It currently trails behind US with 2GW in operational capacity in 2018.
Indonesia ranked as the second global geothermal power outperformer after the US with an estimated 2GW of capacity in operation by end-2018, according to a report by Fitch Solutions.
The report noted that Indonesia's location along a convergent tectonic plate boundary has made it ideally suited for geothermal power production although the country's geothermal power potential remains largely untapped, and can accommodate far greater geothermal capacity.
“Indonesia has supportive regulations in place to encourage investment in the geothermal sector, which we believe will allow the country to overtake the US as the largest geothermal market by installed power capacity over the coming decade,” Fitch Solutions noted.
In this regard, it forecasted growth in Indonesia's total geothermal generation to average 9.2% YoY between 2019 and 2022, which is when it may overtake the US as the world's largest geothermal market by capacity.
Despite its bullish outlook on the industry, Fitch Solutions noted that its forecasts only represent about half of the capacity currently included in its key projects database for Indonesian non-hydropower renewables.
“The majority risks which we have identified in the market all pertain to the economic and financial environment present in Indonesia,” the firm explained. According to the report, government-regulated electricity tariffs are set artificially low, restricting potential returns on investment and likely deterring risk-averse investors from entering the market.
The potential risks may also be exacerbated by the government's stringent local content requirements and a preference for local firms in the tendering process, further weighing on private sector participation in the market.
Furthermore, the country's vast hydrocarbon reserves make thermal energy an attractive low-cost alternative to geothermal power, which may detract from geothermal investment in the medium-to-long term.
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