2008-2009 DATA CONSULT. All rights reserved.
INDONESIAN COMMERCIAL NEWSLETTER
October 2010

FOCUS

STRONG POLICY NEEDED TO SUPPORT PLAN FOR DEVELOPMENT OF RENEWABLE SOURCES OF ENERGY


Procurement of energy in Indonesia has always become a hot political and economic issue. The soaring oil prices in 2007-2008, resulted in shortage in supply of oil fuel in the country and growing demand for alternative sources of energy.

Indonesia is rich in energy sources both in volume and varieties.  Oil was once the country's economic mainstay, easily available and cheap. Indonesia is also one of the world's largest exporters of natural gas in the form of liquefied natural; gas (LNG).  The country has one of the largest natural gas reserves in the world.  In him past two years, Indonesia has become the world's largest coal exporter replacing Australia.

However, despite the abundant reserves of energy sources, Indonesia has continued to be confronted with energy problem. For years, almost all regions have to take turn of being in the blackout. Even Jakarta had had its turn to go through nights without electricity. Only this year Jakarta and other regions in Java are free from blackout. However, power supply in Java is not yet entirely safe as there is always possibility of trouble in the power generating facilities. In the outer regions, shortage in power supply has not been fully resolved.

There is also such irony in the procurement of gas to feed the domestic industries.  Indonesia is one of the world's largest suppliers of gas but shortage in supply to domestic consumers remains a problem.  Major urea fertilizer plants have stopped or suspended operation for shortage in supply of gas as feedstock. High prices of gas in the world market prompted producers to export all or most of their production resulting in shortage in domestic supply especially for urea fertilizer factories. Other industries such as ceramic factories are also major consumer of gas as fuel.

Energy major export commodity.

Until now the country has exported most of its production of sources of primary energy, fossil energy (oil, gas and coal) in particular. In 2008, the country exported 160 million tons of its coal production of 229 million tons leaving only 69 million tons for domestic consumption.

Indonesia's gas production totaled 7,883 million cubic feet (MSCF) per day in 2008 and only 3,769 MSCF of which were for domestic market and the rest or 4,114 MSCF were exported.

The country exports most of its gas production as the government and state oil and gas company PT Pertamina are bound by long term contracts.  In order to cope with further shortage in domestic consumption the government has rejected extension of some contracts already terminated and priority is given to   domestic market for gas production from newly found reserves.

Indonesia was once a member of the Organization of Petroleum Exporting Countries (OPEC) but now it has withdrawn from the cartel as it has become a net importer of oil over the past several years.

For many years after the oil boom in 1972 as a result of oil embargo by Arab countries following the Middle-east war between Israel and the Arab nations, oil was the mainstay of the country's economy. Oil was the country's largest export earner. However, the contribution of oil to the country's foreign exchange earning continued to decline with shrinking reserves and fast growing domestic consumption.

Indonesia is still heavily dependent on oil energy, the fact that has caused problem in energy management and supply.  The dependence was partly caused by the government policy of maintaining subsidy on oil fuel (BBM). The availability of subsidized BBM has discouraged efforts to use alternative sources of energy.  BBM is cheaper because of the subsidy.

Subsidy was provided in 1970's as the country's domestic oil requirement was relatively small and production was large. Subsidy was given mainly on kerosene and premium gasoline.

Now, however, domestic requirement has increased sharply with the growing manufacturing sector while production has declined sharply making the country a net importer of oil.

Energy subsidy not properly used

The subsidy caused price distortion in the energy market in the country as the prices did not reflect the real value of the energy.  The subsidy is aimed at helping  low income people, but the fact is the subsidy has benefited  middle to high income people more than low income members of the community because  individually  they are the largest user of  BBM .

The government still maintains subsidy on BBM and electricity, and the subsidy increases from year to year because of growing domestic consumption and rising prices of BBM and electricity. The government, therefore, has reduced energy subsidy by providing subsidized BBM only for selected consumers.

However, as the BBM and electricity subsidy was not property provided, the effect is not good on development of the energy sector.  Following are among   the negative effects of the policy:
"        Disparity in the prices of subsidized BBM and non subsidized BBM encouraged BBM smuggling and illegal sales of subsidized household BBM to factories.
"        The high subsidy on BBM make inefficient plan to develop alternative sources of energy.
"        The subsidy makes domestic energy market not attractive to producers of energy sources.

Investment in renewable energy sector sluggish

Investment in the energy sector especially in renewable energy sector has been sluggish because of improper domestic energy policy. 

The subsidy has made investment in renewable sources of energy inefficient as BBM is cheaper in price. In addition, there are still factors such as lack of legal certainty, political instability, weak regulation and inadequate information and incentives.

Based on data at the National Energy Council, the price of geothermal power is around 9 US cents per Kwh, the prices of solar energy are around 19-30 cents per Kwh, the prices of wind energy are around 3-8 cents per Kwh, the price of bio-energy is around 5.7 cents per liter as against the electricity basic price of 7 cents per Kwh and the price of automotive diesel oil   of Rp 4,300 per liter and that of premium gasoline of Rp 4,500 per liter.

The facts discourage investors to do business in renewable energy sector.

The need to immediately develop renewable energy is urgent with the increase in the prices of fossil (oil, gas and coal) energy.  Investment in renewable energy sector is expensive; therefore, the government needs to be firm in removing any factors that discourage new investment in the sector.  Fiscal incentives (lower cost of fund, tax exemption) and non fiscal incentives like simple procedure, availability of information). In addition, reasonable tariff of renewable energy is needed to make investment feasible.

Energy subsidy should be scrapped to be replaced with direct subsidy to be provided for low income people.

Development of renewable sources of energy is expensive; therefore, the government should seek financers or sources of funds especially for the development of renewable sources of energy. The source could be funds specially set aside from oil, gas and coal revenues in the form of what is called depletion premium. Depletion premium is basically opportunity cost that has to be paid as exploitation of non renewable energy resources such as oil, gas and coal would be at the expense of the opportunity for the people of the coming generations.


See list of contents>>
2008-2009 DATA CONSULT. All rights reserved.
 
MONTHLY REPORT
INDONESIAN COMMERCIAL NEWSLETTER (ICN)
HOME            Head Line            Focus            List of Contents          To Subsrcibe