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July 12th, 2011 
david Written by Ira Eddymurthy
As global oil and gas reserves continue to decrease amidst rising environmental concerns, geothermal energy is increasingly viewed as an important and reliable source of energy. Indonesia has significant geothermal potential and is already the 3rd largest producer of geothermal electricity in the world. Currently, the Indonesian government is looking into geothermal as an alternative energy source with an eye toward accelerating investment, production and tax incentives for geothermal producers.
The regulatory environment
Geothermal activity in Indonesia is governed under the Geothermal Law (Law No. 27 of 2003). However, only after the issuance of the implementing regulations of the Geothermal Law in 2007 were new geothermal projects being offered by the government. In 2008, the government planned to increase geothermal production fields beyond the existing seven that are already in production. Through the first quarter of 2010, 265 prospective areas have been found in Indonesia with sufficiently high temperatures (above 225° Celsius), with hydrothermal fields taking the majority and medium temperature fields (150°-225° Celsius) and low temperature fields (below 225° Celsius) a minority. However, only 46 of these prospective geothermal working areas throughout Indonesia have been identified and appointed by the Minister of Energy and Mineral Resources (“MEMR”) as geothermal working areas. Although more than 20 new working areas were discovered in the past five years, only seven projects are currently in production as power plants.
Following discoveries of new working areas in the past few years, further steps have been taken to bring the working areas closer to production, of which a significant number of working areas have undergone stages toward a tender process.
According to the regulatory regime, the geothermal working area may be utilized directly or indirectly. Direct utilization shall be the utilization of geothermal energy and/or fluid for non electrical needs, either for public or private purposes. Indirect utilization for electricity regulates utilizing geothermal energy for power plants.
Long-Term Goals
The Government of Indonesia is eager to increase the utilization of geothermal resources for electricity production, and is projecting an increase from 807 MWe in 2005 to 9500 MWe in 2025. This will represent approximately 5% of the energy mix in Indonesia as a goal that has been set by the Government of Indonesia in their National Energy Management Blueprint for 2006-2025. Target production through 2014 is 4733 MWe from the current 1169 MW of production, consisting of 2137 MWe for Java and Bali and 2596 MWe for other areas in Indonesia.
State-owned company PT Pertamina Geothermal Energy Indonesia is currently the main operator in Indonesia, however, the role of independent geothermal power producers is expected to increase. This is because not only are Indonesia’s electricity needs growing at 9-11% annually, but 30 million citizens are currently without access to electricity. In addition, approximately 40% of the world’s geothermal potential is located in Indonesia while only a mere 4% of Indonesia’s geothermal potential is currently in use.
One of the government’s goals stated in their National Energy Management Blueprint is to increase the harmonization between geothermal production and domestic electricity consumption. In line with this effort, Presidential Decree No. 4 of 2010 urged the State Electricity Company (“PLN”) to immediately accelerate the development of renewable energy, coal, and gas power plants. To support the acceleration program, MEMR published a decree containing the list of geothermal projects that are going to be managed by PLN (about 11 projects) and projects to be managed by independent power producers (about 29 projects), amounting to 40 projects to be completed by 2014. These efforts are being carried out parallel to ongoing exploration for new potential geothermal areas as another goal of the government’s efforts to develop Indonesia’s geothermal industry. More efforts are also underway through various laws in the fields of energy and mineral resources, finance, and forestry to support the industry’s development.
Undertaking a Geothermal Operation
Geothermal activities are regulated and consist of the following stages: preliminary surveys, exploration, feasibility studies, and exploitation and utilization stages. The preliminary survey is usually carried out by MEMR, the governor, regent and/or mayor. However, MEMR may assign another party to conduct the preliminary survey by announcing the offer in the media or by way of promotion in various forums, nationally or internationally. MEMR shall then appoint the party to conduct the preliminary survey based on a ‘first come first served’ basis (i.e. the party fulfilling the requirements shall obtain the right to conduct the preliminary survey). Any costs incurred for conducting preliminary survey shall be borne by such party.
Based on the study and the preliminary survey data, the MEMR plans, prepares and stipulates a geothermal working area. The MEMR, governor or regent/mayor shall announce the working area in a transparent manner to be offered to business entities by way of tender, publically announced through the media. To conduct the tender process, the MEMR, governor, or regent/mayor shall appoint a working area tender committee. The tender committee shall evaluate the incoming bids and propose the ranking of the candidates to the MEMR, governor or regent/mayor of which the MEMR, governor or regent/mayor shall then decide the winning bidder.
After appointment, the winning bidder shall pay the basic price of the working area data or bonus to the state as well as any compensation for the data (awarded compensation) to the party that conducted the preliminary survey if the party that conducted the feasibility study is not the winning bidder. Companies that fail to pay these costs within thirty days will forfeit their right to develop the geothermal area. Upon completion of the above steps, the winning bidder will then be granted a geothermal business license (Izin Usaha Pertambangan or “IUP”).
Upon obtaining the IUP, the IUP holder shall conduct exploration activities. Alternatively, the exploration may also be conducted by the MEMR. The IUP for exploration activities may be granted for the maximum period of three years and is extendable twice, each for the duration of one year.
After completing exploration activities, the IUP holder shall conduct a feasibility study for a maximum period of two years. Upon completing the feasibility study, the IUP holder shall apply for an environmental permit before conducting exploitation activities. The IUP for exploitation may be granted for the maximum period of 30 years, and may be extended.
It would be possible for the IUP holder to transfer the IUP to its affiliates. An entity which directly controls or owns 25% or more voting shares in an IUP holder shall be considered as an affiliate.
In the event the IUP holder breaches any condition in its IUP or fails to comply with the requirements set out in the Geothermal Law, the MEMR, governor or regent shall give six months to the IUP holder to comply with the requirements. Failure of the IUP holder to comply with the requirements may give the right to the MEMR, governor or regent to revoke the IUP. The revocation of the IUP does not give any dispensation to the IUP holder to fulfill its obligations in accordance with prevailing laws including the rehabilitation and conservation of the environment in the working areas. These obligations are only deemed fulfilled upon approval of the MEMR, Governor or Regent.
Taxes and Other Payments
The IUP holders shall pay taxes and other non-tax payments to the government in accordance with prevailing laws and regulations. Taxes consist not only of applicable taxes but also import duty and other impositions on excise and imports and regional taxes and retributions. Non-tax payments include deadrent, royalties, other levies and bonuses (such as fees for education, training, research and development).
The deadrent and royalty payments shall be shared between the central and regional government with a 20:80 split. The 80% of such contribution shall be divided 16% for the province, 32% for the producing regency and 32% for other regencies.
Tax and Import Duty Incentives for Geothermal Projects
In order to encourage economic growth and equitable development in certain regions, the government encourages foreign and domestic capital investment in certain business sectors and/or certain regions. The government has already issued various regulations to enable geothermal IUP holder to obtain income tax incentives and exemption from import duty. Geothermal IUP holders may also request that the government bear the VAT, while suspending VAT payments during the exploration and drilling phases.
This article was first published in Asian-Counsel Magazine, Volume 9, Issue 2, 2011.
[...] Geothermal resources are regulated under the Directorate of Geothermal, even though the primary (if not only) use of geothermal energy is to generate electricity. An overview of the geothermal regulatory regime can be found here. [...]