Indonesia’s energy challenge

Author: Fitrian Ardiansyah, ANU

Indonesia is Southeast Asia’s largest energy producer and consumer.

Its government energy policies are fostering reliance on dirty and subsidised fossil fuels and little progress has been made in increasing renewable energy usage. Yet Indonesia has enormous renewable energy potential. Energy sources such as geothermal power could readily meet up to 40 per cent of the country’s energy needs.

Indonesia’s energy policies lack consistency and long term viability, and will continue to drain the country’s financial resources and deplete government budgets. Coal-fired plants contradict Indonesia’s commitment to tackling climate change and produce other environmental harms, such as smog and acid rain. Unless reversed, Indonesia’s current responses to energy shortages — expanding coal-fired power plants and heavily subsidising dirty energy — will see the country fall radically short of its 2025 renewable energy targets.

According to the Green Policy Paper released by the Finance Ministry, total energy demand in Indonesia is growing by around 7 per cent per year as the transport and industrial sectors grow and households become more affluent. A large proportion of this demand is being met by fossil fuels, mainly oil.

A consequence of this skyrocketing demand is that since 2004 Indonesia has become a net-importer of both crude oil and refined products. If no new domestic reserves are found, with the increasing demand for energy and a ‘business as usual’ approach, Indonesia will be a significant oil-importing country in less than two decades.

Already, dramatic increases in average global oil prices have hit Indonesia’s purse strings. Most power generation today is from conventional thermal sources including fossil fuels such as oil, coal and natural gas. Less than 20 per cent comes from hydroelectric, geothermal and other renewable sources. Thus the high price of oil on the global market has made it more expensive to produce and import gasoline and led to increasing electricity-generation costs.

Electricity is heavily subsidised and currently customers pay for electricity at far below market price. The state-owned electricity company PLN, however, is required to buy energy at the market price, something it struggles to do. Fuel is also heavily subsidised by the government. Together, fuel and electricity subsidies create a massive burden on the state budget. Their estimated cost to the government in 2010 was US$9.78 billion, and in 2011 had already hit US$3.68 billion by March.

The subsidies have various perverse economic implications. In 2008 the Coordinating Ministry for Economic Affairs admitted that indiscriminate fuel subsidies have been a poor way to pursue welfare transfers from rich to poor because the wealthiest 40 per cent of households capture 70 per cent of the subsidies. Almost one third of Indonesia’s 225 million inhabitants lack access to electricity (especially in poorer rural areas). Subsidies also lead to over-consumption of energy because the actual cost of that energy is not reflected in the price consumers pay.

Many reports suggest that subsidies discourage energy efficiency measures and the development of alternative or renewable energy sources by way of low electricity tariffs. Adjusting prices and removing subsidies could promote better energy efficiency and conservation while bolstering the competitiveness of renewable energy sources. The money previously used for subsidies could be utilised to help seed investment in renewable energy development, reaching the country’s sustainable energy growth path. Some studies show that such policies could result in increased energy efficiency by as much as 10–30 per cent in households, 10–23 per cent in the commercial sector and 7–21 per cent in industry.

But populism has made such energy reform difficult. Many ordinary Indonesians hate the idea of paying more for fuel, electricity and related services. Throughout the past ten years the government has had some success at whittling away these subsidies but the issue remains politically contentious. As well as taking action on the demand side, the government could take action on the supply side by providing more support for renewable energy. Indonesia possesses a variety of renewable energy resources, including geothermal, solar, micro-hydro, wind and bio-energy. Indeed, Indonesia has more geothermal energy potential than any other country. Most estimates put the potential reserves at 28,000 megawatts, which could meet some 40 per cent of national electricity demand. Yet currently Indonesia only uses 4.2 per cent of that potential. At present, renewable energy production (hydropower, geothermal and biomass) makes use of only 3.4 percent of total potential reserves.

This low figure is partly because shifting the country’s energy portfolio to renewables would require massive investment. Another obstacle is Indonesia’s system of government. Not only is the bureaucracy lacking in capacity and resources, it is also riddled by inter-departmental tension at the national level. The decentralised system of government and the resulting division of power between central and local governments also impedes national coordination in delivering a policy of transition to renewable energy.

Under decentralisation, local governments have been given the rights and responsibility to issue concessions and licenses for renewable energy. Unfortunately most local governments have very limited capacity or understanding of the implications of various energy scenarios. There is no established policy framework through which to encourage local governments to pursue renewable energy initiatives.

The moment is ripe for Indonesia to make tough decisions to sustainably secure its future energy needs. The Indonesian government needs to stiffen its political resolve to phase out subsidies for fossil fuels. Actions to reform policy incoherence, remove structural impediments and promote investments in renewable energy are also needed. Mixing various sources of funds from the private sector and international funding institutions, and encouraging investments with pricing and tax reforms could promote investment in renewable energy. Strong leadership and clear guidance from the top, notably from the president and his cabinet, is needed.

Fitrian Ardiansyah is a PhD candidate at The Australian National University and was formerly program director for climate and energy at WWF-Indonesia.

This is an adapted version of an article that originally appeared here on Inside Indonesia.