PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: AB4685 Project Name. Geothermal Clean Energy Investment Project Region

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: AB4685 Project Name Geothermal Clean Energy Investment Project Region EAST ASIA AND PACIFIC Sector Renewable energy (50%);Power (50%) Project ID P Borrower(s) THE GOVERNMENT OF INDONESIA Implementing Agency Pertamina Geothermal Energy (PGE) Environment Category [X] A [] B [ ] C [ ] FI [ ] TBD (to be determined) Date PID Prepared May 5, 2009 Estimated Date of April 17, 2010 Appraisal Authorization Estimated Date of Board October 11, 2010 Approval 1. Key development issues and rationale for Bank involvement Indonesia s power demand was beginning to outstrip its supply, largely due to high economic growth in recent years that have averaged about 6 percent per annum, and insufficient investment in additional generation capacity. The current global economic downturn has made it less likely that an anticipated increase in power demand growth will be realized in the near term, but electricity consumption is expected to continue to grow at past levels and remain robust 1. Therefore, there remains an urgent need to invest in expanding power generation capacity in the country. The Government of Indonesia (GoI) has responded by supporting PLN, the state-owned power company, in devising and implementing a program to construct 10,000 MW of coal-based generation capacity, which they see as one of the few immediately available options for expanding generation capacity at the lowest financial cost. This decision, along with Indonesia s existing heavy use of diesel, will increase the dependence on fossil fuels, exacerbating local and global environmental impacts. For example, over 80 % of the electricity generation in Indonesia is presently based on fossil fuels, with estimated annual emissions of 39,000 tonnes of total suspended particulates (TSP), 2 million tonnes of SO 2, 1 million tonne of NOx, and over 85 million tonnes of CO 2. The additional 10,000 MW coal-fired, once fully commissioned, will contribute more than an additional 65 million tonnes of CO 2 each year and emissions of SO 2, NOx, and particulate matters (TSP) estimated to be 136,000 tonnes, 40,000 tonnes, and 14,000 tonnes respectively. Therefore, the GoI plans to diversify the country s electricity generation mix and to ensure a more environmentally sustainable development of the sector. Geothermal power is a clean and efficient alternative for diversifying Indonesia s electricity generation mix. Indonesia has the world s largest geothermal potential that could fuel about 27,000 MW of generation capacity. However, the resource makes up only 3.2 percent of the present generation capacity. This largely untapped resource is a good substitute for other baseload generation technologies such as coal, and not subject to the intermittency and variability of 1 A recent quick assessment of the impact of the economic downturn funded by ESMAP indicates that the initially forecasted increase in power demand to between 7-9 percent per annum is now expected to remain around the growth experienced during the period , which was on average about 6 percent per annum.

2 other renewable energy sources. Geothermal resources in Indonesia are also ideally located in some of the major islands where electricity demand is high and continues to grow. Furthermore, as an indigenous and non-tradable energy source, it will also enhance the country s energy security and serve as a natural hedge against the volatility of fossil-based commodity prices. Therefore, by developing its vast geothermal resources Indonesia will minimize the need for additional coal-based capacity to meet its fast-growing electricity demand in an environmentally sustainable manner. This will lead to an optimal power generation mix. The Government of Indonesia recognized the potential for geothermal as a significant power generation source, and began a major effort to scale-up its development in the 1990s. The target at the time was to develop approximately 4,500 MW of geothermal power capacity by both public and private developers. Towards this end, the GoI issued a Presidential Decree in allocating development rights in 18 work areas, and subsequently, geothermal power generation capacity in Indonesia quickly expanded to 807 MW. However, expansion stalled when the region was hit by the Asian Financial Crisis in During the economic turmoil, geothermal contracts with private operators were suspended as with other power sector agreements. These suspended contracts were later either renegotiated or cancelled. Most of the existing geothermal developers who were already producing power eventually renegotiated their power purchase agreements at substantially lower tariff levels, while most developers with unexploited concessions opted to transfer these assets back to public control, either as a result of arbitration proceedings or cancellation of their contracts. Today, there is approximately 750 MW of geothermal capacity that is privately operated with another 1,000 MW of unexploited potential under the control of private developers. Several state-owned enterprises control fields that could fuel about 2,750 MW of generation capacity, with over 2,500 MW that are not yet developed. Indonesia has added very little new geothermal capacity since the Asian Financial Crisis. In 2003, the GoI resumed efforts to revive the sector, and issued a geothermal law (Law 27/2003), making geothermal the only renewable energy governed by its own law. The Law, among other things, shifted regulatory authority of the sector that was previously delegated to the national oil company back to the GoI (Ministry of Energy and Mineral Resources - MEMR); mandated that geothermal fields that are not allocated by PD45 be transparently and competitively tendered for development; and, to be consistent with the decentralization law, enhanced the role of local governments in developing the geothermal resources within their jurisdiction. The Law also grandfathered the rights to fields that were already allocated under PD45. In order to better handle its increased oversight responsibilities over sector development, MEMR established a dedicated directorate for geothermal. The directorate prepared a Geothermal Blueprint, adopted by the government, to progressively develop a total of 6,000 MW of geothermal capacity by If the target is achieved as planned, then geothermal sector is expected to fuel more than 7 percent of the overall power generation capacity at the time. As a result of coal displacement, emissions of CO 2 will be annually reduced by an estimated 46 million tonnes. Furthermore, emissions of local pollutants would also be reduced annually by the following: 41,000 tonnes of SO 2, 30,000 tonnes NOx, and 3,000 tonnes TSP. 2 PD 45/ Later expanded to include an indicative longer-term target of 9,500 MW by 2025.

3 Despite GoI s ambitious geothermal targets and recent reform initiatives, less than half of the geothermal development target that was established was achieved by the end of 2008, and the present capacity stands at 1,052 MW. In general, Indonesia has had difficulty in mobilizing financing even for more conventional power generation options such as coal given the investment climate both globally and within the country. Despite being regarded as a commercially viable renewable energy technology, geothermal power development faces a number of significant issues specific to the sector deterring investments. These barriers include: (a) momentous investment needs that are estimated to be as high as $12 billion to achieve the GoI target, (b) insufficient policies and regulations to support the implementation of the Geothermal Law, (c) inadequate incentives and pricing mechanism that would reflect the environmental benefits of the technology and enable investors to secure a return commensurate with the risks they face especially when developing unexplored (greenfield) geothermal fields, (d) Limited institutional capability to properly plan geothermal development and sufficiently engage suitable developers, and (e) weak domestic capacity in the areas of resource assessment, equipment manufacturing, construction, operation and maintenance of geothermal energy facilities. Consequently, only a handful of existing geothermal fields in Indonesia have been expanded over the past decade with no new development of greenfield projects that are regarded to have greater risks. Rationale for Bank s Involvement Geothermal development remains a key development priority despite the challenges faced by the sector. In fact, the GoI has designated geothermal power to make up to nearly 40% of the next planned 10,000 MW generation capacity expansion, instead of relying solely on coal as they did previously. Furthermore, geothermal development is also one of the key actionable aspects of the Low Carbon Growth Strategy that is being developed by the government. In order to achieve their ambitious target and address the barriers facing the sector, the GoI has also embarked on a comprehensive reform program and requested World Bank assistance. The World Bank Group (WBG) has responded by developing a strategy under which both IBRD and the International Finance Corporation (IFC) are cooperating to bring their own comparative advantages to supporting geothermal development in Indonesia. The WBG strategy calls for a two pronged approach. Primarily, the WBG is assisting the GoI with the major reforms that are being undertaken to progressively enhance the investment climate in the sector. At the same time, the WBG is helping in immediately stimulating investments at an advanced stage of preparation by directly supporting developers. This WBG strategy to support geothermal development in Indonesia is summarized in the table below: Policy Reforms to Enhance Investment Climate for Geothermal Supporting the GoI effort to create sufficient policies and incentives to mobilize investments into geothermal development Helping GoI better prepare and manage the process of offering (tendering) geothermal concessions to developers, in line with the Geothermal Law; Improving domestic capabilities to manage sector development and capacity to undertake geothermal investments Extending long-term carbon funds towards geothermal development in order to enhance the financial viability of investments Direct support to immediately stimulate investment and scale-up development Assisting public and private developers with existing concessions (brownfields) to expand their

4 developments Helping reduce the cost of geothermal development and filling financing gaps by extending attractive financing terms as well as mobilizing grant support; Cost sharing of exploration risks associated with geothermal power development especially with undeveloped fields (greenfields); Improving the capabilities of developers to immediately undertake the development of their geothermal fields. Policy Reforms to Enhance Investment Climate for Geothermal Supporting the GoI effort to create sufficient policies and incentives to mobilize investments into geothermal development Helping GoI better prepare and manage the process of offering (tendering) geothermal concessions to developers, in line with the Geothermal Law; Improving domestic capabilities to manage sector development and capacity to undertake geothermal investments Extending long-term carbon funds towards geothermal development in order to enhance the financial viability of investments Direct support to immediately stimulate investment and scale-up development Assisting public and private developers with existing concessions (brownfields) to expand their developments Helping reduce the cost of geothermal development and filling financing gaps by extending attractive financing terms as well as mobilizing grant support; Cost sharing of exploration risks associated with geothermal power development especially with undeveloped fields (greenfields); Improving the capabilities of developers to immediately undertake the development of their geothermal fields. The GoI is developing a key set of policy reforms in order to mobilize investments in the geothermal sector. The World Bank s Geothermal Power Generation Development Project is providing a $4 million grant from the Global Environment Facility (GEF) towards supporting this effort. The World Bank is also assisting in expanding sales of carbon emission reductions (CERs) from geothermal projects to enhance their financial viability. The Lahendong II Geothermal Project is one of the first such transactions that is currently under implementation. The World Bank is now assisting in preparing and implementing a Framework for Carbon Financing for Geothermal to generate revenues that will complement a pricing policy that is being designed by the GoI. The policy aims to provide developers with returns on geothermal investments commensurate with the risks associated with the sector. Efforts are also underway to identify ways and means to reduce upstream geothermal risks up to the confirmation of resources. Sustained development of the sector over the longer terms will also require geothermal to be more financially competitive with alternatives, and the World Bank is assisting the GoI to explore how they can strengthen domestic capabilities in the sector. The GoI supports the private sector in helping Indonesia achieve its development target, despite the substantial downturn in global private financing in the power sector over the past decade. In this regard, the GoI is working with the World Bank s assistance and input from the International Finance Corporation (IFC) to develop a process for competitively tendering new (unallocated - greenflields) geothermal fields, in particular to mobilize private investments. The World Bank Group involvement would increase the credibility of the process and the confidence of the private investors in it. The GoI plans to promote investment opportunities in the geothermal sector, and develop clear and predictable incentives to ensure the bankability of such investments. The World Bank is directly assisting the GoI to demonstrate one such transaction

5 under the Geothermal Power Generation Development Project. The more expeditious option is to incentivize existing developers to expand the capacity in geothermal fields that are already under operation (brownfields). The IFC is working with regional and international strategic partners to explore such options among private developers who control an estimated 1,000 MW of undeveloped capacity. They are also exploring partnerships with private developers who may bid for future geothermal tenders as well. The investment needs in the sector are momentous, and it is highly unlikely that the private sector alone can meet them. It is estimated that over $12 billion in up-front financing may be required to achieve the GoI geothermal target, while private investments in the entire power sector in Indonesia have only averaged about $350 million over the past five years. With the current tightening credit market, financing power projects, particularly through private equity or debt, is likely to be more challenging, especially given the risks associated with the geothermal sector. Therefore, the GoI has decided to strengthen the capacity of designated state-owned geothermal developers so that they can lead the way in scaling up the development in fields they control. This would lead to immediately stimulating investments and developing part of the estimated 2,500 MW of geothermal capacity that remain unexploited under public control. The GoI has now requested a loan from the Word Bank to support their program to scale-up the geothermal power generation capacity in the country. The proposed World Bank engagement to support the GoI geothermal development program would have a number of benefits. It would help demonstrate a rapid scale-up in geothermal projects in the country, and help revive the confidence of other developers in the sector. Moreover, World Bank financing can fill a critical gap where the private sector is reluctant to invest, particularly in higher risk greenfield projects. This is especially the case in islands outside the economic center of Java, where power shortages are more acute. Experiences can also be drawn from geothermal projects financed by the World Bank in other parts of the world such as the Philippines, Africa and Eastern Europe, to yield lessons learned in addressing technical and institutional challenges and risk mitigation solutions relevant to addressing issues that are being faced by developers in Indonesia. By helping strengthen the capacities of public developers in Indonesia, the World Bank would also contribute to establishing credible institutions that could sustain the long-term geothermal expansion needs of the country. Furthermore, it would prepare these public institutions to be reliable partners with the private sector through strategic public/private partnerships or partial/full privatization in the future. As a result, they would be well placed to continue to advance geothermal development in Indonesia over the long-term. The proposed project is fully consistent with the World Bank s Country Partnership Strategy (CPS) with its theme of investing in Indonesia s institutions. More specifically, it will support the CPS Core Engagement 2 Infrastructure, to help reduce local and global environmental impacts of the sector and focus on clean and renewable energy such as geothermal power investments. It is also in-line with and supports Core Engagement 5 Environment Sustainability and Disaster Mitigation, where Indonesia can benefit from investments designed to scale-up funding to help [with] their effort to address climate change. 2. Proposed objective(s)

6 The development objective of the proposed project is to increase the utilization of clean geothermal based electricity in order to reduce pollution and improve the environment. This will be achieved through: a) development of geothermal power generation capacity in fields under the control of Pertamina Geothermal Energy (PGE), and b) strengthen the institutional capabilities of the company through technical assistance and capacity building so that PGE can contribute to sector development on a sustained basis. The achievement of the development objective of the project will be assessed through the following indicators: a) geothermal power generation capacity developed, b) avoided global and local pollution due to the displacement of additional coal-based capacity. 3. Preliminary description The GoI has requested a loan from the World Bank to support the development of up to 370 MW of capacity, of which about 260 MW are investments at an advanced stage of preparation, and are expected to be included in the scope for the loan. The designated implementing agency is Pertamina Geothermal Energy (PGE), a subsidiary of the national oil company, and a leading state-owned geothermal developer. PGE has requested the World Bank to assist with three geothermal fields that are priority development operations: Ulubelu and Lumut Balai in Sumatra, and Tompaso 4 in North Sulawesi. It is expected that the proposed project will strengthen the capacity of PGE to better undertake the scale-up in geothermal development planned over time by the company so that they can make an increasing contribution to the GoI development target. This is particularly significant since it is only recently that PGE has been established as a subsidiary, and the enhanced capacity will better place them to make more independent decisions and operate with greater autonomy. The following section includes the key components proposed under the project and their preliminary indicative costs: Component 1: Investment in Geothermal Power Generation Capacity ($708 million). Investment in up to 260 MW of power generation capacity, which will include the conformation of resources, production drilling, development of the steam gathering systems, and the construction of the power plant. Upon completion, PGE will be in a position to sell geothermal power into the national electricity grid in order to meet growing demand in an environmentally friendly manner. PGE has indicated their interest in securing the maximum possible loan to finance the project, while the GoI has tentatively agreed by signing a memorandum of understanding with the World Bank for a loan up to $500 million. The Government of the Netherlands has also agreed in principle to assist the project with $10 to $15 million in grant funds. It is expected that the remaining funds will be provided by PGE in the form of equity. The financing arrangement will be finalized during project preparation. Component 2: Institutional Strengthening and Capacity Building (TBD). PGE is in the midst of implementing a Corporate Development Plan that has been prepared with the assistance of a leading consulting firm. It is a program that began in 2006 and expected to 4 Tompaso is often also referred to by the name of the adjacent field, Lahendong. However, they are two distinct geothermal work areas.

7 continue until 2014, where PGE expects to progressively strengthen their institutional capacity and operational autonomy in order to become a world class geothermal company. PGE has requested the proposed project to include assistance to help complete some outstanding actions as well support their upcoming reforms in several key areas: Technical and Scientific Capacity: improve their technical capacity in line with the highest industrial standards through activities that could include: a) technical collaboration with a world class geothermal company, b) information technology for realtime connectivity between field offices and headquarters for enhanced decision making, c) training programs to improve staff skills. Financial Management: implement initiatives that could include enhanced financial controls, independent audits, and greater disclosure. Good Corporate Governance (GCG): implement GCG program initiated by Pertamina, within PGE. This may focus on areas that include training on GCG policies and practices to improve awareness, implementation of whistleblower functions, and application of e- procurement. 4. Safeguard policies that might apply The main aspect related to safeguards in the project is to ensure that it is implemented in an environmentally and socially sustainable manner, since overall the scale-up of geothermal power would have a positive environmental impact. Therefore, the following safeguards policies are expected to apply: Environmental Assessment (OP/BP 4.01) The Project is expected to be assigned an EA category A, and a full environmental impact assessment (EIA) will be required. The EIA will need to particularly assess the impact of the construction of access roads and well pads, steam conduits, steam turbine generator stations, worker camps, office buildings, and workshops, and drilling of multiple deep wells at three different sites, one of them steep and heavily forested, can have significant but not unmanageable impacts. Withdrawal of surface water for drilling and impoundment and disposal of drilling fluids have the potential to affect streamflow and surface water quality. Drilling and operation of the geothermal wells causes noise, and released gas often contains hydrogen sulfide, which has unpleasant odors even at trace concentrations and is highly toxic in moderate concentrations. Geothermal projects require full EIAs (ANDALs) under Indonesian regulations as well. Natural Habitats (OP/BP 4.04) One of the three sites, Lumut Balai, is densely forested and is designated "Hutan Lindung" or "protection forest". Forest so designated is not for biodiversity conservation but is to be left in forest cover for slope stabilization and watershed protection. Consequently, it should be treated as non-critical natural habitat under OP The small fraction of the protection forest in the region that will be cleared, for access roads, office and workshop, and well pads, does not warrant an offset. Instead, the project will support improving the overall protection of forest in the general vicinity.

8 Involuntary Resettlement (OP/BP 4.12) Land for all facilities, except the transmission lines, will be acquired by PGE. Since PGE is legally registered as a private company, it acquires land through direct negotiations, based on the principle of willing buyer-willing seller, in accordance with the provisions of the Civil Law. All negotiations with the land owners are carried out collectively, and in the presence of village heads and community leaders, in an open and consultative manner without any coercion. The negotiation process gives ample opportunities to land owners to obtain information on prices and prepare themselves for negotiations, and to decline the offer made or to sell the land for the project. The technical nature of geothermal development also provides flexibility to redesign the location of drill pads in the event that the land in the initially selected location cannot be acquired. The direct negotiated settlement is also suitable from the technical viewpoint whereby exact locations of land parcels cannot be pre-determined, and are identified, and finalized, based on successive field investigations. However, PGE has the legal right to request appropriations if negotiations fail and if no viable alternative siting exists. Therefore, OP4.12 is triggered, for which PGE will prepare detailed land acquisition procedures of their existing practices, modified to comply with OP 4.12, acceptable to the Bank prior to Appraisal. The Transmission Line (TL) connecting the geothermal power station to the nearest PLN s (national power company) sub-station, proposed to be constructed by PLN, will cause, among others, loss of private assets. The land and other assets affected by the TL will be acquired by PLN following the provisions of President s Regulation 65 of 2006, and since the TL is linked to the PGE project, OP 4.12 will be triggered. Prior to Appraisal, PGE will agree with PLN its land acquisition procedures for the TL to ensure compliance with OP 4.12 acceptable to the Bank. Physical Cultural Resources (OP/BP 4.11) The application of OP4.11 is yet to be determined. The ANDALs already drafted for the project have not identified any sites or features of cultural significance. If the additional EA work required to bring the ANDALs up to Bank standards reveals any PCR, this policy will be triggered. The proposed project will not trigger Bank rules with regard to forest, pest management, indigenous people, dam safety, international waterways, or disputed areas. 5. Tentative financing Source: ($m.) Borrower and other sources 208 International Bank for Reconstruction and Development 500 Total Contact point Contact: Migara Jayawardena Title: Senior Infrastructure Specialist Tel: (202) Fax: (202) mjayawardena@worldbank.org

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