The International Energy Agency recommended on Friday that Indonesia do away with fuel and electricity subsidies, arguing that they constrain investment, cause inefficiencies and impede the diversification of the energy sector.
Nobuo Tanaka, executive director of the Paris-based intergovernmental organization, said both petroleum and electricity subsidies had inhibited investment in upstream and downstream energy.
“Subsidies have undermined energy efficiency and renewable energy programs for many years,” Tanaka said in Jakarta while presenting the agency’s first report on Indonesia’s energy policy.
“These subsidies also incur major financial and political management costs for the state and for state-owned companies responsible for their implementation.”
Tanaka said that removing subsidies on fossil fuels and electricity was key to developing and deploying renewable energy technology.
“Allowing cost-reflective pricing should be the critical priority immediately,” he said.
However, Tanaka also said that wiping out Indonesia’s subsidies could not be done all at once, and that the government should set a phased schedule for their removal. Doing so properly would require publicizing the cuts in advance and explaining the negative impacts of subsidies, he said.
The IEA’s recommendations came at the invitation of Energy Minister Purnomo Yusgiantoro, who had asked the organization to review Indonesia’s energy policies.
Brett Jacobs, the IEA’s manager of Southeast Asia programs, cited next year’s general elections as one short-term impediment in carrying out a program of subsidy cuts. He suggested, though, that the government set a time line for their removal in 2009.
Indonesian officials did not warmly welcome the agency’s recommendations, saying they would place a heavy burden on the poor.
Waryono Karyono, secretary general at the Ministry of Energy and Mineral Resources, said the proposals were unrealistic.
“People’s purchasing power remains low, so it would be hard to implement,” he said.
The energy commission of the House of Representatives agreed.
“Indonesia is a sovereign country,” said Alvin Lie, a member of the commission. “Agencies like the IEA cannot dictate to us what to do.”
Tunggul Sirait, an expert staff member for the commission, said that implementing the agency’s recommendations would be difficult. “The removal could be done in phases,” he said. “But it cannot be done immediately,” considering the average Indonesian’s diminishing purchasing power amid the global financial crisis.
The government set fuel subsidies at Rp 126.82 trillion ($10.53 billion) for 2008 and Rp 105.5 trillion for 2009.
The Jakarta city administration and national government also provide subsidies for state power company PT Perusahaan Listrik Negara to curb power costs. The last time PLN raised its rates was in 2003 under former President Megawati Sukarnoputri.