What has been your experience here since you entered the market?
We entered the Indonesian market by acquiring two existing concessions. One is Sokoria, a 30MW project with a power purchase agreement (PPA) in Flores, and the other is Sorik Marapi, a 240MW project with a PPA located in North Sumatra. At Sorik Marapi, we completed the acquisition process in August 2016 and started drilling almost immediately, finishing exploration in July 2017. That was a record: finishing exploration in that amount of time. We knew it was a great location and the project has an excellent PPA. Comparatively, we are ahead of the game here. During the exploration period, we had two rigs drilling simultaneously; something that I believe no one has done before in Indonesia.
ORKA has effectively pioneered an entirely different model of geothermal exploration. What is different?
One of the reasons we are different is because we have a fundamentally different business model. The traditional model is based on a conventional power plant project finance model, where preliminary surveys are done first. Then the traditional approach is to target the first well where center of the heat sources is. After that traditionally companies start looking for the boundaries of the resource. The idea here is that exploration is focused on determining the size of the resource. Once that is determined, the rest of the project is planned, including the power plant. The assumption is that bigger is better. The problem is that it is difficult to get financing for exploration drilling from banks so generally exploration is done using all equity. Banks then require between 30% and 50% of “steam under wellhead” before they are willing to lend to the project. So for example, for a 100MW project, banks would require 50MW of steam already be drilled. Traditional project financing would then cover the rest of the project, from drilling to power plants. The problem is that it takes a long time to get all this completed before a power plant can be built. It is bad economics and risky, not to mention time consuming. We do not do this; instead, we follow an incremental development model. Our surface exploration is the same: we attempt to identify the center of the heat source but once we do we do not start looking for the boundaries. If we are successful with the initial wells, we continue to drill in the same location. We also use smaller modular units called wellhead units. For us exploration wells are production wells. We do not drill wells as a science project; we want commercially viable wells from day one. Because we use wellhead units, whatever steam we get we can use, which cannot be done with conventional units. Once we find the resource, we develop it in that location; we put a power plant on it and get it operational. Then, we revise our resource model and follow the resource, and then do it all over again. We have our own proprietary power plant technology, which gives us the flexibility to customize our units and the ability to use more of the energy we find. We have very few if any wasted wells and we can develop projects much faster. We are two years ahead of schedule at Sorik Marapi, and we are asking to deliver power early, not later—this has never happened before here in Indonesia.
What is the status of your two projects?
Sorik Marapi already has 14 wells finished, and we are already installing the first power plant on one well pad. We are on track to be the geothermal project with the fastest commercial operation date (COD) in Indonesia; it is scheduled to start generating power in March or April. These are smaller units. The first unit will be 15MW and the second 20MW. With Sokoria, we have already completed exploration and are currently working on drilling the third well. We have not tested the wells yet, and when we do so we will reevaluate our model if necessary and then start designing the power plants. Our financing for both projects all comes from China. We have not done traditional project financing on either project; it is financing at the project level mixed with corporate financing. The idea is that once the units are operational, we will project finance the units and recycle the capital. Our Chinese partner, Kaishan, provides all the power plant equipment, which also gives us more flexibility and the ability to move faster, as well as to provide excellent pricing. The equipment is mostly manufactured in a factory then boxed and shipped here, where it is then reassembled and commissioned. Such delivery is becoming more common because we can control quality and cost, and it is much faster. This is far better than building bespoke onsite.
What do you have in store for future projects?
Since we acquired these two projects, there has been a significant change in the regulatory regime that has had a negative impact on the attractiveness of projects here as a whole. Broadly speaking, there are three areas that are now of concern. One is regarding procedures, where the new regulations stipulate that PPA negotiations cannot start until exploration is finished. Exploration requires USD10-30 million. The government is effectively asking investors to invest that much money without any idea of what the price or quantity will be, let alone the terms of the PPA. Many investors simply cannot take that kind of risk. Additionally, what makes it more worrying is that state-owned electricity company PLN has announced its desire to become a major geothermal generator, which means it is a competitor as well as monopoly offtaker. AsPLN is also interested in acquiring geothermal concessions, there is now a conflict of interest. There seems to be no acknowledgement of that conflict of interest, which is worrying. The second issue is pricing. The new pricing system sets a ceiling on the price based on PLN's average generation cost. This places geothermal in competition with large coal plants. The simple fact is that in some locations this makes geothermal not viable. The practical ramifications are that it is now difficult to build geothermal projects in certain locations due to the price. The other part of the price aspect is the uncertainty. It is one thing to have a set price for a certain location, then at least there would be a clear standard. Unfortunately now there is only a maximum price. Thus, even if we think a project will work at the maximum price, there is no guarantee that we will actually get that price. The third issue is the actual terms of the PPA. There are new regulations change a number of issues that PLN did not like with the prior generations of PPAs. These aspects have stayed in the PPAs all these years primarily to keep the PPAs financeable, in terms of both equity and debt. A number of the changes are simply not financeable; banks will not lend money to PPAs with those terms. If certain provisions are not changed, these PPAs will not be financed and thus, the projects will not be built. As far as I am aware, no new geothermal PPAs have been signed since the new regulations.
What are your main objectives for 2018?
Our main objective is to double the size of our portfolio, in terms of megawatts under development. Currently we have 270MW, and we want to more than double that by the end of the year. Some of the new projects will be earlier stage projects, such as our new project in North Sumatra near Lake Toba. We also expect to acquire at least one later stage project. We continue to look at new preliminary survey areas. We are putting our money where our mouth is and we expect the government in turn will be cooperative and figure out a way to make these new regulations work.