PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE. Lahendong II Geothermal Power Project

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Project Name PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Lahendong II Geothermal Power Project Report No.: Region EAST ASIA AND PACIFIC Sector Energy Project ID P Borrower(s) Not Applicable Implementing Agency PT. Perusahaan Listrik Negara (Persero) (PLN), Indonesia Environment Category [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined) Date PID Prepared October 17, 2007 Date of Appraisal TBD Authorization Date of Approval TBD 1. Country and Sector Background A strong dependence on fossil fuels unlikely to decrease with current development plans 1. Although the Indonesian Archipelago is one of the most volcanic areas in the world, little of its abundant geothermal resources have been developed and the country s current power generation relies heavily on fossil fuel. In 2005, over 89 percent of PLN generation was derived from fossil fuel, 8 percent from hydro, and only 2.3 percent from geothermal energy. 2. With a robust 7-9 percent annual growth forecast, electricity demand is expected to triple between 2005 and 2020 resulting in large quantity of greenhouse gas (GHG) emissions. Already, since 1990, GHG emissions in Indonesia have been growing at a faster pace than in China making Indonesia the third largest GHG emission emitter in among all the developing countries in Asia. 3. In 2005, oil fired power plants produced 39 percent of the total electricity generation of PLN. The cost of oil in these plants accounted for almost 50 percent of the operating expenses and soaring prices are further deteriorating the company s financial standing. The Minahasa system in north Sulawesi Province is highly dependent on costly and polluting diesel power plants. In 2005, diesel power plants contributed up to 42 percent of the total electricity generated by Minahasa system, 260 GWh out of the total 613 GWh. 4. To reduce this dependence on oil products, the Government mandated PLN to undertake an accelerated program of construction of coal-fired power plants totaling about 10,000 MW by 2009, including in North Sulawesi. This program, while reducing the dependence on imported fuels, will increase local pollution through higher emissions of particulates (the coal to be used in these plants is likely to be non-exportable low grade coal) and CO 2 emissions. A commitment to increase renewable energy and access to electricity met with hurdles

2 5. One of the most effective ways to mitigate GHG emissions is to increase the share of renewable energy in the total energy mix. In Indonesia, geothermal resources present the best available option to develop large scale renewable energy. Utilizing the vast and largely untapped geothermal potential can play a critical role in meeting the growing demand for electricity while securing a non-polluting domestic source of supply and mitigating GHG emissions. 6. Yet, the exploitation and utilization of geothermal energy has been slow and currently faces a number of challenges and risks. Over the span of the last 20 years, Indonesia (PLN and private operators) was only able to develop 807 MW of geothermal power, or less than 3 percent of the total estimated potential. The development of geothermal power potential has been impeded by relatively higher development costs (compared with fossil fuel power generation) but also by additional institutional, technical and financial factors such as: (a) the absence of adequate regulations, pricing and fiscal incentives for renewable energy such as geothermal to account for their environmental benefits; (b) inadequate institutional capability to plan geothermal development and engage developers; (c) weak domestic technical capacities; and (d) significant risks related to the development of geothermal fields that limit access to finance. Government early response to meet these challenges 7. The Government of Indonesia (GoI) stated its policy for an environmentally sound national energy development in the Energy Sector Blueprints published by the Ministry of Energy and Mineral Resources. The State Ministry of Environment has also explicitly indicated the actions to be taken towards limiting GHG emissions in the energy sector. Indonesia signed the United Nations Framework Convention on Climate Change (UNFCCC) on June 5, 1992 and its parliament ratified the convention in August 1994 which entered into force on November 21 of the same year. It signed the Kyoto Protocol on July 13, 1998 and its Parliament ratified it on December 4, 2004; the Protocol entered into force on March 3, Indonesia s initial communication to the UNFCC convention included, among other specific actions for the energy sector, the promotion and development of renewable energy, particularly from geothermal resources. 8. In 2003, the GoI passed the Geothermal Law (Law No. 27/2003) to open new opportunities for development of geothermal resources. A road map for geothermal energy development was established to bring geothermal power generation capacity to 6,000 MW by Objectives 9. The development objective of the proposed project is to mitigate global environmental impacts of carbon dioxide (CO 2 ) emissions through purchase of CO 2 emissions avoided by the development of the Lahendong II geothermal project under the clean development mechanism (CDM). The plant has been developed to meet growing power demand in the North Sulawesi area of Indonesia.

3 10. The key project performance indicators are (a) the actual Emissions Reduction (CERs) induced by the geothermal plant and certified by an independent verification entity; and (b) the quantity of electricity generated. 3. Rationale for Bank Involvement 11. The Bank is working with the GoI to promote the development of geothermal resources and has adopted a two-pronged approach. It will assist the GoI in strengthening its regulatory, institutional and technical capabilities through a technical assistance program, the Indonesia Geothermal Sector Reform Project, funded by the Global Environment Facility (GEF). At the same time, the Bank is aiming to directly promote geothermal project development through CDM transactions and possible lending operations. 12. A large portion of Indonesia s geothermal resources are located in the outer islands where approximately 75 percent of Indonesia s poor reside and where access to electricity is low. Lack of access to electricity has been a major hindrance to economic development and poverty alleviation in the outer islands. Harnessing indigenous geothermal resources provides a good opportunity to increase electricity generation capacity at the local level and provide the basis to increase rates of access to electrification in these islands which lag behind the national average. Development of small geothermal production in outer islands complements other ongoing Bank assistance to meet the Government s ambitious rural electrification target. 13. The Bank s activities complement other international agencies programs supporting PLN and GoI to develop geothermal resources. The Asian development Bank (ADB) financed the Lahendong II power generation unit. The Japan Bank for International Cooperation (JBIC) is expected to provide financing for the next extension, Lahendong III. At the same time, the Japan International Cooperation Agency (JICA) is carrying out a technical geothermal assessment across the country that will be used to update the existing sector Road Map. The United Nation Development Program (UNDP) is also supporting a program to address the barriers to widespread application of micro-hydro technology that may have some relevance for smaller scale geothermal development in the country. 4. Description 14. It is proposed that the Bank purchase, on behalf the Netherlands Clean Development Mechanism Facility (NCDMF), the certified emission reductions (CERs) induced by the Lahendong II Geothermal Power Plant from 2008 to 2013, estimated at about 338,000 tons of CO 2e. The exact amounts of CERs eligible for purchase and the price of CERs will be defined in an Emission Reduction Purchase Agreement (ERPA) to be reached through negotiation between PLN and the Bank on behalf of the NCDMF. 15. The Lahendong II Geothermal Power Plant is one subproject of the ADB-financed Renewable Energy Development Sector (REDS) Project which includes twelve subprojects. The Lahendong II Geothermal Power Project includes a single 20 MW geothermal steam turbogenerator plant procured and operated by PLN. The project is designed to deliver up to 158 GWh of electricity annually to PLN s Minahasa system of North Sulawesi. Steam for the project

4 is supplied from an extension of the existing Lahendong geothermal field, under a take-or-pay agreement with the field s owner and developer, Pertamina, the national oil and gas company. The World Bank s role in the Lahendong II Project is limited to purchasing partial emission reduction assets created by the project. 16. The project is located within the existing Lahendong geothermal fields that have been producing since 2001 in the North Sulawesi Province of Indonesia. The geothermal field already supplies an existing power plant of 20 MW owned and operated by the PLN and a third extension of 20 MW is being considered for funding by JBIC. 5. Financing Source: ($m.) BORROWER/RECIPIENT 8.67 International Bank for Reconstruction and Development 0.00 Asian Development Bank 17.5 Total Implementation 17. The Project will be implemented in accordance with the ERPA to be signed between PLN and the Bank, as trustee of the NCDMF. A Monitoring Plan (MP) will be agreed between parties to the ERPA. The ERPA and MP will define the quantity, price and other delivery conditions for CERs to be purchased by NCDMF as well as monitoring and verification systems and methods. Eligibility of ERs for purchase by NCDMF will be verified by an independent third party. Verification and certification of CERs generated annually by the project will be coordinated by the NCDMF which will ultimately purchase the CERs. As per the requirement of the Kyoto Protocol, GoI will operate a registry to manage the transfer of CERs generated by the Project. 18. PLN, the plant owner, will be responsible for implementation of the Project, including the following provisions under the ERPA: Maintain and operate the project in accordance with sound business practices, proper due diligence and high efficiency; Undertake all reasonable efforts, including project documentation, to ensure eligibility of ERs under Art.12 of the Kyoto Protocol; Undertake, satisfactory to the Bank, actions agreed in the Environmental Management Plan to comply with the Bank s safeguard policies; and Notify the Bank of anything that may have an impact on the project or its capacity to deliver ERs, including delays, material adverse changes and force majeure. Specifically, in relation to CERs, PLN will: Monitor the electricity generated and other relevant parameters;

5 Organize periodic auditing of the project and verification that emission reductions have been achieved in compliance with relevant project criteria, including the preparation of required reports; Prepare a brief annual or biannual report that should include: information on overall project performance; emission reductions generated, verified and compared with targets; observations regarding MP baseline scenario indicators; information on adjustment of key MP assumptions, and calculation methods and other amendments of the MP; and Ensure certification of verified emission reductions. 19. Payment and Flow of Funds: The expected flow of funds will be confirmed in the ERPA. After the ERPA becomes effective, NCDMF will only disburse against delivery of certified ERs. The involvement of the NCDMF with the project will expire after CERs up to the total contract amount have been delivered, unless the parties agree to extend the ERPA. In the event that the project sponsors fail to deliver the quantity of CERs for any given calendar year as set forth in the ERPA, they will be required to make-up the shortfall over the course of the following calendar year or another period agreed upon. 7. Sustainability 20. Factors that might affect the sustainability of the Lahendong plant include: (i) a sudden decrease in demand for electricity; (ii) a loss of pressure in the reservoir; and (iii) a decision to develop and aggressively dispatch another, lower cost project for energy that would lead to a low capacity factor for the Project. 21. The demand for electricity to the Project from the Minahasa system is expected to remain high due to the twin effects of increased access to electricity and expected rapid economic growth. Pressure from the reservoir is expected to be stable as demonstrated by a number of feasibility studies and the re-injection of condensed steam back into the reservoir. A swap of plant to generate the electricity is unlikely in part because PLN is very committed to increasing the share of renewable in its energy mix and also because for geothermal, once the physical investment has been done, the operation costs are lower than for other competing fuel sources. 8. Lessons Learned from Past Operations in the Country/Sector 22. Lessons learned from similar projects in the country and experience gained to date by the Bank in other countries is reflected in the project design. They include: Applying approved methodology. The baseline identification of Project emission reductions of this proposed CDM project are based on approved methodologies. This will reduce project credit risks; and Limiting environmental and social risks. The Lahendong II is financed by ADB and ADB has applied safeguards policies that are similar to the Bank. Starting from the project identification stage, the project has been integrated with multiple robust environmental safeguard measures and strategies.

6 9. Safeguard Policies (including public consultation) Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.01) [X] [ ] Natural Habitats (OP/BP 4.04) [ ] [X] Pest Management (OP 4.09) [ ] [X] Cultural Property (OPN 11.03, being revised as OP 4.11) [ ] [X] Involuntary Resettlement (OP/BP 4.12) [ ] [X] Indigenous Peoples (OD 4.20, being revised as OP 4.10) [ ] [X] Forests (OP/BP 4.36) [ ] [X] Safety of Dams (OP/BP 4.37) [ ] [X] Projects in Disputed Areas (OP/BP/GP 7.60) [ ] [X] Projects on International Waterways (OP/BP/GP 7.50) [ ] [X] 10. List of Factual Technical Documents 11. Contact point Mr. Leiping Wang Senior Energy Specialist The World Bank 1818 H Street, NW Washington, D.C For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Fax: (202) pic@worldbank.org Web: