Report and Recommendation of the President to the Board of Directors

Project Number: 52282-001 May 2020

Proposed Loan and Administration of Loan PT Geo Dipa Energi Geothermal Power Generation Project (Guaranteed by the Republic of Indonesia) Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB’s Access to the Information Policy.

CURRENCY EQUIVALENTS (as of 20 April 2020)

Currency unit – rupiah (Rp) Rp1.00 = $0.000064 $1.00 = Rp15,584

ABBREVIATIONS

ADB – Asian Development Bank CTF – Clean Technology Fund EIRR – economic internal rate of return EMP – environmental management plan EMS – environmental management system GDE – PT Geo Dipa Energi GHG – greenhouse gas GRM – grievance redress mechanism GW – gigawatt ha – hectare MW – megawatt PAM – project administration manual PLN – Perusahaan Listrik Negara (State Electricity Corporation) PMC – project management consultant PPA – power purchase agreement RUPTL – Rencana Umum Penyediaan Tenaga Listrik

(Electricity Power Supply Business Plan) SDG – Sustainable Development Goal SOE – state-owned enterprise

NOTE

In this report, “$” refers to United States dollars.

Vice-President Ahmed M. Saeed, Operations 2 Director General Ramesh Subramaniam, Southeast Asia Department (SERD) Director Andrew Jeffries, Energy Division (SEEN), SERD

Winfried Wicklein, Indonesia Resident Mission (IRM), SERD Team leader Shannon Cowlin, Senior Energy Specialist, SEEN, SERD Team members Elizabeth Burges-Sims, Senior Social Development Specialist (Gender &

Development), Human and Social Development Division, SERD Diane Marie Carabeo, Operations Assistant, SEEN, SERD

Diana Connett, Energy Specialist, SEEN, SERD David Dovan, Investment Specialist, Infrastructure Finance Division 2,

Private Sector Operations Departmenta Florian Kitt, Energy Specialist, SEEN, SERDa

Keiko Koiso, Senior Procurement Specialist; Procurement Division 2, Procurement, Portfolio and Financial Management Departmenta

Naning Mardiniah, Senior Safeguards Officer (Resettlement), IRM, SERD

Daniel Miller, Finance Specialist, SEEN, SERD Antoine Morel, Principal Environment Specialist, Office of the Director

General, SERD Takako Morita, Senior Counsel, Office of the General Counsel Christine Samaniego, Project Analyst, SEEN, SERD Peer reviewers Toru Ito, Senior Energy Specialist (Gas), Energy Sector Group, Sector

Advisory Service Cluster (SDSC-ENE), Sustainable Development and Climate Change Department (SDCC) Yongping Zhai, Chief, SDSC-ENE, SDCC

a Outposted to Indonesia Resident Mission

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page PROJECT AT A GLANCE I. THE PROPOSAL 1 II. THE PROJECT 1

A. Rationale 1 B. Project Description 4 C. Value Added by ADB 5 D. Summary Cost Estimates and Financing Plan 5 E. Implementation Arrangements 7

III. DUE DILIGENCE 7

A. Technical 7 B. Economic and Financial Viability 8 C. Sustainability 8 D. Governance 9 E. Poverty, Social, and Gender 10 F. Safeguards 10 G. Summary of Risk Assessment and Risk Management Plan 11

IV. ASSURANCES AND CONDITIONS 12 V. RECOMMENDATION 12 APPENDIXES 1. Design and Monitoring Framework 13 2. List of Linked Documents 16

Project Classification Information Status: Complete

PROJECT AT A GLANCE

Source: Asian Development BankThis document must only be generated in eOps. 18122019143207899958 Generated Date: 18-Dec-2019 14:32:46 PM

1. Basic Data Project Number: 52282-001Project Name Geothermal Power Generation Project Department/Division SERD/SEENCountry Indonesia Executing Agency PT Geo Dipa EnergiBorrower PT Geo Dipa Energi

Country Economic Indicators

https://www.adb.org/Documents/LinkedDocs/?id=52282-001-CEI

Portfolio at a Glance https://www.adb.org/Documents/LinkedDocs/?id=52282-001-PortAtaGlance

2. Sector Subsector(s) ADB Financing ($ million)Energy Renewable energy generation - geothermal 300.00

Total 300.00

3. Operational Priorities Climate Change InformationAddressing remaining poverty and reducing inequalities

Accelerating progress in gender equality

Tackling climate change, building climate and disaster resilience, and enhancing environmental sustainabilityStrengthening governance and institutional capacity

CO2 reduction (tons per annum) 705,699Climate Change impact on the Project

Medium

ADB Financing

Adaptation ($ million) 9.99

Mitigation ($ million) 290.01

Cofinancing

Mitigation ($ million) 35.00

Sustainable Development Goals Gender Equity and MainstreamingSDG 7.2SDG 13.a

Effective gender mainstreaming (EGM)

Poverty TargetingGeneral Intervention on Poverty

4. Risk Categorization: Complex.

5. Safeguard Categorization Environment: B Involuntary Resettlement: B Indigenous Peoples: C

.

6. Financing

Modality and Sources Amount ($ million)

ADB 300.00

Sovereign Project (Regular Loan): Ordinary capital resources 300.00

Cofinancing 35.00

Clean Technology Fund - Project loan (Full ADB Administration) 35.00

Counterpart 134.20

Project Sponsor 134.20

Total 469.20

Currency of ADB Financing: US Dollar

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed loan to PT Geo Dipa Energi (GDE), to be guaranteed by the Republic of Indonesia, for the Geothermal Power Generation Project. The report also describes the proposed administration of a loan to be provided by the Clean Technology Fund (CTF) for the Geothermal Power Generation Project,1 and if the Board approves the proposed loan, I, acting under the authority delegated to me by the Board, approve the administration of the CTF loan. 2. The project will support the expansion of Indonesia’s geothermal generating capacity to contribute to the sustainability, resiliency, and sufficiency of the electricity system. It is aligned with the following Sustainable Development Goals (SDGs): SDG 7 on access to affordable, reliable, sustainable, and modern energy for all and SDG 13 on urgent action to combat climate change and its impacts. The project will support GDE, a state-owned geothermal company focused on the development and use of geothermal resources, to commission an additional 110 megawatts (MW) of geothermal electricity generating capacity—55 MW at the Dieng geothermal field in Central Java and 55 MW at the Patuha geothermal field in West Java.2

II. THE PROJECT A. Rationale

3. Sector status and projections. The Electricity Power Supply Business Plan, 2019–2028 (RUPTL) of the State Electricity Corporation (PLN) projects demand for electricity to grow to 112.2 gigawatts (GW) in 2028.3 As of December 2018, Indonesia’s total power generation capacity was about 65 GW, of which 41 GW was owned by PLN, 15 GW was contracted from independent power producers, and 9 GW was from captive power generators. More than half of Indonesia’s current power generating capacity uses coal; if this continues, it will be challenging for Indonesia to meet its greenhouse gas (GHG) emission reduction target of 29% by 2030 compared with business as usual.4 Part of the contribution to Indonesia’s climate mitigation target will come from renewable energy capacity contributions to total electricity generation, for which the RUPTL sets a target of 23.2% in 2028, up from 11.4% in 2019. In addition to climate benefits, increasing renewable energy’s share in the power mix will improve air quality, the adverse impacts of which disproportionately impact the poor, making them more vulnerable to other stressors. 4. Geothermal energy strategy and challenges. Geothermal energy is one of the few renewable energy technologies that can provide baseload power and improve power system reliability, making it a valuable complement to variable renewable energy such as wind and solar power. Indonesia has the world’s largest geothermal potential, estimated at 29 GW and has the second largest installed capacity after the United States. The government has prioritized

1 The CTF is a funding window for the Climate Investment Funds that provides middle-income and developing

countries with resources to scale up the demonstration, deployment, and transfer of low-carbon, clean technologies. 2 These are net generating capacities. 3 Government of Indonesia. 2019. Keputusan Menteri ESDM No 39/K/20/MEM/2019 Rencana Usaha Penyediaan

tentang Listrik (RUPTL) 2019–2028 (Decree of the Minister of Energy and Mineral Resources No. 39 / K / 20 / MEM / 2019 concerning Electricity Supply Business Plans (RUPTL) 2019–2028). Jakarta.

4 Indonesia’s Intended Nationally Determined Contributions under the Paris Agreement include reducing GHGs by 29% by 2030 (up to 41% with international support) and call for integrating resilience measures in all development plans and projects, given the country’s vulnerability to hydro-meteorological hazards, which are exacerbated by climate change. Priority resilience measures include securing energy, food, water, social welfare, and livelihoods by developing renewable energy, sustainable agriculture, and climate-resilient infrastructure.

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geothermal since enactment of the Geothermal Law in 2003, but development has been slow to take off. Development rights have been allocated for geothermal working areas with an estimated aggregate potential of 4.4 GW. Of these, private sector developers hold the development rights for 2.4 GW and state-owned enterprises (SOEs) hold the rights for 2.0 GW. As of mid-2019, Indonesia had reached only 1.9 GW of installed geothermal capacity, which is less than half of the allocated rights and significantly short of the targeted 7.2 GW by 2025 (footnote 3).

5. To reach the required scale, the private sector must play a strong role in geothermal development. Indonesia has had some success with private sector-led geothermal projects, including those supported by the Asian Development Bank’s (ADB’s) Private Sector Operations Department.5 However, many privately held concession areas have not advanced because of environmental, social, or fiscal issues, and private sector interest in recent tenders has been modest. A variety of challenges face the sector, including the costly, lengthy, and high-risk exploration phase; unstable policy environment; and an often-unfavorable tariff regime. Private sector interest and available financing is now further challenged by uncertainties arising from the global pandemic, with an unclear timeline for investor appetite to return. 6. Development partners are supporting the government to establish a more conducive policy environment for geothermal development. ADB has been an active participant in these efforts, in particular through the recent policy-based lending program.6 To reduce the up-front risks associated with geothermal exploration, the government is implementing a new risk-sharing mechanism for the project initiation phase, funded by the World Bank and the Green Climate Fund. As part of this program, the government will fund exploratory drilling for geothermal working areas that can subsequently be tendered. The updated geothermal regulation allows for greenfield geothermal working areas to be assigned to SOEs if the tender process fails.7 Legacy projects where both private and public sector developers have grandfathered power purchase agreements (PPAs) are expected to proceed under the agreed mechanism and ownership. 7. History and planned developments of PT Geo Dipa Energi. GDE was formed in 2002 as a joint venture company of Pertamina, the state-owned oil and gas corporation, and PLN to manage and develop the geothermal working areas at Dieng and Patuha, which are among the 2 GW of working areas allocated for SOE development. GDE negotiated a PPA with PLN in 2004 for both sites, covering the generation of up to 400 MW at each. In 2011, the government reorganized GDE from a joint venture to a limited liability company and took over the 67% of shares owned by Pertamina. Government equity injections have increased its shareholding to 93.3%, while PLN holds 6.7%. GDE operates a 55 MW power plant at Dieng (Dieng Unit 1) and a 55 MW power plant at Patuha (Patuha Unit 1). It started operations by recommissioning Dieng Unit 1, which was initially commissioned by the private sector and then turned over to the government after the 1997 Asian financial crisis. GDE subsequently constructed and commissioned Patuha Unit 1 in 2014, which is fed by previously drilled wells. Under the proposed project, GDE plans to commission additional units at Dieng and Patuha (Dieng Unit 2 and Patuha Unit 2). These are government priority projects (according to the Regulation of the Ministry of Energy and Mineral Resources No. 40 [2014]) and PLN will purchase the electricity generated

5 ADB. 2018. Report and Recommendation of the President to the Board of Directors: Proposed Loan and

Administration of Loan to PT Supreme Energy Rantau Dedap for the Rantau Dedap Geothermal Power Project (Phase 2) in the Republic of Indonesia. Manila.

6 ADB. 2017. Report and Recommendation of the President to the Board of Directors: Policy-Based Loans for Subprogram 2 and Administration of Technical Assistance Grant to the Republic of Indonesia for the Sustainable and Inclusive Energy Program. Manila.

7 Government of Indonesia. Government Regulation No. 37 Year 2018. Offering of Geothermal Working Areas, Issuance of Geothermal License and Geothermal Business Assignment. Jakarta.

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under the existing PPAs. Separate from this project, GDE will conduct exploratory drilling on behalf of the government, under the new risk-sharing program (para. 6), for sites to be tendered. In addition, GDE will develop geothermal sites for which it holds the development rights in areas that are less attractive to private investment because of environmental and social risks. 8. The project will add renewable energy baseload generation in Java by expanding geothermal power generation to reduce Indonesia’s reliance on coal. It will contribute to reaching Indonesia’s renewable energy targets and reducing GHG emissions in Indonesia and globally. Java has the country’s largest electricity demand but is the most challenging for renewable energy because of low average generating costs from low-cost coal-based electricity generation, against which renewable energy must compete.8 The project will support capacity development of GDE, including increased knowledge of geothermal reservoir performance, contract and project management, and social and environmental impact minimization and management—all with gender and climate resilience considerations. It will also support GDE to enhance its community development programs to be more strategic in responding to community needs, including women’s needs. The strong emphasis on environmental and social risk assessment and management reflects lessons learned from previous energy sector projects in Indonesia, where such issues have impeded efficient and sustainable project development. The enhancement of GDE’s institutional capacity will better equip it to undertake government-supported drilling to bring in the necessary private sector investment and set a proven standard for safeguard management, including for geothermal areas to be newly developed. 9. Alignment. The project is aligned with Indonesia’s long-term goals for economic growth and energy as articulated in the Draft National Medium-Term Development Plan (RPJMN), 2020– 2024 and the National Energy Policy.9,10 These goals include maximizing the use of indigenous energy resources, diversifying the fuel mix, and ensuring environmental sustainability. ADB’s energy sector support, as outlined in ADB’s country partnership strategy for Indonesia, is aligned with these long-term goals, with a focus on policy reforms, developing sustainable electricity generation, and grid investments.11 The project is also aligned with several operational priorities of Strategy 2030 (Table 1).12

Table 1: Alignment with Strategy 2030

Strategy 2030 Priorities Project’s Contributions Tackling climate change, building climate and disaster resilience, and enhancing environmental sustainability

Support increased use of low greenhouse gas-emitting electricity generation in line with the government’s international commitments. Adopt an eco-sensitive and climate-resilient approach to project planning and implementation.

Strengthening governance and institutional capacity

Strengthen GDE’s capacity to conduct competitive procurement and promote enhanced financial management capabilities.

Accelerating progress in gender equality

Incorporate proactive gender designs in human resources practices and community engagement and development activities.

GDE = PT Geo Dipa Energi. Source: Asian Development Bank.

8 The 2018, average kWh power costs in West and Central Java, the location of the proposed projects, was 6.91 US

cents, as compared to 17.58-21.28 US cents in Flores, another region with active geothermal development. 9 Government of Indonesia. Forthcoming. Rancangan Awal Rencana Pembangunan Jangka Menengah Nasional

(RPJMN) 2020-2024. Jakarta 10 Government of Indonesia. Government Regulation Number 79 Year 2014. National Energy Policy (KEN). Jakarta 11 ADB. 2016. Country Partnership Strategy for Indonesia, 2016-2019. Manila. The new country partnership is being

finalized. 12 ADB. 2018. Strategy 2030: Achieving a Prosperous, Inclusive, Resilient, and Sustainable Asia and the Pacific.

Manila.

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10. Pandemic impacts. While the project was planned before the coronavirus pandemic, it was negotiated after its onset, clearly signaling the government’s sustained commitment to its climate ambitions. Engagement from the ADB in the project at this juncture is critical, as Indonesia addresses the pandemic’s impact on the economy. Institutions such as the International Renewable Energy Agency,13 and the International Energy Agency have called for post-coronavirus investments to ensure a climate-conscious recovery.14 ADB’s intervention will help make a clean energy transition a key part of Indonesia’s recovery, and the project will provide jobs for those supplying goods and services for the geothermal, oil, and gas industries, which have been impacted by the drop in oil demand due to quarantine conditions.

B. Project Description 11. The project is aligned with the following impacts: (i) contribution to geothermal energy in Indonesian power supply increased (footnote 3), and (ii) renewable energy in electricity subsector increased.15 The project will have the following outcome: adequacy and sustainability of energy supply increased.16 12. Output 1: Geothermal power plants constructed and commissioned. The project will support GDE in constructing and commissioning a 55 MW geothermal power plant at Dieng, Central Java Province (Dieng Unit 2) and a 55 MW geothermal power plant at Patuha, West Java province (Patuha Unit 2). Both Dieng Unit 2 and Patuha Unit 2 will include (i) the drilling of new wells for the production and reinjection of reservoir fluids, and (ii) the construction of an above-ground steam gathering system and fluid reinjection lines connecting the wells and generating units. Patuha Unit 2 will be a single-flash power plant, and Dieng Unit 2 will be a geothermal combined cycle plant.17 The project will also support the transmission interconnection systems between the plants and the grid. At Dieng, this will include the commissioning of a new, 6- kilometer underground transmission line to the Dieng substation. Existing lines and towers will be used to connect Patuha Unit 2 to the Patuha substation, but the project will include the installation of a new transformer at the existing substation. 13. Output 2: Institutional capacity of GDE strengthened. The project will strengthen GDE’s capacity to plan for, develop, and operate geothermal power plants, including the management of complex technical conditions and multiple contracts with coordinated activities. This will be done through gender-responsive training programs, organized by the loan consultants, on reservoir management and procurement; and on-the-job training, supported by the project management consultant (PMC), on meeting ADB procurement, financial management, and reporting requirements. GDE will also increase its ability to manage environmental and social risks by implementing a revised environmental management system (EMS), which will incorporate gender, climate, and community safety considerations.

13 International Renewable Energy Agency. 2020. Staying on Course: Renewable Energy in the Time of COVID-19 14 International Energy Agency. 2020. Put clean energy at the heart of stimulus plans to counter the corona virus crisis. 15 Government of Indonesia. 2016. First Nationally Determined Contribution, Republic of Indonesia. Jakarta. 16 The design and monitoring framework is in Appendix 1. 17 The wells will produce reservoir fluids that are a mixture of steam and water. In a single-flash steam power plant, the

steam is separated and used as the working fluid for the power plant, while the water is unused and reinjected in the reservoir along with the condensate from the steam cycle. In a combined cycle plant, the steam and water are still separated, but the heat energy from the steam is used twice, and the heat energy from the water is used once before reinjection. The steam will first go through a steam turbine, after which it will go through a heat exchanger where the residual heat in the steam will be transferred to an organic fluid that will power another turbine. The water will also go through a heat exchanger, where the heat is transferred to an organic fluid that will power another turbine.

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14. Output 3: Community development program enhanced. The project will support the enhancement of GDE’s Community Development Program.18 This will begin with the implementation of a gender-responsive stakeholder communication strategy,19 which will involve (i) increased outreach and education on the project and its impacts; and (ii) information gathering on the communities’ challenges, including the differential needs and experiences of men and women. Improved communication will help address misperceptions around the existing power plants and planned development; this is particularly important at Dieng, where communities live and farm close to the project sites. Based on community feedback on key challenges and needs, the community development program will refocus on actions that will contribute most meaningfully to the improved well-being of the men and women in the project communities, e.g., a stronger emphasis on alternative livelihood opportunities and addressing challenges such as access to education (through scholarships), water strain, and declining agricultural production. The improved communication and more strategic focus of programs to benefit neighboring communities will strengthen their relationship with GDE and their support for the project. The PMC will also develop a feasibility study for a geothermal direct-use project, such as use of geothermal heat for drying of agricultural products or heating dwellings for tourism homestays, which could provide enhanced livelihood opportunities for community members. This direct-use project could be implemented as part of the Community Development Program, in parallel with the development of Dieng Unit 3. C. Value Added by ADB 15. ADB’s engagement in this project supports strengthened governance and institutional capacity of GDE, an SOE that can play a catalytic role in the next wave of geothermal expansion in Indonesia. GDE will gain experience in project and contract management, particularly competitive tendering and effective management of multiple synchronous contracts (para. 26), which will be necessary as it undertakes future exploratory drilling for the government and will act as benchmarks for evaluation of IPP proposals. ADB’s engagement during the design phase resulted in GDE adopting design changes to address operational challenges experienced at the existing facilities and introducing best international practice design (para. 21) and sustainability planning (para. 24). The project design will minimize environmental, climate, and social risks, while ADB’s sustained engagement will support GDE to manage residual risks. ADB will also support GDE to (i) ensure gender-sensitive approaches in its human resources and communication activities and (ii) enhance its community development program to meet the needs of the communities suffering from overreliance on agricultural activities and challenges caused by water strain. GDE’s increased experience in designing and developing projects that minimize social and environmental risks and maximize social and gender benefits will provide a model for geothermal projects in Indonesia that could be adopted by both private- and SOE-led geothermal projects. This ADB support through and after the global pandemic contributes to a sustainable and resilient economic recovery. D. Summary Cost Estimates and Financing Plan 16. The project is estimated to cost $469.20 million (Table 2). Detailed cost estimates by expenditure category and by financier are included in the project administration manual (PAM).20

18 GDE’s Community Development Program is a corporate social responsibility program through which it undertakes

activities to benefit communities in the areas surrounding GDE operations. GDE has annual budget allocations and dedicated staff to design and implement these programs.

19 Stakeholder Communication Strategy (assessible from the list of linked documents in Appendix 2). 20 Project Administration Manual (accessible from the list of linked documents in Appendix 2).

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Table 2: Summary Cost Estimates ($ million)

Item Amounta A. Base Cost 1. Geothermal power plants constructed and commissioned 399.51 2. Institutional capacity of GDE strengthened 1.00 3. Community development program enhanced 0.54 Subtotal (A) 401.05 B. Contingenciesb 55.75 C. Financial Charges During Implementationc 12.40 Total (A+B+C) 469.20

ADB = Asian Development Bank, GDE = PT Geo Dipa Energi. a In Q4 2019 prices. Includes taxes and duties of $12.48 million to be financed by ADB ($10.06 million), the Clean

Technology Fund ($0.41 million), and a cash contribution from GDE ($2.01 million). b Physical contingencies are 9% of base costs. Price contingencies use ADB’s international and domestic inflation

forecasts; includes provision for potential exchange rate fluctuation assuming a purchasing parity exchange rate. c Includes interest during implementation and commitment charges. Sources: Asian Development Bank and PT Geo Dipa Energi estimates.

17. GDE has requested a regular loan of $300 million from ADB’s ordinary capital resources to help finance the project. The loan will have a 20-year term, including a grace period of 5 years; an annual interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; a commitment charge of 0.15% per year (the interest and other charges during construction to be capitalized in the loan); and such other terms and conditions set forth in the draft loan agreement. Based on the straight-line method, the average maturity is 12.75 years, and there is no maturity premium payable to ADB. The CTF, approved on 2 December 2019, will provide loan cofinancing equivalent to $35.0 million, to be administered by ADB. The CTF loan will have a 20-year term, including a grace period of 10 years; an annual service fee of 0.75%; a multilateral development bank fee of 0.18% on the undisbursed portion of the loan; and such other terms and conditions set forth in draft loan agreement. Both the ADB and CTF loans will be guaranteed by a sovereign guarantee upon terms and conditions set forth in the draft guarantee agreement. 18. The summary financing plan is in Table 3. ADB will finance civil works, equipment, consulting services, taxes and duties, and financing charges during construction. CTF will finance consulting services, works, taxes and duties, and equipment associated with Dieng Unit 2. GDE will provide counterpart financing of $134.2 million for civil works, equipment, consulting services, land acquisition and resettlement costs, environment and social mitigation, contingencies, overhead and other charges, financing charges during construction, and taxes and duties. Since ADB will administer cofinancing from the CTF, universal procurement will apply to all packages.

Table 3: Summary Financing Plan

Source Amount

($ million) Share of Total

(%) Asian Development Bank

Ordinary capital resources (regular loan) 300.00 63.9 Clean Technology Funda 35.00 7.5 PT Geo Dipa Energi

Equityb 100.00 21.3 Domestic loanc 34.20 7.3

Total 469.20 100.0 a Loan to be administered by the Asian Development Bank; includes administrative fees and other charges. b Balance sheet cash and cash equivalents, and committed government budget allocation. c Domestic debt facility to cover project contingencies. Source: Asian Development Bank estimates.

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19. Climate mitigation is estimated to cost $454.57 million and climate adaptation is estimated to cost $14.45 million. ADB and the CTF will finance 71.5% of mitigation costs and ADB will finance 69.1% of adaptation costs.21 E. Implementation Arrangements 20. The implementation arrangements are summarized in Table 4 and described in detail in the PAM (footnote 20).

Table 4: Implementation Arrangements Aspects Arrangements Implementation period June 2020–June 2024 Estimated completion date 30 June 2024 Estimated loan closing date 31 December 2024 Management

(i) Oversight Body Ministry of Finance (ii) Executing agency PT Geo Dipa Energi (iii) Implementation unit Project management unit under the executing agency; about 88 staff

working at PT Geo Dipa Energi corporate and field offices Procurement OCB (internationally

advertised) 12 contracts $334.69 million

OCB (nationally advertised) 2 contracts $8.45 million Request for quotations 1 contract $0.28 million

Consulting services QCBS, FTP 333 person-months $24.58 million QCBS, FTP (LCB) 28 person-months $1.00 million

Advance contracting and/or retroactive financing

Advance contracting is contemplated for 2 goods, 2 consulting services, 1 non-consulting services, and 10 works contracts.a Retroactive financing will be provided to finance expenditure incurred before the loan effective date, but not earlier than 12 months before signing the loan agreements and not exceeding 20% of the respective loan amount.

Disbursement The ADB and CTF loan proceeds will be disbursed following ADB’s Loan Disbursement Handbook (2017, as amended from time to time) and detailed arrangements agreed between the government and ADB.

ADB = Asian Development Bank, CTF = Clean Technology Fund, FTP = full technical proposal, LCB = limited competitive bidding, OCB = open competitive bidding, QCBS = quality- and cost-based selection. a See the procurement plan in the PAM for details. Source. Asian Development Bank estimates.

III. DUE DILIGENCE

A. Technical

21. The project has been assessed as technically viable. Numerical modeling of the reservoirs demonstrates the capacity to supply steam to the existing and additional plants for their design life. The steam turbine technology to be used for Patuha Unit 2 is based on technology that has been in use for decades, and is similar to that of Patuha Unit 1, which has been in operation for about 5 years. Several international manufacturers are capable of supplying power plants to the required level of quality and reliability. The steam system supplying the new plant will be designed to the same operating conditions as the existing plant to provide operational flexibility.

21 Climate Change Assessment (accessible from the list of linked documents in Appendix 2).

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22. The existing plant at Dieng (Dieng Unit 1) has had operational challenges, resulting in significant mineral deposition in production and reinjection wells, surface piping, and the plant. As a result, the operations of Dieng Unit 1 have been affected, and, at times, the plant has only been able to operate at about 50% of its rated capacity. Studies undertaken during the feasibility study phase have concluded that the traditional steam turbine-based plant and operating conditions selected for Dieng Unit 1 were not appropriate. The Dieng Unit 2 expansion will be based on a plant configuration known as a geothermal combined cycle plant, which consists of a conventional steam turbine and an Organic Rankine Cycle plant—extracting energy from both steam and liquid brine streams produced from the reservoir. Combined cycle plants of this type have been operating in a number of geothermal projects for more than 30 years and are well proven in this environment. In addition to offering Dieng improved performance and reliability, the combined cycle plant will offer improved thermal efficiency compared with the technology used for Dieng Unit 1. The operation of the brine disposal system to be used for Dieng Unit 2 will be new to GDE and will require training in both operation and maintenance to be successful. Various programs are planned to train GDE staff (Output 2), starting with a training program as part of pilot plant trials, which will be undertaken in 2020 to confirm plant design parameters. B. Economic and Financial Viability

23. The project’s economic viability was assessed in accordance with ADB’s Guidelines for the Economic Analysis of Projects.22 A with- and without-project framework was adopted, and economic internal rates of return (EIRRs) of Patuha Unit 2 and Dieng Unit 2 were measured against an assumed hurdle rate of 9.0%, and the sensitivity to adverse changes in the underlying assumptions was also assessed. Each subproject is economically viable, and the combined EIRR is 13.0%, which exceeds the economic hurdle rate. Economic benefits are derived from the incremental and non-incremental output of the geothermal plants to meet additional demand and displace thermal generation. The basis for the valuation of these benefits was the consumers’ willingness to pay and the avoided cost of thermal fuel stock. A sensitivity analysis demonstrates that the expected economic performance is robust.

24. The Project is financially viable, with a financial internal rate of return of 5.8%, which is higher than the 2.3% (real) weighted average cost of capital. A sensitivity analysis showed the project to be robust with the financial internal rate of return exceeding the weighted average cost of capital under all scenarios, including a 20.0% increase in capital costs.23 However, with the current tariff in the PPA, the project would not be viable under commercial financing terms.

C. Sustainability 25. Project planning has considered the actions and resources required to sustain the project outcome throughout the project life. At the technical level, these include planning for additional investments, such as drilling of makeup production wells during operation and capacity building for GDE in geothermal reservoir management. Significant additional efforts are also under way to strengthen institutional capacity. GDE has done a staffing analysis in planning for the establishment of the project management unit to ensure that sufficient permanent staff are hired to support the operations of the power plants after commissioning. In addition, the capacity of both the project management unit and corporate staff in financial management, procurement and contract management, and overall project management will be strengthened. The project is assessed as financially viable and is expected to generate strong positive cash flows to support

22 ADB. 2017. Guidelines for the Economic Analysis of Projects. Manila. 23 Financial Analysis and Economic Analysis (accessible from the list of linked documents in Appendix 2).

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capital investment, debt servicing, and maintenance expenditures. Therefore, the project will positively contribute to GDE’s long-term financial sustainability. The project design has incorporated adaptation measures to address identified climate vulnerabilities and the project will contribute to climate change mitigation over the project’s life (footnote 21). D. Governance 26. GDE has limited experience of managing externally financed projects and will require significant support from the PMC to implement the project. GDE is still enhancing its procurement and contract management capacity and will benefit from the formal training programs and on-the-job training provided by the PMC. Enhancement of GDE’s financial management, procurement, and contract management capacity will help GDE in executing this and future projects. ADB support to strengthen GDE’s capacity in these areas is consistent with the government’s efforts to promote good corporate governance, transparency, and accountability across SOEs. 27. GDE developed standard procurement procedures following those of PLN and carried out strategic procurement planning to ensure that appropriate, fit-for-purpose procurement approaches achieve value for money and the project’s development objectives. Contract packaging of drilling works reflects the most appropriate contract sizes and procurement methods, in line with the strategic priorities of GDE to meet the project schedule and to lower the dispute risk among contractors and suppliers during drilling operations. The market assessment confirms an adequate number of international and national suppliers. Contractors for geothermal power plant projects in Indonesia are international and national companies. 28. The financial management assessment was conducted in accordance with ADB’s Technical Guidance Note on Financial Management Assessment,24 and Financial Due Diligence: A Methodology Note.25 The assessed pre-mitigation financial management risk is substantial mainly because of the untested capacity of GDE’s finance and accounting staff to manage the project’s scale and complexity, the absence of a foreign exchange and interest rate risk management policy, GDE’s unaudited corporate financial model, and inexperience in borrowing from and reporting to multilateral development banks. However, GDE has strong oversight, supported by a clear legislative framework, an internal audit function with direct reporting to the board of commissioners, policy and procedure manuals for all financial operations, and comprehensive enterprise resource planning software. GDE has agreed to implement an action plan with key measures to address the identified risks, which will be a first step in building its capacity to borrow on a commercial basis. 29. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government and GDE. The specific policy requirements and supplementary measures are described in the PAM. Integrity due diligence was conducted.26 No significant integrity risks were identified with GDE.

24 ADB. 2015. Financial Management Technical Guidance Note: Financial Management Assessment. Manila. 25 Financial Management Assessment (accessible from the list of linked documents in Appendix 2); ADB. 2009.

Financial Due Diligence: A Methodology Note. Manila. 26 ADB. 2003. Enhancing the Asian Development Bank’s Role in Combating Money Laundering and the Financing of

Terrorism. Manila.

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F. Poverty, Social, and Gender 30. Electricity supply is essential for economic growth, which can reduce poverty and unemployment. This can create better income-generating opportunities for poor households. Given that higher-value income generation hinges on the use of electricity, the project's contribution to reliable and stable electricity supply will support economic activities for large industries, small and medium-sized enterprises, and households and community-level facilities (e.g., clinics, schools); and provide increased opportunities for employment in project areas. The project will also create substantial domestic employment opportunities for skilled labor. 31. The project is categorized effective gender mainstreaming. A gender action plan has been developed based on a gender analysis and community consultations.27 The plan includes measures to ensure that long-term benefits accrue to both women and men: (i) increased job opportunities for women with both contractors and GDE, (ii) participation of women in capacity-building activities and the incorporation of gender responsiveness in corporate plans and strategies, (iii) implementation of an enhanced livelihood program for women in surrounding communities and a commitment to direct a portion of the community development program budget to support women’s livelihoods and scholarships, and (iv) development of a direct-use geothermal strategy that maximizes opportunities for women and youth. G. Safeguards 32. In compliance with ADB’s Safeguard Policy Statement (2009), the project’s safeguard categories are as follows.28 All safeguard documents were prepared based on meaningful consultations with affected persons and communities, endorsed by GDE, and disclosed on the ADB website in accordance with ADB’s Access to Information Policy. 33. Environment (category B). Initial environmental examination reports were prepared for the proposed facilities in Dieng and Patuha.29 These reports, supplemented by independent studies,30 conclude that the project will extend existing facilities located in built-up and agricultural areas and is not anticipated to result in impacts that are significant or unprecedented. During construction, localized temporary direct impacts will include ground surface disturbances, increased dust and noise levels, occupational and community health safety risks, a significant temporary increase in water usage for well drilling, temporary traffic disturbance, and waste disposal. These and other impacts will be mitigated through measures presented in the environmental management plans (EMPs). Biodiversity action plans prepared for both sites have identified measures to avoid and mitigate adverse impacts on the natural habitat and important ecology. Facility operation is not expected to cause significant adverse impacts. Noise and air quality impact forecasts confirm compliance with relevant ambient air quality standards at the nearest sensitive receptors. Significant incremental operational and community safety risks are not anticipated. An independent assessment confirmed that both facilities have a certified EMS

27 Gender Action Plan (accessible from the list of linked documents in Appendix 2). 28 ADB. Safeguard Categories. 29 Initial Environmental Examination: Dieng 2 and Initial Environmental Examination: Patuha 2 (accessible from the list

of linked documents in Appendix 2). 30 Including critical habitat and biodiversity impact assessments, air quality (including hydrogen sulphide) and noise

impact assessments, audits of existing EMS and emergency preparedness and response systems, and environmental and safety audits of existing facilities.

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compliant with international and government standards on environment, safety and health,31 including emergency preparedness and response systems, in place. These systems will be extended to the new facilities to be supported by the project. Minor gaps identified in the current EMS at existing well pads and the steam above-ground gathering system will be addressed through a corrective action plan, which is included in the EMP. 34. GDE will be responsible for the implementation and monitoring of the EMP and has committed to provide adequate environmental management capacity, both at its head office and the two site offices in Dieng and Patuha. Community members will observe the environmental sampling activities of licensed third-party laboratories. Consultation with stakeholders and affected persons was carried out during project preparation and will be continued during implementation. Project-related complaints will be addressed in a timely manner through a joint social and environmental safeguards grievance redress mechanism (GRM). The GRM will be coordinated by the GDE head office, and GDE will have GRM coordinators at the site offices. 35. Involuntary resettlement (category B). The social impact assessment at Dieng Unit 2 identified a total of 106 persons (29 households) that will be directly affected and four lease coordinators (21 persons), who manage the farmers’ leases, that will be indirectly affected by the project. The resettlement plan documents the assessed impacts and mitigation measures.32 Of the affected persons at Dieng, 86 are considered to be severely affected by the project and 47 are considered vulnerable. No significant changes to land requirements are expected during the construction of Dieng Unit 2, but any changes will be reflected in an updated resettlement plan. Patuha Unit 2 will be built mostly within GDE’s existing premises but requires an additional 7.2 hectares (ha) of land. Some of this (2.6 ha) is located in a forest area that is not used by the community. GDE is processing a forestry land use permit for this land and will be required to provide forestry land replacement. Once identified, GDE will prepare a resettlement plan in compliance with ADB’s Safeguard Policy Statement for this forestry land replacement. The remaining 4.6 ha required for Patuha Unit 2 is within a tea plantation area, and GDE is processing a lease extension to secure its use. The Patuha Unit 2 due diligence report documents the assessments and mitigation measures.33 The PMC will increase GDE knowledge on social safeguards during project implementation to ensure smooth and effective application of social safeguards. 36. Indigenous peoples (category C). The due diligence confirmed that the project is not expected to have any impact on indigenous peoples, as project sites are not in areas with prevalent indigenous communities. It will not directly or indirectly affect the dignity, human rights, livelihood systems, or culture of indigenous peoples or affect the territories of natural or cultural resources that indigenous peoples own, use, occupy, or claim as their ancestral domain. H. Summary of Risk Assessment and Risk Management Plan 37. The overall project risk is moderate. Significant risks and mitigating measures are summarized in Table 5 and described further in the risk assessment and risk management plan.34

31 Relevant certifications are the standard of the International Organization for Standardization that specifies

requirements for an effective EMS (ISO 14001:2015) and the Government Regulation 50/2012 regarding Application of Management System for Work Safety and Health (SMK3 PP No. 50/2012).

32 Resettlement Plan: Dieng 2 (accessible from the list of linked documents in Appendix 2). 33 Due Diligence Report: Patuha 2 (accessible from the list of linked documents in Appendix 2). 34 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

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Table 5: Summary of Risks and Mitigating Measures

Risks Mitigation Measures Water scarcity in Dieng may affect drilling operations

The use of condensate water from Dieng Unit 1 as the main water source for well drilling provides an innovative alternative that enables continuous drilling operations without impacting drilling performance or rig reliability.

Operation and maintenance cost higher than expected because of mineral deposition or high corrosion rates in Dieng surface facilities and wells

Pilot plant testing to confirm plant design parameters before the power plant engineering, procurement, and construction contract is issued for bid.

Risk of unsynchronized drilling activities because of lack of experience of GDE staff in managing drilling contracts

Hiring full-time and contracted staff with relevant experience, and engagement of a PMC to support contracting and project management oversight.

Limited procurement capacity of GDE to manage multiple bidding activities simultaneously

Additional staff allocated following the resource enhancement plan; extensive PMC support in procurement; procurement training and clinics by ADB to train existing and new GDE staff on ADB requirements.

Corporate financial performance compromised if project is delayed or operational problems are encountered because of the large investment size relative to GDE’s current asset base

Capital expenditure estimates reviewed by international experts and validated by market soundings. Financial viability confirmed as robust by modeling a range of adverse scenarios. PMC will support implementation, including cost control.

ADB = Asian Development Bank, GDE = PT Geo Dipa Energi, pH = potential of hydrogen (a measure of the acidity or alkalinity of a solution), PMC = project management consultant. Source: Asian Development Bank.

IV. ASSURANCES AND CONDITIONS 38. The government and GDE have assured ADB that implementation of the project shall conform to all applicable ADB requirements, including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, financial management, and disbursement as described in detail in the PAM and loan documents. The government and GDE have agreed with ADB on certain covenants for the project, which are set forth in the draft loan agreements and guarantee agreement. As a condition for withdrawal, GDE has agreed to secure a domestic debt facility to cover contingencies for the project.

V. RECOMMENDATION 39. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the loan of $300,000,000 to PT Geo Dipa Energi, to be guaranteed by the Republic of Indonesia, for the Geothermal Power Generation Project, from ADB’s ordinary capital resources, in regular terms, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; for a term of 20 years, including a grace period of 5 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan and guarantee agreements presented to the Board. 7 May 2020

Masatsugu Asakawa President

Appendix 1 13

DESIGN AND MONITORING FRAMEWORK

Impacts the Project is Aligned with Contribution to geothermal energy in Indonesian power supply increased (Electricity Power Supply Business Plan [RUPTL] 2019–2028)a Renewable energy in electricity subsector increased (First Nationally Determined Contribution to the UNFCCC: Republic of Indonesia)b

Results Chain Performance Indicators with

Targets and Baselines

Data Sources and Reporting

Mechanisms Risks Outcome By 2027: Adequacy and sustainability of energy supply increased

a. An additional 873 gigawatt-hours of geothermal electricity generated annually (2018 baseline: 0)

a. GDE and PLN annual reports

Government policy or commitment to supporting geothermal power generation is not sustained.

b. At least 705,699 tons of carbon dioxide equivalent avoided annually (2019 baseline: 0)

b. Government statistics and UNFCCC reports

Outputs By 2025: 1. Geothermal

power plants constructed and commissioned

1a. An additional 55 MW geothermal electricity generating plant and transmission connection at Dieng commissioned (2019 baseline: 55 MW)

1a.–b. GDE annual reports

Technical challenges in drilling and reservoir management delay project.

1b. An additional 55 MW geothermal electricity generating plant and transmission connection at Patuha commissioned (2019 baseline: 55 MW)

2. Institutional capacity of GDE strengthened

2a. At least 10 GDE staff (of whom at least 20% are women) reported increased knowledge of geothermal reservoir performance in geothermal operations (2019 baseline: None)

2a.–b. Project management consultant report

2b. 400 GDE staff training days (at least 30% women staff training days) dedicated to increasing knowledge in project and contract management (Baseline: 11% women staff training days out of 140 staff training days)c

2c. EMS expanded to cover new facilities and incorporate gender, climate, and community safety considerations (2019 baseline: EMS for unit 1 only)

2c. EMS covers units 1 and 2 accreditation in accordance with international and government standards for environment, health, and safety (ISO 14001:2015 and SMK3 PP 50/2012)

14 Appendix 1

Results Chain Performance Indicators with

Targets and Baselines

Data Sources and Reporting

Mechanisms Risks 3. Community

development program enhanced

3a. Gender-responsive communication and outreach strategies developed and delivered in each community (2019 baseline: 0) 3b. Feasibility study for direct use of geothermal energy for community economic activities developed, including a specific strategy for maximizing livelihood opportunities for women in the project communities (2019 baseline: 0) 3c. Gender-responsive community development strategy developed and implemented, with 30% budgetary allocation for women’s livelihoods and women’s scholarships (2019 baseline: 0)d

3a.–c. Project management consultant reports

Key Activities with Milestones 1. Geothermal power plants constructed and commissioned 1.1 Drilling at Dieng and Patuha starts by Q4 2020 1.2 Patuha plant construction starts by Q4 2021. 1.3 Dieng plant construction starts by Q1 2022. 1.4 Commission Patuha 2 by Q1 2023. 1.5 Commission Dieng 2 by Q3 2023. 2. Institutional capacity of GDE strengthened 2.1 Train GDE corporate and geothermal power plant staff on reservoir management by Q4 2020. 2.2 Provide training programs to GDE staff on procurement and contract management by Q4 2020. 2.3 Update environmental management system by Q3 2022. 3. Community development program enhanced 3.1 Develop GDE corporate and community communication strategy by Q3 2020. 3.2 Conduct gender-inclusive community consultations on community development program by Q4 2020. 3.3 Prepare feasibility study on the direct use of geothermal energy, incorporating inclusive community

feedback, by Q4 2021. Project Management Activities Issue bidding documents for goods contracts by Q1 2020 Issue bidding documents for drilling services contracts by Q2 2020 Issue bidding documents for Patuha and Dieng engineering, procurement, and construction contracts by Q4 2020 AMDAL addendum for Dieng 2 by Q4 2020 Complete land acquisition for Dieng 2 by Q2 2020 Environment management plan and key activities by Q3 2020 Communication strategy key activities by Q3 2020 Inputs Asian Development Bank: $300.00 million (loan) Clean Technology Fund: $35.00 million (loan) PT Geo Dipa Energi: $100.00 million (equity) and $34.20 million (domestic loan) Assumptions for Partner Financing Not applicable

Appendix 1 15

AMDAL = Analisis Mengenai Dampak Lingkungan, EMS = environmental management system, GDE = PT Geo Dipa Energi, ISO = International Organization for Standardization, MW = megawatt, PLN = Perusahaan Listrik Negara (State Electricity Corporation), Q = quarter, RUPTL = Rencana Umum Penyediaan Tenaga Listrik (Electricity Supply Business Plan), SMK3 = Sistem Manajemen Keselamatan dan Kesehatan Kerja (occupational safety and health management system), UNFCCC = United Nations Framework Convention on Climate Change. a Government of Indonesia. 2019. Keputusan Menteri ESDM No 39/K/20/MEM/2019 Rencana Usaha Penyediaan

tentang Listrik (RUPTL) 2019–2028 (Decree of the Minister of Energy and Mineral Resources No. 39 / K / 20 / MEM / 2019 concerning Electricity Supply Business Plans (RUPTL) 2019–2028). Jakarta.

b Government of Indonesia. 2016. First Nationally Determined Contribution: Republic of Indonesia. Jakarta c Staff training days are calculated by multiplying the number of days spent in training by the number of staff who

participated in training. The baseline of 140 staff training days is calculated from 2018 data: 35 staff x 4 training days = 140 staff training days. The 11% baseline for women staff training days is based on 4 women staff x 4 days of training = 16 women staff training days (11% of 140 staff training days).

d Scholarships for women in the community may be for secondary, university, technical and vocational, or other education depending on the needs identified through the consultation process.

Contribution to ADB Results Framework:

To be determined. Source: Asian Development Bank.

16 Appendix 2

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=52282-001-3

1. Loan Agreement: Asian Development Bank 2. Loan Agreement: Clean Technology Fund 3. Guarantee Agreement 4. Sector Assessment (Summary): Energy 5. Project Administration Manual 6. Financial Analysis 7. Economic Analysis 8. Summary Poverty Reduction and Social Strategy 9. Risk Assessment and Risk Management Plan 10. Climate Change Assessment 11. Gender Action Plan 12. Initial Environmental Examination: Dieng 2 13. Initial Environmental Examination: Patuha 2 14. Resettlement Plan: Dieng 2 15. Due Diligence Report: Patuha 2

Supplementary Documents 16. Stakeholder Communication Strategy 17. Financial Management Assessment