Tue, 24 Jul 2007
From: Asia Times
By Bill Guerin
JAKARTA - Indonesia is now formally on the vanguard of the global green energy movement. A new energy law approved last week aims to reduce significantly the economy's dependence on imported refined oil while boosting the use of other energy sources, including natural gas, biofuels and geothermal supplies.

The law mandates the establishment of a National Energy Board, chaired by the president, which will carve out policies and oversee development in the energy sector. The new law also stipulates that a strategic reserve in both conventional fossil fuels and renewable energy resources, such as bio-diesel, will be maintained and penalties will be imposed on industrial energy users who ignore conservation. Those who promote it, on the other hand, will be given incentives.

The new scheme includes a dramatic altering of the national energy-use mix, with renewable energy sources, currently 5%, accounting for more than 17% of total supply by 2015. Over the same period, the use of oil is scheduled to be reduced from 52% to 20% and alternative fossil fuels such as natural gas and others to more than 60%.

While earning a US$1.36 billion surplus in crude-oil trading last year, at the same time Indonesia net-imported $8.66 billion worth of refined oil products. That energy trade deficit resulted in the government paying Rp60.5 trillion ($6.6 billion) in fuel-price subsidies.

The new policy includes incentives, such as government financial assistance, for private and state companies involved in the distribution and utilization of renewable energies, including biofuels. That's potentially good news for the foreign investors and politically connected local companies that have recently piled into biofuel production, including state-owned oil-and-gas utility Pertamina.

Pertamina currently has an in-country monopoly on biofuel distribution, but has run up heavy losses because biofuel is still more expensive than subsidized gasoline and diesel at the pumps. As global oil prices hit new 10-month highs of about $75 per barrel, Indonesian policymakers are keen to reduce the national fuel bill and move toward more energy sufficiency.

But questions abound about whether the enforced use of more environmentally friendly energy sources makes economic sense. Indonesia is close to overtaking Malaysia as the world's largest producer of crude palm oil (CPO), the most commonly used feedstock for bio-diesel, the biofuel that is blended directly with conventional petroleum-based diesel.

The yield from Indonesia's CPO plantations is way ahead of most other tropical biofuel options, including coconut and castor oil. Yet biofuel is viable only as long as global crude-oil prices stay above $60 a barrel, economists say. If prices were to return closer to their historical moving average, the biofuel drive's economics would be dubious.

Not only does the long-term sustainability of biofuels depend primarily on the future price of oil, but biofuel production is also potentially destructive to the environment through clearing pristine tropical forest areas for plantations.

The threat of food insecurity is one that haunts Indonesia perhaps more than any other country in the region. Domestic cooking-oil prices have this year risen by almost 30% after an 80% rise in CPO futures offshore. Indonesian CPO producers are understandably chasing profits abroad, despite a government bid to stabilize domestic cooking-oil prices through an export-tariff increase of more than 400% imposed last month on CPO and related byproducts.

Meanwhile, nationalist sentiments are gaining ground that foreign companies are disproportionately profiting from Indonesia's natural resources. Those sentiments are expected to be a major factor in the run-up to general elections, which are scheduled for 2009.

However, anti-foreign rhetoric also helps mask the reality that while major foreign investments have recently piled into biofuels, politically connected local companies are grabbing ever larger chunks of the country's energy business, particularly in biofuels. Analysts say that helps to explain the substantial financial assistance for companies involved in the distribution and use of renewable energies included in the new energy bill.

Major investments aimed at leveraging existing green energy incentives and policies had already piled into the CPO plantation sector and processing facilities. The biggest Indonesian biofuel deal to date, worth $5.5 billion, was struck in February among Sinar Mas Agro Resources and Technology, a subsidiary of the Sinar Mas Group, China's state-owned oil company CNOOC (China National Offshore Oil Corp), and Hong Kong Energy.

Still, there are several significant barriers to boosting renewable-energy use and promoting energy conservation. Among them are the high costs of investment, the lack of an efficient distribution infrastructure, and the sea-change in consumer attitudes required to persuade Indonesians to care about saving energy. These factors, analysts say, could all slow the government's ambitious new alternative-energy targets.

Despite declining production, the oil-and-gas sector is still a key contributor to national coffers, particularly when world oil prices are high. Oil and gas revenues made up about 23% of total domestic revenues for 2006, according to data from Bank Indonesia. All told, oil and gas revenues, including income from oil and natural-gas exports, royalties and taxes, reached $22.5 billion, up 17% from a year earlier.

Yet the downside of higher oil prices is that they cost Jakarta more in fuel subsidies and in the substantially higher prices the country must pay for imported fuel products. These subsidies, as well as being a burden on the Indonesian taxpayer, encourage wastage of energy and work at cross-cutting cleavages with the energy-conservation cause.

About Rp42 trillion was allocated in 2006 to subsidize the price of 10 million kiloliters of kerosene, the average level of national annual consumption for household use. A government report issued last year concluded that 83% of direct fuel subsidies were enjoyed by the 60% of Indonesians in the highest income group, while only 40% of the lowest income group received only 17% of the calculated benefit of these subsidies.

Energy subsidies for the poor, including for cooking fuel and public transport, will be continued under the new law. While using oil subsidies as a crude vote-buying technique is nothing new, President Susilo Bambang Yudhoyono won widespread praise among economists in 2005 for making some of the biggest cuts in energy-price subsidies in global economic history.

Yet the marginal impact on the poor of the rising prices that followed subsidy cuts was a sharp blow to confidence in his government's promise to reduce poverty rates substantially. The new energy bill and its stated aim to green Indonesia are unlikely to deliver big economic benefits any time soon, particularly considering the apparent flaws in the policy.

Last year the government said no more subsidy cuts were planned at least until the end of this year. Yet the temptation for populist measures ahead of what are expected to be hotly contested 2009 polls is likely to become increasingly acute. Those political realities could still result in a swing away from the government's new alternative-energy commitments - despite its progressive intentions.

Bill Guerin, a Jakarta correspondent for Asia Times Online since 2000, has been in Indonesia for more than 20 years, mostly in journalism and editorial positions. He specializes in Indonesian political, business and economic analysis, and hosts a weekly television political talk show, Face to Face, broadcast on two Indonesia-based satellite channels. He can be reached at softsell@prima.net.id.



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