VW 1.8L indicates a gas engine, diesels are available in 1.5L, 1.6L, 1.9L and rarely 1.7L sizes. A modified 1.6 (86.5mm stroke) with 1.9 pistons will result in ~1.7L displacement. I haven't really heard of a 1.8L VW diesel.
That bike definitely has a diesel motor (the injection pump is visible) and judging by the valve cover it is probably a 1.9L AAZ code motor. Looks like there's room for a stock diesel turbo.. but it might get warm under the seat

If it's a AAZ engine it's definitely turbo-ready with piston cooling oil jets, proper metal alloys, etc.
1.6L naturally aspirated produces 52hp, 1.6 TD (turbo) produces 68hp, 1.9 TD ~75hp, and I forget how much power a naturally aspirated 1.9 makes, probably ~65hp.
Very cool bike! This engine in a ~2,700lbs VW Golf/Jetta yields approx. 45-50 US MPG.
Get the injection pump rebuilt by Giles in Ontario and it'll increase power very notably without a hit in MPG. A good pump mod does wonders to a VW diesel.. a lot of stockers miss out.