Geothermal Energy in the Region – Asia Pacific


The international demand for geothermal energy is heating up.


Asia Pacific, host to the world’s top producers of geothermal power, is poised to see significant growth as geothermal energy emerges as a viable source of green, reliable and cut-rate power.


While past geothermal usage is minimal, the region is expected to see a boom kindled by the convergence of the following factors:


·     increasing energy security concerns


·     economic progress, especially in developing markets


·     electrification of low-income and rural communities


·     emergence of low-cost and efficient technologies


·     rising environmental awareness


In this newsletter, we focus on the top geothermal destinations in Asia Pacific — the Philippines, Indonesia, Japan, Australia and Vietnam — and the economic and regulatory factors that are taking the steam out of traditional power sources and directing international attention towards geothermal energy.


To read more of our regional insights, please click here. Country-specific updates are available below.


If you would like to discuss any of the matters raised in this newsletter, please contact us.




Paul Curnow.JPG


Paul Curnow


Head, Asia Pacific Renewable Energy Group


Country Updates


We briefly highlight below the key policy developments for Geothermal Energy in Australia, Indonesia, Japan, the Philippines and Vietnam.





The Australian Government is powering the country’s relatively dormant but promising geothermal industry. Recent times have seen the passage of a legislation creating the Clean Energy Finance Corporation, an entity that will invest over AUD10 billion in renewable energy, including in geothermal energy. Further Government funding will be supplied by the Australian Renewable Energy Agency and the Emerging Renewables Program. Industry progress is already apparent in the implementation of major geothermal projects such as the Paralana geothermal project in South Australia and Geodynamics’ Habanero 4 well. READ MORE >>




Indonesia’s current Second Fast-Track Program has allowed the state utility bank PLN to build renewable power projects with IPPs. This is seen to enable the world’s third top geothermal producer to meet its target of an extra 10-GW capacity by 2013/2014 through the creation of more power projects. The Indonesian Government has also introduced the Business Viability Guarantee for investors, ensuring PLN’s ability to fulfill its payment obligations under the power purchase agreement for projects belonging to the Second Fast-Track Program. READ MORE >>




Feed-in tariffs for renewable energy recently took effect in Japan, providing above-market and attractive prices to investors. The Japanese Government has also loosened its restrictions on extracting geothermal energy within national parks and has launched clear guidelines for project approval under the Hot Spring Law, paving the way for more development. READ MORE >>




Investors may see a more liberal regulatory environment in the region’s foremost geothermal destination, as the Philippine President considers a Department of Energy recommendation to allow a 100% foreign-owned corporation to execute financial or technical assistance agreements with the State for a geothermal project. READ MORE >>




Vietnam, a hot water-rich area, has stepped forward from research programs with the upcoming construction of new geothermal power projects. PetroVietnam Power Corporation has announced a second project in the works, involving the flow of a hot water stream in Nghia Thang ward. The Vietnamese Government is also reportedly mulling over the formation of a separate law on renewable energy. READ MORE >>

Indonesia features 1,197 MW of installed capacity, making it the third largest producer of geothermal power next to the US and the Philippines.


It is reported to have 27 GW more of untapped generating capacity available for harnessing. Indonesia’s current year-on-year generation growth for geothermal averages at 9% and is expected to leap to about 20% by 2016.


The Indonesian Government is now looking into developing 93 power plants for its second 10-GW power generation project, as a part of the country’s ‘fast-track’ program aimed at satisfying the country’s rising energy needs. This Second Fast-Track Program has empowered state utility company PT Perusahaan Listrik Negara (PLN) to develop geothermal, coal and hydropower generating plants in tandem with independent producers.


Pioneer projects under Second Fast-Track Program


The Muara Laboh geothermal power project and the Rajabasa geothermal power project are the first two projects to be finalized under the framework of Indonesia’s 10-GW Second Fast-Track Program. Baker & McKenzie’s member firms in Singapore and Jakarta facilitated a consortium of sponsors in concluding these projects’ power purchase agreement and Government guarantee arrangements.
The sponsors consortium consisted of PT Supreme Energy, International Power – GDF SUEZ, and Sumitomo Corporation. The development and construction of these two projects are expected to be financed by the Japan Bank for International Cooperation and other international financial institutions.
Government offers Business Viability Guarantee to power projects
The Business Viability Guarantee is a Government guarantee that ensures PLN’s ability to fulfill its payment obligations under the power purchase agreement (PPA) for projects belonging to the Second Fast-Track Program.[1]
The Business Viability Guarantee Letter is made available to power projects on a case-by-case basis through application by PLN to the Government of Indonesia (GOI) acting via the Ministry of Finance (MOF). The discretion as to which power projects will be given a Business Viability Guarantee lies with the Fiscal Policy Agency and the MOF. It is not a blanket guarantee which covers all independent power producers.
The MOF issued on August 2011 a regulation[2](MOF Reg. 139/2011) stipulating the procedures for the granting of a Business Viability Guarantee in the development of power plants using renewable energy, coal and gas conducted by PLN in cooperation with independent power producers.


Evolution of Viability Guarantee regulation
Before the advent of MOF Reg. 139/2011, MOF Regulation No. 77/2011 (Regulation 77) had previously set out the details and the framework under which the GOI, through the MOF, will provide Viability Guarantees to PLN for specific power projects.
Under Regulation 77, the Viability Guarantee is to be given in the form of a letter to PLN stating that the GOI guarantees PLN’s ability to fulfill its payment obligations under the PPA in the event of a “Shortfall”. A shortfall occurs when PLN’s financial condition is insufficient to meet its payment obligations under a PPA due to an act or a decision of the GOI that significantly results to loss in a project.
If the funding shortfall is not caused by GOI’s decision or act, the GOI shall not cover the shortfall through the Viability Guarantee. Another requisite is for the GOI’s act or decision to be “significant” in causing the loss to the project, which otherwise will not trigger a right to claim under the Viability Guarantee. This requisite adds another layer of uncertainty to the scope of the Viability Guarantee.
Regulation 77 does not offer the project company with a direct recourse against the provider of the guarantee (i.e. the GOI). It also has no mechanism that would enable the project company to require PLN to enforce its rights under the Viability Guarantee or to make a direct claim under the Viability Guarantee in the event that PLN fails to do so.
Viability Guarantee: Now
A positive development under the current regulation in force, MOF Reg. 139/2011, is that it grants the project company direct contractual rights against the GIO, making it more useful to sponsors and their lenders.
Under the regulation, the Business Viability Guarantee Letter shall be directly addressed to the project company that has committed to construct a power plant and supply electricity to the PLN on a long-term basis under a PPA or an equivalent agreement.
Scope of coverage
The Business Viability Guarantee Letter (BVGL) covers the risk of non-payment by PLN for amounts stated in a payment invoice for the purchase of electricity issued by the (project company) power producer, in line the applicable PPA.
In practice, the MOF specifies within the BVGL an exclusive list of PLN payment obligation clauses in the PPA that the GOI pledges that PLN will fulfill.
Such list of clauses calls for a careful review. The more apparent provisions that should be covered by the BVGL guarantee are monthly electricity sales payments, take-or-pay payments, late payment interest and deemed dispatch payment obligations of the PLN under the PPA. Sponsors, however, may also consider negotiating for some other payment obligations of PLN under the PPA, for instance any due payments arising from retrospective adjustments of payments under past invoices following any recalibration of the metering systems.
Since MOF Reg. 139/2011 requires that the guarantee be extended only to payment obligations that are stated in invoices for the purchase of electricity issued under a PPA, care should be taken during the drafting and negotiations of the PPA to address the point that payments which are sought to be covered by the BVGL should fall within the invoicing regime under the PPA.
Coverage – Termination Payments
MOF Reg. 139/2011 does not state whether or not a BVGL can cover the risk of non-payment by PLN of due amounts arising from the termination of a PPA.[3]

A plausible alternative is to incorporate within the BVGL, outside of the guarantee provisions, that the GOI will ensure that PLN fulfills its listed termination payment obligations under the PPA through GOI’s fulfillment of certain statutory public service obligations to PLN under the relevant Indonesian laws and regulations.

The reference to public service obligations is linked to the rule under the existing law on State-Owned Enterprises that the GOI must pay compensation to PLN for performing a public utility function assigned to it by the GOI. This is further implemented by MOF regulations that endorse an electricity subsidy for PLN to cover the difference between its average selling price of electricity and the costs of supplying electricity.
The obligation imposed upon the GOI under the BVGL is not as favorable to sponsors as a clear guarantee for the termination payments, since there is no legal basis for the project company or the lenders to enforce PLN’s rights in compensating the public service obligation. This is because GOI’s obligation to compensate PLN is not owed to the project company.
If the BVGL does incorporate a rule requiring the GOI to fulfill its obligations to PLN, the quantum of damages that could be recovered by the project company on the breach by the GOI still remains unclear.
That said, without clearer legislation supporting the express coverage of the termination payments by the BVGL, this alternative could be a practical solution that may be considered as workable by both the MOF, and the sponsors and lenders in view of previous precedent IPPs that were project-financed in connection with the Umbrella Note of Mutual Understanding signed between JBIC and the GOI.
Under this Umbrella Note, GOI affirms its commitment to enable PLN to perform its PPA obligations in a timely manner by providing it with financial compensation for its public service obligations arising under the laws. The Umbrella Note is, in essence, a confirmation that specific public service obligations-related regulations apply to the power project in question, and does not actually increase the GOI’s commitment to PLN.
The MOF Reg. 139/2011 outlines that, in relation to a BVGL issued for a geothermal power project, a BVGL expires if financial close has not occurred within 48 months after its issuance.
We understand that, as a practical matter, BVGLs will be signed on the signing date of the related PPA or shortly thereafter. The time period for achieving financial close under each BVGL will vary, but it should conform roughly to the equivalent deadline under the relevant PPA.
Under MOF Reg. 139/2011, the financial model (cash flow model) for the project company is required as a part of the BVGL application package to be submitted to the MOF by PLN.
The practical purpose of providing the financial model is to allow the MOF to consider the required tenor of the BVGL coverage on the basis of the financial model, among other things. Each project will need to negotiate its own BVGL tenor with the MOF.
The regulation also provides that the BVGL only covers the risk of PLN’s non-payment during the operation period of the power plant project (i.e. the period after the commercial operation date of the project). On the face of it, invoices for electricity generated during testing and commissioning of the power plant may not be covered by BVGL, if the commercial operation date is interpreted to only occur when the relevant commissioning tests stipulated under the PPA have been successfully completed.
To note, it is also uncertain whether or not the commercial operation date in the regulation can be read more broadly to include the deemed commercial operation date, so that invoiced electricity payments arising from the deemed commissioning under the terms of the PPA[4] can be covered by the BVGL. 
The Business Viability Guarantee Letter marks a key improvement to the Government’s level of support for geothermal power projects.
The outlook is positive for the Indonesian market as the terms and conditions of the BVGL is expected to evolve further, while project companies and their lenders hold discussions with the Ministry of Finance on future projects.
When a more bankable form of the BVGL is created, we will see a faster development of geothermal power projects in Indonesia under the Second Fast-Track Program.

[1] Under Presidential Regulation No. 4 of 2010, as amended by Presidential Regulation No. 48 of 2011. 

[2]PMK No. 139/PMK.011/2011

[3] E.g. Following the termination of a PPA after PLN’s non-remediable default or prolonged political force majeure.

[4] E.g. In respect of a natural force majeure event affecting PLN’s ability to accept electricity.


Latest Developments in the Philippines

By Felix Sy, Partner, and Maria Rica Matute-Dineros, Associate, Banking & Finance, Manila



The Philippines is a top world producer of geothermal power, second only to the United States.


The country’s Department of Energy (DOE) estimates that there is still about 4.41 GW of untapped potential for geothermal energy. Currently, the Philippines has more than 2 GW of installed capacity, comprising nearly 18% of the country’s total energy output.


The impending shortage of electricity supply in the country has pushed the Government to harness its geothermal energy further by approving more energy contracts, especially in relation to renewable energy resources.


The DOE anticipates electricity demand to double in the next 20 years due to growth in its industrial and transportation sectors, and population. In response, the Philippines in its 2009-2030 Energy Plan has targeted to increase its operating geothermal capacity up to 3,447 MW by 2030.
Government may ease project award restriction for foreigners


The Philippines’ conservative approach against awarding renewable energy service contracts to foreigners is gradually evolving as the Philippine President considers a DOE recommendation to allow a fully-foreign owned corporation to execute financial or technical assistance agreements (FTAA) with the State for a proposed geothermal project.


Evolution of geothermal regulations


The Philippines’ Renewable Energy (RE) Act of 2008 does not restrict the nationality of entities who may be awarded renewable energy service contracts in the country.


The DOE, however, took the position in its implementing rules of the RE Act (IRR) that only Philippine nationals (i.e. Filipino citizens or corporations at least 60% of which capital is owned by Filipinos) may harness RE resources. The IRR mandates that renewable energy development may only be conducted through an RE service/operating contract with the Philippine Government, subject to the provisions of the Philippine Constitution.


Another circular[1]was released by the DOE in 2009, exempting foreign corporations from the 60% nationality restriction and allowing them to do large-scale exploration, development or utilization of geothermal energy resources.


This exemption appears to be founded on a provision of the Philippine Constitution that empowers the Philippine President to enter into FTAAs with foreign corporations for large-scale exploration, development, and utilization of minerals, petroleum, and other mineral oils, based on real contributions to the country’s economic growth and general welfare.


A more liberal approach


A later administrative order issued by the Philippines’ Department of Environment and Natural Resources (DENR) classified geothermal energy as “minerals.” The DOE, as a result, decreed that FTAAs may be executed in relation to large-scale exploration, development or utilization of geothermal energy resources.
Based on these regulations, the DOE recommended to the Philippine President that a 100% foreign corporation (in this case, a current steam field operator of two of the Philippines’ largest geothermal plants) be allowed to execute an FTAA with the State for its proposed geothermal project in the Philippines.
The above recommendation by the DOE is seen as an encouraging step for foreign investors. It affords foreign investors the flexibility to invest more equity into geothermal projects without the need of a Filipino partner.
On the other hand, unofficial reports indicate that the Office of the President has asked the DOE to re-evaluate its recommendation since it remains unclear whether or not geothermal energy is properly classified as a mineral resource and thus capable of being the subject of an FTAA. The DOE has yet to make official pronouncements on this matter.
Despite its latent potential, the current challenge in the Philippine geothermal industry is for the Philippine Government to resolve and affirm official policy and position on this matter.


[1] DOE Circular No. DC2009-07-0011 or the Guidelines Governing a Transparent and Competitive System of Awarding Renewable Energy Service/Operating Contracts and Providing for the Registration Process of Renewable Energy Developers.


Latest Developments in Japan

By Naoaki Eguchi, Gavin Raftery, Principals, and Tony Nicholson, Takehito Sekiguchi, Associates, Banking & Finance, Tokyo



Japan’s total geothermal energy reserves are reportedly the third largest in the world, having the potential to generate over 20 GW of electricity. Japanese companies also control more than half the global market for geothermal turbines and are strongly recognized as leading brands in their field.
Despite this latent potential, Japan has up until now remarkably only received approximately 0.3% (537 MW) of its domestic energy per year from these reserves.
This is expected to change with the advent of recent legislative reform favoring the geothermal energy industry. Global interest is now starting to heat up and significant investment and expansion into Japan is anticipated to follow.
Renewable Energy Law

Feed-in tariffs take effect
The Law on Special Measures Concerning the Providers of Renewable Energy (the Renewable Energy Law) came into force on 1 July 2012, introducing a feed-in tariff mechanism for renewable energy similar to those used in Europe.
The Renewable Energy Law requires utilities to purchase, at fixed prices, energy generated from renewable resources (such as geothermal energy) regardless of the project size. Extra costs resulting from the system will be borne by energy consumers through a surcharge to energy prices.
At what price levels and for how long?
The Ministry of Economy, Trade and Industry (METI) has appointed a committee for determining the price and procurement periods, among other things, which on 27 April 2012 tentatively approved the following feed-in tariffs for geothermal energy. The METI, through its Agency for Natural Resources and Energy, released a draft ordinance adopting these proposals on 16 May 2012.


Categories of power generation facilities Procurement prices *
(including consumption tax)
Procurement periods
Geothermal power 15,000kW or more JPY 27.30/kWh
(USD 0.341/kWh)
15 years
Less than 15,000kW JPY 42.00/kWh
(USD 0.525/kWh)
15 years

* Using an exchange rate of USD1.00 =JPY 80.00.

These prices are considered by many as above-market and are certainly attractive as guaranteed revenue for those wishing to participate in the industry moving forward.
The applicable price and procurement period will be determined, on an individual basis, by reference to the date on which the relevant parties enter into a power purchase agreement. Such agreements may be entered into before the start of the construction of facilities giving all participants certainty over the intermediate life of any project before significant investment is committed.
Under the Renewable Energy Law, as a general rule, the new (lower) prices for each subsequent fiscal year, which reflect a decrease in costs, will be determined by 1 April each year. While these prices and their applicable periods are not expected to change significantly for geothermal energy from year to year, there still lies within the system a first-mover price advantage.
Government eases project restrictions on national parks
One of the reasons Japan has been unable to fully utilize its geothermal energy reserves stems from the fact that approximately 80% of those reserves are situated below national parks and other protected areas where development has been heavily restricted.
This is set to change as a recent decision by the Environment Ministry, as part of its overall reform package aimed at promoting the use of renewable energy, eases the standards for building geothermal power stations. This development is encouraging for the industry and will bring significant opportunities in the future.
In particular, the Ministry, through the issuance of its new guidance notice, will permit businesses to dig diagonally into geothermal reserves located below national and quasi-national parks from outside certain restricted “core” areas. It will also permit vertical digging in some less restricted areas provided that all parties concerned reach a consensus in advance and that technology that minimizes the impact such drilling will have on the environment is employed.
Refined Hot Spring Law sets new guidelines for project approval
One other significant reason for the lack of utilization to date has been the difficult and somewhat ambiguous approval process under the Hot Spring Law, which is heavily influenced by Japan’s numerous hot spring owners concerned with the effect geothermal development will have on their businesses.
Recently, however, the Environment Ministry has sought to distill this ambiguity by setting clear and detailed guidelines in relation to the approval process. These guidelines bring much needed certainty and comfort to those looking to invest in geothermal energy in Japan.
The above changes to Japan’s legislative framework surrounding its geothermal energy market bring with them a myriad of timely opportunities for a variety of investors, both domestic and international.
The introduction of fixed prices above-market over lengthy procurement periods will bring certainty to those looking for guaranteed revenue streams.
The recent efforts to remove some of the heavy restrictions surrounding national parks and the introduction of clear guidelines for approval under the Hot Spring Law also add significant weight to Japan’s goal of increasing its reliance on renewable energy.

Latest Developments in Australia

by Paul Curnow, Partner, and Simon Greenacre, Senior Associate, Environment & Environmental Markets, Sydney



What Australia lacks in active plate tectonic processes to produce conventional geothermal resources, it makes up with excellent energy potential from hot sedimentary aquifers and engineered geothermal systems, as well as low enthalpy aquifers, ground source heat pumps and aquifer thermal energy storage applications.
Australia’s present geothermal energy use is very limited. Based on an energy resource assessment by Geoscience Australia and the Department of Agriculture, Fisheries and Forestry, just 1% of the geothermal energy resources in Australia with a minimum temperature of 150 °C and a maximum depth of 5 KM could provide 190 million PJ of energy – enough to supply 25,000 times Australia’s energy usage.[1]
It is clear that the country’s geothermal market is geared for growth, boosted by recent policy changes intended to raise the uptake of renewable energy in Australia.
Australia to launch Clean Energy Finance Corporation
The Australian Government has passed a legislation establishing the Clean Energy Finance Corporation (CEFC), a significant regulatory development for geothermal energy.
The CEFC will invest over AUD10 billion in renewable energy, low-emission and energy-efficient technologies, including that for geothermal energy. The legislation creating the CEFC was passed by Parliament on 25 June 2012. The CEFC will commence operations on 1 July 2013.
The CEFC will apply a ‘commercial filter’ to its investment decisions to balance its public policy objectives in fostering investment in clean and renewable energy with the need to invest capital in a commercially-realistic way.
Government fuels geothermal energy industry

The efforts of the CEFC will be complemented by that of the Australian Renewable Energy Agency (ARENA), which will provide over AUD3.2 billion in grant funding for renewable energy, supporting the early-stage development of the geothermal industry.
The Government has also allocated AUD1.9 million in funding under the Emerging Renewables Program to facilitate the availability of enhanced data for targeted geothermal exploration.


The project aims to assist in defining the best potential geothermal sites, and to reduce the costs and risks associated with geothermal exploration.
Key geothermal power projects in Australia
These policy developments come with recent notable geothermal activities.
The Paralana geothermal project in South Australia has increased its power potential estimates after the latest round of test drilling, with a predicted production of 1,300 MW of geothermal energy over the next three decades.
Meanwhile, Geodynamics has begun drilling the Habanero 4 well to replace the Habanero 3 well that failed in 2009. The new well is an important step in achieving Geodynamics’ goal of establishing a 1 MW pilot plant at Innamincka in 2013.
The establishment of the CEFC and ARENA provides further incentives for the expansion of the geothermal sector in Australia.
It marks a promising development for market participants who, for their part, should monitor the progress of the investment mandate for the CEFC to assess how they might benefit from it.



[1]“Geothermal energy and water use,” National Water Commission on key water issues, February 2012.


Latest Developments in Vietnam

By Frederick Burke, Managing Partner, and Thanh Mai Pham, Associate, Major Projects & Project Finance, Ho Chi Minh City



The geothermal energy industry in Vietnam is still in its infancy stage. Most industry activities consist of research programs. But with 264 sources of hot water nationwide, this Southeast Asian country shows great potential for prospective geothermal power projects.


One factor standing in the way of Vietnam’s geothermal growth is the lack of specific regulatory regime for renewable energy. The current law governing renewable energy in Vietnam is the general Law on the Economical and Effective Use of Energy or the revised Law on Electricity. This is expected to change with the reported imminent creation of a separate law on renewable energy (and with it, geothermal energy).


Pioneer geothermal power project


The country’s first geothermal power project (18.6 MW), found in Quang Ngai province (Thanh Tru village, Duc Lan ward, Mo Duc district), began development in 2007. On 29 July 2008, the project’s investor, PetroVietnam Power Corporation, presented to the Vice Chairman of Quang Ngai province the technical facts and figures of the project, which involves of the use of the technology of ORMAT.


This project serves as a stepping stone to the future of geothermal energy development in Vietnam. PetroVietnam Power Corporation has not announced the investment capital of the first project, but has disclosed that it is presently processing surveys and exploration on the flow of a hot water stream in Nghia Thang ward, Tu Nghia district (Quang Ngai province) to accelerate the investment procedures for its next geothermal power project.




Vietnam’s geothermal resources remain largely untapped, making it a fertile ground for power projects.


With no specific regulations providing details or guidelines for project development, however, the implementation of geothermal power projects should observe the general rules on investment, as well as relevant regulations that apply to power projects.