Clean Energy Opportunities in Indonesia

UNCLAS JAKARTA 000511

SIPDIS

DEPT FOR G, OES, F, EAP/MTS, and EB/ESC/IEC
DOE FOR CUTLER/PI-32 AND NAKANO/PI-42
USAID FOR ANE AND EGAT
STATE PASS TDA FOR STEINGASS
NSC FOR CEQ CONNAUGHTON, VAN DYKE

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ENRG EINV SENV ID
SUBJECT: Clean Energy Opportunities in Indonesia


1. (SBU) Summary. Secretary Paulson's announcement of a Clean
Technology Fund (CTF) comes at an opportune time for Indonesia and
our bilateral relationship. Indonesia is an environmental
superpower with the world's largest store of biological diversity.
It is also the third largest Greenhouse Gas emitter, producing 10
percent of global carbon emissions annually. Indonesia faces
critical shortages of electricity and currently plans to build
highly polluting coal-fired power plants to meet those needs. CTF
support can promote US clean coal technology in place of Indonesia's
current plans to use highly polluting Chinese technology. Indonesia
also has more than 25,000 MW of geothermal potential. Applying
clean coal technology and promoting geothermal power both offer
plentiful opportunities to lower Indonesia's carbon emissions. It
will also increase the likelihood of gaining Indonesia's support for
US climate change policies. Significant geothermal capacity can be
on-line, yielding results within six years to reduce Indonesia's
electricity-related emissions, according to our contacts. End
summary.

Energy Plan Features Renewables
--------------


2. (SBU) President Yudhoyono decided to change course with
Indonesia's basic energy strategy in January 2006 by releasing a
National Energy Blueprint. He has sought a path to lighten the
burden placed on the Indonesian treasury by fossil fuels. The
energy blueprint emphasizes large increases in coal, biofuels, and
other renewable energy. It targets a national fuel mix in 2025 as
follows:

Oil 20 percent or less
Natural Gas at least 30 percent
Coal at least 33 percent
Biofuels at least 5 percent
Geothermal at least 5 percent
Biomass/Wind/Hydro/Nuclear/Solar at least 5 percent

In 2007, petroleum-based fuel stocks provided 41 percent of
Indonesia's electricity needs, while new and renewables accounted
for less than five percent.


Coal Reigns But What Kind of Plant?
--------------


3. (SBU) The Java-Bali grid, which provides electricity to more
than 124 million people, has an installed capacity of approximately
21,100 MW. Indonesia has achieved six percent growth for three
years, which has meant a seven percent annual increase in
electricity demand. Just to keep up with demand, Indonesia needs to
add 12,000 MW of installed capacity by 2011. Indonesia announced a
major initiative in 2006 to build 10,000 MW of electric power by

2009. Relying primarily on highly-polluting Chinese-built
coal-fired power plants, the so-called Fast Track electricity
building program has encountered severe difficulties in contract
negotiation and financing. Only four of the forty projects have
secured financing and begun construction, nearly two years behind
schedule. The delays mean Indonesia will only likely get 1,100 MW
of power by 2010, which presents the opportunity to provide
incentives to use US clean coal technology in place of
environmentally unfriendly Chinese plants.

Geothermal Already A Reality
--------------


4. (SBU) U.S.-firm Chevron is already here in Indonesia and has 365
MW of geothermal installed capacity. They tell us they are eager to
do more projects, as are other firms. Our mining and energy
contacts generally agree that Indonesia has somewhere between 25,000
and 27,000 MW of geothermal potential, equivalent to 7.5 to 8.1
billion barrels of petroleum. The GOI has already completed
feasibility studies and maps for many steam fields. Geothermal
plants can be on-line, yielding significant results within six years
to reduce Indonesia's electricity-related emissions, according to
our contacts.


5. (SBU) Before the 1998 Asian financial crisis, the GOI was
targeting 5,000 MW of geothermal power by 2020. Our electricity
contacts say many of those projects remain viable with the right
financial incentives. Chevron geothermal managers tell us that most
other geothermal producers simply do not think about projects in
Indonesia, assuming that the chaos of the financial crisis and the
fall of Suharto still reign. Targeted CTF money can help spread the
word that Indonesia's geothermal sector is again open for business.
In January, the GOI announced greater flexibility regarding the
price they will pay geothermal power producers: in Java, 4 to 5
cents per kilowatt hour; outside Java, 7 to 8 cents per kilowatt
hour. The Java tariff is far too low to attract private geothermal
investment, according to several contacts. The 8 cent tariff
outside Java-Bali is likely to attract limited interest, though it
is still too low, they said. CTF funding that bridges the gap to
bring the tariff to 10 cents per kilowatt hour is likely to attract
significant investor interest in the near-term, said several private
business electricity contacts.


Aceh Eager for Green Energy
--------------


6. (SBU) The central government has struggled to create an
attractive investment climate for infrastructure projects, but
several reform-minded provincial governors have both new regulatory
authority under the four-year old decentralization policy and highly
prospective geothermal resources. In December 2007 the GOI
transferred to regions the authority to tender to geothermal
concessions. Successful implementation of a regional geothermal
project would pressure the GOI to replicate more projects throughout
the electricity-starved archipelago nation and spur other
reform-minded provinces to seize the initiative.


7. (SBU) We see particular promise for a showcase project in the
once restive province of Aceh, which needs large increases in
electricity generating capacity for economic growth and development.
Aceh has an energetic, forward-looking leader, who has developed a
Green Economic Development and Investment Strategy. It promotes
geothermal energy, including a proposed 160 MW station. Like many
projects, the geothermal plant cannot compete commercially against
coal-fired power, and the GOI is also pressuring Aceh's governor to
put a 2 x 100 MW coal-fired power plant in the province as part of
the Fast Track program. Due to irregularities in the process,
however, in July 2007 the GOI re-tendered the coal plant bid. The
delay offers us the possibility of offering Clean Technology Fund
money to persuade the GOI to use less polluting technology than the
Chinese are currently offering, while also providing support to the
Aceh geothermal project. Dual success in Aceh would create strong
pressure to rethink the other 9,800 MW of dirty coal plants and
motivate other provinces to seek out geothermal power options.
HUME