Indonesia outperforms for geothermal energy: Fitch Solutions

A coal-fired power plant under construction in Sulawesi, Indonesia.
A coal-fired power plant under construction in Sulawesi, Indonesia.
MAY 09, 2019 - 4:45 PM

INDONESIA is one of the world's outperformers for geothermal power, second only to the United States for overall installed capacity forecast in 2019, Fitch Solutions Macro Research said in a May 8 note.

Fitch Solutions' estimates that Indonesia has 2 gigawatts of geothermal capacity in operation as of the end of 2018. "Even so, reports suggest that the country's geothermal power potential remains largely untapped, and can accommodate far greater geothermal capacity," said the note.

Noting that supportive regulations are in place to encourage investment in the geothermal sector, Fitch Solutions sees Indonesia's total geothermal generation growth averaging 9.2 per cent year on year between 2019 and 2022, when it will overtake the US as the country with the largest geothermal capacity.

Despite its bullish outlook, Fitch Solutions identified risks such as artificially low government-regulated electricity tariffs, which restrict potential returns on investment; the government's "stringent local content requirements and a preference for local firms in the tendering process"; and the country's vast hydrocarbon reserves, which make thermal energy -- produced by burning fuel such as coal -- an attractive low-cost alternative to geothermal power.

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The outlook for Indonesia's coal energy, however, faces both short- and long-term risks. In a separate May 9 release, Fitch Ratings said it expects Indonesia's lower coal production quota of 480 million tonnes, compared to the 528 million tonnes produced in 2018, to stunt the growth plans of some rated coal miners.

Moody's Investors Service said on May 8 that regulatory and economic developments in Indonesia will weigh on the earnings of the country's coal producers in 2019, while in the longer term, "carbon transition"and a continued slowdown in Asia's coal demand poses a long-term risk to the credit quality of Indonesian coal miners. Moody's expects pricing pressure on thermal coal to persist due to a global transition toward renewables and away from coal.

In other areas of renewable energy, Fitch Solutions identified Thailand as an outperformer in biomass and an attractive biomass power investment destination over the next decade. In a May 7 note, it noted strong government support for biomass power in Thailand, amid efforts to diversify the country's energy mix.