Muara Laboh Geothermal Power Project


Summary of the Project

Muara Laboh is an 80MW geothermal power project being built by Supreme Energy Muara Laboh (SEML). SEML is owned by Supreme Energy of Indonesia, ENGIE of France and Sumitomo Corporation of Japan. For ENGIE, the project is their first high temperature geothermal power generation plant in the world.

The project is in the South Solok area of West Sumatra.

The project will have a single power generation unit (80 MW) and is intended for baseload generation. The original plan was for 220 MW of capacity, but the project was scaled back. There are discussions over future phases to expand in the resource area.

The EPC contract was awarded to a consortium of Sumitomo Corporation and PT. Rekayasa Industri. Fuji Electric will supply the main equipment (steam turbine and generator).

PLN will build 80 km of transmission lines from the plant to two 150 kV substations. These will connect power to the Sumatra grid through an existing 275 kV transmission line.

 

Project Timeline

Supreme Energy obtained approval from the government in 2008 to work on a pre-feasibility study on the potential of geothermal power plant development in Muara Laboh. The concession covers about 62,300 hectares of land and is bordered by Kerinci Seblat National Park.

These pre-feasibility studies of the geothermal prospect started in 2009 and exploration works in the area started in 2010.

Exploration drilling at the Muara Laboh resource area involved six wells and began in September 2012. It was completed by the end of 2013. Well monitoring, data evaluation and reserve calculations were performed during 2014.

The geoscientific data and analysis classified the Muara Laboh resource as a high temperature resource (240°C or more).

Feasibility study and preliminary design details were completed by the end of 2014.

Financing was agreed in February 2017 and construction started in March 2017.

Commercial operation is scheduled to commence in October 2019, ten years after feasibility studies began.

It’s a good example of why geothermal projects are not “quick win” projects: they are long, slow and with much higher development complexity (and cost) than other renewable power projects. Once constructed though, they are characterised by high capacity factor operation and long lifetimes.

 

Financing

Total costs for the project have been estimated as high as US$625m. The exploration works alone are reported to have cost around US$130m.

PLN will be the off-taker, under a 30-year power purchase agreement (PPA). PLN is the Indonesian government-owned corporation with a monopoly on electricity distribution. The PPA price is $0.13 per kWh.

There is also a business viability guarantee letter (BVGL) from the Ministry of Finance, which acts as a Government guarantee that PLN will fulfil its payment obligations under the PPA. That guarantee lasts for 20 years. That letter was granted in March 2012. This is designed to address one of the key policy risk issues in the market (discussed again later in this document).

Financing was agreed in Feb 2017.

The Japan Bank for International Co-operation (JBIC) has contributed US$198m from its own book. The Asian Development Bank (ADB) agreed a $109m financing package. This is one of the first transactions to receive funding from their “Leading Asia’s Private Infrastructure” Fund (LEAP). The Fund is capitalized by $1.5 billion equity from Japan Bank for International Cooperation (JBIC).

ADB also led a syndicate of commercial banks on the rest of the financing. The syndicate includes: BTMU, Mizuho and SMBC.

Total co-financing has been reported to amount to ~$440m

The commercial portion of the debt is guaranteed (insured) by Nippon Export and Investment Insurance (Nexi), the Japanese government export credit agency. This is the first time NEXI has covered a risk of geothermal resources capacity associated with a geothermal power project financing. Their involvement is due to Japanese industrial giant Sumitomo Corporation’s role in the construction of the project. Coverage is US$132 million with a tenor of approximately 20 years. Political Risk is 100% covered, Commercial Risk 90%.

 

Market Context

The project is a part of the Indonesian government’s drive to reduce carbon emissions by 23% by 2025 (and potentially 29% by 2030). Indonesia is also a market which is considered to have excellent overall power investment growth potential.

A government plan for the period 2016 to 2025 (published June 2016) aims to achieve an electrification ratio for Indonesia of 99.7% by 2025. That will likely require at least 80 GW of new power plants by then, with 18 GW to be constructed by PLN and almost 46 GW by independent power producers (IPPs). The remaining 16 GW has not been allocated.

That level of construction could require at least US$32b of investment by PLN and US$78b from IPPs. As always, power capacity without grid capacity could be a bottleneck, so PLN would likely need to invest US$44b to expand T&D networks.

For geothermal specifically, Indonesia has outstanding natural resource (and is already one of the leading markets). The government has been actively promoting geothermal development.

A new law in 2014 was particularly significant, allowing international companies to access the resources.

Before that, in 2010, the government launched a second “fast-track programme” to develop new generating capacity, including ~4,500MW of energy from geothermal. The government also has a target to achieve 7,000 megawatts in geothermal generation capacity by 2025.

However, given the scale of proposed capacity expansion, geothermal is obviously only a small part: coal and gas are expected to dominate.

 

Policy & Financial Risk

A key policy risk has been that PLN is struggling to strengthen its finances. That is a problem for independent power producers (IPPs), who worry about its creditworthiness as an off-taker.

Electricity tariffs in Indonesia have been increased since 2014, but are still below the cost of production (i.e. subsidised) – hence the financial pressure on PLN. The government supports the utility by allowing it to recover its operating and financing expenses and earn a predetermined margin, set annually. PLN’s earnings before interest, taxes, depreciation and amortisation (EBITDA) would be negative if not for that support.

The lack of a clear and reliable source of funds to cover PLNs financial subsidy has been a concern for private investors; especially since historically, in periods of economic downturn, not all PPA obligations have been honoured.

In addition to specific country risks, geothermal is in general hampered by substantial exploration risks.

These mean that debt funding – even from multilateral development agencies (MDAs) such as the Asian Development Bank (ADB) – is unlikely to be available until at least 50% of the steam resource has been proven. This means investors have to use valuable equity until that point in the project development.

 

[last update April 2017]

 

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