news     September 9, 2020

The Government of Indonesia and the World Bank Signed Cooperation on GREM Project

Jakarta, 03/09/2020 – On August 28, 2020, the Government of the Republic of Indonesia and the World Bank signed financing agreement for the GREM (Geothermal Resource Risk Mitigation Facility) project. The Government of the Republic of Indonesia was represented by the Director General of Financing and Risk Management of the Ministry of Finance, Luky Alfirman, while the World Bank was represented by the Country Director for Indonesia and Timor Leste, Satu Kahkonen. The agreed financing commitment is USD 150 million from IBRD (International Bank for Reconstruction and Development) and USD 40 million from CTF (Clean Technology Fund).

The GREM project aims to provide financing and risk mitigation facilities for geothermal exploration activities, both to be carried out by State Owned Enterprise (SOE) and private. The special feature of this GREM is the derisking facility or a risk sharing scheme, in which if an exploration failure occurs, the developer will not fully bear the risks and costs of exploration. This financing facility with a derisking feature for upstream developments will reduce exploration risk, which is the biggest risk faced by geothermal developers. This will encourage massive exploration activities and further increase investor interest in participating in the geothermal sector.

For Indonesia, with the largest geothermal potential in the world (40% of the world’s geothermal potential), GREM has various strategic significances, as follow:

First, it aims to support the Ministry of Energy and Mineral Resources (MEMR) to accelerate the development of geothermal energy as an energy source to produce electricity or Geothermal Power Plants (PLTP). This is to achieve national energy security through achieving the energy mix target of New and Renewable Energy elements of 23% by 2025.

Second, to increase the utilization of geothermal energy as a sustainable and low-carbon energy source. This is a significant real contribution in supporting the commitment of the Government of the Republic of Indonesia to reduce greenhouse gas emissions and the impact of climate change. This is in line with the Paris Agreement 2015 commitment, as ratified by Law number 16 of 2016 concerning Ratification of the Paris Agreement to the United Nations Framework Convention on Climate Change. The commitment will improve the leverage of the Government as well as bargaining position in international relations and international diplomacy.

Third, as one of the government instruments to correct market failures that are currently still occurring in the geothermal sector, when the exploration activities are increasingly difficult to carry out due to the high risk and unbankable access to conventional financing. This is in particular for geothermal area with relatively marginal economic levels and spread throughout country. The GREM facility represents the government’s strong commitment in providing an innovative specific source of financing for developers.

Fourth, GREM will complement and strengthen the existing specific financing scheme for the geothermal sector, namely the Geothermal Sector Infrastructure Financing Fund/ Geothermal Fund Facility (PISP Fund) to support both government drilling and SOE drilling as well as the Geothermal Energy Upstream Development Program (GEUDP) project which is targeted for government drilling. Therefore, to improve the workability of the GREM scheme, the government has committed to allocate USD 150 million from the PISP Fund as a derisking portion of the GREM scheme for SOE developers. Meanwhile, for private developers, the source of derisking comes from a Green Climate Fund (GCF) grant.

The GREM project is implemented through the SLA (Subsidiary Loan Agreement) mechanism from the government to the SOE – PT Sarana Multi Infrastruktur (PT SMI) which also acts as the Executing Agency. Furthermore, PT SMI will manage and distribute the GREM facilities to the developers. Especially for SOE developers (SOE drilling scheme) the distribution is based on a special assignment from the Minister of Finance, while for private developers (private drilling scheme) the distribution is conducted through a business to business agreement. This is in line with PT SMI’s mandate as the Ministry of Finance’s Special Mission Vehicle which is engaged in development financing, particularly infrastructure. For PT SMI, the management of GREM is the third geothermal financing project after the PISP and GEUDP Funds.

 

Further information regarding the GREM scheme can be seen at this link.

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