Context
The Indonesian Government aims to expand its geothermal energy sector to reduce greenhouse gas emissions.
The Green Climate Fund (GCF) and Clean Technology Fund (CTF) are offering USD127.5m in financing, consisting of a senior concessional loan for public sector projects, a reimbursable grant for private sector projects, and a grant for technical assistance. World Bank will also provide USD100 million loan to scale up investments in geothermal energy in Indonesia.
Stakeholders involved
- Government of Indonesia
- Green Climate Fund (GCF)
- World Bank
- Private Sector Developers
Problem
- The availability of geothermal resources is uncertain and requires high early-stage exploration costs to ascertain. The high risk of unsuccessful exploration makes the activity unattractive to private investment.
- In Indonesia, there is limited availability of suitable financing instruments and options that adequately address geothermal resource confirmation risks.
Innovation
- A key innovation in GCF and CTF’s financing package is the use of convertible bonds (converting fixed-income debt security into equity shares) that will enable private sector geothermal sponsors to mitigate the exploration risk while providing an adequate upside in case of success.
- The project also aims at de-risking the early-stage exploration through the use of private insurance company’s insurance capabilities to cover part of the cost in case of unsuccessful exploration.
Timeline
Results and impact
- At its twenty first meeting in Bahrain, the GCF Board approved the first tranche of USD100 million out of the USD 185 million requested from GCF to finance public and private sector geothermal development in Indonesia. The first tranche of the GCF multi-year support facility will mobilise USD410 million with contributions from the World Bank.
- The Government of Indonesia and private sector developers are expected to achieve 600 MW to 900 MW of additional geothermal capacity. The full project facility will mobilise USD 760 million to support exploration and resource confirmation for 1GW to 1.5 GW of geothermal energy. This translates to 187-281 million tons of CO2?mitigated over the lifetime of the generating assets.
Key lessons learnt
- Government bodies and international institutions need to provide the right calibration of financing packages to mitigate the risks of geothermal energy investment:
- Convertible bonds facilities are able to hedge against risks of non-discovery, due to their nonrecourse features that provide an adequate premium in case of success; and
- The insurance would cover GCF’s nonrecourse loan to the project company for part of the exploration cost, and the insurance (purchased using CTF convertible grant) will cover the resource risk for that GCF loan. Through this structure, private developers appropriately mitigate the exploration risk. If result of exploration is positive and project developers decide to move forward to investment phase, project developer will repay funds from CTF. To the extent the exploration risk insurance product is unfeasible, there may be a possibility to use it as concessional or subordinated debt for exploration/development stage.
- Other forms of incentives that can be provided include increasing data quality through exploration drilling conducted by the government. With this, the risk of exploration will be reduced, because business actors already have an overview of the potential resources in the Geothermal Working Areas being offered.