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Indonesia and Energy








In addition to other sources, Indonesia needs to attract private funds to finance the increasing demand for electricity. In addition the country needs to mitigate the environmental impact of energy use by promoting efficient utilization and optimal resource mix while developing clean air mechanisms. The key priorities and challenges facing Indonesia’s energy sector in the medium term are:

anchor link Securing Financing Needed by the Energy Sector
anchor link Developing Supplies of Natural Gas for Power Generation and Domestic Use
anchor link Protecting the Environment Through Efficient Resource Utilization and Optimal Resource Mix
anchor link Increasing Access to Modern Energy Services

anchor link Other Issues

Securing Financing Needed by the Energy Sector

Indonesia’s demand for electricity (for gas) is expected to grow at 6 percent (5 percent) per year between 2004 and 2012. Power supply shortages have already begun to surface outside Java. To avert a looming power crisis and develop the domestic gas market, substantial investments, close to $25 billion in the power sector and $3-4 in the downstream gas sector, are required.

All studies carried out to date clearly show that Indonesia needs to attract private funds to finance investments of this magnitude, as other sources of financing will not be sufficient. In the power sector, PLN, with its precarious financial condition and $14 billion in contingent liabilities, is unlikely to contribute more that $3 billion during this period. JBIC, ADB and IBRD are committed to supporting Indonesia’s development efforts, and could provide an additional $3 billion. The domestic capital market is underdeveloped and is only expected to contribute $1-$1.5 billion. International investors, who are needed to fill the substantial funding gap, have been reluctant to invest in Indonesia due to a lack of confidence in the viability of the sector (especially power) and perceived higher risks in emerging markets following the financial crisis in East Asia (especially Indonesia) and other regions (notably Argentina). Therefore, it will be vital to restore the credibility of the sector with investors in order to attract them back for much needed funding and expertise in a global context characterized by increased competition for fewer resources among countries and infrastructure sectors. (Despite the setback of the annulment of the 2002 electricity law by the constitutional court, the Government remains committed to reform, private participation, and competition in the long term).

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Developing Supplies of Natural Gas for Power Generation and Domestic Use

The gas supplies in Indonesia remain under-developed for domestic use, and therefore, an unreliable source of fuel for power generation. A significant reason for the slow development has been the poor incentives for investors to earn a reasonable return from the sector.  Subsidies for oil products and the absence of revenue sharing arrangements for gas field exploration/expansion in current production sharing contracts are largely responsible for the current situation. The oil and gas law passed in 2001, the recent efforts by PGN to expand the system, and the return of some private investment in gas field development all represent progress in the sector. The sector is now poised to exploit the substantial gas reserves in South Sumatra and/or East Kalimantan, and LNG from the Tangguh field in West Papua, and transport them to the industrial consumers and power generators mostly in Java. 

With depleting resources and rising domestic demand, Indonesia recently became a net oil importer. Subsidies for oil products, which induce higher demand and further reliance on imports, have also resulted in a sub-optimal energy mix in Indonesia and hampered the development of the domestic gas market and increased gas penetration (especially for power generation) that could bring about substantial economic and environmental benefits.

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Protecting the Environment Through Efficient Resource Utilization and Optimal Resource Mix

In 2002, thermal sources dominated Indonesia’s total energy consumption: oil 54 percent, gas 29 percent, coal 14 percent, hydro 1 percent, and other renewable sources 2 percent. Consequently, the environmental conditions have suffered as carbon dioxide emissions from energy use grew by over 7 percent every year during the 1990s reaching some 270 million tons in 2000.  Driven by the untenable nature of the fuel subsidy due to record-high world oil prices, the government is planning to provide better incentives for efficient use of energy and optimize the energy mix in Indonesia. This mix, however, will include an increased reliance on coal, mainly for power generation and the cement industry, which will increase local and global environmental impacts.  To balance this trend, the government is also planning to expand the use of “cleaner” fuels such as natural gas and renewable energy. Conversion to natural gas for industrial uses is expanding in Indonesia but renewable energies remain marginal despite sizable resources (especially geothermal) which could substantially contribute to the country’s environmental sustainability and energy security.

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Increasing Access to Modern Energy Services

Indonesia lags behind most other countries in the EAP region in electrification, even those with less developed economies. The country’s 57 percent rate of electrification means that some 90 million people still do not have access to electricity. Of those who do not have access to electricity, 90 percent are poor and many live in rural areas. An inclusive development strategy should ensure that population is not left behind, that they begin to make a larger contribution to economic growth and are able to share in prosperity. In this respect, the current government goal of providing electricity access to 90 percent of the current population by 2020 is commendable. The strategy to meet the stated coverage objective by 2020 (provision of access to about 14 to 15 million households in the next 15 years in remote areas with low affordability) should focus on novel approaches based on community initiatives and diversified business/financing models. Based on international experience, this will take time and will require pilot programs to test the optimum schemes and technologies to deliver power, wide consultation, development of a conducive framework to involve private sector, design of well targeted and performance based subsidies during the transition to affordability, etc. To remain on track for achieving this target, over seven million new connections are needed by 2012 at a cost of $4.5 billion - $6.5 billion followed by a similar infusion for the following eight years. This is a daunting task physically as well as financially, due to the geography of Indonesia with its widely dispersed rural population over a large number of islands.

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Other Issues

Biomass use in households. Biomass, mostly wood, is the primary fuel for cooking and other purposes in rural areas. If biomass energy use were included in Indonesia’s energy balance for the year 2000, it would represent over 70 percent of residential demand. With fuel prices remaining unaffordable for the poor along with the high transportation cost of diesel fuel to remote areas, biomass is considered the cheaper alternative by the poor. The International Energy Agency expects biomass consumption to account for 25 percent of all energy consumption in Indonesia by 2010. The heavy biomass use contributes to the continuing degradation of Indonesia’s biomass resources through illegal logging and the excessive conversion of forest areas into agricultural land.

Subsidies to petroleum products consumption as transport needs rise. Until recently, Indonesia has been a net exporter of oil and natural gas. In 2002, oil and gas exports contributed almost $12.1 billion which was equivalent to 21.2 percent of total national export earnings and about 25 percent of government budget. Although significant, this is in stark contrast from 1990, when the oil and gas sector contributed 43 percent of export earnings and 45 percent of government revenues. The declining earnings from export reflect Indonesia’s declining oil production and rising domestic consumption.

The government has attempted to reduce the impact of fuel subsidies on budgetary resources by bringing them down from 5 percent of GDP in 2000 to 1.5 percent in 2003, even though compensating safety net programs were poorly targeted and monitored. In 2000, the domestic prices of petroleum products like gasoline, kerosene, and industrial diesel oil, were, on average, only 43 percent of their international prices. In 2002, the government introduced an automatic price adjustment system under which Pertamina, the state-owned oil company, resets domestic oil products prices at 75 percent of international prices every month with the exception of kerosene for which prices are set at 63 percent of international prices (kerosene and LPG are a major cooking fuel expense for the urban poor).

On the demand side, the total number of vehicles in Indonesia increased from 12 million to almost 21 million between 1995 and 2001. Motorcycles (which comprise 71 percent of the total vehicle fleet) alone accounted for 5 million of this increase. The transport sector is estimated to account for roughly 60 percent of oil demand between 2005-2007.

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Of Interest - Indonesia

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