IFC and JICA continue to lend support to geothermal development

• IFC introduces Geofund initiative to mitigate high risk of geothermal drilling
• JICA to focus on fund implementation, FiT and tender process improvements

The geothermal sector may now look forward to better times after being dogged by financing barriers and insurance issues. Some cheer is coming from two financing agencies:

• The International Finance Corporation (IFC) has reconfirmed that it will be available to finance new independent power projects and is setting up a fund to mitigate exploratory risk.

• The Japan International Cooperation Agency (JICA), Indonesia’s largest development partner, will continue to support geothermal fund implementation in the archipelagic nation.

IFC to work with commercial insurers

The IFC’s Geofund is a donor-assisted fund that will help to remove barriers to geothermal development by creating and piloting “resource risk insurance” in Turkey. The fund uses US$10 million from the World Bank-administered Global Environment Facility (GEF).

Dana R Younger (photo credit: GPA Photo)

Dana R Younger, IFC chief renewable energy specialist, says the primary aim is to mitigate the primary barrier of geothermal development – the high risk of geothermal drilling. 

He says the funding allows IFC to work with commercial insurers to pioneer the development of a new geothermal well productivity insurance (GWPI) instrument and related financial incentives. This insures them against dry wells. 

“Since there is currently no commercially available insurance covering this risk, insurers have little knowledge and experience of the technologies, techniques or hazards of geothermal drilling. As a result, the premiums they would charge to geothermal developers are expected to be high for initial projects.” 

As such, GEF funds would be used to help decrease the costs of the first policies by reducing upfront development costs and portfolio risks for the insurers. This will be scaled back once the insurers have built up experience and success rates are established. It is hoped a commercially-viable geothermal risk insurance sector can eventually be rolled out internationally. 

Dr Bret Mattes (photo credit: GPA Photo)

Geothermal project financing and development is highly challenging because of the perceived risks, says Dr Bret Mattes, chief executive officer of OTP Geothermal. These risks include a high “front-end” resource risk which requires all “fuel supply” to be certified upfront.  

“Investors face some major risks before traditional debt finance can kick-in – which is probably not until the project is more than 90% certain (Chart 1). Hence, an effective management and decision process must be followed to mitigate risk and to ensure successful development.”

Chart 1: Risk profile during development

Source: Dr Bres Mattes, OTP Geothrmal

Some of these risks can be mitigated by creating a commercial electricity market in which geothermal earns a premium for reliability in times of electricity shortages, drought and fuel price spikes. 

Mattes also encouraged electricity retailers to include “renewable quotas” as part of their business planning, thus forcing a tariff to encourage geothermal development. The tariff should be judged on a case-by-case approach based on declared guidelines. 

He says Indonesia must aim not just to develop power plants to fill a gap but to create a sustainable power system. 

“This means consistent routine development of the power system with no more crash programmes. Although they cover a deficit, they are not consistent with long-term sustainability. Positive efforts must also be made to reduce the carbon footprint grid-wide with strong emphasis on energy efficiency within power systems and by the customers.”

Maintaining investor confidence

To maintain investor confidence, government support for geothermal initiatives is critical in ensuring project success. Vincent Villegas, vice-president of business development of the Energy Development Corporation (EDC), says this will lead to a higher probability of timely project completion which would in turn strengthen the company’s credibility with investors and financiers.

“Another equally important key factor would be robust tariff resulting in reasonable returns and bankability for the developer.”

Vincent Villegas (photo credit: GPA Photo)

Edward McCartin, senior development advisor of Alterra Power, did not mince his words when he pointed out that Indonesia seemed to deny that some of the problems of the late 1990s impacted the development of the power sector.  

“For geothermal, the change in the structure following the end of PT Pertamina’s oil, gas and geothermal monopoly and bringing in a host of new regional government actors with little experience rendered the entire issue of development moot for almost a decade,” says McCartin.

“Finally, with some positive developments in the regulatory scheme and an appreciation that geothermal can play a major role in several areas of Indonesia as a hedge on rising fossil prices, we are seeing movement.”

The key, McCartin points out, is to keep that movement aimed and proceeding in the right direction rather than cutting it off once it gets moving.

JICA lends a hand

Currently, the largest development partner in Indonesia with over 50 years of cooperation is the Japan International Cooperation Agency (JICA). Its Indonesian office senior representative Akira Matsunaga says the cumulative amount of its cooperation in Indonesia is equal to 4.6 trillion yen (about US$54 billion). 

Akira Matsunaga (photo credit: GPA Photo)

“About 50% of our total support (to Indonesia) is in geothermal loans. To date, [JICA] has provided loans amounting to US$1.125 billion (or 480 MW in total).” (Refer to Table 1.)

Table 1: Target commercial operation dates for government-let projects financed by JICA

Source: Electricity Provision Plan (RUPTL) 2011-2020

Besides being a financier of state-owned enterprise projects in Indonesia, JICA is also a policy development partner for the government, especially in the promotion of IPP development. “Our focus in the future is geothermal fund implementation, feed-in tariff (FiT) and tender process improvements.”

He says geothermal power can be further promoted with the introduction of a FiT; creating an alignment of the geothermal tender process with the public-private partnership (PPP) tender process to secure PT PLN off-take guarantee; implementing a detailed geothermal fund process; and getting the coordination of the Ministry of Forestry for accelerating the issuance of forestry permits. 

Those quoted in stories from pages 22 to 35 were speakers at the GeoPower Indonesia & Philippines conference in Jakarta, Indonesia (June 6th to 7th) organised by GreenPower Conferences.