Indonesia’s Economic Success Hinges on Energy Investments

New IEA review of country’s energy policies lauds phase-out of gasoline subsidies as key first reform.

Indonesia is enhancing the governance and transparency of its energy institutions and state-owned companies, reducing fuel subsidies and facilitating much-needed infrastructure investments, the International Energy Agency (IEA) said today in its second in-depth review of the country’s energy policies, but it must move to meet demand growth and ensure the environmental sustainability of energy supplies.

The new IEA review notes that even though Indonesia remains a net energy exporter due to the expansion of its coal and liquid biofuel production, the country is consuming ever more energy as a result of rising living standards, population growth and rapid urbanisation.

In the review, Energy Policies Beyond IEA Countries: Indonesia 2015, the IEA finds that energy subsidies lie at the heart of the challenge to developing the country’s energy sector. The report acknowledges progress made in decreasing fossil fuel subsidies since the first IEA review, in 2008: the government’s recent move to phase out gasoline subsidies is a powerful sign for change but needs to be sustained and extended to other fuels.

In the power sector, Indonesia’s achievements are notable: a steady increase of installed capacity, the partial opening of the electricity sector and a substantial increase in the electrification rate. But to avoid electricity shortages and large-scale brown-outs, the country must take action to increase investment immediately in generation transmission and distribution infrastructure.

“Multi-layer government approval procedures, unrealistic targets and unclear regulations, difficult land and licensing acquisition, and limited options in private financing for small and medium-sized project developers are all major barriers to investment in Indonesia’s energy sector development,” IEA Executive Director Maria van der Hoeven said at the launch of the report in Jakarta.

Noting that Indonesia targets 23% renewable energy by 2025, Energy Policies Beyond IEA Countries: Indonesia 2015 points out that the time frame is overly ambitious. Besides encouraging immediate investment in renewable energy, the report calls for enhancing the coal-mining sector’s sustainability. And it urges development of a more transparent and flexible domestic natural gas market. To do so, Indonesia needs to reform wholesale pricing and allocation to more closely reflect global markets as well as implement an integrated long-term development plan for natural gas infrastructure, and establish an independent regulator to monitor and co-ordinate the downstream sector.
 

Other key recommendations include:

• National energy plans and policies should be updated in tandem, based on reliable data and realistic implementation capacity.
• Central-level institutions must be streamlined, with clearly delineated responsibilities to ensure that local level regulations conform to national plans