilling work all the time. The drilling target for the next well could be revised based on the information obtained from the drilled well. 6) Well Data Analysis (i) Well Geology (Cuttings analysis) The purpose of the study is to obtain subsurface geological information. The study items are as follows. - Observation of cuttings and preparation of the geologic column - Microscopic observation - X-Ray diffraction analysis - Fluid inclusion analysis (optional) Obtained geological information will be utilized for the understanding of the drilling conditions and revision of the drilling program. The information will be analyzed and interpreted for the



construction of a conceptual model of the geothermal system. Cuttings analysis will generate the following outputs: - Geologic column of the well - Results of Microscopic observation - Results of X-Ray diffraction analysis - Results of fluid inclusion analysis (optional)

Cuttings taken during well drillings will be studied. The following items will be observed and described at intervals of 5 -10 m in depth.

Observation of cuttings

- Rock type - Color - Hardness - Rock faces - Degree of hydrothermal alteration - Characteristics of hydrothermal alteration - Size of cuttings The geologic column will be prepared by the integration of these observed items. Through comprehensive interpretation, stratigraphy around the well will be determined.

Representative rocks samples illustrating the lithology and hydrothermal alteration will be selected from the cuttings of the well. Thin-sections of the selected rock samples will be prepared and observed. A polarizing petrography microscope will be used to study the textural classification, volume of crystal content, mineral paragenesis, degree of alteration, occurrence of secondary minerals, etc.

Microscopic observation

The aim of X-Ray diffraction analysis is to identify alteration minerals. Due to the interaction of rocks and geothermal fluid (hot water, steam and gas), chemical reactions take place between the rock-forming minerals and the geothermal fluid. The rock-forming minerals will be alteration minerals (secondary minerals). These changes observed in alteration minerals will depend upon the temperature, pressure and chemical composition of the geothermal fluid. With a knowledge of these dependencies, the temperature and pH of the geothermal fluid that caused the alteration can be estimated based on the presence of alteration minerals detected by X-Ray diffraction analysis. In principle, rock samples should be obtained and analyzed for every 100m of increasing depth (depending on the geological condition of the well).

X-Ray diffraction analysis

Fluid inclusion thermometry is an effective methodology for estimating underground Fluid inclusion analysis (optional)



temperature around the well and for obtaining geochemical information concerning the geothermal fluid. Using the hydrothermal minerals obtained from cuttings, the fluid inclusion homogenization temperature (Th) will be measured and the temperature at which the minerals were formed will be determined. In addition, in order to obtain information on the salinity of the inclusions, their ice melting point (IMP) will be measured. From this information, the chemical condition of the trapped hot water will be estimated. Fluid inclusions are micron-sized cavities filled with fluid trapped during mineral precipitation or during subsequent fracturing. Information on the trapping temperature and on the composition of the inclusion fluids is derived from phase changes occurring in the inclusions during heating and freezing. At room temperature, fluid inclusions from geothermal systems typically consist of both a liquid phase and a vapor phase. Provided that the inclusion trapped a single phase, either liquid or vapor (steam), then the trapping temperature can be determined from the temperature at which the liquid and vapor phases homogenize (homogenization temperature, Th) under heating. The salinity of fluid inclusions is calculated based on the temperature of liquid phase freezing (Ice Melting Point, IMP). Although fluid inclusion analysis is not common in geothermal resource exploration in Indonesia, considering the effectiveness of the method, it is recommendable to introduce this analysis into Indonesia. (ii) PT(S) Logging For the purpose of obtaining pressure and temperature data around the well, Pressure and Temperature (PT) logging shall be carried out. If available, Pressure, Temperature and Spinner (PTS) logging is much preferable. The logging data will provide information about the geothermal structure and the extension of the high temperature zone. This information will contribute to the construction of the geothermal conceptual model and resource evaluation.

The pressure and temperature logging should be carried out basically after the completion of the drilling. It should be carried out also during drilling, for instance before setting the casing pipe, to check the condition of the well. It is preferable to use an electrical-type logging tool for the continuous measurement of pressure and temperature. If an electrical-type logging tool is not available, a mechanical gauge will be used for the measurement of pressure and temperature. In this case, the depths of the measuring points, intervals between the points, and the stopping time have to be decided carefully in the planning of the logging work. Measurement with dense points is recommended around the depth where a temperature anomaly is observed.

Pressure and temperature logging

The objective of the temperature recovery test is to estimate the stabilized formation temperature profile from the successive temperature logging data. The successive temperature logging will be carried out, for example, 12 hours, 24 hours, 48 hours, and 72 hours after the stopping of water circulation. These times is just for reference, and can be changed according to

Temperature recovery survey



the situation. It is better to obtain temperature data over longer time intervals because it will indicate the recovered temperature more accurately with less effect of cold water circulation in the well. The location of the permeable zone of the well can be estimated from the successive temperature logging data. The estimated stabilized formation temperature will be the basic information necessary for the construction of a 2-D (vertical and horizontal) temperature distribution map. (iii) Well Completion Test The objective of a well completion test is to identify permeable zones and to evaluate their thermal-hydraulic characteristics. The required equipment is basically same as that for pressure and temperature logging. These days, the spinner sensor, which can indicate the flow speed of the fluid inside the wellbore by its impeller rotation, is often used in geothermal fields. The permeable zone can be detected more precisely by using a PTS (pressure, temperature and spinner) tool. The well completion test generally consists of three tests: a multirate injection test, a water loss test, and a pressure fall-off test. The necessary tool for this test is a PT or PTS tool. . In the test, first the tool will be lowered to a depth identified by the drilling records and borehole loggings as a major permeable zone. Then three or four different injection flow rates (60, 80, 100 and 120 m3/h, for example) will be injected sequentially until pressure stabilizes, as shown in Fig.-3.9-1 (multirate injection test). After stabilization at the last injection rate, the tool will be run up and down at production depth to obtain the PT(S) profiles vs. depth during injection (water loss test). After that, the pump will be stopped, and the pressure fall-off will be monitored until pressure stabilizes (pressure fall-off test). Then the tool will be retrieved from the well. Using the results of the multirate injection test, the injectivity index will be calculated. This index expresses the rate of mass the well is able to accept per each (kg/cm2 or bar) of pressure build-up. This value is the simplest crude gauge of the total permeability of the well. The results of the fall-off test will be used to estimate the flow capacity, such as permeability-thickness products (kh value), of the reservoir near the well. These are very important reservoir properties for evaluating the productivity and/or injectivity of the well. The water loss test will assist in identifying the permeable zones.



Inje

ctio

n R

ate

Pressure Fall OffQ1

Q２

Q３

Q４

Multirate Injection Test Water Loss Test

Time

Bor

ehol

e P

ress

ure

P1 P2P3

P4

Fig.-3.9-1 Procedure of Well Completion Test 7) Discharge Test The objective of the discharge test is to confirm the productivity (pressure, temperature, steam and water mass flow rate), discharge stability, and chemistry of the geothermal fluid of the well. The obtained data will be fundamental for the assessment of the geothermal reservoir. (i) Mass Flow Measurement After the completion of drilling, a master valve with a sufficient pressure capacity will be connected to the wellhead. The discharge test facility (separator or silencer, mass flow measuring system, etc.) will be connected to the well (the master valve) through pipelines and control valves. The discharge test will be carried out after a safety inspection of the facilities. If the well cannot start discharging by itself, some kind of stimulation to induce self-discharge, for example pressurization of the well using an air compressor, will be required. The discharged geothermal fluid will be separated into steam and brine. The brine should be reinjected continuously to another well so that the discharge test can be continued for a sufficient period. If no reinjection well is available, the brine should be temporarily stored in a seepage-controlled pond, and should be reinjected back into the production well. There is a possibility that poisonous gas may discharge prior to the geothermal fluid at the initial discharge. Therefore it is necessary to examine the possibility of poisonous gas discharge through the drilling and logging data, and ensure that the proper safety measures are taken as a precaution.



(ii) Fluid Sampling and Chemical Analysis Geochemical surveys of geothermal fluid are conducted to clarify the chemical characteristics of the fluid, the reservoir temperature, the origin of the fluid and fluid flow and to elaborate a geothermal model. Geochemical surveys also provide baseline data concerning scale deposition, erosion from the geothermal fluid and ejection of non-condensable gas. Through the production test, geochemical monitoring of the fluid will be conducted to elucidate: 1) the influence of the drilling mud water, 2) the impact on production wells of reinjection fluid, 3) cyclic changes in fluid chemistry. Items to be monitored are the pH, electric conductivity, turbidity, Cl and T-SiO2. In particular, the Cl concentration is important for evaluating the impact of reinjected fluid. Sampling intervals are short at the beginning of the production test and longer in later stages. Basically, after eliminating the influence of the drilling mud water, fluid will be sampled for full-spec analysis. Items for analysis are the following: • Hot water: temperature, pH, electric conductivity, turbidity, Na, K, Li, NH4, Ca, Mg, Fe, Al,

Sr, Cl, SO4, HCO3, T-CO2, F, Br, I, As, B, T-SiO2, H2S, T-Hg, δD(H2O), δ18O(H2O), δ18O(SO4), δ34S(SO4), Tritium, δ10B

• Condensate water: pH, electric conductivity, NH4, Cl, T-CO2, As, B, T-SiO2, T-Hg, δD(H2O), δ18O(H2O)

• Gas: Non-condensable gas, CO2, H2S, residual gas (R-gas), H2, CH4, N2, O2, He, Ar, δ13C(CO2), δ13C(CH4), δ34S(H2S)

• Sampling conditions: Date, atmospheric temperature, atmospheric pressure, well-head pressure (or temperature), sampling pressure (or temperature), flow rate of steam and hot water

(iii) Well Characteristics Test The objective of a well characteristics test is to understand the discharge characteristics (physical and chemical) of the production well. The test will be carried out after the discharge condition of the well has stabilized. The control valve will be adjusted to obtain at least three different discharge wellhead pressures, and steam and water mass flow rate will be measured for each condition. It is preferable to carry out a well characteristics test twice during the period of discharge testing. The first test and second test will be conducted at the middle and at the end of the discharge period, respectively. The measured steam and water mass flow rate will be plotted against wellhead pressure to obtain the so-called well characteristics curve. If the test can be done twice, the curves can be compared with each other to examine the stability of the discharge conditions. Geothermal fluid sampling will also be carried out during the well characteristics test under each different flow condition to analyze the chemical characteristics of the fluid. (iv) Dynamic PT(S) logging The logging tool will be run in-hole to obtain information from inside the wellbore during production. For the purpose of detecting the point where geothermal fluid is coming into the



wellbore (the so-called feed point), it is strongly recommendable to use a PTS logging tool. When a PTS tool is not available, simultaneous measurement of pressure and temperature in the wellbore is required. The data to be obtained is very important for examining the fluid flow pattern during production. Combining the PT(S) logging data and well characteristics test data, the flow conditions and productivity of the well can be elaborated. The information about the feed point will contribute to the construction of the geothermal conceptual model. (v) Pressure Interference Test (Optional) A pressure monitoring system will be installed in a well which will not be used as a production well or reinjection well. During the discharge testing, the downhole pressure will be monitored to determine if there is a change in pressure due to the fluid production and/or reinjection. Such a pressure change might indicate hydraulic connectivity among the wells. This information is useful for understanding the geothermal structure and also for the future planning of drilling targets. It is proposed that the implementation of a pressure interference test be optional because it might not generate useful data when the period of discharge testing is not sufficient, and/or the distance between the observation well and the production/reinjection well is significant. However, it is recommendable to carry out the test if the wells are located in close proximity and/or are thought to be encountering the same geological structure, in which case a pressure response is likely to be observed. In the planning of the discharge test procedure, it is necessary to decide which well will be used as the production well, reinjection well, or observation well based on the drilling and logging results. (vi) Tracer Test (Optional) The objective of the tracer test is to examine the possible impact of the reinjection fluid returning to the production well, and to further understand the hydraulic connectivity in the reservoir. In this test, an easily-detected chemical reagent, which is normally not contained in the natural geothermal fluid and will not be dissolved in a high temperature environment, will be mixed into the reinjected brine as a tracer chemical. The separated brine from the production well will be monitored to check if the injected chemical (tracer) will be detected in the brine or not. If the tracer chemical returns from the reinjection well to the production well, it is obvious that there is a direct connection between these two wells. In this case, the elapsed time from the injection of the tracer to its detection and the change in concentration or amount of the returned tracer will be analyzed to investigate the connectivity. This test is also proposed as an optional test for the same reason as the pressure interference test, though it is preferable to carry it out to evaluate the mutual interference of the wells. 8) Integrated Interpretation The above-mentioned survey results will be combined into a geothermal conceptual model through an integrated analysis. The most important factors to be considered in constructing a geothermal conceptual model are the following three factors.



1. Geological Structure 2. Temperature Distribution 3. Fluid Flow Conditions

Geological segments with high permeability, such as fracture zones or porous layers, play the role of “containers” of geothermal fluid. The candidates for the containers are, for example, fracture zones surrounding faults, layer boundaries, the periphery of intrusive rocks, porous layers, and so on. Another important factor is whether or not the containers are furnished with “lids”, because, when the containers are not furnished with lids, the heat stored in the containers can easily be dissipated to the surface. Moreover, cold water such as rain could penetrate and cool the containers. Impermeable layers acting as lids of the containers will prevent heat dissipation and cold-water penetration. Such impermeable layers are called “Cap Rocks”. Layers argillized by hydrothermal alteration often function as cap rocks. The distribution of high-permeability and impermeable layers are quite important in constructing the geothermal conceptual model, and thus the geological setting must be clarified through exploration activity. The other factor of great importance is whether or not the heat energy necessary for power generation is stored in the subsurface. Surveys on the subsurface temperature distribution that indicates the pathways of heat energy are necessary. Also, it is necessary to understand the subsurface motion of the water that transports the heat energy. For example, a reservoir with fossil water only and lacking recharge from the surroundings should be regarded as a limited geothermal resource since exploitation will quickly deplete the reserve, even if sufficient heat is supplied continuously. Thus, in terms of elucidating the recharge availability, the study of hydraulic conditions is also important. Among the various forms of surface exploration, the most important one for the understanding of geological structure is the surface geological survey. However, the information obtained from a surface geological survey applies only to the structure at shallow depth. Thus the surface geological survey is supplemented with geophysical explorations such as gravity, resistivity, or seismic explorations. The three-dimensional geological structure is estimated based on the results of surface geological survey and geophysical exploration. The estimate of the geological structure must be confirmed and corrected based on drilling results from the exploration wells. A method frequently used in delineating the subsurface temperature distribution and hydraulic conditions is geochemical surveying. A technique called “geochemical thermometry” utilizes the chemical compositions of hot spring water or brines produced from existing wells to provide a rough estimate of subsurface temperature distributions. What cannot be obtained from geochemical thermometry is the indicated temperature values corresponding to the temperature at a particular location or depth. Thus the detailed temperature distribution must be confirmed by drilling exploratory wells. The hydraulic conditions can be deduced from geochemical surveying to some degree from the chemical composition of waters and the locations of sampling points. However, the results of chemical analysis of steam/water sampled in deep



wells are necessary for detailed investigation of water flow at depth. It is noteworthy that the hydraulic conditions deduced from geochemical surveys indicate the approximate direction of water-flow, but flow pathways need to be further investigated taking into account the geological structure deduced from other exploration techniques. Keeping in mind the points mentioned above, the existing data and the data newly obtained from Governmental Exploration must be integrated into a geothermal conceptual model of the survey area. The characteristics of the geothermal reservoir must be investigated or estimated based on all available information. The issues or problems that need to be solved to carry out the geothermal power development are investigated, and appropriate countermeasures must be devised. (4) Proposal for the Contents of the Report on Governmental Exploration

The contents of a report on Governmental Exploration carried out along the lines of the methodology mentioned above, and the necessary descriptions, figures, and tables to be included in the report, are proposed below. It is supposed that all the results of Governmental Exploration should be disclosed. Therefore, the contractor has to prepare all the raw data, figures and tables in the report in a digital format so that they can be provided immediately when requested. Contents Figures and Tables Executive Summary 1. Introduction - Background, Objectives,

etc.

2. Surface survey 2.1 Geology - Field activity

- Data analysis method - Results of surface

geological survey and data analysis

- Discussion

- Geological map - Distribution of identified

and estimated faults - Location map of altered

ground and geothermal manifestations (hot springs, cold springs, fumaroles, and steaming ground) and their coordinates (easting, northing and elevation)

- Mineralogy of altered ground

2.2 Geophysics - Field activity

- Data analysis method - Location map of

measurement stations



- Data analysis results - Results of geophysical

survey - Discussion

- Maps of apparent resistivity at different frequencies

- Cross-sections of apparent resistivity

- Resistivity interpretation map

2.3 Geochemistry - Field activity

- Data analysis method - Data analysis results - Temperature estimated

through geothermometers - Results of geochemical

survey - Discussion

- Location map of sampled hot spring waters, cold spring waters, and fumarolic gases, and their coordinates (easting, northing and elevation)

- Fluid temperature at sampling

- Chemical and isotopic compositions of samples

- Triangular diagram (main anion ratio)

- Cl/B relationship - δD-δ18O relationship - Estimated reservoir

temperature

3. Drilling targets and Well Specification

- Drilling targets and aim - Specification of wells

(depth, casing program, etc.)

- Discussion and justification of selected targets

- Map of drilling location and targets

- Cross-sections - Schematic diagram of

wells - Coordinates of wells

(easting, northing, and elevation of each wellhead)

- Planning trajectory data for each well (azimuth and incline angle)

- Schedule of drilling



4. Exploration Drilling 4.1 Well A - Wellhead location

- Activity record and observations

- Lost circulation - Completion details - Description of drilling

equipment - Actual trajectory - Drilling mud - Bit record - Material usage - Casing tally

- Location map - Schedule and actual work

period - Well-completion diagram - Description and layout of

equipment - Actual trajectory (plan

view, cross-section, and data table)

- Bit record - Material usage - Casing tally

4.2 Well B - Ditto

- Ditto

4.3 Well C - Ditto

- Ditto

5. Well Data Analysis 5.1 Well A

1) Well geology - Description of sampling - Observation of cutting

samples (using stereomicroscope and polarization microscope)

- X-ray diffraction analysis - Fluid inclusion analysis

(optional) - Discussion

- Well geological column - Results of microscope

observation - Results of X-ray

diffraction analysis

2) PT(S) Logging - Field activity - Description of logging

tool - Measurement procedure - Results of measurement - Estimation of formation

temperature - Discussion

- Conditions of measurement (standing time, etc.)

- Measured PT(S) profiles with estimated formation temperature

- Numerical data table



3) Completion Test - Field activity - Description of logging

tool - Measurement procedure - Results of measurement - Analysis of permeability - Discussion

- PT(S) record during test - Injection rate record - PT(S) profiles during

water loss test - Injectivity Index - Permeability - Numerical data sheet

5.2 Well B - Ditto - Ditto 1) Well geology 2) P/T Logging 3) Completion Test

5.3 Well C - Ditto - Ditto 1) Well geology 2) P/T Logging 3) Completion Test

6. Discharge Test 6.1 Mass Flow Measurement - Field activity

- Description of testing facilities

- Description of measurement system

- Testing procedure - Results of measurement - Calculation method - Calculated mass flow rate

and fluid enthalpy - Discussion

- Activity record - Schematic diagram of

testing facilities - Fluid flow diagram - Plots of mass flow rate

(steam and water) and enthalpy vs. time

- Numerical data sheet

6.2 Fluid Sampling and Chemical Analysis

- Field activity - Sampling point - Sampling method - Laboratory analysis

equipment, method and accuracy

- Results of laboratory analysis

- Data analysis - Discussion

- Chemical and isotopic compositions of samples

- Triangular diagram (main anion ratio)

- Cl/B relationship - δD-δ18O relationship - Estimated reservoir

temperature



6.3 Well Characteristics Test - Description of testing facilities

- Description of measurement system

- Testing procedure - Results of measurement - Calculation method - Calculated mass flow rate

and fluid enthalpy - Discussion

- Activity record - Schematic diagram of

testing facilities - Fluid flow diagram - Well characteristics curve

(plots of mass flow rate (steam and water) and enthalpy vs. wellhead pressure)

- Numerical data sheet

6.4 Dynamic P/T logging - Field activity - Description of logging

tool - Measurement procedure - Results of measurement - Detected feed point depth - Discussion

- Conditions of measurement

- Measured PT(S) profiles - Numerical data table

7. Integrated Interpretation 7.1 Geothermal Model - Integrated interpretation

of acquired data and results of analysis

- Construction of geothermal model

- Geothermal conceptual model (including geological structure, location of heat source, temperature distribution, fluid flow pattern, and distribution of geothermal reservoir)

7.2 Resource Evaluation - Production potential of

exploration wells - Reinjection capacity of

exploration wells - Resource potential

estimation with methodology

- Production potential of exploration wells

- Reinjection capacity of exploration wells

- Resource potential estimation with methodology

7.3 Development Plan (tentative plan)

- Power plant capacity - Power plant type - Development schedule

- Plant layout - Future drilling targets - Pipeline layout



- Number of required wells - Location of additional

wells - Location of power plant - Layout of surface

pipelines - Plan for EIA

- Development schedule

8. Conclusions - Conclusions



3.10 Socio-Environmental Study for Governmental Exploration

In this section, the Study Team examined the necessary socio-environmental permits and licenses applicable to the execution of the Governmental Exploration and shall be obtained by the Government or by its Executing Agent prior to their execution of the Governmental Exploration. The necessary permits and licenses required for the Governmental Exploration are studied based on the following two aspects.

(1) Regulatory Framework of Environment under the jurisdiction of Ministry of Environment

(2) Regulatory Framework of Development in Forestry Area under the jurisdiction of Ministry of Forestry

The details of each regulatory framework are reported as below. In addition, the Study Team also makes a recommendation on the Executing Agent from the view point of obtaining the necessary permits and licenses prior to execution of the Governmental Exploration and maintaining such permits and licenses until a geothermal power developer for the next stage of the Exploitation Phase being selected through IUP tender and IUP being granted to such IUP winner for respective WKP. The recommendation from the Study Team are described in (3) below. (1) Environmental Protection and Management Study for Governmental Exploration

Article 1 of Law Number 32 of 2009 regarding Environmental Protection and Management (“Law No. 32/2009”) stipulates that the environment shall be the spatial unity of all materials, forces, situations, and living creatures, including humans and their behavior, which influences the continuation of the life and welfare of humans and other living creatures. Further, the Article provides that environmental protection management shall be a systematic and integrated effort to preserve the functions of the environment and prevent environmental pollution and/or destruction, which covers the planning, utilization, control, maintenance, supervision and law enforcement. Instruments designed specifically to prevent environmental pollution and/or damage are provided in Article 14 of Law No. 32/2009 as follows.

a. KLHS (or Strategic Environmental Study, in English); b. layout; c. environmental quality standards; d. standard criteria for environmental damage; e. AMDAL (or Environmental Impact Analysis, in English); f. UKL-UPL (or Environmental Management Effort and Environmental Monitoring



Effort document, in English); g. licensing; h. economic instruments for the environment; i. environment-based legislation; j. environment-based budget; k. environmental risk analysis; l. environmental audit; and m. other instruments in accordance with need and/or scientific developments

Under Article 22 of Law No. 32/2009, every business and/or activity which has a significant impact on the environment must have an AMDAL. However, according to the State Minister of the Environment Regulation Number 11 of 2006 regarding Types of Business Required to have an AMDAL (Environment Regulation No. 11/2006), an AMDAL will only be required for the Exploitation20

of geothermal energy.

Article 34 of Law No. 32/2009 further provides that activities which do not require an AMDAL will still require an Environmental Management Effort and Environmental Monitoring Effort document (UKL-UPL). Therefore, when Exploration21

The format of the UKL-UPL is presented in Appendix II of the State Minister of the Environment Regulation Number 13 of 2010 regarding UKL-UPL (Environment Regulation No. 13/2010).

is implemented under Government initiative, the Government (or its Executing Agent) must have a UKL-UPL prior to undertaking Exploration for geothermal energy in a geothermal work field.

Fig.-3.10-1 UKL-UPL or AMDAL for Geothermal Development 20 Under Government Regulation No.59 of 2007 regarding Geothermal Business Activities 21 Under Government Regulation No.59 of 2007 regarding Geothermal Business Activities



Based on the State Minister of the Environment Regulation Number 05 of 2008 regarding Administration of the AMDAL Appraisal Commission (“Environment Regulation No. 05/2008”), assessment of UKL-UPLs for exploration activity in protected forest shall be conducted by an Evaluation Commission of the Ministry of Environment. Assessment of UKL-UPLs for exploration activity outside protected forest shall be conducted by an Evaluation Commission established by the Minister of Environment, governors, or regents/mayors in accordance with their respective scopes of authority.

Table-3.10-1 Evaluation Authority of UKP-UPLs for Governmental Exploration

Development Location

Evaluation Authority (Environment Regulation No. 05/2008)

Remarks

Protected Forest

By an Evaluation Commission established by;

the Ministry of Environment All Locations

Outside of Protected Forest

the District If the development location belongs to that District only.

the Province If the development location belongs to more than two Districts.

the Ministry of Environment If the development location belongs to more than two Provinces.

(2) Governmental Exploration in Forestry Areas

Article 38 of the Forestry Law (Law No. 41 of 1999 as amended by Law No. 19 of 2004) and Government Regulation No. 24 of 2010 regarding the Use of Forest Areas (Government Regulation No. 24/2010) stipulates that development activities other than forestry activities may be conducted in protected forest or production forest areas. Forestry areas can only be utilized for mining purposes;

a. after the mining company has obtained a Borrow-to-Use Permit (“Ijin Pinjam Pakai”) from the Ministry of Forestry (and if necessary, approval from the House of Representatives (Dewan Perwakilan Rakyat), in the event it will have a significant impact, wide scope and strategic value etc.)

b. if the mining activities are to be conducted within a protected forest area, they cannot include open pit mining. Open pit mining is allowed only within production forest areas.



Under the State Minister of Forestry Regulation Number 43 of 2008 regarding Guidelines for Borrow-to-Use Forest Areas (Forestry Regulation No. 43/2008), a “Borrow-to-Use Permit for a forestry area” is an utilization permit for part of a forest area given to another party for development other than forestry activities, without changing the status, purposes or functions of the relevant forest area. A Borrow-to-Use Permit can only be issued for a production forest or protected forest. According to an unofficial dialogue with a Ministry of Forestry official speaking anonymously, a Borrow-to-Use Permit is required for each phase of mining activities to be conducted in the forestry area, namely the Exploration and Exploitation phases, in conjunction with the geothermal working permit (IUP) for Exploration or Exploitation to be issued by MEMR. However, a Borrow-to-Use Permit for Exploration activities can only be issued for two years and is only extendable on the basis of the applicant’s work plan and subject to an evaluation report from the Ministry of Forestry. It is unclear how many extensions may be granted or for how long a period. Article 6 of Government Regulation No. 24/2010 stipulates the compensation necessary to obtain a Borrow-to-Use Permit for the utilization of a forest area22

The holder of a Borrow-to-Use Permit must compensate the Government for the utilization of the forest area within two years (extendable) of the issuance of the Borrow-to-Use Permit. Compensation can take the form of (i) a cash payment or (ii) exchange for another plot of land, in accordance with the following conditions.

for commercial purposes.

(i) If a Borrow-to-Use Permit covers a forest area in a province and the forest area covers

more than 30% of the total area of the relevant province, the compensation should be in the form of the payment of a non-tax government charge (Penerimaan Negara Bukan Pajak – PNBP) for the utilization of the forest area.

(ii) If a Borrow-to-Use Permit covers a forest area in a province and the forest area covers less than 30% of the total area of the relevant province, compensation should be made by providing another non-forest plot of land.

However, Article 6 paragraph (2) letter c point 2 of Government Regulation No. 24/2010 also

22 Regulations related to Compensation for a Borrow to Use Permit for the utilization of a mining area are: 1. Government Regulation No.2 of 2008 regarding Types and Tariffs for Non-Tax Government Revenue from the

Use of Forestry Areas for Non-Forestry Development Activities applicable in the Ministry of Forestry; 2. Regulation of the Minister of Forestry No. P.56/Menhut-II/2008 regarding Procedures for Determining

Interference and Reclaimed Areas and Revegetation for the Calculation of Non-Tax Government Revenue; 3. Regulation of the Minister of Forestry No. P.43/Menhut-II/2008 regarding Guidelines for Borrowing to Use

Forest Areas; 4. Decision of Minister of Finance No. 91/PMK.02/2009 regarding Guidelines for Imposition, Collection and

Deposit of Non-Tax Government Revenues from the Use of Forest Areas for the Development of Non-Forestry Activities; and

5. Government Regulation No. 24 of 2010 regarding the Use of Forest Areas.



stipulates that for a survey and exploration, neither compensation in the form of land nor compensation by payment of a non-tax government charge should be required if, in the case of exploration, no excessive sampling is conducted as part of mining tests to establish commercial feasibility. This means that, if Governmental Exploration is carried out under the conditions of a Fund Cost Recovery Scheme, that Governmental Exploration might possibly be regarded as part of a mining test to establish commercial feasibility and subject to compensation for the Borrow-to-Use Permit.

Table-3.10-2 Compensation for Borrow-to-Use Permit for the utilization of forest area for commercial purposes

Forest Area Coverage in

Province Method of Compensation Remarks

More than 30% of the total area of the relevant province

By Payment of a non-tax government revenue (The calculation of a non-tax government revenue is based on Government Regulation No. 02/2008.)

No compensation required, if the forest is used for survey and exploration. (If in the exploration, excessive sampling is conducted as part of mining tests to establish commercial feasibility, compensation will be required.)

Less than 30% of the total area of the relevant provinces

By Land Compensation (The size of Land Compensation shall be twice as large as the land under a Borrow-to-Use Permit.)



Fig.-3.10-2 Flow Chart for obtaining a Borrow-to-Use Permit for Governmental Exploration In addition, the holder of a Borrow-to-Use Permit must carry out a reclamation and replanting program in the forest area when the work is completed. Thus, if Governmental Exploration is carried out in a WKP and no IPP developer is awarded an IUP, then the Government will be obliged to carry out a reclamation and replanting program in the forest area explored. (3) Summary pf permits and licenses

The necessary permits and licenses to be obtained prior to the Governmental Exploration are shown in Table-3.10-3 below. The permits and licenses as described in (1) and (2) of this section are the most important and the integral factors, from the view point of, not only (i) the environmental protection management and greenhouse gas reduction, but also (ii) the long term geothermal development business. The long term geothermal development will be carried out by the geothermal power developers of the respective WKPs following to the Governmental Exploration.



Table-3.10-3 Permits and licenses for Governmental Exploration Area of

Governmental Exploration UKL-UPL

Borrow-to-Use Permit (“Ijin Pinjam Pakai”)

In Forestry Area Necessary Necessary

Not in Forestry Area Necessary Not Necessary

(4) Recommendations

When a geothermal power developer enters into a geothermal power business in a WKP for long term scheme under the Geothermal Law and PPA with PLN, the geothermal power developer shall take over the socio-environmental permits and licenses from the Government or its Executing Agent of the Governmental Exploration. The developer is also liable to maintain such permits and licenses. Normally, when the geothermal power developer is another entity than the Executing Agent of the Governmental Exploration, the geothermal power developer will conduct legal due diligence, inclusive, but not limited to, the socio-environmental permits and licenses and it takes long time with high cost to carry out such legal due diligence. However, if the Executing Agent of the Governmental Exploration will be the same entity with the geothermal power developer to be selected through IUP tender, then the geothermal power developer will not require to carry out the legal due diligence and can be confident to the long-term validation of the related socio-environmental permits and licenses to backup the eligibility of their project. Therefore, the Study Team recommends that the Executing Agent of the Governmental Exploration shall be the potential geothermal power developer who has an interest to enter into a long-term development of such respective WKP. The reason is to minimize the unnecessary procedures in relation to potential change in ownership of or transferring the socio-environmental permits and licenses in future when the geothermal power developer win the IUP tender and commence development of Exploitation.



Chapter 4 Issues Related to the Current Regulatory Framework for Geothermal Development and Suggested Options for Policy Reform

As explained in the Chapter 3, this Study recommends introducing the Government Exploration Scheme as the measure for the risk mitigation to accelerate the promotion of geothermal development in Indonesia by IPPs. The Study Team suggests in 3.2. (3) 2) that the Executing Agent of the Governmental Exploration by the Fund will be private companies, who are also allowed to participate in the WKP tender. In order to carry out tenders for both Governmental Exploration and WKP in a transparent manner while allowing a private company to tender both bids, these two tenders are required to be managed independently and separately. This chapter describes the details of the WKP tender process. For the details of the selection and evaluation methods for the Executing Agent of the Governmental Exploration, please refer to the previous chapter (3.7). 4.1 Regulatory Framework for the WKP (Mining Work Area) Bidding Procedures,

Challenges and Suggestions

In this section, the Study Team at first reviews the existing legal frameworks and WKP bidding procedures. Then, the Study Team lists out the issues hampering IPP investments to geothermal development projects, based on the comments and suggestions obtained by the concerning government entities and private entities including IPPs, based on interview surveys and at the workshops. The Study Team also included the issues that to be incorporated due to the introduction of the Fund. (1) Legal Frameworks for Geothermal Development

Prior to the enactment of Geothermal Law (Law No. 27/2003), the development of the geothermal power business was regulated by Presidential Decrees No. 45/1991 and No. 49/1991. Under these regulations, Pertamina served as a geothermal mining authority, and private participation in geothermal power projects was enabled through Joint Operating Contracts (JOC) with Pertamina and Energy Sales Contracts (ESC) with PT PLN (Peresero). A new geothermal registration scheme was implemented after the government of Indonesia withdrew the previous presidential decrees through Presidential Decree No. 76/2000 and applied Law No. 27/2003 on geothermal energy to geothermal development projects. Law No. 27/2003 transfers PERTAMINA’s regulatory authority to MEMR and requires that future geothermal fields (Work Areas, or WKP) be tendered competitively.



Table-4.1-1 Geothermal Energy Development in Indonesia before the issuance of the Geothermal Law

LAW No. 8/1971Pres. Decree No. 22/1981And No 45/1991

LAW No. 22/2001Gov’t RegulationNo.31/2003

LAW No. 27/2003Minister DecreeNo. 76/2003

• PERTAMINA was given the authorization to explore and develop geothermal in Indonesia

• PERTAMINA has already conductedgeothermal surveys in about 50 geothermal areas with a total resource of 9,076 MW

• PERTAMINA was given the authorization to develop 33 Working Areas

• PERTAMINA was renamed to PT PERTAMINA (PERSERO)

• The foundation of PT Pertamina Geothermal Energy (PGE) on 12 December 2007 through Decision of the Minister of Justice and Human Rights No.017.00089 HT 01.01 dated 3 January 2007, as a Geothermal Business Unit

• The Gov’t has revoked Pertamina’s monopoly on geothermal development

• PERTAMINA has to return working areas that are not yet developed by2010

• PERTAMINA returned 18 Working Areas from 33 Areas authorized.

• PERTAMINA has 15 Working Areas :

√6 Working Areas are jointly exploited through JOC and Joint Venture

√ 9 Working Areas are Own Operation.

LAW No. 22/2001PP No. 31/2003

PT PGE

(Note) * After the issuance of PP 70/2010, the deadline was extended until the end of 2014. (Source) Pertamina, “Geothermal Activities, Current State and Development Plan Presented at Energy Business

Forum APG EWG 38 Bali, Indonesia” (2009) The Geothermal Law (27/2003) governs the upstream side of geothermal development (for the downstream aspect of electricity generation, Law No. 30/2009 is the governing law) and provides a broad outline of the change in policy. Several regulations have been issued in relation to the Geothermal Law in order to provide detailed guidelines for carrying out geothermal business activities: Government Regulation No. 05/2007 (GR 05/2007) on guidelines for geothermal preliminary survey assignment; Government Regulation No. 57/2007 (GR 57/2007) on the tendering process for obtaining a geothermal license; Government Regulation No. 59/2007 (GR 59/2007) on geothermal business activities; and MEMR Regulation 11/2009 (MEMR 11/2009) on procedures for applying for a geothermal energy business permit (IUP), and MEMR Regulation No. 02/2011 (MEMR 02/2011) on assignment to PLN to purchase electricity from geothermal power plants and its ceiling purchasing prices by PLN. (2) WKP (Work Area) Tender Methods

1) Players Before the implementation of the Geothermal Law, the Government was in charge of the development of Indonesia’s geothermal resources through Pertamina (the geothermal mining authority) and PLN (the electricity business authority). Presidential Decree 45/1991 stipulated that PERTAMINA and contractors (private companies) could explore and exploit geothermal resources, build power plants, and sell electricity through a Joint Operation Contract (JOC). The JOC stipulated that Pertamina should manage the operation and that the contractor should be responsible for producing geothermal energy from the contract area, converting energy to



electricity, and delivering energy or electricity to PLN through an Energy Sales Contract (ESC) and/or to other consumers through direct contracts. After the implementation of Law 27/2003, Pertamina no longer held full authority over the geothermal business, and was treated as merely one among many geothermal companies. Law 27/2003 and Government Regulation No. 59/2007 stipulate that the Government issues Business Permits (IUPs) and that all geothermal operations must carried out by an Indonesian incorporated entity 23 with either Indonesian ownership 24 (private entities or state-owned enterprises such as the Pertamina subsidiary PGE, the PLN subsidiary PLN Geothermal25 and Geo Dipa26) or with foreign ownership (the foreign share being limited to a maximum of 95% under the Negative List Regulation (No. 36/2010)27

).

As for the regulating authority in the central level, the Law 27/2003 also stipulates that the MEMR are in charge of setting national policy regarding the geothermal energy. For the supervision of the geothermal developers activities, granting permits (Geothermal Energy Business Permit, or IUP, through competitive WKP tender by being a head of Tender Committee) and information management, the MEMR is in charge for the Geothermal Work Areas (WKPs) located across provincial boundaries, and a provincial authority (governor) for the WKPs that are in a province or cross regency or municipal boundaries, and a regency or municipal authority (local regent or mayor) for the WKPs in a regency or a municipality. As for the offtaker, PLN plays the vital role. The Law on electricity (No. 30/2009) removed PLN’s monopoly status28, however, PLN has the first priority to conduct the supply of electric power for public purposes. For the projects under the Crash Program II, PLN is assigned as the offtaker29

23 Meaning that subsidiaries of foreign entities are not eligible.

.

24 It does not extend to a subsidiary of a foreign company. Therefore, foreign companies must establish an Indonesian incorporated entity with foreign ownership. 25 PLN Geothermal was established in 2008, and commenced operations from 2009. The main shareholder in the company is PLN (99.9%). 26 Geo Dipa Energi (Geo Dipa) was established in 2002 by Pertamina (holding 67% of shares) and PLN (holding 33%), with a focus on developing geothermal projects. In February 2011, Pertamina transferred all its shares in Geo Dipa to the government, which resulted in Geo Dipa becoming a stand-alone SOE company that is more focused on developing local geothermal projects. 27 Under the “Negative List” (Regulation No 36/2010), a foreign investor is permitted to hold up to 95% of the shares in a company participating in the electrical power sector including power generation. The other 5% must be held by a local Indonesian person / entity. Further, all projects below 1 MW are reserved exclusively for Indonesian Companies. 28 Law 30 / 2009 stipulates the supply of electric power is organized by the state and carried out by state-owned enterprises, regional government-owned enterprises, private business entities, cooperatives, and self-supporting social organizations. 29 Presidential Regulation No. 4/2010 (PR 4/2010) appoints PLN to accelerate the development of 10,000MW of power plants under 2nd phase of Fast Track Program utilizing renewable energy (including geothermal), coal and natural gas by itself and through cooperation with independent power producers (IPPs) from whom PLN will purchase electricity. It also stipulates that the Government to guarantee the business feasibility of PLN in accordance with prevailing laws and under provisions by the Ministry of Finance, which are now under preparation



2) Types of Geothermal Work Areas (WKPs) Currently, there are two types of Geothermal Work Areas (WKPs) in Indonesia. One type consists of Legacy WKPs, which belong to the state-owned companies (namely PGE and PLN) and are governed by Presidential Decree No 45/1991. The other consists of New WKPs, offered under Law 27/2003. (i) Legacy WKPs All Legacy WKPs are held by Pertamina (currently Pertamina Geothermal Energy (PGE)) 30

, a geothermal development subsidiary of Pertamina, and by PLN. PGE was granted 15 WKPs as defined in MEMR Decree 0980/K40/MEM/2004, and PLN has 2 WKPs. Many of those have been developed and operated through Joint Operating Contracts with private firms so that the Study does not cover the issues related to Legacy WKPs.

(ii) New WKPs For new WKPs, the mining areas are to be determined and announced by the Minister of the Energy and Mineral Resources based on the analysis and processing of preliminary survey and/or exploration data according to the Geothermal Law (Law No. 27/2003, “Geothermal Law”), the Government Regulation (GR 59/2007) on Geothermal Business Activities, and the MEMR Regulation on Procedures for Determination of Geothermal Mining Working Areas (MEMR 11/2008). The Geothermal Law also stipulates that geothermal fields to be developed after the issuance of the Law (new WKPs) must be transparently and competitively tendered. a) Preliminary Survey As stated in PP 59/2007, MEMR Regulation No. 05/2007 on guidelines for geothermal preliminary survey assignment (MEMR 05/2007) and the regulation amending it, MEMR Regulation No. 02/2009 on Guidelines for Geothermal Surveillance Duties (MEMR 02/2009), the MEMR has the authority to plan, prepare and determine a work area based on the analysis and assessment of data obtained from preliminary surveys. Preliminary surveying should be undertaken by a national authority (MEMR), a provincial authority (governor), or a regency or municipal authority (local regent or mayor) according to their respective authority over available geothermal energy resources. The MEMR can also assign a preliminary survey and exploration to a private business entity with the expertise and ability to conduct the survey on a first-come-first-served basis. Although a private entity conducting a preliminary survey does not automatically obtain the relevant work area, the company will be granted the first right of refusal for the WKP, or recover survey costs from the winner of the tender31

30 Following the establishment of Law No. 22/2001 in the oil and gas sector, Pertamina was transformed into PT Pertamina (Persero) and through Government Regulation No. 31/2003, geothermal activity was transferred to a subsidiary company, PT Pertamina Geothermal Energy (PGE), which was established in 2006.

.

31 As in MEMR 05/2007



3) WKP Tender Process (i) Existing Tender Process As explained above, the legacy WKPs were granted solely to Pertamina or PLN. Therefore, the WKP tender procedure is only applicable to the new WKPs. The new WKPs must be developed through the transparent and competitive tenders after the implementation of the Geothermal Law (Law 27/2003). The Geothermal Law also provides for a greater role for provincial and local governments in the tendering process for geothermal resources. The Tender Committee is authorized to determine the winner of the WKP in a competitive bidding process. The jurisdiction of the Tender Committee depends on the location of the proposed geothermal working area, the jurisdiction over the Tender Committee, may fall to a national authority (MEMR), a provincial authority (governor), or a regency or municipal authority (local regent or mayor) over the applicable area. Tender evaluations are carried out in two phases by a Tender Committee, as stipulated in the GR 59/2007 and MEMR regulation 11/2009 on Guidelines for the Implementation of Geothermal Business Activities (MEMR 11/2009). a) First phase (Pre-Qualification Selection) The first phase is the pre-qualification stage, which covers administrative formalities as well as technical and financial capabilities. Candidates who meet the pre-qualification criteria will be short-listed to proceed to the second phase. - Administrative Assessment

IUP application letter to the Minister, Governor, Regent or Mayor with appropriate authority

company articles of association company profile tax payer number Statement letter of commitment to pay the necessary fees and compensation for data

- Technical Evaluation

Company profile (experience, qualification of experts, project organizational structure) Work Program based on the data from the preliminary study32

Resource development program (activities that need to be done, associated costs and schedule for exploration, exploitation stage, and utilization stage (power plant construction and operation)

and provided in the tender documents, which covers the following items:

32 The preliminary study may contain the following information: basic information from topographical data, general geological and geochemical surveys, general geophysical surveys, capacity estimation, and information on infrastructure and land status in the WKP.



Estimated capacity - Financial Evaluation

Financial condition of the Company Bidders are required to deposit the following cash guarantees:

Proof of bid security (Bid Bond) amounting to at least 2.5% of the first year’s planned exploration costs and issued by a local bank in the name of the Work Area Bid Committee

Proof of establishment of a security fund for implementation of exploration or exploitation in the amount of USD 10,000,000 (ten million US dollars) at government-owned bank, such as a local government bank located in the jurisdiction of the local government that administers the Tender Committee (for drilling activities involving two (2) or more wells of exploration and exploitation standard). This may take the form of: A joint account (Escrow account) held by the business entity and the relevant

Minister, Governor, Regent or Mayor, or official duly appointed according to their respective authority in accordance with the provisions in the Statutory regulation on finance;

A ready-to-use loan (standby loan); or A guaranteed credit facility certificate from a financial institution

(underwritten credit facility). b) Second Phase (Price Bidding) As stated in MEMR 11/2009, the second phase assessment shall be based on the assessment of the lowest steam or electric power prices offered by the bidders, with the mandatory ceiling price of USD 9.7 ¢/kWh specified in MEMR Regulation No. 02/2011 (MEMR 02/2011). Before the MEMR 02/2011 was issued, the price submitted by the winning bidder was not thereby confirmed as the price that PLN would ultimately pay for the power. The winning bidder could only start to negotiate a Power Purchase Agreement (PPA) with PLN after completion of the feasibility study, when the winning bidder and PLN could obtain the detailed information on geothermal resources to define the generation capacity and the price. In other words, the IUP holder had to renegotiate the power price with PLN, which was time consuming, and resulted in a high entry barrier for IPPs. In order to resolve this issue, the Government issued MEMR Regulation 02/2011 (MEMR 02/2011) in February 2011 to accelerate the development of power generation from geothermal plants. The main points of MEMR 02/2011 are as follows: - PLN is required to buy electricity from the geothermal plant at the same price that the

winning bidder quoted on the tender to a maximum of 9.7 USD ¢/kWh for all WKPs after



implementation of this regulation. - This decree only applies to the projects listed under MEMR Decree 15/2010 (projects under

the Crash Program II). It is expected that several PPAs33

will be signed between IUP holders and PLN in 2nd quarter of 2011.

Based on this two-stage assessment, the winning bid for the WKP (Work Area) will be announced by the appropriate national authority (MEMR), provincial authority (governor), regency or municipal authority (local regent or mayor) based on the results of the evaluation by the Tender Committee. 4) IUP (Geothermal Energy Business Permit) The power to grant an IUP is vested in a national authority (MEMR), provincial authority (governor), regency or municipal authority (local regent and mayor) depending upon the jurisdictional status of the relevant WKP. According to MEMR 11/2009, the winner of a WKP tender 34

- Payment of the basic price of data concerning the WKP or of a bonus as State Non-Tax Income and/or

will be able to obtain a geothermal energy business permit (Izin Usaha Pertambangan Panas Bumi or IUP) for the Work Area after completing the following obligations:

- Payment of compensation for data (awarded compensation) to the business agency that implemented the preliminary survey but fails to win in bidding for the Work Area

IUP holders are entitled to conduct geothermal business activities (i.e. exploration, feasibility studies and exploitation) within their respective work areas, utilizing all government data and information related to their respective work area during the term of validity of their IUP. IUP holders shall start operation not later than 6 months after the stipulation of the IUP, and the duration of the IUP will be for a maximum of thirty five 35 years, comprised of an exploration period of 3 years (extendable 2 times for a period of 1 year each time), a feasibility study period for a maximum of 2 years and an exploitation period for a maximum of 30 years after exploration has ceased (extendable upon application), as detailed in PP 59/2007 and MEMR 11/2009. IUP holders are also required to pay state revenues, including taxes and applicable non-tax State

33 The newspaper Investor Daily has reported that 11 PPAs will be signed. 34 All business entities may participate in WKP bidding, and the winner may obtain the license. However, under the current regime, one business entity can only hold one work area. If a business entity already holds a work area and wishes to obtain other work areas, it must set up a separate legal entity for each further work area .



fees and charges. However, the government is providing tax and fiscal incentives to attract investors and to promote Indonesian renewable resources with the intention of reducing dependence on and preserving non-renewable resources. These incentives are stipulated in regulations such as MOF Decree No. 22/PMK.011/2011 on VAT suspension on Imported Goods for Upstream Oil and Geothermal Activities, and No. 21/PMK.011/2010 on Tax and Fiscal Incentives for the Exploitation of Renewable Energy. Under these regulations, IUP holders are entitled to certain tax and fiscal incentives such as the following: - Income tax: a net income reduction of 30% of capital investment over a six-year period

where the reduction is 5% per year - Accelerated depreciation and amortization. - Income tax liability on dividends paid to non-resident taxpayers: set at 10% or the rate

stipulated in the applicable Double Taxation Treaty, whichever is lower. - Loss carry-forward: extended beyond five years but may not exceed ten years - VAT: Imports of strategic goods, i.e. machinery and equipment (excluding spare parts),

required by geothermal contractors to produce taxable goods are exempt from VAT. - Import duty exemptions: exemption from customs duty on the importation of goods for

upstream exploration business activities (including geothermal) as stipulated in MOF No. 176/PMK.011/2009

Pursuant to Article 86 of PP 59/2007, if IUP holders have not begun exploration by 21st October 2010 for WKPs for which a bid was made before PP 59/2007 came into effect, the IUP holders were required to give up their license and to re-apply for the WKPs35

. However, the GOI issued Government Regulation No. 70/2010 on the Amendment to PP 59/2007 (GR 70/2010) in order to extend the deadline for the commencement of exploration until the end of 2014, based on an understanding that the complexity of PP 59/2007 and the associated bureaucracy was hampering the commencement of license holders’ exploration activities.

5) Tender Committee The tender is administered by the appropriate national authority (MEMR), provincial authority (governor), regency or municipal authority (local regent or mayor) through the establishment of a Tender Committee. The head of this Tender Committee will usually be the head of the local government36

The head of the Tender Committee is mandated to determine the winner of the WKP through a competitive bidding process. The role and the membership of the Tender Committee are defined

, as stipulated in the Geothermal Law and relevant regulations. This is in line with Indonesia’s decentralization of government, which included the transfer of rights and responsibilities for development and tendering of geothermal WKPs to local governments acting in consultation with the Ministry of Energy and Mineral Resources.

35 Most are Legacy WKPs 36 MEMR will only head the Tender Committee if the WKP spans two or more provinces.



in GR 59/2007 and MEMR 11/2009 as follows: - The Tender Committee shall comprise odd numbers and at least five (5) persons and

consist of representatives of the Department of Energy and Mineral Resources, relevant agencies37

- A Tender Committee which is representative of the Department of Energy and Mineral Resources shall consist of staff from:

and Regional Government, and representatives from the relevant area.

the Directorate General of Mineral, Coal and Geothermal; the Directorate General of Electricity and Energy Utilization; the Geological Agency; and/or the Secretariat General of the Department of Energy and Mineral Resources.

- If required, the Tender Committee may appoint experts as resource agents. These experts may come from academia or be geothermal professionals or practitioners.

The role of the Tender Committee, as defined in GR 59/2007, is as follows:

- Developing a schedule and designating a location for the WKP (Work Area) - Preparing Tender Documents - Announcing the Work Area Tender - Evaluating qualifications of Corporate Entities - Evaluating incoming bids - Proposing a prospective awardee, and - Keeping minutes of the Work Area Tender Committee meetings

(3) Major Issues and Suggested Reforms

In order to promote geothermal development by IPPs, it is crucial for the WKP tender process to be conducted fairly and effectively. However, most investors find that the current Indonesian WKP tender process is not always conducted in that way. For investors, a lengthy and opaque licensing procedure will be perceived as risky since it jeopardizes the economics of the projects. The Study Team has analysed the issues which make the tender process inefficient and opaque, and will suggest possible reforms. 1) Structural and Procedural Issues (including Tender Evaluation) (i) Issues The WKP tenders are administered by a Tender Committee, which is set up for each WKP on an ad-hoc basis. The Committee is also supposed to evaluate a wide range of issues, including technical and financial items which require expertise. Even if the committee is able to mobilize the necessary human resources, such as technical and/or financial experts, to cope with some of the technical issues, the Committee’s administrative capacity depends solely on local government officers who do not necessarily have enough experience to effectively carry out a 37 No specific agencies or criteria are defined in this regulation.



geothermal tender. As a result, the time required for processing tenders varies depending on the capacity of the local government, and it usually takes more time than the bidders expect. It is also said that in some cases the tender results do not always appear to be transparent. The Tender Committee is also responsible for preparing the tender documents. Through the interviews, some investors pointed out that the quality and quantity of the information regarding the geothermal resource in these documents varies from one WKP to the next. The geothermal resource information attached to the tender documents is not always a preliminary study completion report, but can be a mere summary prepared by government officers who do not always have a sufficient technical background. This creates a risk of misinterpretations, unclear explanations, and/or overstated/understated information being included in the bidding documents. Separate from issues deriving from the limited capacity of Tender Committees, in order to carry out WKP tenders fairly and efficiently, it is essential to have standardized tender guidelines drawn up by the central government, which is responsible for supervising every tender process to ensure fairness and effectiveness. However, in reality, there are no government guidelines, nor is there any central government organization fulfilling that supervisory responsibility. Under the current legal framework, the task of carrying out the tender is assigned to the local government. Therefore, in order to strengthen the tender process, providing training courses for local government officers to build their capacity to process geothermal tenders would be one practical solution for the current bottleneck. However, even local governments which have several WKPs in their jurisdictions usually don’t have that many opportunities to build up the experience and expertise needed to conduct a geothermal WKP tender. Therefore, in order to strengthen the tender evaluation framework, in addition to providing capacity-building opportunities for the local officers, assigning responsibility to an entity of the central government in order to centralize the tender process would also be a possible solution. (ii) Suggested Reforms a) Enhance the Tender Evaluation Framework i) Involvement of PLN as a member of the Tender Committee In the current legal framework, PLN is not explicitly excluded but neither are they specifically mentioned as a committee member. However, the MEMR interprets that PLN is not able to be assigned as a resource agent so that PLN cannot be a member of Tender Committee, to avoid the possible occurrence of conflict of interest, as PLN, including its subsidiary (PLN geothermal) could also participate in the tender as a developer. Considering the fact that, after MEMR 02/2011 comes into effect, PLN is mandated to purchase electricity from the IUP holders for the price they quote on the tender as long as the price is less than USD 9.7 ¢/kWh, the Study Team suggests 1) that PLN be a member of the Tender Committee, and 2) that the responsibility of PLN as a Tender Committee member be clearly specified.



Having PLN as a member of the Tender Committee would provide a level of comfort for investors. Currently, bidders place their bids without having a draft PPA, and they only start PPA negotiations with PLN once they complete the feasibility study. This arrangement creates confusion for the IUP holder, and delays geothermal development. In order to overcome these obstacles, investors requested and the government agreed to the preparation of a standard PPA format to be included as a part of the tender documents. Having PLN as a member of the Tender Committee could ensure that this arrangement works smoothly. In addition, investors could also expect that PLN would have the necessary information about the WKP from the beginning of the tender process, which would allow the IUP holder and PLN to speed up the PPA negotiation process. Therefore, it is suggested for MEMR to change its interpretation towards PLN’s participation to the Tender Committee, by clearly specifying PLN’s role and responsibilities as a member of the Tender Committee. ii) Strengthen the function of the Geothermal Department at MEMR The Study Team would like to suggest that the relevant central government organization, the Department of Geothermal Enterprise Supervision and Groundwater Management at MEMR (hereinafter “the Geothermal Department”), should become an apex organization for geothermal development by extending its support for the tender process to local governments by 1) establishing and thoroughly implementing standardized tender guidelines and 2) supervising the tender to ensure an effective and fair tender process. The Geothermal Department would also be expected to coordinate with relevant government agencies and other entities. The Geothermal Department should provide a standardized set of “Tender Guidelines”, which would specify all the processes required as well as the following items to help every government officer conduct WKP tenders in a transparent and uniform manner.

- Eligibilities and responsibilities of the Tender Committee members including PLN - Evaluation guidelines to provide standardized evaluation methods for

the technical evaluation of work programs (resource development programs) the financial evaluation of the financial condition of companies

- A standardized format for tender documents in Indonesian and in English (the language issues to be further discussed in 4.1 (3) 3) (ii) b)) including the following items to be specified at the discretion of the Tender Committee depending on the characteristics of a WKP or decisions made by the local government: Project functional specifications such as transmission network obligations Government guarantees Required land expropriation Royalties (to be further explained in 4.1 (3) 3) (ii) c) in this section)

- Formats of the documents required for the entire tender process (in Indonesian and in



English) including a draft PPA based on the Standard PPA38

Format for a Conditional PPA (to be further explained in 2) (ii) c) in this section)

(to be finalized by PLN and relevant authorities)

Format for a Proof of Bid Security Format for a Performance Bond (to be further explained in 2) (ii) b) in this

section) These guidelines should also be updated periodically, in consultation with government and relevant agencies. The Geothermal Department should also provide the following services which require geothermal-specific or other expertise to local government in order to maintain the quality of the standardized formats and methods.

- Preparation of bidding documents in a uniform format for local governments, including geothermal resource information from the preliminary survey

- Evaluation of Tenders As the Geothermal Department will be the apex organization for geothermal development, it will play a supervising role in each WKP tender. As requested by investors, the Geothermal Department is also expected to help visualize the progress of each tender by means of a bulletin board that illustrates the state of each WKP tender, so that the bidders can always know the current procedural status. Disclosing this information in a timely way should also give the Tender Committees an incentive to follow the tender schedules that the committee originally set. 2) Tender Procedures (i) Issues a) Pre-Qualification (P/Q) Tender Committees define the parameters for the administrative, technical and financial assessments involved in P/Q. The Committees are required to cover the items identified in MEMR 11/2009, as discussed above (4.1 (2) 3) (i)), but are able to define their own set of additional items. Through the interview surveys, investors pointed out that there have been some cases where the bidding requirements, or the requirements set for P/Q assessment, were not necessarily strict enough to exclude unqualified bidders. For example, one of the technical evaluation items was phrased in general terms such as “company experience” with no specific requirement for experience related directly to geothermal power generation. Because of this ambiguous requirement, investors, through interviews, pointed out that they have observed some companies

38 For the recommendation concerning Standard PPA, please refer to the Annex -II.



lacking sufficient geothermal experience or without a strong intention to develop the WKP are not excluded for the bids, and, place low bids with the intention of reselling the IUP, for the price that are not commercially viable and other investors cannot compete with. In addition to this, as a part of the financial assessment, it is required that bidders submit proof of the creation of a security fund in the amount of USD 10 million at a Government Bank in the form of 1) an account held jointly by the bidder and the head of the Tender Committee, 2) a stand-by loan, or 3) an underwritten credit facility. This requirement is set to require bidders to show the financial health of the bidding company, and its commitment to the tender. Thus every bidder must prepare a cash deposit of USD 10 million. Most investors are not comfortable with this requirement and it is considered to be one of the most significant entry barriers, since arranging that much cash is a huge financial burden for IPPs, even before bidders have been assured of the terms and conditions (and thus the profitability) of the project. Some investors are also reluctant to deposit that money with a bank which has little business experiences with the non-Indonesian companies. b) PPA Negotiation As explained above 4.1 (3) 1) (ii) a) i), the bidders place the bid without having a draft PPA, and they only start PPA negotiations with PLN once they complete the feasibility study according to the current regulations. To accelerate the IPP’s investments, the Governments has been making significant reforms relating to PPA, such as issuing MEMR 02/2011, which mandates PLN to purchase power from geothermal power plants under the Crash Program II as long as the WKP winner’s quoted price is less than the ceiling price (USD 9.7 ¢/kWh), and preparing a model PPA to be included as a part of the tender documents. However, even though these significant changes have taken place, the investors still have to wait to finalize the terms and conditions of the PPA (including power purchasing price, power selling mechanism, construction of transmission lines, etc.) until after the completion of the feasibility study when they can conclude the PPA negotiations. (ii) Suggested Reforms a) Prepare more detailed and concrete technical requirements The purpose of conducting P/Q is to screen the bidders and select only qualified bidders who can proceed to the second stage (price bidding). In this case “qualified bidders” means those bidders with sufficient technical capacity to carry out the project in an efficient and effective way. In this regard, the Study Team suggests revising the technical requirements in order to make them more detailed and concrete, as they are for coal-thermal power generation projects. This would ensure that unqualified bidders, such as companies without any geothermal technical capability and whose only purpose is to resell the IUP for a higher price after winning the tender, are automatically excluded.



The followings are technical requirements that should be included: - Business criteria

Equity ownership interest in [ X ] MW of power generation - Project development criteria

Experience in financial closing for projects operated on a project-finance basis - Technical criteria

O&M and Construction experience in [ X ] MW power generation projects Experience in Geothermal Development

b) For financial requirements, allow performance bonds as proof of creation of a security fund Currently, bidders must place a cash deposit with an Indonesian state-owned bank to meet the proof of security fund requirement, and this is perceived as a significant entry barrier for IPPs. Hence, the Study Team would like to suggest 1) allowing a performance bond, in lieu of a cash deposit, as proof of the creation of a security fund in the amount of USD 10 million, and 2) allowing such bonds to be issued by any creditworthy bank, including foreign banks, in order to encourage IPP entry. The performance bond in this context is a surety bond issued by a financial institution to the Minister, Governor, Regent or Mayor, or appropriate official authority to guarantee satisfactory completion of the drilling of two wells by the bidder. As a bidder does not have to actually set aside USD 10 million to open the cash deposit, the financial burden for the bidders are significantly reduced. This is in line with the procedures for coal-thermal power generation projects in Indonesia, which attract a number of IPPs. Through this arrangement, the government would still be able to secure a monetary commitment of USD 10 million from the bidder (potential IUP holder) for exploration or exploitation activities, so the impact of the change would be quite minimal. On the other hand, this change would significantly reduce investors’ financial burden. In addition to this, the restrictions on the financial institutions handling this security fund should also be relaxed to include any creditworthy bank, even including foreign institutions. The IPPs likely already have an operational relationship with a foreign commercial bank in Indonesia, but do not necessarily have one with an Indonesian state-owned bank. As the performance bond would be issued by the creditworthy banks in Indonesia that are capable of analysing the IPP’s financial condition, it would be desirable to include those banks, (international or otherwise), that the IPPs have an existing relationship with, as long as those banks are proved to be creditworthy. c) Include Conditional PPA The Study Team would also propose that PLN and the winning bidder sign a Conditional PPA right after the issuance of the IUP. The contents of the conditional PPA would specify the basic



and important commitments from PLN, including the power purchase price (the same as the bid price, if it is less than USD 9.7 ¢/kWh), PLN’s other obligations relating to the power purchasing mechanism (e.g. purchasing all the electricity generated from the plant to be built in the WKP under the take-or-pay clause) and the construction of a transmission line (specifying the operator’s and PLN’s obligations). The agreed contents of the Conditional PPA are obliged to be transcribed to the relevant clauses in PPA, which is finalized after the IUP holder could provide the detailed geothermal resource information complete the feasibility study. The purpose of having a Conditional PPA between PLN and IUP holder is to provide comfort to an IUP holder with providing the PLN’s basic obligations for purchasing the power with the conditions (power price, power selling mechanisms and the obligations of the transmission lines) that both parties are mutually agreed when a winning bidder is awarded to the right to conduct geothermal business activities by being issued the IUP. For the IUP holder’s side, being able to have the conditional PPA can not only shortens the PPA negotiation process, but also reduce the uncertainty towards materialization of the projects. Through the interviews, some banks mentioned that they can provide indications for funding to IUP holders at an early stage if the Conditional PPA can be signed. PLN confirmed the contents of Conditional PPA and expressed that there is no issue signing the Conditional PPA as the Study Team suggested at the Workshop held in April 2011. 3) Contents of Tender Documents (i) Issues The tender documents are prepared by the Tender Committee for a WKP, usually in the Indonesian language. However, as pointed out above, the Tender Committee does not always consist of technical or administrative experts, so that the quality of the tender documents varies depending on the capacity of the local government(s) involved. In general, the Team understands through the interview survey that the contents of the tender documents used so far are not perceived as sufficient by investors. Because there is no model PPA, the IPP must place their bid without knowing important details of the project such as the power-selling mechanism, penalties for non-compliance, risk allocation, etc. The quality and quantity of geothermal resource data for the WKP is also an issue, as pointed out in 4.1. (3) 1) (i). In addition, further elaboration of the contents of the documents is required. Investors point out that detailed information or conditions concerning the project, such as project coverage, government guarantees, land title and project development schedule, which are necessary to judge the project risks are often not available, which makes the IPPs hesitant to participate in the tender. It is also said that the definitions of provisions in the tender document are not always clear. In the current legal framework, the contents of the tender documents for each WKP vary, so that the winner of the WKP might have to engage in further discussion in order to clarify certain clauses and unclear items before they proceed to arrange for IUP issuance.



Also, through the interview survey, some investors pointed out that, in some cases, the winner of a WKP tender is able to learn the detailed royalty stipulations only when they negotiate the terms of the IUP with the local government. According to the investors, there is no clear royalty calculation definition in the legal documents39

. In practice, geothermal operators are required to pay 2.5% royalties on their revenues from electricity sales, which means that operators have to pay a royalty even if a project is losing money.

(ii) Suggested Reforms a) Active participation of the Geothermal Department to improve the quality of tender

documents As previously explained, the Study Team recommends that the Geothermal Department play a major role by improving the quality and quantity of the tender documents and providing guidelines to ensure and maintain their quality. The contents of tender documents should include detailed information on the project, including project functional specifications such as transmission network obligations, the coverage of government guarantees, land acquisition, and an expected project development schedule up to the commencement of commercial operation, etc, as well as clear articulation of all clauses. The guidelines should provide for a standardized format by specifying all the information (e.g., data from government exploration, draft PPA, etc) or documents to be included in the tender documents, as explained above (4.1 (3) 1) (ii) a) i)). If requested by the local government, the Geothermal Department may also help prepare the tender documents for a given WKP. b) Language of the Tender Documents The Study Team suggests that Tender Documents in English also be prepared for the WKP bidding process in the future to accelerate the participation of international IPPs to promote geothermal development in Indonesia. Hence, it is suggested that the Geothermal Department include an English language version of the guidelines for the preparation of the tender documents, so that the Tender Committee can produce the documents in English easily. Currently, all tender documents are drafted in the Indonesian language. However, if the Government of Indonesia is to undertake serious action to promote IPP participation in geothermal development, it would be effective to produce the tender documents (and relevant formats40

39 The provisions of the Geothermal Law stipulate that the IUP holder is required to “pay tax and non-tax state revenue subject to the provisions of prevailing laws”. However, no regulation which specifies the rate and calculation method for non tax state revenue for geothermal activities has been issued yet.

) in English too. With English-language tender documents, non-Indonesian investors

40 The Government of Indonesia issued Law number 24 Year 2009 on the National Flag, Language, Emblem and Anthem, which stipulates that parties must use the Indonesian language in written agreements with Indonesian counterparties. The Law further provides that if any such agreements involve non-Indonesian parties, the agreements may also written in Indonesian and in English and/or in the national language of the non-Indonesian party, and that all of such texts are to be treated as equally valid. Currently, this Law has not come into effect, as the Government is preparing the implementation regulation. However, depending on the details of the implementation regulation, this



would be able to directly access the actual tender documents, so that they are able to avoid the risk of a misunderstanding concerning their contents. c) Inclusion of Provision for Royalties The provisions of the Geothermal Law stipulate that the IUP holder is required to “pay tax and non-tax state revenue subject to the provisions of prevailing laws”. The Study Team deems that the government might now prepare the relevant regulations, since there is no relevant regulation specifying the rate and calculation method for the Royalty. In the meantime, the Study Team suggests that the Geothermal Department undertake the following measures to avoid confusion on the part of the possible participants in tendering until the relevant regulations have been issued: - Specify the rate and the calculation method for royalties, which should be 2.5% (or other

rates clearly specified in the relevant document) of net income, to clarify that the IPPs do not have to pay royalties when they are making losses, as is the case, for example, in the Philippines41

- Include this provision in the tender documents to make it apply uniformly to all future WKP bidding processes, so that the winner of a WKP tender does not have to negotiate this issue separately with the local government.

.

4) Required Modifications due to the Introduction of the Fund (i) Issues Through the introduction of the Fund, the cost recovery of the Fund will be made from the payment of the winner of the WKP tender. In order to select the form of investment from the Fund and the method of cost recovery by the Fund (in the form of debt or equity / upfront repayment, long-term or short-term repayments), the Study Team recommends that the Fund Manager participate in the preparation of WKP tender documents and choose either one of the following approaches on a WKP-by-WKP basis.

new law could add a very considerable amount of additional cost and complexity to projects, which might ultimately hamper the participation of non-Indonesian IPPs in projects in Indonesia. 41 Philippine Local Government Code stipulates that operators should pay 40% of their after-tax profit to the local government which hosts the company’s geothermal facilities.



Approach

(1) The Fund Manager decides the form of investment from the Fund and the method of cost recovery by the Fund, and this method is described in the bidding document.

(2) A bidder proposes the form of investment from the Fund and the method of its repayment to the Fund.

Such a variation of approaches above from site to site will help increase flexibility in the scheme in order to balance the impact on the Fund with the attractiveness for the investors. That means, for option (1), Fund Manager can choose the method of the cost recovery which is likely to contribute to Fund’s revolvability, while no investors may bid if this method of the cost recovery is not attractive for investors. For option (2), investors can ensure profitability of the project, but it has possibilities to work against the profitability of the Fund. Therefore, rather than fixing either of the options at this moment, the option should be chosen on a WKP-by-WKP basis: for WKP where many investors are likely to be interested, option (1) can be chosen. For less attractive WKP for investors, option (2) should be chosen. (ii) Suggested Reforms The Fund Manager should participate in the tender document preparation in order to manage the impact of these choices on the Fund. At the same time, these options need to be stipulated in the tender documents. (i.e. to stipulate the following: whether the bidder can propose the repayment method to the Fund or not, or if the Fund Manager decides the repayment method, what will be the modality) 5) Issues and Proposals for Improvement in PPAs (i) Tariff a) Tariff in the bidding and the one in the PPA The long-awaited MEMR Regulation 02/2011 (on Obligation to PLN to purchase electricity from Geothermal Power Plants and its ceiling purchase price) was issued in February 2011. This regulation was the great progress for investors, since one of the great concerns for investors is expected to be solved: the discrepancy in the tariff between the tariff in bidding and the one signed in PPA. Therefore, following the issuance of this regulation, many projects are expected to start negotiating PPAs. However, the application of this regulation is limited to projects in the Crash Program II according to MEMR officials. b) Tariff ceiling of USD 9.7 ¢/kWh In the current regime, the electricity price is limited to a maximum of USD 9.7 ¢/kWh for all WKPs, as defined in MEMR 02/2011. The only time the price might exceed the ceiling of USD 9.7 ¢/kWh are those cases in which the WKP tenders were made before the enactment of



MEMR 02/2011 and a winner who tendered a price higher than USD 9.7 ¢/kWh was chosen by the respective Tender Committee. However, the profitability of geothermal projects varies depending on the location; therefore, a uniform ceiling price is not suitable, given the variable nature of geothermal projects. c) Government Guarantee of Off-Taker (PLN) Risk In order for international IPPs to implement power generation projects, the government guarantee for off-taker risk (i.e. PLN’s default risk) is one of the important requirements. The international financial institutions require this guarantee to provide finance on non-recourse basis, since they do not have the confidence over the repayment capability of PLN at this moment. For example, Thailand and Mexico provide the government guarantee for off-taker risks of IPP projects. Philippine used to provide the government guarantee, when they promoted IPP in power sector. (ii) Suggested Reforms a) Tariff: To ensure that the tariff bid in the WKP bidding process is reflected in the PPA Considering the importance of the tariff assurance for investors by this regulation, the Study Team strongly recommends that this be expanded to apply to projects other than those developed under the Crash Program II. However, since the advantage of this regulation is to exclude the uncertainty for the tariff which an investor will receive, a new tariff mechanism to function for this purpose such as a Feed-in-Tariff can also be an alternative to this regulation. b) Ceiling of USD 9.7 ¢/kWh As discussed in the issues b) above, the profitability of geothermal projects varies depending on the location; therefore, a uniform ceiling price is not suitable, given the variable nature of geothermal projects.On remote islands, for example, the scale of a project is quite limited, since the power system is small. Since the power generation cost in this type of area is high relative to the volume of electricity sales, it might be appropriate for the electricity tariff to exceed the ceiling of USD 9.7 ¢/kWh. For these areas, the alternatives for power generation are limited to diesel power generation, which is extremely expensive - usually more than USD 20 ¢/kWh - given current rising international oil prices. Coal-thermal power generation would also be an option, but the generation capacity is likely to be small, so the power selling price would have to be higher than USD 9.7 ¢/kWh anyway. Therefore, defining the ceiling price statutorily is not suitable for geothermal power generation, or for any other power generation system. For these reasons, the Study Team would like to suggest abolishing the ceiling price provisions for small-scaled project which have proven to be not profitable enough for IPPs to operate, even with the support of government exploration suggested in this study. This profitability will be evaluated based on the expected equity IRR considering all expected costs such as construction cost, exploration and expected revenue based on the tariff.



c) Government Guarantee of Off-Taker (PLN) Risk For projects in the Crash Program II, Presidential regulation 04/2010 mentions government supports for the business viability of PLN, and this detail will be stipulated in the MOF regulations. The MOF regulations are under preparation and investors are waiting for them, since they are a critical condition for receiving financing from banks. In addition to the projects listed in the Crash Program II, a project may receive a guarantee from Indonesia Infrastructure Guarantee Fund (IIGF42

) covering a payment obligation failure by PLN, provided that the project is considered to be a PPP project based on Presidential Regulation 67/2005 and 13/2010. However, unless a project falls into one of these categories (Crash Program II or PPP project), the off-taker risk of the project will not be covered. If the country expects to develop many projects utilizing international IPPs in addition to those of the Crash Program II, it is recommended that non Crash Program II will be guaranteed. To make these projects into PPP projects is one option, but IIGF’s guarantee capacity is limited; therefore, it is not necessarily a panacea. Therefore, if IIGF’s guarantee will be chosen for non Crash Program II, the IIGF’s guarantee capacity needs to be confirmed whether it will be sufficient to cover high potential non Crash Program II. If necessary, its capacity needs to be expanded (i.e. IIGF’s capital is increased), though this will not be a easy process.

d) Flexibility in PPAs Compared with coal-fired power generation, there is more uncertainty for geothermal development projects at the time of signing of PPAs. Hence, it is preferable to allow flexibility in PPAs. Examples of the kind of flexibility envisaged are: (a) As additional resources are confirmed, it should be possible to accommodate the expansion of capacity and/or (b) it should be possible to amend the cost of interest for tariff calculation, since this cost depends on the market and might change by the time a PPA is signed after tender. In terms of the flexibility upon expansion of the capacity, the capacity expansion (and/or to build additional units) is allowed in PPA if the larger resource is identified after the initial COD. Furthermore, in the earlier section, the conditional PPA was proposed to fix the tariff in order to give comfort to investors. While it is desirable to do so to ensure the minimum tariff for investors, the room to adjust the tariff based on the interest rate increase will be investor-friendly. (i.e. The tariff is in principle fixed in the conditional PPA, but the tariff is allowed to be increased when the interest rates are increased compared with the initial assumption.) In case of PPA in the coal-fired power plants, such an adjustment clause is included.

42 A state-owned company that was established in December 2009 in order to guarantee risks for infrastructure PPP projects in Indonesia.



4.2 Concluding Remarks

As described above, the Study Team suggests improving the current WKP tender process through i) the enhancement of structural and procedural issues (including tender evaluation), ii) the revision of the tender procedures, and iii) improvement of the contents of the tender documents. In addition to that, iv) appointing a Fund Manager of the Fund for the Government Exploration to be a member of the Tender Committee is also suggested based the Team’s suggestion as a mean of risk mitigation measure in this Study. Of which, the suggestion which directly affects the current WKP tender process (relating to the ii) above) is to introduce conditional PPA, that is to be signed after the issuance of IUP, to confirm power purchase obligations of PLN by specifying the price and power purchasing mechanisms, and the obligations of the transmission lines between PLN and IUP holders. Besides that, rather than changing the existing process, the Study Team suggests strengthening the existing frameworks through the enhancement of Tender Committees (relating to the i) and iv) above). The Team suggests involving PLN as a member of the Tender Committee, to make PLN able to access the WKP information from the early stage. As a member of the Tender Committee, PLN is also obliged to provide the required document for the tender, so that the draft PPA based on the Standard PPA, which is in the process of finalization, could be surely provided as a part of the tender document. In addition to that, PLN can be well prepared for the Conditional PPA and PPA negotiations with the IUP holder, so that the IPPs could expect that the PPA related negotiations will be carried out rather smoothly and efficiently. In addition to that, involvement of the Fund Manager to the Tender Committee ensure the cost recovery for the Fund to articulate the appropriate clause in the tender document depending on the repayment methods determined on WKP-by-WKP basis, is also suggested. The Team also suggests strengthening the function of the Geothermal Department at MEMR. The Geothermal Department is expected to provide the standardized tender guidelines to make every process done by any Tender Committees in a transparent and uniformed manner, and to monitor the progress of the tender to avoid undue processing delay. This suggestion also relates to the Team’s another suggestion to improve the contents of the tender documents (relating to iii) above), as the tender documents and related formats are to be included in the tender guidelines. The contents of tender documents, such as P/Q requirements, should be well scrutinized, and the articles are to be well clarified by liaising with relevant government agencies, technical experts, PLN and private sector entities including IPPs. As the process requires significant coordination assigning the Geothermal Department at MEMR to be an apex organization for the geothermal development by extending its support for the tender process to local governments is very crucial to carry out the WKP tender in efficient and effective way.



Chapter 5 A Proposal for a Yen Loan to the Fund

5.1 Formulation of a Project for a Yen Loan to the Fund

This chapter discusses the possibility of a project for a Yen Loan to the Fund. The example case selected for discussion is a Yen Loan project that provides financing for Governmental Exploration in eight (8) fields. The activities enabled will include: MT surveying of 12 fields to select eight (8) fields for Exploration, and the Exploration of the eight (8) fields selected at a cost of USD 25 million per field. The MT surveying is to be done prior to the selection of the Exploration fields, and six (6) fields are to be surveyed in one year. The estimated cost of these activities is USD 208 million (USD 200 million for Governmental Exploration of eight (8) fields and USD 8.4 million for MT surveys in 12 fields). Therefore a Yen Loan project of USD 210 million is examined in this Chapter. The revenue and expenditure of the Fund for the discussion case is shown in Fig.5.1-1 and Table-5.1-1. Yen Loan funds are first provided to the Fund by JICA. Using this money, the Fund performs MT surveys in the first and the second year. The MT surveying is performed in six (6) fields in every year, and 12 fields are to be surveyed in total. The four (4) fields where Governmental Exploration is to be carried out are to be chosen from the six (6) fields surveyed in each year in light of the results of MT surveying. The Government carries out the Exploration of the first batch of four (4) fields from the second year to the fourth year. The second batch of Exploration is to be carried out from the third year to the fifth year, after the selection of four more fields based on the MT surveying that is done in the second year. The first batch of Exploration finishes in the fourth year. If the Exploration results are excellent, private developers are likely to participate in the tender of Working Areas in the fields, and the winners will purchase the Exploration results for their Working Area at a sales price of USD 30 million, which includes a 20% markup over cost. Since it is not known how many fields will be sold, the Success Rate is assumed to be 50% for the purposes of this discussion. Namely, it is assumed that two (2) fields will be sold from among the four (4) fields explored. Additionally, different Success Rate cases are examined in the sensitivity analysis below. Private developers will continue geothermal development from the 5th to the 8th year, if development and construction is done in a four (4) year period. Power plant operation can be expected in the 9th year, if development and construction proceeds well. Payment for the Exploration results is assumed to be made in installments over 15 years after inception of operation (Debt (15yr) type). The interest rate during the grace period and repayment period is assumed to be 10% considering the current financial market situation. As a result, for the two (2) successful fields of the four (4) fields in the first batch there will be interest income from the 5th year, and the repayment of principal starts in the 9th year. The repayment of principal and interest continues for 15 years from the 9th to the 24th year.



Yen Loan for GeoFundYen Loan

MT Year -1 Year -2Total

8.4 m$ 100 m$ 100 m$ 210 m$Repayment

r = 0.30%n = 40 (10) years MT Exploration Total

12 fields 4 fields 4 fields 8 fields

Success Success Total2-3 fields 2-3 fields 4-6 fields

Year-1 MT SurveyYear-2 GOI Exp.Year-3 GOI Exp.Year-4 GOI Exp.Year-5 IPP Dev'tYear-6 IPP Dev'tYear-7 IPP Const. Year-8 IPP Const. Year-9 IPP Operation

: :: :: :: :: :

Year-38 IPP OperationYear-39 IPP OperationYear-40 IPP Operation

JICA GeoFund

On the other hand, the Fund needs to repay the interest and the principle of the Yen Loan to JICA. The interest rate of the Yen Loan is 0.3% and the repayment period is 40 years including a 10-year grace period. Therefore, the balance of the Fund in every year changes according to the revenue to and expenditure from the Fund. This balance of the Fund is simulated to examine the feasibility of the Yen Loan project. The operation and maintenance cost of the Fund is assumed to be USD 0.5 million per year, and this cost is assumed to increase by 5% every year. The operation and maintenance cost of the Fund is assumed to be necessary until the 26th year when the revenue from the private developers of the second batch of explored fields ends. (The O&M cost of the Fund is assumed to be unnecessary beyond that point because the remaining work is only to continue scheduled repayment of the Yen Loan to JICA.) The detailed assumptions and schedule used in calculating the above-mentioned cash flow simulation are as shown in Table-5.1-2 and Fig.-5.1-2. The cost estimation for the MT surveying is as shown in Table-5.1-3.

Fig.-5.1-1 Cash Flow to and from the Fund in case of Yen Loan



Table-5.1-1 Outline of Fund activities and cash flow Year Year Yen

Loan Activities Repayment

of Yen Loan MT

survey Governmental Exploration (1st batch)

Governmental Exploration (2nd batch)

Interest (10%)

Principal (30year）

1 210 m$ 6 flds Payment 2 -7 6 flds 4 fields -ditto- 3 -6 4 fields 4 fields -ditto- 4 -5 4 fields 4 fields -ditto- 5 -4 Dev’t by IPP 4 fields -ditto- 6 -3 -ditto- Dev’t by IPP -ditto- 7 -2 -ditto- -ditto- -ditto- 8 -1 -ditto- -ditto- -ditto- 9 1 Operation -ditto- -ditto-

10 2 -ditto- Operation -ditto- 11 3 -ditto- -ditto- -ditto- Payment : : -ditto- -ditto- -ditto- -ditto-

24 15 End of Paym’t -ditto- -ditto- -ditto- 25 End of Paym’t -ditto- -ditto- 26 -ditto- -ditto- : -ditto- -ditto-

40 End End

Table-5.1-2 Conditions of cash flow simulation Item Condition

Yen Loan amount USD 210 million Interest rate 0.30% Yen Loan Repayment years 40 years (including a 10-year grace period) Cost of Exploration per field USD 25 million Sales of Exploration results per field

USD 30 million (Mark Up 20%)

Success Rate 50% Repayment method Debt type (15 yr) Repayment schedule For 15 years after Operation (grace during

construction) Interest rate during repayment 10% Fund O&M cost USD 0.5 million (inflation rate 5%/year)



Table-5.1-3 Cost estimation of MT survey (including Technical Assistance)

Item Specification Cost (m$)

Break down (m$)

1st Year 2nd Year MT Survey Data Collection

Analysis

12 Fields @ $ 345 k /fld @ $ 105 k /fld @ $ 240 k /fld

4.14 2.07 2.07

Technical Assistance (T/A) 60 MM @ $ 30 k /MM 1.80 0.90 0.90 T/A other expense 60 trips @ $ 6 k /trip

60MM @ $ 6 k /MM 0.72 0.36 0.36

Equipment Donation MT units, etc. 1.00 1.00 Sub Total 7.66 4.33 3.33 Contingency 10% 0.77 0.43 0.33 TOTAL 8.43 4.76 3.66

(Note) MM: Man Months



Year

MT SurveySelection of MT Survey companyMT Survey

Field Selection & Work planningTeam A (3 fields/year) Team B (3 fields/year)

EvaluationTechnical AssistanceReport compilation








Tender ProcessDevelopment by IUP HolderConstruction by IUP HolderOperation by IUP Holder








Tender ProcessDevelopment by IUP HolderConstruction by IUP HolderOperation by IUP Holder

MT

Surv

ey (T

A)1

st b

atch

2 nd

bat

ch

Year-2 Year-8Year-7Year-6Year-5Year-4Year-3Year-1 Year-9 Year-10

Fig.-5.1-2 Detailed schedule of project of Yen Loan to the Fund



5.2 Calculation Results

Table-5.2-1 shows the cash flow to and from the Fund for one (1) exploratory field. As it shows, the Fund expends USD 25 million in total in costs for the Government Exploration over three (3) years between the 7th year (-7th year) and the 5th year (-5th year) prior to the inception of operation of the geothermal power plant (see column (a) of Table-5.2-1). Afterwards, a private developer continues geothermal development following the Government Exploration. In the case of construction of a 55 MW geothermal power plant, the development cost and the construction cost are estimated to be USD 158 million in total43

. This amount is expended over four (4) years between the 4th year (-4th year) and the 1st year (-1st year) prior to operation, as shown, for example, in column (b) of the Table. Moreover, the developer will make payments for the Exploration results in installments over 15 years after operation of the plant commences. The total amount of the principal and interest to be repaid is estimated to be USD 63.0 million (column (c)). In this calculation, the repaid money is assumed to accumulate in the Fund. (This means that the returned money is not used for other geothermal development and, therefore, it is not assumed to be a “revolving fund.”) By the way, calculation of the Economic Internal Rate of Return (EIRR) requires social benefits of geothermal plants. As mentioned in Section 3.4, geothermal plants will substitute for coal-fired power plants that would be built otherwise. The value of saved coal and CO2 emissions is estimated to be USD 915 million, as mentioned in Section 3.4. This social benefit of the geothermal plant is distributed over 30 years of operation as shown in column (d).

In the case of construction of a 20 MW geothermal power plant, the development cost and the construction cost are estimated to be USD 84 million in total. This amount is expended over four (4) years between the 4th year (-4th year) and the 1st year (-1st year) prior to operation, as in the 55 MW case (column (e)). Regardless of plant capacity, the total amount of the principal and interest repayments is estimated to be USD 63.0 million (column (f)). The value of saved diesel oil and CO2 emissions is estimated as USD 981 million, as mentioned in Section 3.4. Similarly to the case of a 55 MW plant, this social benefit of the geothermal plant is distributed over 30 years of operation as shown in column (g). Based on these data, the Financial Internal Rate of Return (FIRR) and the Economic Internal Rate of Return (EIRR) of the Fund are simulated. In the simulation, revenue from private developers is multiplied by the probability of success (Success Rate). The social benefit of a geothermal plant is also multiplied by the Success Rate. The cash flow in the case of a 50% Success Rate is shown in Table-5.2-2. When the Success Rate is 50%, the final balance of the Fund after Yen Loan repayment turns out to be USD 5.9 million. (In the first half of the period,

43 The construction is based on Table-3.3-2, but does not include Governmental Exploration costs (USD 25 million).



the final balance increases due to the revenue from the private developer and reaches the peak of USD 125.7 million in the 22nd year. However, because of repayment of the Yen Loan, the final balance reduces in the second half of the period and becomes USD 5.9 million in the 40th year.) In this case, the profitability of the Fund business, FIRR, is calculated as 0.98%. The profitability of the Fund business is very low. This low profitability is attributed to the conservative assumption that Success Rate is 50% and the Repayment method is Debt (15yrs). However, it is important to note that geothermal development is promoted even though the profitability of the Fund is very low. Namely the effect of the Fund activity is summarized in the following way; (i) the Fund borrows Yen Loan of USD 210 million, (ii) four (4) geothermal power plants are constructed, (iii) the Fund completes repayments of Yen Loan, (iv) the final balance of the Fund is in the black (USD 5.9 million). The annual cash flow and the year-end balance of the Fund are shown in Fig.-5.2-1 and Fig.-5.2-2. Next, the sensitivity of this result to different Success Rates is analyzed. Fig.-5.2-3 shows the changes of the year-end balance of the Fund for various Success Rates. The lowest Success Rate that leaves a positive final balance in the Fund is 48.8%. If the Success Rate is lower than 48.8%, the final balance of the Fund is negative (in the red). In this simulation, the period of development and construction by the private developer is assumed to be four (4) years. However, this period can become longer for various reasons during actual development. Fig.-5.2-4 shows the year-end balance changes in cases where development is delayed by one (1) to four (4) years. (In other words, where the development and construction period expands to between five (5) and eight (8) years.) If there is some delay in the development and construction period, the repayment of the principal to the Fund is also delayed accordingly, but the final balance of the Fund improves because of the increase in interest repaid during the lengthened development and construction period. Regarding the socio-economic evaluation of the Fund, EIRR, is calculated. The expenditure of the Fund is USD 208 million for MT surveying, the first and the second batch of Governmental Exploration and so on. As a result of this expenditure, society obtains geothermal power plants and can save coal that would be burnt and avoid CO2 emissions that would be produced by the alternative coal-fired plant if geothermal was not developed. If diesel power plants are built instead of geothermal ones, the diesel oil saved and CO2 emissions avoided are part of the value of the geothermal plant. These are socio-economic effects of the Fund. Table-5.2-5 shows the socio-economic value of the Fund when the Success Rate is 50%. According to the table, the socio-economic effect in terms of EIRR is 15.3% when a 55 MW geothermal power plant is developed with support from the Fund. If a 20 MW plant is developed, the EIRR is calculated as 16.6% through comparison with construction of a 20 MW diesel power plant. Fig.-5.2-5 shows the change in EIRR when the Success Rate varies from



Governmental Exploration 25 m$Governmental Exploration Sales Price 30 m$

Type Debt 15 yrs

Fund Expenditure IPP From IPP IPP From IPP

Expenditure to Fund 55 MW Coal Expenditure to Fund 20 MW DSL(m$) (m$) (m$) (m$) (m$) (m$) (m$)(a) (b) (c) (d) (e) (f) (g)

-7 3.0-6 12.5-5 9.5-4 11.1 3.0 -11.1 1.6 3.0 -1.6-3 13.9 3.0 5.4 4.3 3.0 -4.3-2 64.4 3.0 -33.6 37.8 3.0 -28.8-1 68.1 3.0 -41.2 39.9 3.0 -28.91 4.8 29.8 4.8 28.82 4.6 30.1 4.6 29.13 4.4 30.4 4.4 29.54 4.2 24.7 4.2 29.95 4.0 31.0 4.0 30.46 3.8 31.3 3.8 30.87 3.6 31.7 3.6 31.28 3.4 32.0 3.4 31.69 3.2 26.3 3.2 32.1

10 3.0 32.6 3.0 32.511 2.8 32.9 2.8 32.912 2.6 33.3 2.6 33.413 2.4 24.6 2.4 33.914 2.2 33.9 2.2 34.315 2.0 34.3 2.0 28.816 34.6 35.317 35.0 35.818 29.3 36.319 35.7 36.820 36.0 37.321 36.4 37.822 30.8 35.323 37.1 38.924 37.5 39.425 37.9 40.026 29.3 34.527 38.7 41.128 39.0 41.729 39.4 42.330 39.8 42.9

Total 25.0 157.6 63.0 915.0 83.7 63.0 980.9

Social Benefits

20 MW Geo PP case

Year

CashFlow

Social Benefits

55 MW Geo PP case

Success Rate = 100% Success Rate = 100%

100% to 10%. This figure shows that the EIRR is 12.2% when compared with a coal-fired plant and 13.1% when compared with a diesel plant, even when the Success Rate falls to 30%. These EIRRs are larger than the minimum acceptable 12% criterion44

and show that the Fund is significant from the socio-economic point of view.

Table-5.2-1 Basic data of cash flow to and from the Fund for a Debt-type (15yr) scheme

44 See footnote No. 13 on page 70.



Fund Cash Flow (In case of Yen Loan)Fund Type Debt (15yrs)

Success Rate 50.0%Surveyed Fields 4 Yen Loan

Successful Fields 2.0 Interest 0.30% annualSales Price 30.0 m$ Grace period 10 years

O&M cost 0.5 m$/year Repayment Years 30 yearsDevelopment Delay 0 years Total Repayment Years 40 years

Escalation 5.0% /year (m$)

Cash Flow Budget Fund Annual Interest of Repayment Total Fund Fund MT Svy (TA Survey-1 Survey-2 Total O&M Total Yen Loanof Yen LoanRepayment Cash flow Balance

Year a b0 b1 b2 b=Σbi c d=b+c e1 e2 e=e1+e2 f=a-d-e g1 2011 210 -4.8 -4.8 -0.5 -5.3 0.6 　 0.6 204.1 204.12 2012 -3.7 -11.8 -15.5 -0.5 -16.1 0.6 　 0.6 -16.7 187.43 2013 0 -50.0 -11.8 -61.8 -0.6 -62.4 0.6 　 0.6 -63.0 124.44 2014 -38.2 -50.0 -88.1 -0.6 -88.7 0.6 　 0.6 -89.4 35.05 2015 6.0 -38.2 -32.2 -0.6 -32.8 0.6 　 0.6 -33.4 1.66 2016 6.0 6.0 12.0 -0.6 11.4 0.6 　 0.6 10.7 12.47 2017 6.0 6.0 12.0 -0.7 11.3 0.6 　 0.6 10.7 23.18 2018 6.0 6.0 12.0 -0.7 11.3 0.6 　 0.6 10.7 33.79 2019 9.6 6.0 15.6 -0.7 14.9 0.6 　 0.6 14.2 48.0

10 2020 9.2 9.6 18.8 -0.8 18.0 0.6 　 0.6 17.4 65.411 2021 8.8 9.2 18.0 -0.8 17.2 0.6 7.0 7.6 9.6 74.912 2022 8.4 8.8 17.2 -0.9 16.3 0.6 7.0 7.6 8.8 83.713 2023 8.0 8.4 16.4 -0.9 15.5 0.6 7.0 7.6 7.9 91.614 2024 7.6 8.0 15.6 -0.9 14.7 0.5 7.0 7.5 7.1 98.715 2025 7.2 7.6 14.8 -1.0 13.8 0.5 7.0 7.5 6.3 105.016 2026 6.8 7.2 14.0 -1.0 13.0 0.5 7.0 7.5 5.5 110.517 2027 6.4 6.8 13.2 -1.1 12.1 0.5 7.0 7.5 4.6 115.118 2028 6.0 6.4 12.4 -1.1 11.3 0.5 7.0 7.5 3.8 118.919 2029 5.6 6.0 11.6 -1.2 10.4 0.4 7.0 7.4 3.0 121.920 2030 5.2 5.6 10.8 -1.3 9.5 0.4 7.0 7.4 2.1 124.021 2031 4.8 5.2 10.0 -1.3 8.7 0.4 7.0 7.4 1.3 125.222 2032 4.4 4.8 9.2 -1.4 7.8 0.4 7.0 7.4 0.4 125.723 2033 4.0 4.4 8.4 -1.5 6.9 0.4 7.0 7.4 -0.4 125.324 2034 　 4.0 4.0 -1.5 2.5 0.3 7.0 7.3 -4.9 120.425 2035 　　 0.0 0.0 0.0 0.3 7.0 7.3 -7.3 113.126 2036 　　　　　 0.3 7.0 7.3 -7.3 105.827 2037 　　　　　 0.3 7.0 7.3 -7.3 98.528 2038 　　　　　 0.3 7.0 7.3 -7.3 91.329 2039 　　　　　 0.2 7.0 7.2 -7.2 84.030 2040 　 0.2 7.0 7.2 -7.2 76.831 2041 　 0.2 7.0 7.2 -7.2 69.632 2042 　 0.2 7.0 7.2 -7.2 62.533 2043 　 0.1 7.0 7.1 -7.1 55.334 2044 　 0.1 7.0 7.1 -7.1 48.235 2045 　 0.1 7.0 7.1 -7.1 41.136 2046 　 0.1 7.0 7.1 -7.1 34.037 2047 　 0.1 7.0 7.1 -7.1 26.938 2048 　 0.0 7.0 7.0 -7.0 19.939 2049 0.0 7.0 7.0 -7.0 12.940 2050 0.0 7.0 7.0 -7.0 5.9

Total 26.03 26.03 43.6 -22.3 21.3 15.4 210.0 225.4 5.9IRR Final Balance

0.98% 5.9

Expenditure for Survey & Income from Survey

Table-5.2-2 Cash flow to and from the Fund for Debt-type (15yr) scheme



-100

-75

-50

-25

0

25

50

75

100

125

150

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

2037

2039

2041

2043

2045

2047

2049

Year

Annual

Cas

h F

low

(m

$)

-600

-500

-400

-300

-200

-100

0

100

200

300

Fund

Year

-end

Bal

ance (

m$)

Annual Cash Flow

Fund Year-end Balance

-50

0

50

100

150

200

250

300

2011

2014

2017

2020

2023

2026

2029

2032

2035

2038

2041

2044

2047

2050

Year

Fund

Bal

ance

(m$)

Fig.-5.2-1 Annual cash flow to and from the Fund and year-end balance of the Fund

Fig.-5.2-2 Year-end balance of the Fund (re-posted)



-300

-200

-100

0

100

200

300

400

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

2037

2039

2041

2043

2045

2047

2049

Year

Fund

Bal

ance

(m$)

100% 75% 50% 48.8% 25% 0%

0

50

100

150

200

250

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

2037

2039

2041

2043

2045

2047

2049

Year

Fund

Bal

ance

(m$)

Delay = 0 yr Delay = 1 yr Delay = 2 yr Delay = 3 yr Delay = 4 yr

Fig.-5.2-3 Year-end balance of the Fund for various Success Rates

Table-5.2-3 Final balance of the Fund and FIRR for various Success Rates Success Ratio 100% 75% 50% 48.8% 25% 0% Fund Balance (m$) 285 132 6 0 -120 -229 FIRR (%) 9.7% 5.8% 1.0% 0.7% - -

Fig.-5.2-4 Year-end balance of the Fund for various development delays (Success Rate is 50%)

Table-5.2-4 Final balance of the Fund and FIRR for various development delays (Success Rate is 50%） Development Delay No delay 1 year delay 2 year delay 3 year delay 4 year delay Fund Balance (m$) 6 10 19 29 38 FIRR (%) 1.0% 1.1% 1.5% 1.8% 2.0%



EIRR Fund Cash Flow (In case of Yen Loan)Fund Type Debt (15yrs)

Success Rate 50.0%Surveyed Fields 4

Successful Fields 2.0Sales Price 30 m$

O&M cost 0.5 m$/yearDevelopment Delay 0 years


Cash Flow Budget Fund Annual MT Svy (TA) Survey-1 Survey-2 Total O&M Total Base Benefit Survey-1 Survey-2 Benefit Base Benefit Survey-1 Survey-2 Benefit

Year a b0 b1 b2 b=Σbi c d=b+c e f1 f2 f=Σfi g=f-d j k1 k2 k=Σki l=k-d1 2011 210 -4.8 -4.8 -0.5 -5.3 -5.3 -5.32 2012 -3.7 -11.8 -15.5 -0.5 -16.1 -16.1 -16.13 2013 0.0 -50.0 -11.8 -61.8 -0.6 -62.4 -62.4 -62.44 2014 -38.2 -50.0 -88.1 -0.6 -88.7 -88.7 -88.75 2015 -38.2 -38.2 -0.6 -38.8 -5.6 -22.3 -22.3 -61.0 -0.8 -3.2 -3.2 -41.96 2016 0.0 -0.6 -0.6 2.7 10.8 -22.3 -11.5 -12.1 -2.2 -8.7 -3.2 -11.8 -12.57 2017 -0.7 -0.7 -16.8 -67.3 10.8 -56.5 -57.2 -14.4 -57.7 -8.7 -66.3 -67.08 2018 -0.7 -0.7 -20.6 -82.3 -67.3 -149.6 -150.3 -14.5 -57.9 -57.7 -115.5 -116.39 2019 -0.7 -0.7 14.9 59.7 -82.3 -22.7 -23.4 14.4 57.5 -57.9 -0.4 -1.1

10 2020 -0.8 -0.8 15.1 60.3 59.7 120.0 119.2 14.6 58.3 57.5 115.8 115.011 2021 -0.8 -0.8 15.2 60.9 60.3 121.1 120.3 14.8 59.1 58.3 117.4 116.612 2022 -0.9 -0.9 12.4 49.5 60.9 110.3 109.5 15.0 59.9 59.1 119.0 118.113 2023 -0.9 -0.9 15.5 62.1 49.5 111.6 110.7 15.2 60.7 59.9 120.6 119.714 2024 -0.9 -0.9 15.7 62.7 62.1 124.8 123.8 15.4 61.5 60.7 122.3 121.315 2025 -1.0 -1.0 15.8 63.3 62.7 126.0 125.0 15.6 62.4 61.5 123.9 122.916 2026 -1.0 -1.0 16.0 63.9 63.3 127.3 126.2 15.8 63.2 62.4 125.6 124.617 2027 -1.1 -1.1 13.1 52.6 63.9 116.5 115.4 16.0 64.1 63.2 127.4 126.318 2028 -1.1 -1.1 16.3 65.2 52.6 117.8 116.7 16.3 65.0 64.1 129.1 128.019 2029 -1.2 -1.2 16.5 65.9 65.2 131.1 129.9 16.5 65.9 65.0 130.9 129.720 2030 -1.3 -1.3 16.6 66.5 65.9 132.4 131.1 16.7 66.8 65.9 132.7 131.421 2031 -1.3 -1.3 12.3 49.2 66.5 115.7 114.4 16.9 67.7 66.8 134.5 133.222 2032 -1.4 -1.4 17.0 67.9 49.2 117.1 115.7 17.2 68.7 67.7 136.4 135.023 2033 -1.5 -1.5 17.1 68.6 67.9 136.4 135.0 14.4 57.6 68.7 126.3 124.824 2034 -1.5 -1.5 17.3 69.2 68.6 137.8 136.3 17.6 70.6 57.6 128.2 126.725 2035 -1.6 -1.6 17.5 69.9 69.2 139.2 137.6 17.9 71.6 70.6 142.2 140.526 2036 　　 14.7 58.6 69.9 128.6 128.6 18.1 72.6 71.6 144.1 144.127 2037 　　 17.8 71.3 58.6 130.0 130.0 18.4 73.6 72.6 146.1 146.128 2038 　　 18.0 72.1 71.3 143.4 143.4 18.6 74.6 73.6 148.2 148.229 2039 　　 18.2 72.8 72.1 144.8 144.8 18.9 75.6 74.6 150.2 150.230 2040 15.4 61.5 72.8 134.3 134.3 17.7 70.7 75.6 146.3 146.331 2041 18.6 74.3 61.5 135.8 135.8 19.4 77.8 70.7 148.5 148.532 2042 18.8 75.0 74.3 149.3 149.3 19.7 78.9 77.8 156.6 156.633 2043 18.9 75.8 75.0 150.8 150.8 20.0 80.0 78.9 158.8 158.834 2044 14.6 58.5 75.8 134.3 134.3 17.3 69.1 80.0 149.0 149.035 2045 19.3 77.3 58.5 135.8 135.8 20.6 82.2 69.1 151.3 151.336 2046 19.5 78.1 77.3 155.4 155.4 20.8 83.4 82.2 165.6 165.637 2047 19.7 78.9 78.1 157.0 157.0 21.1 84.5 83.4 167.9 167.938 2048 19.9 79.7 78.9 158.6 158.6 21.4 85.7 84.5 170.3 170.339 2049 79.7 79.7 79.7 85.7 85.7 85.740 2050

Total 210.00 -8.50 -99.97 -99.97 -208.4 -23.9 -232.3 457.5 1830.1 1830.1 3660.2 3427.9 490.5 1961.8 1961.8 3923.6 3691.3

EIRR 15.3% EIRR 16.6%

Effect of Fund (vs 20MW Diesel)Expenditure for Survey & Income from Survey Effect of Fund (vs 55MW Coal)

Table-5.2-5 Table for Economic Internal Rate of Return of the Fund



0%

5%

10%

15%

20%

25%

100% 90% 80% 70% 60% 50% 40% 30% 20% 10%

Success Rate (%)

EIR

R (%

)

EIRR (v.s. Coal power Plant) EIRR (v.s. Diesel power Plant)

Fig.-5.2-5 Socio-economic effects of the Fund (EIRR) 5.3 Feasibility of a Project for Yen Loan to the Fund

The business performance of the Fund depends on how many geothermal power plants will ultimately be constructed by private developers in fields where Governmental Exploration has been carried out (the Success Rate). As a rough estimation, the probability of success of geothermal development is assumed to be around 50%. Therefore, the simulations in this report are basically based on a 50% Success Rate. However, since Indonesia is a country that boasts of the world’s most extensive geothermal resources, a Success Rate higher than 50% can be expected. When the Success Rate is 48.8% or more, the final balance of the Fund is positive (in the black). This means that the Fund business can produce a surplus even after carrying out Governmental Exploration and repaying the Yen Loan, although the numbers are in nominal monetary terms. If the Success Rate is less than 48.8%, the final balance will be negative (in the red). This means the Fund will need a bridging loan to make repayments of the Yen Loan when the balance becomes negative. However, even if the Fund ends up in the red, it is important to emphasize the positive benefits of having Governmental Exploration effectively performed at a very small cost. Namely, take 37.5% Success Rate case as an example. In the case of 37.5% Success Rate, three (3) geothermal plants are to be constructed. The final balance of the Fund is minus USD 57.1 million (Table-5.3-1). This means that the Fund can construct three geothermal plants at the costs of USD 57.1 million. The social benefit of this case is USD 2,513 million and 13.5% of EIRR (compared with 55 MW coal-fired thermal plant) or USD 2,710 million and 14.6% of EIRR (compared with 20 MW diesel power plant) (Table-5.3-2). These positive benefits that have 12% of EIRR or more can be observed as long as the Success Rate is 30% or more.



If the Success Rate is 100%, the financial performance of the Fund business (Financial Internal Rate of Return; FIRR) is 9.7%. Since the yield of the US dollar-based ten (10) year government bond issued in January 2010 in Indonesia is 5.875%, the Fund business would be feasible even when private capital is used, if the Success Rate is 100%. However, the FIRR decreases to 5.8% when the Success Rate decreases to 75%. The FIRR decreases to 1.0% when the Success Rate falls to 50%. It would be difficult to carry on such a business using private finance. It is necessary for the Fund to be operated by the Government and to utilize low-interest finance such as ODA loans. It is true that the final balance of the Fund is negative if the Success Rate is less than 48.8%, even when ODA loans are used. However, the Fund has a positive socio-economic significance, as already discussed. Therefore, it is highly desirable that the Fund be realized as a Governmental business, using ODA financing mechanism such as Yen Loan.



Fund Cash Flow (In case of Yen Loan)Fund Type Debt (15yrs)

Success Rate 37.5%Surveyed Fields 4 Yen Loan

Successful Fields 1.5 Interest 0.30% annualSales Price 30.0 m$ Grace period 10 years

O&M cost 0.5 m$/year Repayment Years 30 yearsDevelopment Delay 0 years Total Repayment Years 40 years


Cash Flow Budget Fund Annual Interest of Repayment Total Fund Fund MT Svy (TA Survey-1 Survey-2 Total O&M Total Yen Loanof Yen LoanRepayment Cash flow Balance

Year a b0 b1 b2 b=Σbi c d=b+c e1 e2 e=e1+e2 f=a-d-e g1 2011 210 -4.8 -4.8 -0.5 -5.3 0.6 　 0.6 204.1 204.12 2012 -3.7 -11.8 -15.5 -0.5 -16.1 0.6 　 0.6 -16.7 187.43 2013 0 -50.0 -11.8 -61.8 -0.6 -62.4 0.6 　 0.6 -63.0 124.44 2014 -38.2 -50.0 -88.1 -0.6 -88.7 0.6 　 0.6 -89.4 35.05 2015 4.5 -38.2 -33.7 -0.6 -34.3 0.6 　 0.6 -34.9 0.16 2016 4.5 4.5 9.0 -0.6 8.4 0.6 　 0.6 7.7 7.97 2017 4.5 4.5 9.0 -0.7 8.3 0.6 　 0.6 7.7 15.68 2018 4.5 4.5 9.0 -0.7 8.3 0.6 　 0.6 7.7 23.29 2019 7.2 4.5 11.7 -0.7 11.0 0.6 　 0.6 10.3 33.6

10 2020 6.9 7.2 14.1 -0.8 13.3 0.6 　 0.6 12.7 46.311 2021 6.6 6.9 13.5 -0.8 12.7 0.6 7.0 7.6 5.1 51.312 2022 6.3 6.6 12.9 -0.9 12.0 0.6 7.0 7.6 4.5 55.813 2023 6.0 6.3 12.3 -0.9 11.4 0.6 7.0 7.6 3.8 59.614 2024 5.7 6.0 11.7 -0.9 10.8 0.5 7.0 7.5 3.2 62.815 2025 5.4 5.7 11.1 -1.0 10.1 0.5 7.0 7.5 2.6 65.416 2026 5.1 5.4 10.5 -1.0 9.5 0.5 7.0 7.5 2.0 67.417 2027 4.8 5.1 9.9 -1.1 8.8 0.5 7.0 7.5 1.3 68.718 2028 4.5 4.8 9.3 -1.1 8.2 0.5 7.0 7.5 0.7 69.419 2029 4.2 4.5 8.7 -1.2 7.5 0.4 7.0 7.4 0.1 69.520 2030 3.9 4.2 8.1 -1.3 6.8 0.4 7.0 7.4 -0.6 68.921 2031 3.6 3.9 7.5 -1.3 6.2 0.4 7.0 7.4 -1.2 67.622 2032 3.3 3.6 6.9 -1.4 5.5 0.4 7.0 7.4 -1.9 65.823 2033 3.0 3.3 6.3 -1.5 4.8 0.4 7.0 7.4 -2.5 63.324 2034 　 3.0 3.0 -1.5 1.5 0.3 7.0 7.3 -5.9 57.425 2035 　　 0.0 0.0 0.0 0.3 7.0 7.3 -7.3 50.126 2036 　　　　　 0.3 7.0 7.3 -7.3 42.827 2037 　　　　　 0.3 7.0 7.3 -7.3 35.528 2038 　　　　　 0.3 7.0 7.3 -7.3 28.329 2039 　　　　　 0.2 7.0 7.2 -7.2 21.030 2040 　 0.2 7.0 7.2 -7.2 13.831 2041 　 0.2 7.0 7.2 -7.2 6.632 2042 　 0.2 7.0 7.2 -7.2 -0.533 2043 　 0.1 7.0 7.1 -7.1 -7.734 2044 　 0.1 7.0 7.1 -7.1 -14.835 2045 　 0.1 7.0 7.1 -7.1 -21.936 2046 　 0.1 7.0 7.1 -7.1 -29.037 2047 　 0.1 7.0 7.1 -7.1 -36.138 2048 　 0.0 7.0 7.0 -7.0 -43.139 2049 0.0 7.0 7.0 -7.0 -50.140 2050 0.0 7.0 7.0 -7.0 -57.1

Total -5.47 -5.47 -19.4 -22.3 -41.7 15.4 210.0 225.4 -57.1IRR Final Balance

#NUM! -57.1

Expenditure for Survey & Income from Survey

Table-5.3-1 Cash flow to and from the Fund for Debt-type (15yr) scheme at 37.5% of Success Rate



EIRR Fund Cash Flow (In case of Yen Loan)Fund Type Debt (15yrs)

Success Rate 37.5%Surveyed Fields 4

Successful Fields 1.5Sales Price 30 m$

O&M cost 0.5 m$/yearDevelopment Delay 0 years


Cash Flow Budget Fund Annual MT Svy (TA) Survey-1 Survey-2 Total O&M Total Base Benefit Survey-1 Survey-2 Benefit Base Benefit Survey-1 Survey-2 Benefit

Year a b0 b1 b2 b=Σbi c d=b+c e f1 f2 f=Σfi g=f-d j k1 k2 k=Σki l=k-d1 2011 210 -4.8 -4.8 -0.5 -5.3 -5.3 -5.32 2012 -3.7 -11.8 -15.5 -0.5 -16.1 -16.1 -16.13 2013 0.0 -50.0 -11.8 -61.8 -0.6 -62.4 -62.4 -62.44 2014 -38.2 -50.0 -88.1 -0.6 -88.7 -88.7 -88.75 2015 -38.2 -38.2 -0.6 -38.8 -5.6 -16.7 -16.7 -55.5 -0.8 -2.4 -2.4 -41.26 2016 0.0 -0.6 -0.6 2.7 8.1 -16.7 -8.6 -9.3 -2.2 -6.5 -2.4 -8.9 -9.57 2017 -0.7 -0.7 -16.8 -50.5 8.1 -42.4 -43.1 -14.4 -43.2 -6.5 -49.7 -50.48 2018 -0.7 -0.7 -20.6 -61.8 -50.5 -112.2 -112.9 -14.5 -43.4 -43.2 -86.7 -87.49 2019 -0.7 -0.7 14.9 44.8 -61.8 -17.0 -17.7 14.4 43.1 -43.4 -0.3 -1.0

10 2020 -0.8 -0.8 15.1 45.2 44.8 90.0 89.2 14.6 43.7 43.1 86.8 86.111 2021 -0.8 -0.8 15.2 45.7 45.2 90.9 90.0 14.8 44.3 43.7 88.0 87.212 2022 -0.9 -0.9 12.4 37.1 45.7 82.8 81.9 15.0 44.9 44.3 89.2 88.413 2023 -0.9 -0.9 15.5 46.6 37.1 83.7 82.8 15.2 45.5 44.9 90.5 89.614 2024 -0.9 -0.9 15.7 47.0 46.6 93.6 92.6 15.4 46.2 45.5 91.7 90.715 2025 -1.0 -1.0 15.8 47.5 47.0 94.5 93.5 15.6 46.8 46.2 92.9 92.016 2026 -1.0 -1.0 16.0 48.0 47.5 95.4 94.4 15.8 47.4 46.8 94.2 93.217 2027 -1.1 -1.1 13.1 39.4 48.0 87.4 86.3 16.0 48.1 47.4 95.5 94.418 2028 -1.1 -1.1 16.3 48.9 39.4 88.4 87.2 16.3 48.8 48.1 96.8 95.719 2029 -1.2 -1.2 16.5 49.4 48.9 98.3 97.1 16.5 49.4 48.8 98.2 97.020 2030 -1.3 -1.3 16.6 49.9 49.4 99.3 98.0 16.7 50.1 49.4 99.5 98.321 2031 -1.3 -1.3 12.3 36.9 49.9 86.8 85.5 16.9 50.8 50.1 100.9 99.622 2032 -1.4 -1.4 17.0 50.9 36.9 87.8 86.4 17.2 51.5 50.8 102.3 100.923 2033 -1.5 -1.5 17.1 51.4 50.9 102.3 100.9 14.4 43.2 51.5 94.7 93.324 2034 -1.5 -1.5 17.3 51.9 51.4 103.3 101.8 17.6 52.9 43.2 96.2 94.625 2035 -1.6 -1.6 17.5 52.4 51.9 104.4 102.8 17.9 53.7 52.9 106.6 105.026 2036 　　 14.7 44.0 52.4 96.4 96.4 18.1 54.4 53.7 108.1 108.127 2037 　　 17.8 53.5 44.0 97.5 97.5 18.4 55.2 54.4 109.6 109.628 2038 　　 18.0 54.0 53.5 107.6 107.6 18.6 55.9 55.2 111.1 111.129 2039 　　 18.2 54.6 54.0 108.6 108.6 18.9 56.7 55.9 112.7 112.730 2040 15.4 46.1 54.6 100.7 100.7 17.7 53.0 56.7 109.7 109.731 2041 18.6 55.7 46.1 101.8 101.8 19.4 58.3 53.0 111.3 111.332 2042 18.8 56.3 55.7 112.0 112.0 19.7 59.1 58.3 117.5 117.533 2043 18.9 56.8 56.3 113.1 113.1 20.0 60.0 59.1 119.1 119.134 2044 14.6 43.9 56.8 100.7 100.7 17.3 51.8 60.0 111.8 111.835 2045 19.3 58.0 43.9 101.9 101.9 20.6 61.7 51.8 113.5 113.536 2046 19.5 58.6 58.0 116.6 116.6 20.8 62.5 61.7 124.2 124.237 2047 19.7 59.2 58.6 117.7 117.7 21.1 63.4 62.5 125.9 125.938 2048 19.9 59.8 59.2 118.9 118.9 21.4 64.3 63.4 127.7 127.739 2049 59.8 59.8 59.8 64.3 64.3 64.340 2050

Total 210.00 -8.50 -99.97 -99.97 -208.4 -23.9 -232.3 457.5 1372.6 1372.6 2745.1 2512.8 490.5 1471.4 1471.4 2942.7 2710.4

EIRR 13.5% EIRR 14.6%

Effect of Fund (vs 20MW Diesel)Expenditure for Survey & Income from Survey Effect of Fund (vs 55MW Coal)

Table-5.3-2 Table for Economic Internal Rate of Return of the Fund at 37.5% of Success Rate



Chapter 6 Proposals for Further Acceleration of Geothermal Development in Indonesia

This Study proposes a plan to attract private developers to participate in geothermal development in Indonesia through mitigation of their resource risks and improvements for the current legal geothermal development framework. One of the main components of the proposal, the Governmental Exploration scheme and supporting Fund, was proposed as a risk mitigation measure in Chapter 3. Moreover, some points that need to be rectified in the current legal geothermal development framework are pointed out and discussed in Chapter 4. In addition, the possibility of a Yen Loan for the support and realization of the Fund is discussed in Chapter 5. These proposals are ideas that can be put into practice over a short-term period to further promote geothermal development by private developers in the current framework of geothermal development in Indonesia. This chapter proposes further recommendations to accelerate geothermal development in Indonesia. The two recommendations in this chapter were first raised in the interviews conducted with private investors. The Study Team hopes these proposals will furnish additional material for discussion and lead towards a further refinement of geothermal policy in the future. 6.1 Combination of Energy Conversion by Private Sector and Steam Development by

Public Sector

In this Study, the Study Team has conducted a series of interviews with private companies that are thought to have an interest in geothermal development in Indonesia. Among the many useful opinions from the interviewees was strong interest of private developers in the energy conversion of geothermal steam into electric power, if other developers could supply geothermal steam to them, rather than developing geothermal steam in a Green Field from scratch by themselves. This attitude follows naturally from the fact that the risks of the energy conversion business are small enough for many private companies to take, unlike the large risks of geothermal steam development in a Green Field. The Philippines offers an example of a system where private companies participate in the energy conversion of geothermal steam into electric power. In the 1990s, the Philippines had adopted a system where a government-run geothermal development company (PNOC-EDC) developed geothermal steam and private companies undertook the business of converting the geothermal steam into electric power. As a result, geothermal development advanced rapidly in the Philippines in the 1990s. The government later shifted their policy to the privatization of the electric power sector, and PNOC-EDC has been privatized. This policy change terminated this development system and resulted in a stagnation of geothermal development in the country. However, the system of "energy conversion by private companies of the geothermal steam

Proposals for Further Acceleration of Geothermal Development in Indonesia



supplied by a state-run development company" has attracted wide attention among private companies and drew a large amount of private capital into the geothermal development market in the Philippines. Nowadays, Kenya is keen to introduce this system to accelerate geothermal development there. There are two advantages to this system: one is in controlling costs and the other is in controlling risk. One of the biggest barriers to geothermal development is that it requires a large amount of up-front investment. Due to this large initial investment, the selling price of geothermal energy is likely to be higher than energy from other thermal power plants, where the initial capital cost is smaller. Fig.-6.1-1 shows the components of the selling price of geothermal energy. When developers sell geothermal energy, they do not sell energy at the generation cost. They need to sell it at a price which allows them to secure an appropriate return on their investment and pay all business taxes on top of the generation cost. The investment return will be determined by the amount of the initial investment and the developers’ expected rate of return. In other words, the relation between the selling price and the investment return is an upward-sloping curve. Fig.-6.1-2 shows examples of this relation curve for two different generation types: a geothermal plant and a gas-fired thermal plant. Since geothermal power generation requires a larger initial investment than gas-fired thermal power, the curve for geothermal (red bars) is steeper than that for the gas-fired project (blue bars). Comparison of the two curves shows that:

(i) For companies which consider their expected rate of return to be about 10% - 12% (for example, a government-run power company), the selling prices of both geothermal and gas-fired thermal power will be almost the same.

(ii) Companies which require a 15% expected rate of return or more (i.e. private companies) will set the selling price of geothermal power higher than that of gas-fired thermal power.

(iii) If low-cost funds are available for the construction of power plants, the selling price of geothermal power will be less than that of thermal power.



0.0

2.0

4.0

6.0

8.0

10.0

12.0

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%14

.0%

15.0%

16.0%

17.0%

18.0%

Capital Cost (%)Selling

Price (

cents

US$/kW

h)

Geothermal　

Gas CC

Return on Investment

Tax Selling (Tax Rate t %) Price

OthersOperation & Maintenance Cost

Generation Cost Capital Cost

(Source) JICA (2009) Fig.-6.1-1 Components of selling Fig.-6.1-2 Relation between selling price and

price of energy expected rate of return Fig.-6.1-1 Components of selling price of energy

Fig.-6.1-2 Relation between selling price and expected rate of return As mentioned above, when a geothermal plant is developed using high-cost private capital, the selling price of geothermal energy will be high. On the other hand, however, if low-cost capital can be used, the selling price of geothermal energy will be cheaper than that of thermal power. A government-run company, benefiting from the creditworthiness of the government, can raise low-cost capital from the market. As a result, the development of a government-run company can be expected to lead to a lower selling price for geothermal energy. The second advantage of steam supply by a state-run company is risk mitigation. Fig.-6.1-3 shows the profit density curve of geothermal business. Since there is much unknown information concerning resources before starting geothermal development, the distribution of the profit density curve assumes the shape of a mountain of low height with extensive foothills. The extent of these gradual foothills defines the business risk. However, if the developer carries out development in several fields and takes the average of the profits, the profit density curve is a higher and narrower one. This means that there is less risk in developing a “Portfolio” of fields. This is supported by statistical theory. The Central Limit Theorem of probability theory states that a new distribution curve of the average of “n” number of samples out of a random distribution comes close to the normal distribution with σ/√n of standard deviation where σ is the standard deviation of the original random distribution. This means that development in 4 locations will reduce the risk to 1/2 and in 9 locations to 1/3. This is risk dilution by the portfolio effect. A developer who is able to undertake development in several fields should have strong financial and technological capacity. There may be no developer other than a



Distribution of "Mother Group" Average = μ Standard deviation = σ

Distribution of "Sample of n" Average = μ Standard deviation = σ/√n

PortofolioEffect

X1 Xn

XiX2Y=(X1+X2+.....+Xn)/n

0

20

40

60

80

100

120

140

160

-5% 5%-6%

6%-7%

7%-8%

8%-9%

9%-10%

10%-11%

11%-12%

12%-13%

13%-14%

14%-15%

15%-16%

16%-17%

17%-18%

18%-19%

19%-20%

20%-21%

21%-22%

22%+

Pro

babi

lity

(Tim

es/1

000

times

tria

l)

Trial Number = 1000 timesPrice = 9.9 c$/kWh,WACC = 11.1%Target FIRR = 14.1%

Average (μ）= 12.9%Standard deviation（σ) =2.97%

government-run developer who has such capacity. Therefore, to foster such a governmental-run developer to undertake development in several fields could be an appropriate risk mitigation measure.

Fig.-6.1-3 Risk of geothermal business

Fig.-6.1-4 Risk mitigation by the Portfolio Effect The policy of enabling a government-run developer to undertake development in many fields will also lead to an accumulation of experience, knowledge and technology in the developer. The result will be the operation of a positive “learning effect” in the development of geothermal, and a consequent reduction in development costs can be expected. In the Philippines, PNOC-EDC had undertaken development in almost all geothermal fields, and, as a result, the state-run developer acquired technology to develop geothermal at low costs. This policy is deemed to have been an important factor in the virtuous circle of the geothermal development in the Philippines. Therefore, the fostering of a government-run geothermal company to undertake steam development in various fields in Indonesia is highly desirable. It is also preferable to use this government-run geothermal company to perform Governmental Exploration. In Indonesia, there is Pertamina Geothermal Energy (PGE), which is a subsidiary of the state-run company Pertamina. However, PGE has the status of a private company and is allowed



to undertake geothermal development activity in its own Geothermal Working Areas (WKP) like any of the other geothermal development players. On the other hand, there is PT. Geo Dipa, which is a subsidiary of Pertamina and PT. PLN. The Indonesian Government is now acquiring the shares of PT. Geo Dipa from Pertamina and transforming it into a government-run company. However, PT. Geo Dipa is a company established to develop geothermal only in the Dien and Patuha fields. The capacity of the company is not sufficient to carry out geothermal development in the whole country. There is also PT. PLN Geothermal. This company is a subsidiary of PT. PLN established to promote geothermal development on behalf of PT. PLN. However, the activity of this company has just started and its status is that of a private company like PGE. Therefore, an appropriate government-run geothermal development company does not exist at present in Indonesia. However, many private companies are awaiting geothermal steam supply from a reliable geothermal company. For this purpose, the promotion and establishment of a government-run geothermal company is necessary. It is hoped to establish a government-run geothermal company that performs geothermal steam development across the country. This company can be fostered as a center of geothermal development in Indonesia. It is also hoped to utilize this company to undertake initial Governmental Exploration in the fields where private companies are hesitant to start development. 6.2 Measures to Procure Drilling Rigs

The cost of developing geothermal energy is increasing in the 2000s. One of the big factors in this increase is a rise in drilling costs. This is because geothermal drilling rigs are the same rigs as those used for oil and gas drilling. As drilling in the oil and gas market intensifies due to the increase in oil prices, the supply of drilling services has become very tight, leading to a sharp rise in prices. The cost of drilling wells is a big part of geothermal development costs. For instance, the development costs of a 55 MW-class geothermal power plant are estimated at about USD 180 million, and 40% or more of these costs are the drilling costs. Therefore, to lower geothermal development costs it is essential to reduce drilling costs. The government is expected to work out some measures to lower geothermal drilling costs in addition to its measures to mitigate development risks. For example, it would be helpful if there was a tax incentive enabling developers to purchase drilling rigs themselves. Drilling costs may be 20% lower if developers own their own drilling rigs in the common case of drilling wells than outsourcing drilling services. Table-6.2-1 shows the drilling cost estimation for the outsourcing case and Table-6.2-2 shows the cost estimation when the developers’ own drilling rigs are used. If the developer plans to drill six (6) wells a year for a ten (10) year period, the drilling cost is about 20% less when the developer owns its own drilling rig. Moreover, there is another advantage to owning one’s



Items RemarksMobilization/Demobilization 0.4 ～ 0.7 Depends on site and number of lots (3-5 wells case)Rig Cost 1.8 ～ 2.1 Day rate ap. 30,000-35,000 $/day × 60 daysDrilling Services Procurement of services (cementing, mud, etc.)Materials Cement, Casing, Well head, Fuel etc.TOTAL 5.7 ～ 6.3 Approximately 6 million US$

2.01.5

Cost (mil US$)

ITEMS REMARKSMobilization/Demobilization 0.4 ～ 0.7 Depends on site and number of lots (3-5 wells case)Rig depreciation 25m$ x Annuity Factor (0.1770) ｘ 0.167 (6 wells/yr)

Personnel fee Day rate 100 $/day x 40 psn x 60 daysDrilling Services 1.0 ～ 1.5 Depend on the extent of In-house workMaterials Cement, Casing, Well head, Fuel etc.TOTAL 4.4 ～ 5.2 Approximately 4.8 million US$(Note) Annuity factor is;

If i= 12% discount rate and n=10 years economic life, then annuity factor is 0.1770. After economic life ends, the drilling cost becomes around 4 million US$.

2.0

0.70.2

Cost (mil US$)

[ ]1)1(

)1(*−+

+= n

nni i

iir

own rigs: it confers greater freedom in drawing up drilling plans even in a high-demand market where the supply of drilling services is very tight. The government is strongly expected to extend some support encouraging geothermal developers to own their own rigs to cope with the present situation in which the oil and gas industry and the geothermal industry are competing to procure drilling services in the market.

Table-6.2-1 Drilling cost estimation in the case of outsourcing

Table-6.2-2 Drilling cost estimation for a developer using its own rig(s)



Chapter 7 Concluding Summary

In the current framework of geothermal power development by IPPs, JICA proposes the following with a view to organizing a detailed structure of potential needs for foreign financing and building consensus among stakeholders to implement the suggested improvements, which have been obtained from the JICA study including “Risk Mitigation Measures for Geothermal IPP Development” and “Issues related to the Current Regulatory Framework for Geothermal Development”. As “Risk Mitigation Measures for Geothermal IPP Development”:

1. In Green Fields (Pre-tender Fields), Governmental Exploration including the drilling of three (3) exploratory wells with “Fund scheme” financing in the amount of USD 25 million shall be required to mitigate resource development risks before the IUP tender process.

2. Expenditures from the Fund shall be recovered by means of a Debt-type scheme that is mainly suitable for small capacity projects (e.g. those in Eastern Indonesia) and by means of an Equity-type scheme that is mainly suitable for large capacity projects (e.g. those in Java-Sumatra).

3. The Fund shall revolve in proportion to the Success Rate of Governmental Exploration. When the Success Rate is high (more than 75%), it is possible to compose the Fund of Debt–type schemes alone. In this case, the Fund is expected to return to the original balance in several years.

4. When the Success Rate is 50%, the Fund is not expected to return to the original balance in 30 years. Even in this case, however, if the Fund includes Equity-type schemes by 50% in the Fund portfolio, it is expected that the Fund will recover the original balance in the long-term (around 21 years).

5. If the Success Rate is low (25%), the Fund does not return to the original balance. 6. Therefore, it is recommendable that the Fund support not only fields where small-scale

geothermal power plants, which are suitable for Debt-type, can be developed but also fields where large-scale geothermal plants, which are suitable for Equity-type, can be developed. It is also recommendable that the Fund makes an appropriate portfolio of Debt-type and Equity-type taking the characteristics of each project into consideration.

7. Several forms of Fund management by both MOF and MEMR are proposed, of which one shall be chosen as suitable in terms of practical operation according to government regulations.

8. The Executing Agent as a contractor for Governmental Exploration should be selected through a consideration of QCBS (technical and cost) evaluation criteria.

9. Candidate fields for Governmental Exploration shall be selected on the basis of geothermal resource potential criteria with less emphasis on social and environmental issues. Detailed selection criteria are proposed in this report, and required studies for



Governmental Exploration are proposed in some detail. As “Issues related to the Current Regulatory Framework for Geothermal Development”:

1. A private company, who are assigned as the Executing Agent of the Government Exploration, is also allowed to participate in the WKP tender. Hence, the tender for the Government Exploration and WKP tender should be managed independently.

2. As for the WKP tender process, the Study Team suggests improving the current WKP bidding process through the enhancement of the administrative capacity, the revision of the tender procedures, and the improvements of the contents of the tender documents.

3. Regarding the enhancement of the administrative capacity, the involvement of PLN as a member of the Tender Committee, and strengthening the function of the Geothermal Department at MEMR to be an apex organization for geothermal development by extending its support for the tender process to local governments by establishing tender guidelines and by supervising the tender to ensure an effective and fair tender process, are suggested.

4. For the revision of the tender procedures, clarification of the P/Q requirements and introduction of the Conditional PPA between the IUP holder (WKP winner) and the PLN are suggested. The clarification of the P/Q requirements aims to select only qualified bidders to carry out the geothermal development by specifying the technical requirements, and encouraging IPPs’ participation for the bids by removing the entry barriers in relation to the financial requirements. The introduction of the Conditional PPA intends to provide comfort to an IUP holder with providing the PLN’s basic obligations for purchasing the power with conditions (power price, power selling mechanisms and obligations of the transmission lines) when an entity obtains an IUP. The contents agreed in the Conditional PPA are obliged to be transcribed to the relevant clauses in PPA when the IUP holder and the PLN finally sign the PPA.

5. Regarding the improvements of the contents of the tender documents, the Geothermal Department is expected to play a large role, by providing guidelines to ensure and maintain the quality of those documents. The guidelines are suggested to include an English version to accelerate the participation of international IPPs, and also clearly stipulate the issues which directly affect the economics of the project such as provision of the royalty.

6. In relation to the introduction of the Fund for the Government Exploration, the cost recovery of the Fund will be made from the payment of the WKP winner, by the method decided by the Fund Manager or proposed by a bidder on a WKP-by-WKP basis. The Fund Manager is suggested to participate in the tender document preparation to stipulate the relevant items (the repayment method decided by the Fund Manager or to be proposed by a bidder) in the tender document.

7. In terms of PPA, the Team suggested the tariff proposed in the bid by the WKP winner, to be reflected in PPA for not only the projects under Crash Program II as stipulated in



MEMR regulation 02/2011, but all geothermal projects. In addition, the Team suggested abolishing the ceiling price provisions for small-scaled projects which are proven to be not economically viable for IPPs. The Team also suggested the Government to provide the government guarantee for off-taker (PLN) risk for the projects besides the projects under Crash Program II which are expected to be covered under Presidential Regulation 04/2010, or the projects recognized as PPP projects which may receive the guarantee from IIGF. Furthermore, in the standard PPA, the transmission lines connecting to the power plants operated by IPPs are expected to be constructed by IPPs according to MEMR Regulation 15/2010. However, the team suggests that PLN will be the principal responsible party for it while an IPP constructs the transmission lines on a case-by-case basis depending on the characteristic of a project.

8. Among the suggestions above, the suggestion which directly affects the current WKP bidding process is the introduction of the Conditional PPA. Other than that, the suggestions do not have any influence on the current procedure. Some suggestions may require change of interpretation, however, all suggestions do not also interfere in existing legal framework, too.

In addition, the Feasibility of a Project for a Yen Loan to the Fund is studied, and the final balance of the Fund is found to be positive (in the black) when the Success Rate is 48.8% or more. The socio-economic effect (EIRR) of the Fund is larger than 12% when the Success Rate is 30% or more. Additional recommendations are made for further acceleration of geothermal development in Indonesia; (i) to promote a development system that combines a government-run geothermal steam developer and private energy conversion companies, and (ii) to work out a governmental support that enables developers to procure new geothermal drilling rigs. These two additional supports will further encourage geothermal developers in Indonesia.



Acknowledgments JICA and the Study Team would like to express our sincere thanks to the National Development Planning Agency (BAPPENAS), the Ministry of Finance, the Ministry of Energy and Mineral Resources, PT PLN, the Embassy of Japan in Indonesia, and companies engaged in geothermal business both in Indonesia and Japan for their cooperation and kind understanding of the Study.



References

Asia Development Bank, “Guidelines for the Economic Analysis of Projects”, Feb. 1997.


JICA A1-1 West JEC and JERI

Annex-I Characteristics of each Financial Scheme

In this Annex, the assumptions of financial schemes mentioned in the section 3.3 and the issues to note for each financial scheme are discussed. Throughout the discussions, the investors are assumed to be the international IPPs. The number of purely domestic IPPs, who is capable for geothermal development without international investors, is limited in Indonesia; therefore, to attract international investors to the geothermal sector in the country is essential in order to promote geothermal development in the short term. The established international investors prefer to procure the construction cost of the project by non (or limited) -recourse finance basis for the following reasons: - When the project is financed on recourse basis, the debt will be shown on the balance sheet

(B/S) of the investors. This lead to the weaker financial structure of the investors; therefore, the investors prefer to borrow on non-(or limited) recourse basis to avoid the impact on their B/S.

- When the project is financed on non-recourse basis, this finance is mainly based on the project’s profitability and repayment capacity and will not be restricted only to the creditworthiness of the investor; therefore, the investor could raise more finance in the case of non-recourse basis than the case of recourse basis.

Based on the above-mentioned investment environment, the following discussion assumes that most of the SPC’s initial project costs (especially construction costs) are procured by non-recourse project finance from financial institutions (“main loan” hereinafter) and based on this assumption, the characteristics of each financial scheme is discussed below. As described in the section 3.3, the four main investment recovery options (i.e. financial scheme) for the Fund are as follows;

Option (1) Equity (Sales): Sell equity in a short time, Option (2) Equity (Div): Hold equity for a long time, Option (3) Debt (Upfront): Bullet payment upon COD or financial closure; and Option (4) Debt (15yrs): Amortized long-term scheduled repayment.

(1) Characteristics of Cost Recovery through Equity Both Equity (Sales) and Equity (Div) mentioned in 3.3 (1) are recovery through equity options. In these options, the amount invested by the Fund (the costs of Government Exploration and some markup) are converted into a share of the SPC’s equity. The following characteristics in common as equity options can be noted: 1) Common characteristics for equity options (Equity (Sales) and Equity (Div)) (i) Possibility of high volatility



It is possible for the value of this equity to fluctuate, and this possible fluctuation means that returns to the Fund may also fluctuate in the case of Equity (Sales). Furthermore, depending on the performance of a project, the amount of dividends paid to the Fund might fluctuate and this possibility means that the returns to the Fund might fluctuate in case of Equity (Div). These fluctuations could be in either direction, enhancing cost recovery or inhibiting it, and the extent of these fluctuations is uncertain. (ii) Possibility of favorable effects to receive non-recourse project finance in terms of the SPC’s cash flow Unlike repayment through debt, an SPC will not have a fixed repayment obligation to the Fund when the Fund takes equity in the SPC. This means that the negative impact on SPC’s cash flow is likely to be less than it would be for the debt options; therefore equity options will be a relatively favorable form to obtain non-recourse project finance for SPCs compared with the debt options. (iii) Different assessment of the main loan lenders (hereinafter “the lenders”) toward the Fund’s ownership and possibility of additional requirements based on these assessments Interviews with the lenders showed two different reactions to equity participation by the Fund: it was welcomed in terms of political risk mitigation, but concern was shown about potential government intervention in the management of a project. In this regard, there is no unified opinion among the lenders about equity ownership by the Fund. When a lender assesses ownership by the government negatively, some additional conditions might be required by the lenders depending on the lenders’ assessment toward the ownership by the government. For example, (i) the portion of shares held by the Fund may not include voting rights, or (ii) the lenders may request to stipulate the criteria for the potential buyer of the Fund’s share. Such requirements are more likely when the Fund takes a substantial portion of an SPC’s shares. (iv) Detailed design for equity conversion As mentioned earlier, the amount invested by the Fund (the costs of Government Exploration and some markup) will be converted into a share in the SPC’s equity. This means that the cumbersome process such as a detailed design for the conversion and equity issuance will be required.



2) Each characteristics of Equity (Sales) and Equity (Div) So far, the characteristics common in equity options (Equity (Sales) and Equity (Div)) are discussed. The characteristics specific to Equity (Sales) and Equity (Div) are summarized in the following table.

Option Cost

recovery period

Contribution to revolvability of Fund Risks

Equity (Div): Hold equity for a long time (i.e. (i) until after substantial expansion of plant capacity, (ii) till the end of the project)

Long-term Low The recovery for the Fund will take a long time and it will lower the revolvability of the Fund.

Since the dividend will depend on the level of success of a project, dividends from the SPC may fluctuate and this will affect the returns to the Fund.

Equity (Sales): Equity sales in a short time (around COD)

Short-term High Substantial flow of cash back to the Fund in a short time and make it easier for the Fund to revolve.

The value of the shares has possibility to differ from what the Fund expects, based on project valuation by the buyers of the shares. (i.e. the return to the Fund is uncertain until the equity is actually sold.)

(2) Characteristics of Recovery through Debt Both Debt (Upfront) and Debt (15 yrs) mentioned in 3.3 (1) are recovery through debt options. The following characteristics of debt options ((Debt (Upfront) and Debt (15 yrs)) in common) can be noted: 1) Common characteristics in debt options (Debt (Upfront) and Debt (15 yrs)) (i) Possibility of low volatility The debt repayment is a fixed obligation for SPCs regardless of the success of the project; therefore, the volatility of returns to the Fund is lower than with equity options. (ii) The Fund’s right of recourse to the SPC’s parent companies Recourse of debt from the Fund may be obligated to various parties. For example, the debt can be designed with full recourse to the SPC’s parent companies. This means that if an SPC fails to fulfill its financial obligation to the Fund, the SPC’s parent companies must make repayment in place of the SPC. This design looks attractive for the Fund, since it decreases the probability of repayment failure. However, this is not attractive for IPPs at all, especially for international ones for the following reasons: - When the project is financed on recourse basis, the debt will be on the balance sheet (B/S)



of the investors. This leads to the weaker financial structure of the investors; therefore, the investor prefers to borrow on non-(or limited) recourse basis to avoid the impact on B/S.

- When the project is financed on non-recourse basis, this finance is mainly based on the project’s profitability and repayment capacity and will not be restricted only to the creditworthiness of the investor; therefore, the investor can raise more finance in the case of non-recourse basis than the case of recourse basis.

On the other hand, when the loan from the Fund is designed without recourse to the SPC’s parent companies, it is attractive for IPPs, although this loan then takes on some of the project completion risk and/or project credit risk and resource depletion risk. Indonesia needs to attract the experienced international investors in order to promote geothermal development in the short-term. Considering this environment, non-recourse of debt from the Fund is desirable. (iii) Investors’ preference for debt structures The debt can be structured in various ways in terms of (i) repayment schedule, (ii) priority between creditors etc. The attractive debt structure for the Fund has the possibility for the Fund to take more default risks of SPCs, but it has the possibility to earn more returns by taking this risk and it attracts the investors as well. The preferred structure for international investors is discussed in the end of this 2) below (“The potential attractive debt structure in Debt (15yrs)”). (iv) Timing of debt repayment It is preferable for IPPs if repayment occurs upon or after the financial close of the SPC’s main loan (Hereinafter, “the loan which covers most of the SPC’s initial project costs by non-recourse project finance from financial institutions” is called the “main loan”), since SPCs have to seek additional sources of finance (i.e. additional financial costs are required.) when such the repayment obligation falls before the financial close of the main loan. Since this additional financial cost for the investors will be eventually reflected in the tariff increase in the bidding, it is preferable for the Fund to allow the repayment to the Fund from SPC upon or after the financial closure of the SPC’s main loan. 2) Each characteristics of Debt (Upfront) and Debt (15 yrs) So far, the characteristics common in debt options (Debt (Upfront) and Debt (15 yrs)) are discussed. The characteristics specific to Debt (Upfront) and Debt (15 yrs) are summarized in the following table.



Option Cost

recovery period

Contribution to revolvability of

Fund Amount to be recovered by Fund

and the risks with it

Debt (15yrs): Amortized long-term scheduled repayment

Long-term Low The recovery for the Fund will take a long time and it will lower the revolvability of the Fund.

Compared with Debt (Upfront), the returns to the Fund are higher by earning the interests, though the Fund will bear SPC’s default risks for the longer period.

Debt (Upfront): Upfront payment to the Fund upon financial closure for the main loan to the SPC or COD

Short-term High Substantial flow of cash back to the Fund upon financial closure or CDO and make it easier for the Fund to revolve.

Compared with Debt (15yrs), the returns to the Fund are limited since the interest cannot be earned. (But the Fund bears SPC’s default risk only for the short period.)

This debt will be repaid by SPC in parallel with the main loan from the lenders. Therefore, various measures to coordinate with the main loan will be required and this coordination results need to be reflected in loan documentation. The coordination includes specifying the priority of creditors’ rights regarding their loans. If the debt from the Fund is subordinated to the main loan from the lenders, it will work as a mitigant against SPC’s default risk for the main lenders (i.e. the repayment to the main lenders will be made before the repayment to the Fund; In case that there is no sufficient cash to repay to the main lenders and the Fund, the main lenders will have higher probability for repayment compared with the Fund.) and it will make it easier for them to offer financing; this will be of great help for investors. In addition to such subordination, another attractive structure for investors is the accrual repayment. If this accrual repayment is stipulated in a loan agreement, the Fund will bear some resource depletion risk. One concern about this structure is that it may negatively affect the behavior of SPCs such as encouraging excessive repayment delay. In order to discourage such behavior, step-up interest rates on payments to the Fund can be applied to the accrued amount.

The potential attractive debt structure in Debt (15yrs)



Annex-II Recommendations concerning the Standard PPA (Draft)

The Team has reviewed the draft standard PPA posted on the website of PLN in December 2010. The draft standard PPA has apparently been updated since then, but this draft on the PLN website is the only information presently available in the public domain; therefore we have reviewed the PLN website draft and make the following recommendations: (i) Issues As a general observation, the detailed clauses are missing compared with PPAs for coal-fired power plants. If the aim is to attract as many developers including international IPPs to geothermal power development, more details need to be added. (ii) Suggested reforms a) Overall It is hard to point out all necessary clauses for the contract, since the contents of the current standard PPA is too thin: in the typical PPA, various events are assumed and countermeasures for each event are specified (e.g. who will do what and who will pay for it when event A happens). One example which is missing inn PPA is political force majeure such as a change in law and/or the denial of or delay in the granting of any governmental authorization upon due application or diligent effort by an applicant. Furthermore, the definition of terms used in PPA is also missing (e.g. Force Majeure). b) Language According to Law 24/2009 (UU 24/2009), “when a non-Indonesian party is involved, both the Indonesian language and the other language are allowed and both are equally valid”. However, according to interviews with international IPPs, they would highly welcome the inclusion of a clause stating that the English version will prevail for contractual documentations. This is because the interpretation of contracts in English is more standardized (i.e. there are standardized expressions used in the contracts in English and the interpretation of particular expression has the common understanding and easy to predict, since the international IPPs have experience to work with PPA in English in the past.) and there is less risk of misunderstandings. c) Transmission lines According to MEMR Regulation 15/2010 for the Crash Program II, the transmission lines connected to the power plants developed by IPPs are expected to be constructed by the IPPs. The standard PPA is drafted on the basis of this assumption; the transmission lines are constructed by the IPP and transferred to PLN, with PLN making installment payments in IDR after the ownership transfer. In this connection, some financial institution and investors have expressed the opinion that it would be more efficient if the various permits for the transmission



lines could be obtained together with the permits for the power plants. However, some power plants require long transmission lines exceeding 50 km, which is too heavy a burden for IPPs, and some power plants are more complicated in terms of resettlement than others. In this regard, to attract more IPPs to the geothermal development market, it would be ideal if PLN could be the principal party responsible for the construction of transmission lines, with IPPs constructing some transmission lines on case-by-case basis, when the characteristics of the project are suitable. d) Arbitration rule In the current version of the draft, BANI (the Indonesia National Board of Arbitration) is the expected authority over arbitration. However, international IPPs are more familiar with standardized international rules such as the rules of International Chambers of Commerce (ICC) than they are with BANI. For example, ICC is applied in PPA for the coal-fired power projects in Indonesia as well as in other countries; therefore, it is easier for international IPPs to accept arbitration rules other than those of BANI. For Indonesian parties also, it can be considered less risky for the same reason that standardized rules reduce uncertainty in interpretation. The language to be used in arbitration is not specified in the draft PPA, but as with the language issue for PPAs, it will encourage international IPPs to participate in the market, if the “English prevails” principle is adopted here as well.