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PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: 41031 Project Name Region Sector Project ID Borrower(s) Implementing Agency Environment Category Date PID Prepared Estimated Date of Appraisal Authorization Estimated Date of Board Approval Lahendong II Geothermal Power Project EAST ASIA AND PACIFIC Renewable Energy (100%) P096677 Indonesia [ ] A [ ] B [ ] C [ ] FI [X] TBD (to be determined) September 1, 2007 October 15, 2008 January 30, 2008 1. Key development issues and rationale for Bank involvement The Indonesian Archipelago is one of the most volcanic areas in the world, with very rich geothermal energy resources. These resources offer significant prospects for generating power from a clean renewable energy source and mitigating greenhouse gas (GHG) emissions. The total geothermal power generation potential in Indonesia is estimated to be about 27 GW1 but only around 3 percent of the potential has been developed so far. In the next ten to fifteen years, the electricity demand is expected to grow at 7 to 9 percent annually, resulting from robust economic growth and increasing electricity access. The largely untapped and vast geothermal potential can play a critical role in meeting the growing demand for electricity. The Indonesian power generation relies heavily on fossil fuel sources, accounting for over 80 percent of the state-owned power company, PT Pelayanan Listrik Negara (PLN)’s generation in 2005, while geothermal accounted for only 2.3 percent. This heavy dependence on fossil fuel and especially the recent push for coal-fired generation is exacerbating the poor environmental situation in Indonesia and leading to a fast increase in GHG emission, which has grown at a more rapid pace than in China and India. The rapid development of locally available and clean geothermal energy can greatly reduce the dependence on non-renewable sources and contribute to a more sustainable environment. In 2003, the Government of Indonesia (GoI) passed the Geothermal Law (Law No. 27/2003) to open up new opportunities for commercial as well as public engagement, and to speed up the development of geothermal resources. A road map for geothermal energy was also developed to meet the target of 6,000 MW of geothermal power generation by 2020. Three years after the passage of the Law, however, Indonesia is still facing major hurdles in attracting commercial 1 Including reserves of 14 GW (2 GW are proven with exploration drilling and feasibility studies, 1.5 GW of possible potential with exploration drilling and pre-feasibility studies, and another 10.7 GW of probable with detailed surveys) and resources of around 13.5 GW mostly based on preliminary surveys. These potentials are identified in 253 locations mainly in Java, Sumatra and Sulawesi. financing and private investors to develop its geothermal resources while the scale of available public funds are not sufficient to achieve this goal. The development of geothermal power potential has been impeded by the relatively higher (compared with conventional fossil fuel power generation technologies) development costs but also due to additional institutional, technical and financial factors such as the: (a) the absence of regulations and adequate pricing and fiscal incentives which consider the environmental costs resulting from fossil fuel burning and the benefit of using a renewable energy such as geothermal; (b) inadequate institutional capability to properly plan geothermal development and sufficiently engage suitable developers; (c) weak domestic technical capacity in the areas of resource assessment, equipment manufacturing, construction, operation and maintenance of geothermal energy facilities; and (d) the significant risk in upstream and downstream geothermal development, matched with high up-front costs, which hampers access to finance. The Bank is adopting a two-pronged approach in working with the GoI to promote the development of geothermal resources. First, the Bank is assisting GoI in strengthening its regulatory, institutional and technical capability through technical assistance. Second, the Bank is trying to directly promote geothermal project development through carbon financing and possible lending operations support. The proposed project, if approved, will strengthen the financial viability of Lahendong II Geothermal Power Plant by purchasing carbon credits produced by the Plant. The proposed project will fully support the CAS goal of improving infrastructure services for economic growth and poverty elimination. The proposed plant, situated in the outer island of Sulawesi, will enable increased electrification in the island, with benefits to the rural poor. It will also contribute towards the government’s plan to expand renewable energy use to reduce the country’s heavy reliance on fossil fuels. PLN, as the project sponsor has signed the Letter of Intent to sell the carbon credits to the Bank. The Carbon Finance Document (CFD) submitted by the sponsor has been approved by the Bank’s Carbon Finance Unit (ENVCF), based on the fact that the geothermal power plant is not the financially preferable solution but would avoid carbon emissions from equivalent fossil-fuel power generation. 2. Proposed objective(s) The development objective of the proposed project is to reduce GHG emissions by using marketbased clean development mechanism (CDM) under the Kyoto Protocol through support to geothermal power investments to meet the growing demand for power in North Sulawesi of Indonesia. It is fully consistent with GOI’s energy sector development strategy. The key indicator is the annual delivery of emission reductions (ERs) to be verified by a third party according to a baseline data and annual measurements of actual reductions compared to those planned. 3. Preliminary description The Lahendong II Geothermal Power Project comprises the design, procurement, construction, and commissioning of a single 20 MW geothermal steam turbine-generator plant. It will provide 20 MW of additional capacity and deliver up to 158 GWh of additional electricity generation annually into the existing PLN Minahasa System, to meet increasing demand in the system. Steam for the project will be supplied from an expansion of the existing Lahendong geothermal field, under a take-or-pay agreement with the field’s owner and developer, Pertamina. Once operational, the plant is expected to mitigate about 60,000 tCO2 annually. The power plant will be operated by the project sponsor, PLN. It is proposed that the carbon finance business of the Bank purchase partial or entire emission reduction (ER) assets to be created by the geothermal power project for a period of seven to ten years. The exact amount of ERs eligible for purchase will be subject to a Baseline Study that has been commissioned by ENVCF and independent verification of energy output each year after plant commissioning. The purchase amount and price will be defined in an Emission Reduction Purchase Agreement (ERPA) to be reached through negotiation between the Bank and PLN. 4. Safeguard policies that might apply Geothermal steam and subsequent power generation are generally considered as activities with minimal environmentally adverse impacts. Potential impacts related to power generation consist of gaseous emissions and waste management. The project is only an extension of the existing geothermal production field. As such it will not entail activities associated with full blown geothermal power development such as building of new roads, clearing of forested area for temporary facilities, and drilling of several exploratory wells. Recent site visit by the team’s social specialist also indicates that this project will involve neither land acquisition nor indigenous people issues. 5. Tentative financing Source: BORROWER/RECIPIENT International Bank for Reconstruction and Development International Development Association (IDA) Total 6. Contact point Mr. Leiping Wang The World Bank 1818 H Street, NW Washington, DC 20433 USA ($m.) 25 0 0 25