Government’s exit strategies for failing energy subsidies
By the end of May, the government will announce an energy conservation regulation. Due to hassles in the political process to increase subsidized-fuel prices, the government will design a policy that aims to curb consumption of subsidized fuel.
Theoretically, economists prefer a price mechanism to adjust fuel consumption to volume restriction, because the latter is difficult to control and the administrative costs to run the policy will exceed the benefits.
Preparing the regulation takes time. After more than two months, the government remains uncertain about the timeline of the regulation. There is also a question as to whether the policy will be mandatory or just optional like the previous regulations.
What are the rewards and punishments? Is it fair enough? Who will execute the program? How does the personnel assess the regulation? How easy or difficult is it for people to follow the regulation? Simply put, skepticism is haunting the creation of the regulation.
As time goes by, new problems arise. There are fuel shortages such as what happened in oil-rich Kalimantan, rapid increases in fuel smuggling and a rise in the expected inflation rate, all because, directly or indirectly, of the big price gap between subsidized and market prices of fuel. Realization of subsidized fuel has far exceeded the quota set in the state budget.
At the same time, people are worried that the conversion of cars from fuel to gas will not materialize anytime soon due to poor infrastructure, including a lack of gas-refilling stations.
The rising demand for gas also needs to be managed effectively, because not only is the retail industry needing more, but so are the electricity and transportation sectors.
Any constraint in the supply of gas will adversely affect growth in those sectors and distress overall economic growth.
As all sectors will compete to obtain natural gas, the government needs to pursue a gradual approach during the transition process in order to provide more space for infrastructure development.
On fuel subsidies, Indonesia is trapped in its own wait-and-see policy, rather than taking a more systematic approach to address the problem for the long term. According to the 2007 Energy Law, energy prices are to be set based on fair economic value.
Further, the law also says that the government should provide subsidies to the poor. But the current fuel subsidy means both the rich and the poor enjoy it, so the energy pricing policy fails to address the issues of fairness and efficiency that are clearly stipulated in the law.
Between 2005 and 2011, Indonesia had five regulations on energy conservation: Presidential Instruction No. 10/2005 on Energy Conservation, Energy and Mineral Resources Ministerial Regulation No. 0031/2005 on Technical Instruction to Implement Energy Conservation, Government Regulation No. 70/2009 on Energy Conservation, Presidential Instruction No. 13/2011 on Energy and Water Saving and Presidential Decree No. 61/2011 on National Action Plan to Reduce Greenhouse Gas Emissions.
The question is how we can effectively implement those regulations. Michael T Rock wrote a paper for the Bulletin of Indonesian Economic Studies (BIES) this year, making four suggestions as to how Indonesia can improve energy saving programs by taking lessons from China.
First, Indonesia needs to provide more incentives to the industry to improve energy efficiency, conduct technology upgrades, save energy and increase exports.
Second, China has liberalized the prices of coal, petrol and electricity. This will give a better chance for firms to demonstrate their ability to improve energy use.
Third, the Chinese government has a mandatory performance level for energy efficiency and the results are published publicly.
Fourth, the capability to conduct research and development needs to be enhanced by substantially increasing public-sector research.
Indonesia has all but to reform its energy pricing policy to ensure that prices reflects the costs. This can be done credibly if the policy is shifted from a political consensus to an agency or a board/committee that can calculate the costs of services in a more rational, transparent and credible manner.
The energy price policy will be more efficient if the market is competitive. Due to its lack of capacity to monitor and evaluate energy savings, the government needs to focus on policies that will have a high impact on reducing fuel subsidies.
Dependency on fossil fuels in the electricity sector must be gradually reduced, especially for regions outside of Java.
The government should encourage state-owned electricity company PT PLN to operate more efficient engines, such as supercri-tical or ultrasupercritical, at coal-fired power plants.
It also has to reform the pricing structure because the existing one does not encourage energy savings. PLN is applying fixed prices for customers using between 1,300 volt amperes — 5,500 VA.
In the transportation sector, the best strategy is a gradual reduction of fuel subsidies and the allocation of more subsidies for the cost of public transportations, such as buses and commuter trains.
The government may try this policy in Jakarta first by providing price discounts on TransJakarta bus services and commuter trains, then evaluating their impact on fuel consumption.
The writer is a researcher at the Economic Research Center at the Indonesian Institute of Sciences (LIPI) and PhD candidate at the National Graduate Institute for Policy Studies (GRIPS), Tokyo.