By: Muhammad Razin Abdullah
Research Assistant at Purnomo Yusgiantoro Center (PYC).
Indonesia continues to improve its renewable energy (RE) mix in order to support the Paris Agreement. Indonesia’s RE mix target in 2025 is set at 23%. However, according to the Minister of Energy and Mineral Resources presentation for the House of Representatives, until 2020 the achievement is still at 11.2%. Various programs have been carried out and the House of Representatives is currently designing the RE bill. Moreover, the government, through the Ministry of State Owned Enterprises (SOE), is also considering another alternative, which is the establishment of a geothermal SOE holding company.
The plan to form a geothermal holding company was getting attention since the beginning of 2021. It involves three state-owned companies, namely PT Pertamina Geothermal Energy, PT Geo Dipa Energi, and PT PLN Geothermal. The holding company’s establishment aims to support the government target to achieve a 7,000 MW installed geothermal power plant (PLTP) in 2030 and 9,000 MW in 2045. Until 2019, the utilization of geothermal energy to generate power was still minimal, 2,130.7 MW of the total potential of 23,965.5 MW, or only 8.9%.
In 2020, PT Pertamina Geothermal Energy operated PTLP with a total capacity of 220 MW, PT Geo Dipa Energi with 115 MW and PLN with 687,5 MW (Figure 1). If the merger of the three companies is completed, then the geothermal holding company will operate a total of 1,022.5 MW PLTP or 48% of the total installed PLTP. It is also claimed that the Indonesia geothermal holding company will become the largest geothermal company in the world.
Figure 1. Indonesia’s geothermal power plant capacity in 2019 (MW).
Advantages of A Holding Company
The formation of a holding company, in general, can bring various advantages, especially in terms of company management. These advantages are described in the following points:
- Financial Strength
Combining the fiscal resources of several companies will strengthen the holding company’s financial condition, thus it might obtain more favorable financing terms than if the subsidiaries were standing on their own. The holding company could get loans with a lower interest rate and distribute the funds to the subsidiary. Moreover, by pooling together the fiscal resources, the holding company will be able to take on large-scale projects.
- Efficient Spending
A holding company of the same industry subsidiaries will have greater buying power and can get better prices from suppliers and also a better credit term.
- Protect Assets and Reduce Risk
A holding company can hold valuable assets such as property, intellectual property, and equipment. Moreover, if the holding company is a separate entity from the subsidiary, the risk of losing those assets is minimized if the subsidiary goes bankrupt.
- Minimize Tax
A holding company could better manage and structured the company to receive a lower tax bill.
- Centralized Control
The control of subsidiary companies by the holding company could provide a cohesive and centralized management structure that allows the holding company to maximize its performance and growth. For the case of SOE holding, centralized planning could also benefit the sustainability of the company and help support the government’s programs.
- Transfer Knowledge
Another advantage of a holding company is its ability to transmit any special skills and know-how that could be used to develop its subsidiaries.
Geothermal Holding Company Role in Energy Security
The abundant geothermal reserves in Indonesia should be responded by encouraging and prioritizing its utilization, especially for power generation. Considering that geothermal is renewable and sustainable energy, then the unused reserves will become an opportunity loss for Indonesia. However, the in-situ nature of geothermal energy is indeed one of the main challenges in its development. Oftentimes, the geothermal source is located far from the promising electricity market. In this case, the government can play an important role in reconciling supply and demand for geothermal energy through its national development strategies. The strategies need to consider the location of geothermal potential so that its utilization can be optimized.
Furthermore, in the 2019-2028 Electricity Procurement Plan (RUPTL 2019-2028), electricity sales are projected to increase steadily, with an average growth of 7.06% per year. PLTP can be a proper solution in meeting this electricity demand in Indonesia. PLTP is a reliable source of electricity because it can be operated continuously and potentially become the primary base load in Indonesia’s electricity generation system. In addition, the development of PLTP can also be done by substituting the existing coal fired power plant (PLTU). Currently, PLTU still dominates Indonesia’s power generation sector, with a share of up to 63.92%. The substitution of PLTU with PLTP can support the diversification of energy sources in Indonesia and simultaneously enhance its sustainability.
The opportunity to further develop PLTP in Indonesia is still wide open. The establishment of a geothermal holding company could result in more structured management, increased capital strength and access to other various financial benefits. Therefore, it should be able to accelerate the development of PLTP in Indonesia. The formation of a holding company also improves the possibility of developing a larger PLTP capacity. Hence, the geothermal holding company can help enhance the availability and accessibility of electricity by constructing various new PLTPs. The financial efficiency of a holding companies can also reduce the levelized cost of electricity (LCOE) of PLTP and resulted in cheaper electricity rates (affordability). Furthermore, the environmentally friendly PLTP can boost the acceptability in the community. Lastly, with the development of the renewable PLTP, the sustainability of both energy sources and environmental aspects in Indonesia will be improved.
Disclaimer: This opinion piece is the author(s) own and does not necessarily represent opinions of the Purnomo Yusgiantoro Center (PYC).