By Ed Davies and Karen Lema
JAKARTA/MANILA, June 29 (Reuters) - Faced with looming energy crises in their developing economies, power-hungry Indonesia and the Philippines are looking deep into the earth for a solution.
Both are in the so-called Pacific Ring of Fire, an area peppered with volcanoes and home to the world’s biggest reservoir of geothermal power. "When I think of Indonesia and energy, I think geothermal. Indonesia has more than 500 volcanoes, of which 130 are active," Lester Brown, president of the Washington-based Earth Policy Institute, told CLSA Asia-Pacific Markets in a speech in June.
"Indonesia could run its economy entirely on geothermal energy and has not come close to tapping the full potential," he told the investment group.
That may be changing though as soaring oil prices, surging demand and creaking infrastructure in the power sector make it all the more urgent for both Indonesia and the Philippines to find ways to exploit their geothermal reserves.
But unlocking the potential is proving difficult.
Geothermal projects involve drilling wells deep into the earth to tap steam or hot water to power turbines. Not all of the challenges are terrestrial in nature. It’s a capital-intensive process made worse by tortuous red tape and other stumbling blocks in places such as Indonesia and the Philippines.
Indonesia’s Bedugul project, set among volcanoes on the Hindu enclave of Bali, aims to develop up to 175 MW of power, or roughly half of the resort island’s needs. But the project is now on hold because local residents fear it could damage a sacred area and affect water supplies from the nearby lakes.
Most of Bali’s power is currently supplied from neighbouring Java island via an undersea cable. Supporters say the project is essential to meet growing electricity demand in the resort island, which is at the heart of Indonesia’s tourism industry.
"We hope that the project will run, not just because of the investors but for Bali’s future," said Ni Made Widiasari of Bali Energy, the firm behind the project. She denied the project would be damaging.
In the Philippines, currently the world’s second-biggest geothermal producer behind the United States, one of the main obstacles to developing the reserves is the high acidity associated with active volcanoes, which can corrode the pipes.
"There are many fields that are still acidic, meaning the dead volcanoes underlying them are not really dead," said Paul Aquino, president of PNOC-Energy Development Corp EDC.PS which operates nine steamfields with a capacity of 1,199 Megawatts (MW), or about 60 percent of the country’s geothermal capacity.
That would make it hard for the Philippines to achieve its goal of raising geothermal capacity from an existing 1,931 megawatts to 3,131 MW by 2013, and overtaking the United States as top global geothermal producer, he added.
Geothermal power accounts for around 18 percent of the Philippines’ energy needs.
"We have already exploited those areas with the biggest geothermal resource," Aquino said, adding that many of the Philippines’ most attractive untapped sites are located in natural parks or protected by the Indigenous Peoples Rights Act.
Catherine Maceda, spokeswoman for the Renewable Energy Coalition, a group promoting the use of alternative energy, also warned that the Philippines needed to push through a renewable energy bill to provide greater incentives and clarity.
While President Gloria Macapagal Arroyo has earmarked the bill as urgent, political bickering is holding up its passage.
"Right now there is no predictability," said Maceda.
Electricity networks in the Philippines and Indonesia, with a combined population of 316 million, are already under strain.
Philippine power demand is estimated to be growing at an average rate of 4.8 percent a year, while Indonesia has suffered power blackouts with razor-thin supply cushion when demand peaks.
Indonesia currently supplies just 850 MW of an estimated 27,000 MW potential from geothermal, or about 3 percent of its current power output.
While the government wants to focus on using more coal-powered stations to meet energy needs, Energy Minister Purnomo Yusgiantoro has said power from geothermal could reach 9,500 MW by 2025.
Despite the setbacks and stalled projects, high energy prices are providing the spur for firms to look at geothermal again, and several are keen to expand their existing operations or bid for fresh projects in Indonesia under a new government framework.
Indonesian energy firms Medco Energi Internasional (MEDC.JK) and Star Energy, are looking at making new investments, while Chevron, the world’s largest private producer of geothermal energy, plans to double its geothermal business in Indonesia and the Philippines by 2020 despite the heavy capital outlays.
It takes about 7 to 8 years for a geothermal plant to move from exploration to production. Aside from drilling and plant costs there are often additional expenses such as building access roads in remote and mountainous areas.
Geothermal plants require high capital investment for exploration, drilling wells and plant installation compared to other alternatives. But operation and maintenance costs are relatively low.
Chevron is looking at further expansion of its existing fields in West Java and is considering 10 out of 256 other sites which Indonesia has identified as having geothermal potential.
"You have to spend all your capital up front to develop these fields, you know, put in the wells and power plants, but with current prices of oil, gas and coal, geothermal is becoming competitive" said Barry Andrews, president of Chevron’s geothermal power operations.
Eligibility for carbon credits could make such investments more attractive, he said, as they may offset some of the hefty start up costs.
Chevron’s Darajat plant, also in West Java, has been registered with the United Nations as eligible for 650,000 certified emissions reductions per year.
Meanwhile, Indonesia is putting the finishing touches to new regulations for the geothermal sector, after many projects collapsed in the wake of the 1997-98 Asian financial crisis.
"I think we’re virtually on the cusp of seeing all of that come together in the next year or so," said Chevron’s Andrews.
Environmentalist Brown, from the Earth Policy Institute, says this follows a global trend in localising energy policies as high oil prices prod countries to find cost effective alternatives.
"In Indonesia that means geothermal is going to loom large in the energy economy of the future, and that development could come very quickly once the leadership begins to see the potential," he added.
(Editing by Sara Webb and Megan Goldin)