Difficult policy choices in Indonesia’s energy development

By Fitrian Ardiansyah, published in Coal Asia, August 17 – September 4, 2013, page 90-91

for the pdf version, please see Opinion Fitrian Ardiansyah_CoalAsia_AugSep2013

CoalAsia_AugSep2013_difficultchoiceAs an emerging economy and fast growing consumer of energy, Indonesia faces a difficult decision when it wants to continue its economic growth while at the same time ensuring that its greenhouse gas (GHG) emissions are reduced.

Currently, along with the growth in Indonesia’s economy, the energy demand of the country increases significantly, as the transport and industrial sectors grow, households become more affluent and commercial area development expands rapidly.

According to a 2009 report by the Finance Ministry and a 2011 analysis by PricewaterhouseCoopers, Indonesia’s steady economic growth of more than 6%, even during the recent global recession, was accompanied by a 9% growth in electricity demand and a 7% growth in the country’s total energy demand each year.

Should the country search for an easy answer for its energy supply, the most probable path is likely to be heavily relying on its fossil fuels, particularly coal and gas reserves.

Indonesia cannot any longer depend on oil to sustain its energy development. Since 2004, as reported by many studies, the country has already been a net importer of both crude oil and refined products.

With the relatively high global oil prices, the dependency on imported oil has placed considerable strain on the Indonesian economy and will create further burden, particularly since the country still has significant oil and electricity subsidies.

Hence, the country may see an option to maximize the use of coal and gas as one of the optimal solutions to meet its energy demand.

To boost the use of coal for power generation, for instance, the government launched a ‘crash program’ as mandated by the Presidential Regulation No. 71 of 2006, instructing the state-owned electricity company (Perusahaan Listrik Negara [PLN]) to accelerate the development of 10,000 MW (Megawatts) coal-fired plants.

With regard to the use of gas for power generation, the president issued the President Regulation No. 4 of 2010 that instructs PLN to develop gas-fired power station, along with the development of power plants that use renewable energy and more coals (known as the ‘second crash program’ of another 10,000 MW).

Such option in utilizing coal and gas, however, is not without unwanted consequences.

The first consequence is the likelihood of resources depletion risk. With pressures on production mounting to meet the export demand for coal and gas as well as rising domestic consumption, coal and natural gas shortages may eventually happen.

If Indonesia is not careful in managing its two important non-renewable resources, a similar situation to what the country has experienced with oil can recur, hitting back its economy.

If coal is heavily exploited and the rate of use for power generation is high, Indonesia will also likely to have another immediate negative consequence, which is a significant increase in its GHG emissions, especially CO2.

If electricity generation is dominated by coal, for instance, some experts predict increased CO2 emissions from the power sector by 2030, reaching 810 million metric tons of carbon dioxide equivalent (MtCO2e), or nearly seven times the amount in 2005.

In fact, the continuous increase in the use of fossil fuels may lead to an increase in the overall country’s GHG emissions by fourfold in 2030.

This projected growth in emissions is in contradiction with Indonesia’s pledge on climate change actions, as announced by its president, to reduce GHG emission by 26% by 2020 and to increase the use of renewable energy so that it accounts for 25% of total energy production by 2025. Such pledge has been further legally stipulated, among others, in the Presidential Regulation No. 61 of 2011 regarding the National Action Plan to Reduce GHG.

In addition, the high CO2 emissions resulting from a significant increase in fossil fuel consumption are likely to exacerbate global climate change impacts, in which Indonesia as an archipelagic nation is already vulnerable to.

With the current situation, the country has already experienced weather and climate-related disasters related. Data from the National Disaster Management Agency reveal that in the period of 1815-2013, the occurrence of disasters in this country has been dominated by this type of disasters, consisting of flooding (38%), land-sliding (18%), typhoons (18%), droughts (13%), flooding and land-sliding (3%), tidal waves or coastal erosion (2%) and forest/
land fires (1%).

Against these backdrops of a dilemma in further using fossil fuels, renewable and new energy resources appear to be well positioned to play a critical role in Indonesia’s energy policy.

To accelerate the use of renewable and new energy, however, is also not without difficulties.

If Indonesia is merely endeavoring towards climate change mitigation goals, for instance, the country may formulate a package of policies which totally promote and accelerate renewable energy development and radical reduction of fossil fuel subsidies.

Of various renewable energy sources (e.g. hydro, solar, biomass, geothermal) available in the country, unfortunately, not all can be considered as the ‘preferred solution’ to meet an ever increasing energy demand of Indonesia.

Geothermal power in particular appears to be the most appropriate and preferred solution. This is understandable because first, the country holds approximately 40% of the world’s geothermal reserves, which are still underutilized. It has also the potential to replace coal-fired power plants as a baseload electricity source with virtually no emissions.

Even with the attractiveness of geothermal and the push to develop this energy, an abrupt limitation to fossilbased energy consumption, as part of such environmentally-friendly policy, will likely have an adverse impact on the Indonesian economy.

This could happen particularly where rapid industrialization and economic development have been fueled mostly by fossil-based energy sources over so many decades, and rapid transformation means rapid changes required in the government’s and society’s sides. These include policy, programmatic and budgeting changes, as well as changes in public perception and support (especially when the price of energy may need to be adjusted).

Physical changes are also required in a bigger scale. The government needs to push for new infrastructure development, particularly in the forms of power plant, and grid transmission and distribution. This, for sure, will entail huge investment, human capacity and other support coming not only from outside the country but also domestically.

Such gigantic development programs cannot be carried out overnight.

Hence, there is a need for creative and balanced but firm solutions so that the country can achieve its goal to continue its economic growth while reducing its GHG emissions.

To start with, strong leadership and clear guidance from the top level of the government is key, especially to tailor different efforts and different technological development so that Indonesia has an optimal energy mix policy and reasonable but effective implementation programs.

The 2014 presidential and parliamentary elections may present such opportunity. The public need to scrutinize the candidates and ensure that they only elect those who have clear platforms to equitably balance economic and environmental goals.

Other immediate actions required to achieve such balanced solutions are mobilizing financial support and building human resource capacity. Close collaboration with the private sector is crucial in this case, especially when the government would like to attract huge investments for the future energy development.

The overall endeavor is a herculean task for a developing country like Indonesia. Nevertheless, the country has to take it on to ensure that its future is as bright as it aspires.


The author is climate and sustainability specialist, a doctoral candidate at the Australian National University, and the recipient of Australian Leadership Award and Allison Sudradjat Award.

Hot, clean and complex: Unlocking Indonesia’s geothermal power

Strategic Review, The Indonesian Journal of Leadership, Policy and World Affairs, January-March 2013, Vol. 3, No. 1, pp 72-85,

by Fitrian Ardiansyah and Adhityani Putri

Geothermal_Strategic Review_FA_2013The first parts of the article can be read below, the remaining section can be read if you are subscribed to Strategic Review http://www.sr-indonesia.com/index.php/subscribe

Indonesia has huge potential geothermal resources, but develop­ment has been slow and speeding it up is considered a herculean task. The high cost of investment and lack of government capac­ity are often cited as hindrances to development, along with familiar concerns from the era of decentralized government about unclear regulatory and institutional frameworks.

Finding solutions to these issues is critical to further unlocking this indigenous, clean and renewable source of power. Success could bring positive benefits to the country’s energy security and climate change mitigation efforts.

Indonesia can no longer depend on fossil fuels, particularly oil, to power its economy. Soaring global oil prices have placed consid­erable strain on the economy. According to the Finance Ministry, energy subsidies – from both fuel and electricity – in 2012 cost the government $18.55 billion (17 percent of government expenditures). This is a significant increase from $9.78 billion in 2010, as shown by several studies.The figure could even be higher since it reportedly underestimates the actual global oil price.

With Indonesia’s projected gross domes­tic product growth to remain steady at 4-6 percent and industrial production to slightly increase over the next couple of years, sev­eral studies, including from the National Council on Climate Change (NCCC) and the Energy and Mineral Resources Ministry (MEMR), have estimated that the power sector is projected to grow from 120 tWh (terawatt-hour) in 2005 to 970 tWh by 2030.

If Indonesia continues to depend on oil, rising electricity needs would lead to the depletion of Indonesia’s domestic oil reserves sooner than expected. A 2012 statement from the energy ministry estimated that the country’s remaining 10 billion barrels of oil reserves will be exhausted in the next 20 years should no new reserves be found. In fact, the country has been a net importer of both crude oil and refined products since 2004.

The formidable task of meeting rising electricity demand requires a funda­mental change in Indonesia’s energy policies, programs and actions. The country could opt for an easier solution, such as utilizing its abundant coal reserves. According to a 2009 World Bank report, the central government already has initiated a “crash program” to bring 10,000 MW (megawatt) of coal-fired power plants online as stipulated in Presi­dential Decree No 71.

Many critics, however, argue that while coal-fired power plants can alleviate short-term supply problems and reduce depen­dency on imported oil, the approach fails to address energy security goals and more im­portantly casts a shadow on the government’s pledge to tackle climate change and reduce emissions.

Key Indonesian stakeholders in­terviewed in 2011 believed that the new coal power plants – purchased at low cost from China – were mostly dirty and inefficient, according to the paper, “An Environmental Perspective on Energy Development in In­donesia” included in the 2012 book “Energy and Non-Traditional Security in Asia.” If the use of coal continues to dominate the power sector, many experts predict that increased CO2 emissions from electricity generation by 2030 could reach 810 million metric tons of CO2 equivalent (CO2e), an increase of nearly seven times the amount in 2005.

To read the complete article: Subscribe now

Fitrian Ardiansyah is a doctoral candidate at the Australian National University.

Adhityani Putri is a postgraduate scholar at the Australian National University.

About Strategic Review:

The Strategic Review is the Indonesian Journal of Leadership, Policy and World Affairs with its editorial board led by Dr Hassan Wirajuda (Former Minister of Foreign Affairs) and its advisory board consists of Prof Juwono Sudarsono (Former Minister of Defense), Let Gen (Ret) Agus Widjojo (Executive Board in the Partnership for Governance Reform), Prof. John Thomas (Harvard Kennedy School of Government USA), Prof. Erhard Friedberg (Sciences Po France) and Prof Arne Westad (London School of Economics UK).

Balancing energy development and forest protection


by Fitrian Ardiansyah

To see the pdf version, please click COALASIA_OPINION_fitrian ardiansyah_energy&forest_Aug2012

As the largest energy producer and consumer in Southeast Asia, Indonesia is currently struggling to cope with the increase in energy demand each year, causing short-term energy shortage and likely leading to worse situation if no immediate actions taken.

Albeit having enormous energy potential, developing energy sources in this country, while desirable, is fraught with hurdles, ranging from regulatory and pricing issues, lack of capacity and investment, to the problematic location of energy sources.

The heavy reliance on subsidized fossil fuels means it has brought about significant problems of energy security and economic issues, especially ever since Indonesia became a net importer of both crude oil and refined products in 2004.

The new extraction of oil, gas and coal as well as the development of new and renewable energy sources has been viewed as a priority by the government but this development faces a number of challenges, such as the fact that some locations of these energy sources overlap with Indonesia’s remaining important and fragile ecosystems, including its forests.

It has been reported by the Forestry Ministry in 2011 that the area of forests within mining concessions, which include for oil, gas and coal activities, covers approximately 2.03 million hectares – based on 842 licenses given for mining related exploration and exploitation between 2005 and 2011.

A number of environmental organizations, such as Mining Watch Canada and Walhi, even claimed a higher number stating that as of 2005, mining activities have encroached on or threatened 11.4 million hectares of forest in Indonesia, including 8.68 million hectares of protection forests and 2.8 million hectares of conservation areas.

A 2008 study conducted in South Kalimantan by M. Handry Imansyah and Luthfy Fatah of Lambung Mangkurat University, published in ASEAN Economic Bulletin, found that a massive coal exploitation without a proper technical handling for reclamation can cause serious water contamination and land degradation, because many mining areas are often left without rehabilitation.

A similar concern may also be said when it comes to the development of renewable energy, namely biofuels and geothermal.

In the case of biofuels development, mainly from palm oil, although considered as one of renewable sources of energy and therefore has the greenhouse gas (GHG) saving potentials, the development of these crops can further increase GHG emissions if the plantation replace forests and peat lands.

A 2011 article written by Gayathri Vaidyanathan in Nature shows that, for example, in North Sumatra and Bengkulu provinces, 38 and 35 percent, respectively, of peat-swamp forest were converted to oil palm plantations by the early 2000s – leading to the release of about 144.6 million tons of carbon from biomass above ground and peat oxidation below ground.

Another study conducted by Lian Pin Koh and David S. Wilcove in 2008, published in Conservation Letters,estimates that over 56 percent of oil palm expansion occurred at the expense of natural forest cover for the period between 1990 and 2005. In addition, according to the 2009 BAPPENAS (National Development Planning Agency) report, as of 2006, plantation licenses (i.e. predominantly for oil palm) on peatlands totalled 1.3 million ha.

With regard to geothermal energy, this type of renewables has a significant potential to contribute to the future electricity generating capability – with 10 gigawatts of total geothermal potential that is presently ready for commercial extraction as reported in 2009 by the World Bank.

If developed appropriately and immediately, geothermal energy can at least reduce the burden of approximately 35 percent of the current total generation capacity in 2035, as argued in a 2012 paper written by a research team from the Christian University of Indonesia, and eventually contribute to climate change mitigation.

Accelerating the development of geothermal energy is likely to be challenging since up to 60 percent of its potentials and reserves are located in the remaining important forest areas, according to a 2009 paper written by Montty Girianna, the Energy, Mineral and Mining Resources Director of Bappenas.

The exploration, extraction and overall activities of oil, gas, coal and geothermal have been previously subjected to the laws regulating the protection and management of pristine forests, including employing stricter conditions under which licenses are to be issued.

A 2011 report by PricewaterhouseCoopers explains that the Forestry Law No. 41 of 1999 (and its amendments No. 1 of 2004 and 19 of 2004) prohibit oil, gas and mining activities in protected forest areas except where a government permit is obtained.

This, however, was gradually altered, particulary since February 2010 when Government Regulation No. 10 of 2010 on Forest Areas Utilization was introduced. According to this regulation, development projects, including oil and gas activities, power plants, mining, transport and renewable energy projects, can take place in protected forests if they are deemed strategically important.

Specifically on geothermal, a presidential decree (No. 28 of 2011) released on 19 May 2011, allows conditional underground mining in protected forest areas, which includes geothermal energy. This decree was later strengthened with the release of the Memorandum of Understanding between the Energy and Mineral Resources Ministry and the Forestry Ministry (No. 7662 of 2011) aiming at accelerating the permit issuance of geothermal energy development in forest areas.

Critics, however, view that these regulations and policies which promote and accelerate energy development in forest areas will also encourage other destructive mining activities to take place since the use of the definition of ‘strategic’ or ‘vital’ development activities can have multiple interpretation.

Furthermore, these critics question the level of seriousness of the Indonesian president’s pledge to reduce Indonesia’s GHG, if many of his government’s policies still incorporate a large number of activities that will lead to deforestation in primary and secondary forests as well as peatlands.

It is, therefore, imperative for Indonesia to find practical and applied solutions to balance energy development and forest protection.

The balanced development of energy and forest protection is also crucial since the pledge made by Indonesia’s President particularly mentioning his commitment to changing the status of Indonesia’s forests from a net-emitter sector to a net-sink sector by 2030 and more specifically, emphasizing the preservation of areas under forest protection as one of key programs.

One immediate step to do this, for example, is by harmonizing and synergizing different regulations and policies that will result in a clearer guidance from the government. Vague words like ‘vital’ or ‘strategic’ development activities need to be clarified so that these will not be used as a loop hole.

Synergyzed policies will not be implementable if data regarding conventional energy sources, renewables and forest areas are not synergized as well. Recent actions taken by a number of government’s institutions to synchronize and agree on a map of forest and land use in Indonesia – adhered to across all sectors and levels of government – are therefore crucial to contribute to balancing energy development and forest protection.

Following these steps, a set of sustainability benchmarks is deemed urgent to be instituted to provide technical directions to mitigate the impacts and risks of energy development on forests.

The sustainability benchmarking – promoting principles of high conservation value forest, effective environmental assessment, management plans and monitoring, and multi-stakeholders participation – is required because not only the actual environmental impacts have to be mitigated but also the perceived risks coming from energy projects on these ecosystems need to be addressed, in which local communities and the public may have substantial interest.

The development and implementation of these benchmarks will also align with other laws regulating forest and biodiversity protection, namely the 2009 Forestry Law, the 1990 Biodiversity Conservation Law and the 2009 Environmental Protection and Management Law.

As an emerging economy with a significant increase in energy demand, supplying energy while reducing environmental impacts is definitely a balancing act.

Finding solutions, as elaborated above, is hence urgently required and if these solutions are applied appropriately, Indonesia is likely to secure its future energy in a sustainable way.


Fitrian Ardiansyah

The writer is climate and sustainability specialist, a doctoral candidate at the Australian National University, and the recipient of Australian Leadership Award and Allison Sudradjat Award. He can be reached at fitrian.ardiansyah@anu.edu.au

An Environmental Perspective on Energy Development in Indonesia

“An Environmental Perspective on Energy Development in Indonesia”. Authors: Fitrian Ardiansyah, Prof Neil Gunningham, Prof Peter Drahos.

A book chapter (Chapter 5) in M. Caballero-Anthony et al. (eds), Energy and Non-Traditional Security (NTS) in Asia, SpringerBriefs in Environment Security, Development and Peace 1.

Please check this link to access the chapter: http://www.springerlink.com/content/k34716127r953750/

or see the pre-published version of the chapter here: ESDP Vol 1 Ch 5 F Ardiansyah et al Environment Energy Indonesia


Indonesia faces an energy trilemma on the energy security, climate change goals and energy poverty fronts. Policies that focus exclusively on one prong of the trilemma may lead to unacceptable consequences in the others. Conceiving the predicament as a trilemma will encourage a more unified approach to its problem solving. Successful management will require a search for policy complementarities—the likeliest source of which may be the renewable energy sector—that allow the country to move forward on all three fronts. A reform of its bureaucracy to address implementation gaps in its energy policy will also be needed. The reduction in transaction costs associated with the implementation of Indonesia’s energy policy could be used as a broad criterion when considering these necessary changes.

Keywords:  Energy security – Energy poverty – Renewable energy – Biofuels – Climate change – Environmental impacts – Deforestation

Energy and NTS


Igniting the Ring of Fire: a Vision for Developing Indonesia’s Geothermal Power

Early July 2012, Published by WWF-Indonesia, Author: Fitrian Ardiansyah and Ali Ahsat.

WWF-Indonesia released a report, co-authored by Fitrian Ardiansyah and Ali Ashat, entitled “Igniting the Ring of Fire: A Vision for Developing Indonesia’s Geothermal Potential” – an essay that elaborates the challenges and opportunities involved in the development of geothermal energy in Indonesia, as well as gives a picture on their possible workarounds.

For the pdf file of the complete report: please read geothermal_report or alternatively click http://awsassets.wwf.or.id/downloads/geothermal_report.pdf

This report discusses economic, social, policy, financial and environmental aspects of geothermal energy development in Indonesia, including balancing geothermal energy development and forest protection, and setting the price right for geothermal investment.



Magsaysay and the environment

The Jakarta Post, Fitrian Ardiansyah, Canberra | Sunday, 7 August 2011, page 4, 3:26 PM

Original link: http://www.thejakartapost.com/news/2011/08/07/magsaysay-and-environment.html

The Ramon Magsaysay Award, considered Asia’s equivalent of the Nobel Prize, recently given to two Indonesians, clearly acknowledges that there are leaders in this country who significantly bring about positive changes to the environment.

Indonesia is a resource-rich country but is striving to develop its economy, alleviate poverty and at the same time secure energy, reduce deforestation and tackle climate change.

One of the two award recipients was Tri Mumpuni, acknowledged for her work leading IBEKA (the People-Centered Business and Economic Institute) in building community-run hydropower plants in rural Indonesia.

The award for Tri would offer a sense of optimism, particularly to approximately 70-80 million people, or almost one-third of Indonesia’s population, who currently lack access to electricity. These people mostly live in rural areas and the outer islands.

Developing micro-hydro power plants as a renewable energy resource serves the objectives of advancing this country’s economy, reducing greenhouse gas (GHG) emissions and alleviating poverty (for example by providing basic access to electricity).

IBEKA has demonstrated that by building 60 micro-hydropower plants with a capacity to generate 5 to 250 KW of electricity and provide electricity to 500,000 people in rural Indonesia, it has contributed to achieving these objectives.

This organization works closely with local communities to ensure that projects are sustainable in the long term and that electrification will have a maximum impact on the development of the communities. This success gives true hope to millions of Indonesians, in that such a complex challenge can be overcome.

The award is also expected to convince the government to intensify its current work in renewable energy development.

The central government has already had a general energy policy that advocates the diversification of energy sources and conversion from coal and petroleum-based fuels to renewable energy sources in a bid to reduce emissions.

However, the promotion of renewable resource development over the last five years has moved at a snail’s pace. At present, renewable energy production (hydropower, geothermal and biomass) makes use of only 3.4 percent of total potential reserves.

This is rather ironic, considering that this massive archipelago possesses a variety of renewable energy resources, including geothermal, solar, micro-hydro, wind and bio-energy.

Further breakthroughs are urgently required such as by reforming and correcting policy and pricing incoherence (for example by phasing out subsidies for fossil fuels), removing structural impediments and promoting investments in renewable energy.

The success story of IBEKA and others who are harnessing renewable energy, therefore, needs to be magnified and/or replicated.

The other award recipient is another source of inspiration of similar magnitude. Tuan Guru Haji Hasanain Juaini, has made his mark, not only through establishing a progressive Islamic boarding school, but also in motivating and organizing students, community members and fellow Indonesians to actively contribute to forest and water conservation.

Tuan Guru, meaning “esteemed master”, is an honorific title used by Muslim leaders in Lombok Island (east of Bali), West Nusa Tenggara. As a local religious leader, Hasanain is a key non-state actor of considerable influence in Lombok society.

Hasanain and his progressive Narmada Islamic School gained great respect by advocating the importance in preserving the remaining forests and water catchment areas in Lombok. They also demonstrated that conservation can start with a school.

Lombok has experienced the worsening seasonal water crisis. Droughts have brought misery to many and clean water is still a luxury only available to some. During the rainy season, some parts of the island suffer from flooding and landslides. With a majority of Lombok’s people still living in poverty, deforestation and the water crisis have worsened local people’s livelihoods.

A collaborative action plan — between governments, local communities, NGOs, the local public water enterprise (PDAM) — was formulated to show that there are solutions to this resource problem, and Hasanain has been lending his voice to support it since.

The solutions include forest restoration in upper catchment areas, payment for watershed services, river conservation and social economic development for local communities.

To back up his call for conservation, starting from Narmada, his students and teachers have established a number of nurseries providing approximately 1.5 million seeds and seedlings, and are also involved in restoration activities that have successfully rehabilitated 36 hectares of degraded forests.

His own house also provides a good example of conservation, which can start from each individual household. A semi-structured nursery and a humble green garden clearly symbolize the intentions of the owner.

Verses from the Koran on the house wall, including the first revelation (i.e. Iqra! or Read, Recite!), appear to reaffirm the commitment of Hasanain and his school to learn more and understand many things, including from nature.

These two Indonesian winners of this year’s Magsaysay Award have shown that ordinary Indonesians can overcome big challenges. Amid negative political, economic and environmental issues faced by this country, their leadership and success are a demonstration of the confidence, strength and capabilities of our people.

These two figures show that there is in fact a bright light of hope for this nation to prosper.

The writer is a doctoral candidate at the Australian National University, and the recipient of Australian Leadership Award and Allison Sudradjat Award.

The energy challenge


Original link: http://www.insideindonesia.org/feature/the-energy-challenge-18071467


Indonesia is rich in renewable energy but government policies foster reliance on fossil fuels

Indonesia is Southeast Asia’s largest energy producer and consumer. Its reliance on dirty and subsidised fossil fuels means it has made little progress in terms of renewable energy. 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.

Unless reversed, Indonesia’s current trends of expanding coal-fired power plants in order to respond to energy shortages and of heavily subsidising dirty energy will see the country fall radically short of its 2025 renewable energy targets. These trends will also continue to drain the country’s financial resources and deplete government budgets.

But switching to renewable energy won’t be easy. Removing fuel subsidies is a sensitive political issue. Promoting renewable energy requires structural adjustment and high levels of initial investment. Yet these are the conundrums which need to be urgently resolved if Indonesia wants to secure its energy, develop its economy and tackle climate change.


Increasing energy demand

Who would have thought that such a resource rich country would one day have difficulties securing and providing basic energy to its citizens? Indonesia has a plentiful supply of accessible energy sources, both from fossil fuels and renewables, and is the largest energy producer in Southeast Asia. Yet the country is struggling to keep up with its own energy demands.

Historical data from the Ministry of Energy and Mineral Resources show that energy demand has been increasing faster than economic development and population growth. According to the Green Policy Paper released by the Finance Ministry, total energy demand is growing by around seven per cent per year, as the transport and industrial sectors grow, and as households become more affluent.

A large proportion of this demand has been met by polluting fossil fuels, mainly oil. A consequence of this skyrocketing demand is that since 2004 Indonesia had become a net-importer of both crude oil and refined products.

With a production capacity of half a billion barrels per year and increasingly limited oil reserves, it is estimated that Indonesia’s remaining 10 billion barrels of oil reserves will be exhausted in less than 20 years. If no new 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.


Electricity shortages

More than 70-80 million people, or almost one third of Indonesia’s 225 million inhabitants, lack access to electricity. These people mostly live in rural areas and the outer islands. In 2004 for instance, 90 per cent of rural households had no electricity compared to only 16 per cent in urban areas, and the electrification ratio in Papua and Nusa Tenggara was only 20-30 per cent.

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. Hence, the high price of oil on the global market has not only made it more expensive to produce and import gasoline, but has also 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 – as stipulated in Presidential Decree number 55 of 2005 – and it struggles to do so. Fuel is also heavily subsidised by the government. Together, fuel and electricity subsidies have created a massive burden on the state budget. Their estimated cost to the government in 2010 is US$9.78 billion, and in 2011 had already hit US$3.68 billion by March.


Reliance on subsidies

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. Moreover, and very relevant to the issue of climate change, subsidies lead to overconsumption of energy because the actual cost of that energy is not reflected in the price that 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. There is plenty of room for improvement. Some studies show that Indonesia could relatively painlessly achieve 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. In 2009 Agus Purnomo the special advisor to the president on climate change stated that cutting subsidies on fossil fuels would bolster the competitiveness of renewable energy sources. The logic is that 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.

However, eliminating fuel subsidies has never been an easy task. 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 at these subsidies but the issue remains politically contentious. The parliament in particular is reluctant to take action.


Renewables: potentials and challenges

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.

The central government’s general energy policy advocates diversification of energy sources and conversion from coal and petroleum-based fuels to renewable energy sources, with the overall goal being to reduce emissions. Nonetheless, promotion of renewable resource development over the last five years has progressed very slowly. 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 very system of government. Not only is the bureaucracy lacking in capacity and resources, and riddled by inter-departmental tension, at the national level. But 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. However, 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.


Between a rock and a hard place

Currently, Indonesia’s total power generation capacity is 21 gigawatts, but the actual rated capacity is just 18 gigawatts, two-thirds of which is concentrated in Java, Madura and Bali. Electricity demand grows by 9 per cent per year on average, hence the current capacity is no longer sufficient. The pressure to meet the energy shortfall is immediate and pressing, and a cause of discontent both to those who are beyond the reach of the existing grid, and those who are part of it but increasingly subject to black outs.

The government faces dilemmas in working out how to meet the expectations of these groups. Continuing the use of subsidised oil will cost the country’s economy. Increasing the use of coal – the current policy envisages the construction of coal-fired power plants with a total capacity of 10,000 megawatts – will meet demand in the short term but it does not provide a long term solution since the plants are mostly inefficient. Coal-fired plants also contradict Indonesia’s commitment to tackling climate change, and also produce other environmental harm, such as smog and acid rain.

On the other hand, despite the potential of renewable energy in Indonesia, the preference for coal and previously oil have seen this sector grow only sluggishly. Successful renewable energy development would address escalating concerns over environmental issues and reduces dependency on conventional energy resources. However, to get there, significant investment and serious governance reforms are needed.

This is ripe for Indonesia to make tough but right decisions about 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 (fitrian.ardiansyah@anu.edu.au) is a PhD candidate at the Australian National University, and was formerly program director for climate and energy at WWF-Indonesia.

This article was re-published in Climate Spectator (Indonesia’s dirty energy challenge, 1 August 2011), East Asia Forum (Indonesia’s energy challenge, 26 August 2011) and Jakarta Globe (Renewable energy’s slow road in Indonesia, 27 August 2011):