Mon, 31 May 2010

From: The Jakarta Post

By Hanan Nugroho, Jakarta
Indonesia is endowed with considerable energy resources, both fossils and renewable. With our resource wealth, strategically located close to East Asian industrial nations and openness to international trade, we have seen over the last three to four decades that Indonesia a world class exporter of oil, gas and coal. The exports of energy have contributed to our country’s export earnings largely as well as to the government as a source of revenue.

However, as domestic demand for energy is skyrocketing (a result of high economic growth, population increase and changing lifestyles that prefer more energy) we are facing several energy-economy challenges. Putting it shortly, the challenge is to maintain the right balance among exports of primary energy commodities, fueling the domestic demand appropriately, securing long-term supply and working toward energy-economy sustainability. It is clear and not new, but the solutions need bolder action.

The major challenge is related to oil, which for long we have largely relied on. The current fact is, as we need more oil, our production capacity is declining, widening the gap between the fast growing demand and decreasing supply capacity.

One might argue that our oil fields are maturing whereas efforts to replace the forgone reserves are far from significant, and the application of advanced recovery techniques is limited.

The bolder recommendation is we have to decrease our dependency on oil by shifting the country’s energy mix to that with lesser share of oil.

The next challenge is on energy prices and subsidy. Price of selected fuels (mostly oils) and electricity in Indonesia have for a long time been regulated below market levels, with the gap bridged by subsidy from the state budget.

Access to the capped prices is made equally to the high- and low-income people, whereas the subsidy budget is actually given to the state companies undertaking the oil fuel and electricity delivery jobs.

The long practices of implementing a price cap and subsidy must be corrected in next to no time for its target groups, amount of subsidy and delivery mechanism. Rp 1.4 trillion (US$151,000,000) (State Budget 2010) or 10-20 percent of the state budget spent in energy subsidy is incredible huge.

Indonesians are becoming richer, only a small part of us now really eligible for such energy subsidy.

Energy subsidy discourages efforts to develop alternative energy, provides no incentives to use energy in an efficient way as well as fails to make energy conservation a habit in our society. It restricts the state budget to finance other sectors, including to construct energy infrastructure, which is actually more necessary.

The other challenges are on infrastructure and access to energy, investment climate and works toward long term energy-economy sustainability.

Despite the resources wealth, our access to energy is still limited, constrained significantly by lack of infrastructure. Our electrification ratio is a mere 65 percent (distributed unequally), natural gas is consumed by below than 1 percent of the country’s households and many of our people - those living in small islands/remote areas - do not have the access to modern energy services. The inconvenient truth: not only that the existing capacity of our energy infrastructure is not sufficient, but they are also inefficient, unreliable, aging, need major repairs and replacement.

The acceleration of energy infrastructure provisions and the effort to make energy available call for huge investments. For instance, the state electricity company (PLN) requires $58.5 billion to finance electricity infrastructure within the next 10 years, of which $34.3 billion is expected to come from foreign loans (PLN Business Plan 2009-2018). Data shows that recent investments in the energy sector is far from sufficient to finance the development of new infrastructure for electricity, to find new oil and gas reserves to compensate the already forgone ones, and so on.

Investment in energy sectors, which are typically very expensive, have high risks, are technologically intensive, need private/foreign partnerships and take decades to mature, require clarity of legislation and long-term security. For many investors, these factors are more important than economic incentives the government may provide to attract them.

The annulment of the 2002 Electricity Law and parts of the 2001 Oil and Gas Law, inconsistencies among laws on mining, forestry, environmental, taxes among others and the unclear division of responsibilities between the central and regional governments on energy and mining issues, have distorted investment climates so that they must be clarified soon.

There are complaints that legislations are not detailed and clear enough, and poor coordination across institutions are taking place in many energy investment cases. Licensing, tendering and procurement processes are also among the complaint issues.

The capacity of institutions and human resources dealing with energy business, in central and regional offices including those in the energy regulatory agencies needs to be improved so that they are more investments-friendly and adaptive to the waves of reforms in energy sector, which are going on in Indonesia.

Our fast growing energy demand combined with of lack of access dictates that we need not only additional capacity for energy infrastructures and finances, but also larger quantity and quality of human resources to tackle our energy challenges.

The world is shifting undoubtedly toward a green economy society, wherein the application of green energy will be larger. The challenge: Indonesia, which has been mentioned frequently as the Middle East of renewable energy, needs to exploit its renewable potential more progressively and share the world’s movement from the large use of black energy (fossil fuel) to the greener kind, where renewable and energy efficiency/conservation serve as pillars.

The writer is the senior energy planner and an economist with the National Development Planning Agency. The opinions expressed are his own.