Indonesia is one of the world’s most volcanically active countries and among the countries with the greatest geothermal energy potential. Dwindling production of traditional energy sources such as oil and gas has the Government of Indonesia (GOI) seeking alternatives to maximise national energy production. That includes developing geothermal energy, which is expected to play a larger role in Indonesia’s energy production going forward.
To this end, the GOI has introduced provisions to better manage geothermal energy, through a new law approved by the House of Representatives in August 2014, Law No. 21 of 2014 ( the New Geothermal Law).
The New Geothermal Law was proposed by President Susilo Bambang Yudhoyono in August 2013. It contains new provisions that are more industry-friendly compared to the previous law on geothermal energy, Law No. 27 of 2003 (Law 27/2003). The highlights of the New Geothermal Law are as follows.
Separation from mining activities: One of the biggest philosophical changes in the New Geothermal Law is the separation of geothermal activities from other natural resources exploitation (such as hard mining or oil and gas exploitation). Law 27/2003 categorised geothermal exploitation as a mining activity and required the same type of mining business license (Izin Usaha Pertambangan or IUP) for geothermal exploitation as for mining activities. The specific license for geothermal exploitation was the Izin Usaha Pertambangan – Panas Bumi or IUP-PB.
The New Geothermal Law drops the term ‘mining’ to establish a distinction that geothermal activities are not part of mining activities. We believe that the consequence of this will be that business players involved in geothermal exploitation will no longer be subject to the restrictions that apply to mining activities.
Government authorisation: Pursuant to the New Geothermal Law, geothermal operational activities consist of (i) Direct Utilisation and (ii) Indirect Utilisation.
Direct Utilisation is defined in the New Geothermal Law as the utilisation of geothermal energy directly, without any conversion process of the thermal/fluid energy to become any other form of energy for non-electricity purposes. Direct Utilisation is allowed for various activities, such as tourism, agribusiness, industry and other activities that use geothermal energy directly, and a Direct Utilisation Permit (Izin Pemanfaatan Langsung or IPL) is required.
An IPL is granted by the Minister of Energy and Mineral Resources (MEMR) or the relevant Governor or Regent/Mayor, depending on the production area.
Indirect Utilisation is defined as the utilisation of geothermal energy through conversion of the geothermal energy from thermal/fluid energy to electricity. The New Geothermal Law makes Indirect Utilisation the main priority of geothermal activities. To engage in Indirect Utilisation, a geothermal license (Izin Panas Bumi or IPB) is required.
Under Law 27/2003, IUP-PB licensing power was spread among central and local Governments. Local Governments were also authorized to issue local regulations for the geothermal industry. This led to a chaotic bureaucracy and legal uncertainty that hindered the development of geothermal energy in Indonesia. The New Geothermal Law has addressed this issue, which will hopefully encourage development of the geothermal industry.
Under the New Geothermal Law, an IPB license can only be issued by the central Government in Jakarta. In addition, only the central Government can hold a tender for geothermal working areas. As the main priority for geothermal activities, Indirect Utilisation is supervised closely by the central Government.
Interestingly, the New Geothermal Law provides that even though an IPB itself cannot be transferred, the shareholding composition of the IPB holder can be changed through a transfer of share ownership on the Indonesian stock exchange after exploration is finished, subject to approval by the MEMR. This means that the transfer of shares of an IPB holder can only be done after the IPB holder is listed on the Indonesian stock exchange.
Pricing: One obstacle to the development of the geothermal industry in Indonesia has been the low pricing for geothermal power and the high development costs. MEMR officials confirm that a new pricing regime will be formulated under an implementing regulation for the New Geothermal Law to address this issue. This implementing regulation, according to officials, will also consider the economic feasibility of all aspects of geothermal activities.
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