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Using Private Finance to Accelerate Geothermal Deployment: Sarulla Geothermal Power Plant, Indonesia


Published: June, 2015

Geothermal offers considerable potential to contribute to the development of low-carbon energy systems in developing countries. Its ability to provide stable and affordable power make it suitable for replacing fossil fuels as a provider of baseload power to backstop fluctuating supply from other renewable energy sources (GEA 2013).

Indonesia has the world’s largest geothermal resource with potential for 29GW of capacity. However, less than 5% of the potential has been utilized. Regulatory barriers, inadequate feed-in tariffs, lack of financing and early-stage exploration risks have frustrated exploitation of the country’s large geothermal potential. Despite these barriers, geothermal deployment in Indonesia still grew 4.8% between 2002 and 2013, compared to global growth of 4.5%. However, the figure is much smaller than the annual growth of 13.6% required to reach the government’s target capacity of 7.6GW in 2025 (DEN 2014). Government projections show that meeting its broader energy objectives will require an investment of USD132 billion over the next 10 years, of which the government plans to contribute USD 69 billion and expects the private sector to cover the remaining amount (PLN, 2015). Increased private sector participation in geothermal, mobilized by public risk mitigation tools, could help Indonesia meet its deployment target.

This case study analyzes the Sarulla Geothermal Power Plant (GPP) which, if successful, will be the largest single contract geothermal power plant project in the world with a total capacity of 330MW in 2018. The project has the highest private sector involvement of any geothermal project on a previously undeveloped field in Indonesia, thanks to substantial public support in the form of financing, guarantees and a feed-in tariff. This case study is part of a series of analysis carried out by Climate Policy Initiative on behalf of the Climate Investment Funds. The overall objective of the analysis is to help policymakers and donors understand which financing and policy support tools can help accelerate geothermal deployment effectively and efficiently.

Key findings for policymakers


    • Access to proven geothermal resources provided a strong incentive for the private developer, Sarulla Operations Limited (SOL), to develop the project. The significant exploration work already completed by the previous developer, Unocal North Sumatra Geothermal (UNSG), provided SOL with access to high quality exploration data and surveys and reduced their exposure to resource risks significantly. Because of the reduced risk SOL was willing to pay USD 70 million to Indonesian’s state-owned utility PLN for the completed exploration (ADB 2015), which included two completed production wells to support the first unit (PGE and SOL 2013).
    • When fully operational in 2018, Sarulla GPP will increase geothermal capacity by 20%, increase renewable capacity by 5% and meet 10% of the projected geothermal capacity additions in Indonesia between 2013 and 2020. The project is also estimated to save 1.3 mt of CO2 annually (SOL 2013), create thousands of additional jobs and may spur the local economy through the creation of new business, such as food, transportation and accommodation.
    • Increasing geothermal capacity fivefold by 2025 to meet its 7.6 GW target, may require the government to take a larger role – especially in exploration. Many countries’ experience suggests the high risks associated with exploration remain a significant barrier to the scale up of geothermal. In fields where there is little interest in private exploration, government could play a larger role by either performing the exploration itself before tendering out proven concessions to the private sector or providing financial support to the private sector.

Taking on exploration could be beneficial in the long run due to lower returns required by developer, while it could also potentially reduce tariff by USD 1-3 ¢/kWh (ADB 2015). Sarulla GPP provides a good example of the private sector’s willingness to provide compensation for the exploration costs previously carried out to obtain access to proven fields. If private exploration is required, the government may have to provide private developers with concessional financial support or incentives such as soft loans, grants, insurance and sovereign guarantees.

  • Significant public support in the form of guarantees and long-term Feed-in-Tariff (FiT) unlocked access to long-term debt at competitive rates and provided a strong boost to the project’s expected equity returns. CPI estimates that the project’s expected equity returns are in line with other geothermal projects in Indonesia where they range from 14-16%. Without public support, equity returns would drop 4% to a level that is likely below the developer’s return expectations. The 30-year FiT provides revenue certainty over the project’s life cycle, and its provision of a higher tariff in the earlier years of operation allows the project to achieve payback within nine years of all three units becoming operational.
  • Sarulla GPP delivers power at a comparable cost to other geothermal projects globally, but is still a more expensive source of baseload power in Indonesia than coal. CPI estimates that the project’s levelized cost of electricity (LCOE) amounts to USD 7.8-8.2 ¢/kWh and would increase by USD 1 ¢/kWh in the absence of public support. The cost, with or without public support, is broadly competitive with various benchmarks for geothermal projects in Indonesia and globally. However, even when public support is not taken into account, the cost of baseload power from Sarulla GPP is still 40-60% higher than coal in Indonesia if the cost of emission and health impacts are disregarded.

Key findings for public finance providers


  • Proven resources, extensive due diligence and a range of risk mitigation measures enabled the lenders to provide debt financing for the plant’s three units under a single contract even though the project was in the field development phase where resource risk would still be considered high. During due diligence, lenders hired a technical consultant to perform detailed reservoir analysis and develop a completion test system, designed to test the plant’s ability to meet design specifications, including the plant’s target capacity, and to sustain production over the project’s life cycle. Sponsors’ contingent equity provides additional support in case further works are needed to meet the required specifications. Furthermore, the development of a robust drilling and construction program was crucial to ensure that the project was completed more quickly. Concessional loans provided by the Clean Technology Fund and the Canadian Climate Fund were crucial for the project to achieve financial close.
  • Commercial lenders have signaled their willingness to fund construction works once key bankability concerns have been resolved, so public finance can focus on activities where funding gaps still exist. The government’s Business Viability Guarantee Letter appears to have been effective in addressing the bankability concerns of power plant projects in Indonesia and may unlock access to commercial finance for the construction stage. Nonetheless, the involvement of commercial lenders in field development may not always be replicable in other projects since, in the Sarulla case, significant exploration had already been done and the resource was already proven. Typically, at least 70% of expected capacity must be drilled before commercial financing is available (Audinet 2013). As such, public finance would be increasingly useful if it focuses on supporting activities in which commercial debt finance is scarce – e.g. exploration and field development stages.