Green investors eye Indonesia but want regulatory reform

JAKARTA (Reuters) - Mini-hydro power, waste water and geothermal projects are shaping up as favorites among green investors eyeing Indonesia, but regulatory problems are holding back a potentially lucrative sector, investors said on Tuesday.

These policy hurdles could leave Southeast Asia's biggest economy struggling to attract the investment needed to meet its targets to grow power supply and cut greenhouse gas emissions, and keep carbon developers focused on China and India instead.

Swedish carbon credit trader Tricorona AB, which specializes in sourcing, developing and trading offsets from greenhouse gas reduction projects, is eyeing four or five emissions reductions and renewable energy projects in Indonesia, said Sushila Maharjan, a Tricorona director.

"We have projects we are working on here but getting the right information at the right time, to feel comfortable that there is a solid project, it takes so long here," she told Reuters at a green investment conference in Jakarta. "There's some regulatory and policy barriers."

Problems with land acquisition, conflicting regulations, and graft have thwarted infrastructure development in Indonesia, leaving it lagging regional rivals in attracting foreign direct investment.

China and India are the largest sources of U.N.-backed carbon offsets, which big European or Japanese polluters can buy to meet emissions reductions targets.

Tricorona, which has 63.8 million offsets in the pipeline for delivery between 2013 and 2020 and was bought by Barclays Plc in June, is working on deals in Indonesia on biofuels and waste water projects and on one 50 megawatt (MW) geothermal project, Maharjan said. If realized, the combined projects would create 400,000 offsets per year.

Indonesia boasts the potential to produce an estimated 27,000 MW of geothermal power, thanks to its many volcanoes, but technical risks and the cost of exploration may turn off investors looking for a quick return.

"For the short term, mini-hydro, waste water have shorter lead times and with initial capital you can make it happen within a year," she said.

Indonesia has vowed to cut its greenhouse gas emissions by at least 26 percent from business-as-usual levels by 2020, and to improve an electricity system prone to blackouts by building new coal-fired and renewable power plants.

Mari Yoshitaka from Mitsubishi UFJ Morgan Stanley Securities said that Japan was still interested in geothermal in Indonesia.

"The Japanese government is very keen on Indonesia. We are looking at geothermal," she said. "For Japanese industry, our technology is quite good so a lot of our companies would be interested."

Frederic Crampe, managing director of ReEx Capital Asia -- which arranges financing for green projects -- said his firm had been turned off by Indonesia's huge fossil fuel subsidies, low electricity tariff and weak land acquisition laws.

"In Indonesia, the reason we haven't done that much work, is because there are a lot of restrictions and distortions in the market," he said, adding that more incentives for green investors were needed.

"It would be great if there was a fund to support the cost of geothermal exploration, like in oil and gas."

He said investors were aware reform was taking place in Indonesia, which raised electricity tariffs by an average of 10 percent this month.

"The Indonesia government, with the tariff increase, is probably going in the right direction. But are they doing it fast enough?"

(Editing by Neil Chatterjee)