Dear Min It is a ple Agency, review c Kingdom States. I would other

Indonesia 20
015: In-Depth
h Energy Poliicy
IEA
A Executive Director
D
Maria van der Ho
oeven
17 February 2015
Jakarta
nister Said, D
Distinguished
d guests,
Dear Min
It is a pleeasure to bee here today to present you
y the resullt of a year of
o work by th
he Internatio
onal Energy
Agency, with the sup
pport of the Ministry of Energy and Mineral Reso
ources. I sho
ould also notte that this
t United
review ccould not haave been possible without the support of the governments of France, the
Kingdom
m and Japan and the exp
pert contribu
utions from N
Netherlands, Sweden, Au
ustralia and tthe United
States.
I would like to expreess our gratittude to the Ministry of EEnergy and M
Mineral Reso
ources, as weell as to all
other staakeholders w
who have pro
ovided advice, guidance and analysis on Indonesiia’s energy p
policies and
support to prepare tthis review. TThis review is an importaant milestone in relations between the IEA and
Indonesiia.
Sometim
mes when I present such reviews, I am
m compelled to start with
h pointing ou
ut significant challenges
that lie ahead. For n
no energy syystem is without its challenges. Yet today I am pleased – in
n fact I am
d – to be able to start by offering con
ngratulationss.
delighted
In the past few m
months, Ind
donesia hass already taaken significcant steps on one off our key
progress on a number o
of others. Th
ncrete exam
mple is the
recommendations, aand made p
he most con
oordination Board to faacilitate infrrastructure
creation of a singlee office witthin the Invvestment Co
wable energyy, electricity aand natural gas.
g This is a notable achievement.
investmeents in renew
And of course I mustt note the acction that Ind
donesia is takking on redu
ucing fossil fu
uel subsidies,, beginning
dition there has
h been pro
ogress on strreamlining of overlapping agencies, d
discussions
with gassoline. In add
on indep
pendent regu
ulators, and action
a
on energy sector ggovernance. While these are all first steps, they
are vitallly important steps.
© OECD
D/IEA, 2015
hich it can bee proud. A ssuccessful traansition to
Of coursse, Indonesiaa has a great many succcesses of wh
democraacy, high grow
wth rates ovver the past 1
15 years, join
ning the G20,, and devoluttion of decisiion-making
and budggetary poweer to the local level. Thesee are significaant achievem
ments.
But proggress always comes at a price. Indonesia’s econo
omic success,, rising livingg standards, population
growth and rapid u
urbanisation have increaased energyy consumptio
on rapidly. TThis trend iis likely to
continuee.
For now, Indonesia rremains a neet energy exp
porter. Globaally it is the largest coal eexporter and
d regionally
products the country is
the largeest exporter of gas and liquid biofueels. Indeed, apart from oil and oil p
energy in
ndependent.. The expanssion of its coaal, palm oil aand biomass production, as well as a substantial
increase in the explo
oitation of thee archipelago
o’s renewablle energy pottential, have helped this process.
Nonetheeless, amid d
dwindling oil and gas reeserves and production, a lack of exxploration, aand ageing
refineriees, Indonesia is increasinggly dependen
nt on imported oil supplies – it is now
w the second
d-largest oil
importerr in the region. This has led to thee country beeing faced w
with a consid
derable bill to finance
subsidiseed end-consu
umer prices – a legacy off its times as a net oil exporter.
The conttinuation of Indonesia’s economic, political and
d social succeess story deepends on itss ability to
deliver ssustainable and sufficient energy supply to maarkets and u
ultimately to
o consumerss. Meeting
demand growth and
d ensuring tthe environm
mental sustaainability of energy supp
plies must remain
r
key
pillars off its economic and investtment policiees and strateegies. This wiill require further improvvements to
Indonesiia’s institutiional set-up
p, alongsidee stronger policy planning and im
mplementation, more
investmeent in criticcal energy infrastructure, and conttinued moveement towaards regulated energy
markets and cost-refflective pricin
ng.
© OECD
D/IEA, 2015
our last Enerrgy Policy Reeview. Howeever Indonesia still lacks policy and
There haas been proggress since o
institutio
onal coheren
nce. There is a need for cclearer definition of respo
onsibilities, improved co--ordination
and greaater market o
orientation.
Simply speaking, eneergy policy in
n Indonesia today sufferss from the invvolvement o
of too many iinstitutions
overlapping roles. In particular, thee co-existencce of ministrries, councilss and task
and agencies with o
e
charged
d with co-ord
dinating poliicy implemen
ntation in th
he same secttor, complicaates rather
forces, each
than faccilitates policy formulation and imp
plementation
n. There is no clear reesponsibility for policy
formulattion and implementation.
What this means in practice
p
is th
he lack of a single
s
point o
of responsibiility for the d
delivery of po
olicy goals.
on can be helld accountab
ble when goals are not reaached in time.
As such, no institutio
This has led to policyy goals that are sometim
mes too amb
bitious, refleccting politicaal priorities rather
r
than
achievab
ble targets. The
T goal of reaching
r
a 23
3% renewable energy sh
hare in the energy mix byy 2025 is a
case in p
point.
One meaans to addreess this prob
blem could b
be to updatee the 2007 Energy Law to delineate clearly the
responsiibilities of ceentral-level institutions,
i
and ensure that districtt-level regulations are required to
m to national fframework leegislation on
n energy policies and lawss.
conform
Similarlyy, despite thee progress In
ndonesia hass made in itss transition ffrom a centrrally planned
d economy
towards a market-baased econom
my, the legal and regulatory framew
work needs further
f
impro
ovement if
ntry is to attrract the invesstment necesssary to conttinue to deveelop and susttain its energgy sector.
the coun
Private investment rrelies on cleaar and transparent rules and a reaso
onable degreee of confideence about
ure. Indonesia urgently needs to claarify the rules, regulatio
ons and tax regimes forr investors
the futu
engaged
d in natural reesource extraaction as well as in electrricity generattion.
The Antii-Corruption Commission
n could servee as an organ
nisational mo
odel for an in
ndependent institution
that rem
mains part of the state. The presentt integration
n of the secttor regulatorrs into the M
Ministry of
Energy, or into the state-owned
d companies,, has created
d conflicts o
of interest vis-à-vis the ssetting and
ment of ruless.
enforcem
D/IEA, 2015
© OECD
will continue to face challenges in dellivering suitaable infrastru
ucture. This
Without such clarity,, Indonesia w
us energy m
mix objectives, increase
need is at the heartt of Indonessia’s challengge to reach its ambitiou
production an
nd ensure deemand growtth can be meet.
energy p
The plan
nned increasse in renewaable energy p
production relies
r
on largge investmen
nts in the traansmission
grid alo
ongside inveestment in geothermal, solar and wind generating caapacity. Sim
milarly, the
establish
hment of a d
domestic gass market requires additio
onal gas tran
nsport infrasttructure in o
order to be
able to re-direct gas from the export markket. The dom
mestic coal ssector stand
ds to benefitt from the
ong-standingg plans to bu
uild coal transport railwayys, and the eelectricity seector needs
implemeentation of lo
additional transmissiion lines.
Indonesiia’s policies and plans identify thesse infrastruccture projectts but their developmen
nt is often
delayed and the fund
ding sources unclear. And
d without this new infrasstructure, Ind
donesia riskss electricity
ming years and a higher en
nergy bill as a result of grreater reliancce on imports.
blackoutts in the com
Overall, Indonesia needs to strengthen its support for in
nvestment in
n critical eneergy infrastru
ucture and
ntly enhancce co-ordinaation among all state actors. Th
he Investmeent Board sshould be
significan
strengthened and a one-stop-shop for co-ordinating renewable
r
eenergy, electtricity and n
natural gas
ucture investment established within it. This will gguide investo
ors through th
he process of obtaining
infrastru
the neceessary permits for consttruction of eenergy infrasstructure on each of thee district, regional and
central leevels.
Energy subsidies
s
aree holding bacck Indonesia’’s transition to a sustainaable energy system in a number of
ways. Su
ubsidies takee much-needed resources from the sstate budget that could b
be used to fu
und critical
energy infrastructuree and other public spen
nding needs. Subsidies allso discouragge the conseervation of
© OECD
D/IEA, 2015
witch to cleaaner alternattives, thereb
by impedingg the achievvement of Indonesia’s
energy aand the sw
National Energy Policcy goals and further increeasing its dep
pendence on
n energy impo
orts.
Clearly, any
a phase-out of subsidiies will have short-term negative effeects in the fo
orm of increases in the
cost of living and inflationaryy pressures. The goverrnment needs to ensure the availability of
ures to support the pooreest households.
compenssatory measu
Given paast resistancce to subsid
dy reform, th
he government needs to
t devise a clear politicaal strategy
regarding subsidy ph
hase-out, com
mmunicate eexplicitly thee steps it inteends to takee, provide traansparency
usage of saved expenditure, and com
mpensate peeople living in poverty o
or at risk of ffalling into
on the u
poverty again.
All of theese obstaclees stand in th
he way of a ccritical goal ffor Indonesia, the establlishment of a domestic
gas markket.
If the country wishess to establish
h gas as a briidging fuel to
owards a mo
ore sustainab
ble energy seector, it will
nclude addreessing the lack of long--term policyy planning,
need to take signifficant steps. This will in
ment and co
onstruction, and the lackk of coordination betweeen market
extensive lead timess for investm
sectors.
o-ordination of the gas
It will allso mean the evolution of the transsmission nettwork. Overssight and co
transporrt sector neeed to be placced with an independent
i
t, well-resourced regulator. It should
d be tasked
with oveerseeing thee long-term developmen
nt of the secctor, as well as with thee implementtation of a
transparrent transmisssion access aand pricing regime.
r
orm the mandatory alloccation of gass supply and
And of course
c
the go
overnment n
needs to refo
d regulated
prices. In
n their place, it should grradually intro
oduce a tran
nsparent and
d predictable natural priccing regime
and bring domestic w
wholesale gas prices closeer to export levels.
© OECD
D/IEA, 2015
onesia’s prim
mary source of energy, accounting for about 3
36% of the
But of ccourse, oil remains Indo
country’s total primaary energy su
upply. Indeed
d as you kno
ow, the coun
ntry is a matu
ure player in the global
ory of oil eexploration and production. Howevver, there h
have been
oil industry, with a long histo
considerrable changes in recent decades.
The coun
ntry’s reservves and production have declined con
ntinuously sin
nce its produ
uction peak in
i the mid1990s, leeading to thee country beecoming a neet oil importeer in 2004. Meanwhile,
M
IIndonesia’s o
oil demand
has increeased significcantly in receent years, bo
olstered by sttrong nationaal economic growth.
Indonesiia is now facced with incrreasing dependency on im
mported crude oil and oil products. TThis places
enormou
us pressure o
on its govern
nment budgeet, as the govvernment sub
bsidises a number of oil p
products at
prices lower than international leevels.
Despite aims to redu
uce the sharre of oil in itss future energy mix by encouraging
e
the use of o
other fuels,
especiallly in the tran
nsport and p
power sectors, oil will reemain imporrtant for nattional energyy supply as
well as ggovernment revenue. Th
here are multiple challen
nges to be reesolved in th
he oil sectorr along the
entire value chain, to ensure o
optimal, susttainable devvelopment and utilisatio
on of the co
ountry’s oil
resourcees.
As for ccoal, the po
olicies and rregulatory frramework ggoverning the mining seector have undergone
considerrable changee since 1998, accompanieed by rapidlyy rising export volumes. Indonesia
I
is one of the
world’s lleading coal producers, aand since 201
12 has been the world’s lleading expo
orter. This is largely
l
due
to Indon
nesia’s democratisation and the deecentralisatio
on of goverrnment, brin
nging greateer regional
autonom
my to the coaal mining secctor. This hass led to the rapid expansiion of the co
oal industry aand a surge
in exportts.
© OECD
D/IEA, 2015
nities have beegun demanding greater benefits fro
om the minin
ng industry,
At the saame time, local commun
increasin
ngly calling fo
or companies to be moree transparent and promo
ote better social and enviironmental
outcomees. Recent go
overnments h
have therefo
ore been challlenged to baalance the sh
hort-term maaximisation
of beneffits, in termss of mining revenue,
r
with the medium- to long-tterm develop
pment of a ssustainable
industry.
However, conflicts between
b
com
mpanies and
d communityy have increaased in frequency and m
magnitude.
Indonesiian civil socieety organisattions are playying an impo
ortant advocaacy role for local
l
commu
unities with
the coal industry, deemanding thaat mining com
mpanies reco
ognise “local rights”. Thiss has sometiimes led to
ompanies an
nd civil society. It is eessential thaat companiees demonstrate better
conflict between co
mental and ssocial respon
nsibility to eensure comm
munities in th
he host areaas benefit fro
om mining
environm
sector acctivities.
Indonesiia was the w
world’s sixth-llargest emittter of carbon
n dioxide in 2
2012, accoun
nting for 4.5%
% of global
emission
ns. Energy-reelated emissions make up
p 25% of thatt total and are rising fastt. They are prrojected to
increase further, in liine with Indo
onesia’s high economic grrowth rate.
So like m
many countrries, Indonessia today facces a dilemm
ma – how to
t balance th
he developm
ment of its
economyy, the extracction of natural resources, increasin
ng energy deemand with rising GHG emissions,
worsenin
ng air pollutiion, and the loss of the significant natural capitaal and ecosysstem servicees provided
by its forrests and theeir underlyingg biodiversityy.
with an exteensive coastline and sign
At the saame time, ass a tropical archipelago
a
nificant depeendence on
agricultu
ure and natu
ural resourcees, Indonesiaa is highly vu
ulnerable to the effects o
of climate ch
hange. The
Asian Deevelopment Bank estimaated that thee economy-w
wide cost of climate change in Indon
nesia could
reach beetween 2.5%
% and 7% of GDP by 2100. This raises questions about the reesilience of Indonesia’s
energy iinfrastructure to more ffrequent and
d more intense weatherr related dissasters such as floods,
storms, and
a sea-level rise.
Finding tthe appropriaate balance will
w be criticaal to ensuringg a sustainab
ble future forr the countryy.
© OECD
D/IEA, 2015
ources hold significant po
otential for electricity gen
neration. Thee country ben
nefits from
Indonesiia’s fuel reso
considerrable domesttic coal, geotthermal and hydropower availability,, but faces significant challenges in
realising this potential, given its vvast size and almost coun
ntless numbeer of islands. As such, thee country is
ng shortages in electricityy supply, and
d is forecast to experiencce significantt growth in
encountering ongoin
power demand.
Since the last Energy Policy Revview of Indonesia in 200
08, the country has steadily increaseed its total
installed capacity frrom around 29 500 meegawatts in 2007 to approximately 46 400 in 2013. The
on in installed capacity haas helped co
ontribute to aan improved national eleectrification rrate, which
expansio
increased from aroun
nd 65% in 20
008 to just ab
bove 80% in 2013.
2
Rural eleectrification, however, co
ontinues to fface challengges, as most off-grid areaas are in the outer ring
of island
ds and locateed far from ffuel sources. Indonesia’s fuel mix forr power geneeration has aalso seen a
significan
nt shift awayy from oil in recent yearss towards th
he utilisation of domesticc coal resourrces, as the
struggle to develop hydropower
h
and geothermal power p
persists.
ble energy plays an im
mportant rolee in Indoneesia’s national energy p
policies, partticularly as
Renewab
maximising renewab
ble resourcess helps strengthen the seecurity of en
nergy supply.. The government aims
d up the explloitation of rrenewable en
nergy and to increase its share of prim
mary energyy to 23% by
to speed
2025. To
oday, howeveer, the counttry is exploiting only arou
und 5% of its renewable energy
e
capaccity.
This is u
unfortunate, because Indonesia’s po
otential for renewable eenergy is higgh. The cou
untry holds
around 28 gigawatts of the wo
orld´s geotheermal reservves, about 3
32 gigawattss of potentiaal biomass
watts of hydro energy resources. It also has consiiderable solar energy pottential.
reservess and 75 gigaw
D/IEA, 2015
© OECD
o this potenttial, the goveernment has implementeed feed-in taariffs and taxx incentives
To take aadvantage of
to encou
urage investm
ment, includiing subsidies for transporrt biofuels, and the Energgy Self Sufficiient Village
program
mme. As the cost of tran
nsporting fosssil fuels to ffar-off island
ds is high, reenewable energy could
significan
ntly enhancee the provisio
on of basic en
nergy needs on isolated iislands and rural off-grid areas.
Of course the cheapeest power is the power not used at all.
Indonesiia is the larggest consumer of energyy in Southeaast Asia, acco
ounting for more than 3
36% of the
region’s energy dem
mand. Energyy consumption is forecast to increasse by 7% peer year, and growth in
demand for energy ccan be seen in all sectors..
In response to this growing demaand, and to ffacilitate thee implementaation of enerrgy efficiencyy plans and
program
mmes, Indoneesia establisshed the Dirrectorate-Geeneral of Neew Renewab
ble Energy aand Energy
Conservaation (DGNR
REEEC) withiin the Minisstry of Enerrgy and Min
neral Resourrces (MEMR
R) in 2010.
Significant potential exists for Ind
donesia’s eneergy efficienccy market ass the governm
ment increasses support
he residentiaal, industrial aand transporrt sectors.
for energgy efficiency policies in th
Indonesiia’s transporrt sector is deefined by thee nature of iits geographyy. The counttry is urbanissing and its
population is increassing, as are ssales of motor vehicles. TThese trendss are converrging to causse crippling
per capita is expected to
o rise by app
proximately
congestion in the citties, especiallly here in Jaakarta. GDP p
will inevitablyy lead to mo
ore families owning
o
cars.. Moreover, fuel prices are
a heavily
60% by 2020, this w
donesia’s govvernment recceipts and crreates disinceentives for effficiency.
subsidiseed, a policy that hurts Ind
An imbalance between vehicle growth and in
nfrastructuree, combined with a lack o
of spending o
on efficient
n stationary traffic. Averaage speeds
mass traansit, means that one-third of Indoneesian fuel usee is wasted in
© OECD
D/IEA, 2015
And bus lanees suffer from
m a lack of
continuee to decreasee unabated across all major Indonessian cities. A
enforcem
ment, underm
mining their potential to become high
h-capacity bu
us rapid transit systems.
Of coursse the govern
nment is awaare of these challenges and has respo
onded by prioritising four transport
policies:




First, to increasee usage of compressed natural gass in vehicless, with reseaarch and development
focused on masss production of converterr kits and devvelopment off CNG infrasttructure.
ond, the prom
motion of Afffordable Eneergy-Saving Cars – smaller, typically domesticallyy produced
Seco
cars,, that bring w
with them th
he downsidee of increasin
ng congestion
n, as they caan enter prevviously unmoto
orised areas..
Third
d, the impro
ovement of the ability of gasoline and diesel engines to handle high
her biofuel
conttent.
And fourth, the d
developmentt of public traansport and traffic management.
Ladies an
nd gentlemen,
You will forgive me ffor having spoken bluntlyy about the challenges faccing the country, for greaat progress
omes withou
ut new challlenges. And so with thaat in mind, I will leave you with fo
our specific
never co
recommendations – the full set o
of recommen
ndations can be found in the publicattion, which I encourage
o read.
you all to




First, while Indo
onesia has sttarted impleementing our basic recommendation
n to phase o
out energy
while fully rolling out its new social
subssidies, we urrge the government to ccontinue on this path, w
assisstance prograam for Indon
nesia’s population.
Seco
ond, step up co-ordinatio
on in energy policy makin
ng and regulation; ensure consistenccy between
mod
delling scenaarios, targetss, and impleementation; and focus on the quaality of legisslative and
regu
ulatory proceesses.
Third
d, improve the energy in
nvestment fraamework byy speeding up
p decision m
making and opening the
enerrgy sectors to
o market-bassed mechanissms for pricees and fuel ch
hoices.
Fourrth and finally, develop aand implemeent an integrrated, long-tterm develop
pment plan for natural
gas infrastructure, reform wh
holesale natu
ural gas pricing and allocaation mechanisms, and eestablish an
wnstream reegulator for natural gas and electricity, with th
he long-term
m goal of a
independent dow
onal wholesaale market an
nd more efficcient use of ggas.
natio
© OECD
D/IEA, 2015
With these key recommendations in mind, I again offer my congratulations for steps already underway.
There is much for Indonesia to be proud of, just as there is much that remains to be accomplished, and
of course there is much to look forward to.
Thank you for your attention.
© OECD/IEA, 2015