In all national economies, even in highly liberalized economies, entrepreneurs develop new economic activities that are subject to the legal framework and controlling mechanisms as implemented by the competent governmental institutions. In liberalized economies, the entrepreneurs are mainly privately capitalized companies, who compete mutually, and who select and mature the investments to be pursued (this is known as ‘picking the winners’). To realize these investments, the private entrepreneurs need to apply for the pertinent permits or licenses at the competent authorities, upon which the competent governmental institute studies the application and applies the prevailing criteria for (conditionally) granting or rejecting the application. The criteria must be transparent and tailored to the government’s policy of promoting a certain economic activity within the societally accepted constraints. If a license application is deemed to be unduly rejected (or the provisos are deemed excessive), the entrepreneur can escalate this in court, where an independent judicial system will judge the legality of the rejection.
Important distinctions of a truly liberalized economy vis-à-vis a less liberalized economy are, for example, that 1) the government will not compete with private companies in terms of ‘picking the winners’ (i.e. state companies are an exception and only exist because private companies are not capable of providing some service of national interest, with the required quality and security), and 2) logistical chains will be legally ‘unbundled’ in order to prevent market power from developing and being concentrated in only one or a few companies. In liberalized economies, monopolies and oligopolies have been broken and the government strives for a competition between private companies that is to be fair, adequate and transparent. For example, in the power sector it is not allowed to combine the functions of transport, trading and generation within one (holding) company. Similarly, in the gas sector: gas production and gas transport must be unbundled. Prices are made by supply and demand on an exchange, which uses anonymous, standardized contracts for pricing transparency. Ultimately, it is believed that liberalized economies provide a better service at a lower price to the general public. However, it is an enormous challenge to bring the governmental institutes to the required level of competence and create and maintain a dynamic and level playing field for private enterprises. In general, this takes many years, gradually evolving from monopolistic (state or private) enterprises to an adequate number of mutually competing private enterprises of which no single company is dominant enough to influence the overall pricing level.
In less liberalized economies, the degree of government control and the government’s stake in ‘picking the winners’ is (much) higher than in liberalized economies. In addition, logistical chains are typically not unbundled legally, thereby perpetuating the incumbent state monopolies or oligopolies and concentrating the market power in only one or a few state enterprises. Indonesia is a relatively young economy in terms of market liberalization. In the power sector, transport and trade are not yet unbundled and prices or tariffs are negotiated between the power generating company and the state monopolist transport and trading company, rather than ‘made’ on a power exchange. Therefore, Indonesia’s legal framework for the power and geothermal sectors very much determines the overall business climate for private geothermal entrepreneurs, on which the Indonesian government heavily relies to develop its geothermal resources. Hence, if Indonesia’s geothermal energy is really to take off, it is crucial to foster the mutual understanding between the private sector and the state institutes, in order to get to know each other’s concerns and internal processes. This will be instrumental in expediting Indonesia’s geothermal development ambitions.
To this end, GEOCAP has developed three activities as part of its overall programme, i.e.
- Government geothermal energy policy-making and decision-making for geothermal energy projects;
- Investment decision support for geothermal operators;
- Investment decision support tool for geothermal operators.
The first topic addresses the government’s point of view when updating its national policies on geothermal energy and when confronted with a geothermal license application. The second topic addresses the private company’s perspective when maturing a rough idea to Final Investment Decision. The third topic discusses a computer tool developed for GEOCAP to investigate the technical and economic feasibility of geothermal field developments. The topics are discussed in the remainder of this chapter.