Policy Support for Geothermal Energy Development in Indonesia: What Needs to Change?

Geothermal energy development in Indonesia faces various policy barriers that require immediate attention to ensure optimal utilization of its potential. One aspect that needs to be changed is the licensing process, which is currently very complex and involves various ministries and local governments. Overlapping regulations and bureaucratic red tape often cause delays in project development. Reforms are needed to create a more integrated one-stop licensing system, eliminate regulatory conflicts between agencies, and accelerate project approvals in conservation areas such as protected forests. In addition, geothermal energy tariff certainty is a major challenge. The tariff offered by the current feed-in tariff (FiT) scheme often does not reflect the cost of production in various locations, especially in areas with complex geological conditions. This makes geothermal projects less attractive to investors. The government needs to introduce a flexible and market-based tariff mechanism, which is able to accommodate the high risks in the exploration stage and differences in regional conditions. In addition, fiscal and non-fiscal incentives, such as tax exemptions for exploration equipment and subsidies for project start-up costs, should be strengthened to reduce the initial investment burden.

Exploration funding support also needs to be improved through more effective management of the Geothermal Fund. The geothermal exploration stage has high risks, thus requiring adequate financial support from the government or international partners to attract more investment. In addition, there needs to be regulations that encourage private sector involvement through public-private partnerships (PPPs) to accelerate project development. The issue of land conflict is also a significant obstacle. Many geothermal potentials are located in protected forest areas or areas with overlapping land uses. Policy changes should include efficient land conflict resolution mechanisms, including dialog with local communities to ensure fair benefits for all parties. To encourage faster development, policies are needed that prioritize the development of supporting infrastructure in geothermal potential areas. The government can accelerate the development of this infrastructure through greater budget allocations and cooperation with the private sector. With these changes, Indonesia can accelerate geothermal energy development, not only to meet national energy needs but also to achieve energy transition targets and contribute to global emissions reductions.

Indonesia's geothermal energy development policy has been designed to promote renewable energy transition while utilizing the country's vast geothermal potential. The following is an analysis of existing policies, including achievements, challenges, and gaps that still need to be addressed.

1.      Legal and Regulatory Framework

Indonesia has a legal framework that supports geothermal development, including:

• Law No. 21 Year 2014 on Geothermal, which changes geothermal management from a mining category to an energy activity, allowing development in conservation areas.

• Government Regulation No. 7/2017, which regulates indirect geothermal exploitation, including exploration, production, and electricity distribution.

While this regulation provides a strong legal foundation, its implementation is often hampered by overlapping authorities between the central and local governments. This prolongs the licensing process and creates uncertainty for investors.

2.      Energy Targets and Planning

• The National Energy General Plan (RUEN) sets a geothermal energy capacity target of 7.241 MW by 2025.

• PLN's 2021-2030 Electricity Supply Business Plan (RUPTL) prioritizes renewable energy, including geothermal, in the national energy mix.

However, the realization of geothermal development is still far below the target, with an installed capacity of around 2.292 MW by 2023. Major barriers include limited funding, high risk of exploration, and lack of attractive incentives for developers.

3.      Funding and Incentives

The government has established a Geothermal Fund to support the high-risk exploration phase, as well as providing some fiscal incentives such as equipment import tax exemptions. However, the implementation of this fund is often inefficient, with insufficient allocations to attract large-scale investment. Other incentives, such as feed-in tariffs (FiTs), are also considered less competitive than fossil energy or other renewable energy sources.

4.      Coordination and Governance

Geothermal development policies often face coordination barriers between government agencies, such as the Ministry of Energy and Mineral Resources, the Ministry of Environment and Forestry (MoEF), and local governments. In addition, stakeholders at the local level, including indigenous peoples and communities around geothermal sites, are often not involved in the planning and development process.

5.      Infrastructure and Technology

Many areas with high geothermal potential are located in remote areas with minimal infrastructure. This increases logistics costs and makes projects less attractive to investors. Exploration and development technologies also need improvement in order to overcome complex geological challenges.

Geothermal energy development in Indonesia faces significant gaps in policy, implementation and infrastructure. One of the main gaps lies in the complex and time-consuming licensing process. Ineffective coordination between central and local governments leads to overlapping regulations and procedures, creating legal uncertainty for investors. In addition, geothermal electricity tariffs offered through the feed-in tariff (FiT) scheme do not fully reflect production costs that vary based on the location and complexity of the project, making the sector less competitive than other energy sources. Another gap is the lack of support for exploration funding, which is the riskiest stage in geothermal development. Although the government has established a Geothermal Fund, the allocation of this fund is still limited and less attractive to large-scale investors. Land use conflicts, especially in conservation areas or protected forests, are also an obstacle that often hampers projects, with conflict resolution mechanisms that are not yet optimal. And not to forget the lack of supporting infrastructure in remote areas with high geothermal potential increases logistics costs and reduces investment attractiveness. These gaps point to the need for comprehensive policy reform and stronger support to accelerate geothermal energy development in Indonesia.

To overcome the obstacles and gaps that hinder the development of geothermal energy in Indonesia, a comprehensive set of policy recommendations and strategic steps are needed. The following are some proposals that can accelerate the effective utilization of geothermal energy:

1.      Simplification of Licensing Process

The government needs to integrate the licensing process through a one-stop mechanism to reduce excessive bureaucracy. This can be achieved by creating a unified digital system that enables cross-agency coordination and accelerates the project approval process. Regulatory alignment between central and local governments should also be done to remove overlapping rules.

2.      Tariff and Incentive Scheme Reform

Implement a more flexible and market-based feed-in tariff (FiT) mechanism, which can reflect the risks and costs of exploration in specific locations. The government could also provide additional incentives, such as subsidies for initial exploration costs, equipment import tax exemptions, or income tax reductions for geothermal developers.

3.      Strengthening Exploration Funding

Allocate greater funds to the Geothermal Fund and increase partnerships with international financial institutions to share exploration risks. In addition, introduce innovative financing mechanisms, such as green bonds or public-private investment funds, to attract more investors.

4.      Infrastructure Improvement in Potential Areas

The government can prioritize the development of supporting infrastructure, such as access roads, power grids, and logistics facilities, in areas with high geothermal potential. This will reduce project development costs and increase investment attractiveness.

5.      Land Conflict Resolution

Develop an inclusive and transparent land conflict resolution mechanism, including dialog with local communities and fair compensation. The government also needs to accelerate the licensing process in conservation areas without ignoring the principle of environmental sustainability.

6.      Capacity and Awareness Building

Organize training programs and workshops to increase the technical capacity of developers, local governments, and communities in understanding geothermal technology and its impacts. In addition, public awareness campaigns on the benefits of geothermal energy can help reduce social resistance to new projects.

7.      Strengthening Cross-Sector Coordination

Establish a special working team involving the Ministry of Energy and Mineral Resources, MoEF, local governments, and the private sector to ensure effective coordination in the planning and implementation of geothermal projects. This team can serve as a forum to resolve policy obstacles quickly and collaboratively.

By implementing these recommendations, Indonesia can accelerate geothermal energy development, achieve its renewable energy mix target, and support a sustainable energy transition. These recommendations will also strengthen the competitiveness of Indonesia's energy sector globally, while contributing to climate change mitigation.

Several companies and institutions in Indonesia have analyzed policies, identified gaps, and proposed recommendations to accelerate geothermal energy development. As a green energy company, PT Pertamina Geothermal Energy Tbk (PGE) manages 15 geothermal working areas (WKP) with an installed capacity of 672 MW and plans to increase capacity to 1 GW in the next 2-3 years. With a total of 3 GW of geothermal reserves, PGE is driving a new paradigm through collaboration, cost efficiency, and business diversification such as green hydrogen. The target is to reach 7 GW of national geothermal capacity by 2033. This strategy is expected to strengthen the role of geothermal in the energy transition towards Net Zero Emission 2060. The paradigm shift in geothermal energy development is important, because with the current geothermal electricity tariff, there needs to be a more optimal approach to increase the profitability of developers (Independent Power Producers/IPPs). The new paradigm offered by PGE puts forward three main strategies to achieve this.

1. Business model renewal strategy through phased development in geothermal working areas to increase the chances of success and cost optimization, given that large-scale direct development often leads to cost overruns.

2. Strategies to reduce development cost per unit (USD per MW) through the use of new technologies and increase operating volume through collaboration among geothermal developers to build markets and consolidate demand.

3. Diversification strategy through related business development and local manufacturing. Geothermal developers need to expand off-grid businesses such as green hydrogen and green ammonia and promote technology development and local manufacturing for key components of geothermal power plants in the country.

In addition, it is important to consider other incentives such as access to concessional loans and international carbon credit sales. This will also require government support to provide additional incentives, especially support for increased local content and infrastructure.