Geothermal energy could readily meet up to 40 percent of Indonesia?s energy needs

Indonesia’s energy policies lack consistency and long-term viability and will continue to drain its 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. If left unchanged, Indonesia’s current responses to energy shortages — expanding coal-fired power plants and heavily subsidizing dirty energy — will see the country fall radically short of its 2025 renewable energy targets.

According to the Green Policy Paper released by the Ministry of Finance, total energy demand in Indonesia is growing by around 7 percent per year as the transportation 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, and 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 percent comes from hydroelectric, geothermal and other renewable sources. Thus the high price of oil in the global market has made it more expensive to produce and import gasoline and has led to increasing electricity-generation costs.

Electricity is heavily subsidized; customers pay for electricity at prices far below market. State-owned electricity company PLN, however, is required to buy energy at market price, something it struggles to do. Fuel is also heavily subsidized 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 $9.78 billion, and in 2011 had already hit $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 percent of households captures 70 percent of the subsidies. Almost a third of Indonesia’s 225 million inhabitants lack access to electricity, especially in poorer rural areas. Subsidies also lead to the overconsumption 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 rates. 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 utilized 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 percent to 30 percent in households, 10 percent to 23 percent in the commercial sector and 7 percent to 21 percent 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 10 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.

The country possesses a variety of renewable energy resources, including geothermal, solar, micro-hydro, wind and bioenergy. 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 percent of national electricity demand. Yet currently Indonesia only uses 4.2 percent 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 decentralized 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 decentralization, 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, as well as 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, formerly program director for climate and energy at WWF-Indonesia, is a PhD candidate at the Australian National University.