Restructuring Energy Subsidy Policies

It is said that experience is the best teacher. From experience, we can learn to improve ourselves. We have repeatedly faced the negative impacts of oil shocks. Less than five years later, we are experiencing it again. When Russia and Ukraine went to war in February 2022, global oil prices surged in March 2022. Global oil prices remained above 100 USD per barrel for a long time before gradually declining in the second half of 2022.

The pressures from oil prices and exchange rates in 2022 and 2026 are worth examining. There are differences in policy adjustments and supporting variables. In 2022, energy subsidies and compensation increased from Rp152.5 trillion to Rp502.4 trillion. However, the realisation still exceeded the ceiling, reaching Rp551.2 trillion. Why did the DPR Budget Agency and the government agree on this policy? Why pour out such massive fiscal ammunition?

In 2022, Indonesia was still in the phase of national economic recovery post the COVID-19 pandemic that struck in 2020 and peaked in 2021. If energy subsidies and compensation were not increased, the public would face much heavier economic pressures. In addition, the boom in coal and CPO in 2022 drove a surge in state revenues. This windfall profit became ammunition to dampen the volatility in oil prices and exchange rates.

The situation is slightly different this year. We are facing two pressures at once: rising oil prices and exchange rates, without support from windfall profits from CPO and coal. The ceiling for energy subsidies and compensation in the 2026 State Budget is Rp381.3 trillion, assuming an oil price of 70 USD per barrel and an exchange rate of Rp16,500 per USD. The risk is that every rise in oil prices and weakening exchange rate will add to the burden of energy subsidies and compensation.

The government has affirmed that fuel and LPG prices will not change. In the 2026 State Budget, the government has ammunition from the Budget Surplus Balance of Rp420 trillion, as well as a burden-sharing scheme with Pertamina to hold prices steady. This step is commendable, because amid weakening public purchasing power, a rise in fuel prices would further burden the people.

However, this step must be followed by subsidy policy reforms. Discussions and designs for reform have long been deliberated between the DPR Budget Agency and the government, even since the era of President Joko Widodo, but have not been implemented optimally.

Mis-Targeted Subsidies

Susenas data shows that diesel and LPG subsidies have so far been mis-targeted. In 2022, subsidies were intended for poor households, but in practice, they were enjoyed by capable households.

BPS and the Ministry of Social Affairs divide households into 10 deciles. The higher the decile, the higher the welfare level. In fact, diesel subsidy recipients from deciles 6-10 reached 72%. The higher the decile, the greater the diesel consumption. Conversely, households in deciles 1-5 only enjoyed 28%.

A similar thing happened with Pertalite. As much as 79% of the subsidies were enjoyed by deciles 6-10, while the poor group only got 21%. This occurs because the upper group has more vehicles and higher fuel consumption. Meanwhile, the poor group generally has limited vehicles, or none at all.

For LPG subsidies, the deciles 6-10 group enjoyed 69%, while deciles 1-5 only 31%. This inaccuracy occurs because 3 kg LPG is traded freely, so all levels can buy it, including the capable group with higher consumption.

Unlike fuel and LPG, electricity subsidies are relatively more targeted because they are aimed at customers with 900 VA capacity and below. Households in deciles 1-5 enjoy 60% of electricity subsidies, although there is still leakage of around 40% to the capable group that needs correction.

However, there are still issues, such as households that have risen in decile but still use 900 VA capacity, so they still enjoy subsidies. In addition, electricity theft practices still occur in various regions.

Changing Subsidy Targets

The government needs to immediately change energy subsidy policies. LPG subsidies should be directed to the 40% of the population with low incomes or up to decile 6. This group generally consists of micro-business actors, small fishermen, farm labourers, and small farmers. To reach 40% of those households, there are several options. First, ensuring accurate recipient data. Second, using biometric systems for beneficiaries.

India has implemented the Aadhaar system, a biometric identity linked to the bank accounts of subsidy recipients. This system is hard to manipulate because subsidies are not given in cash, but through biometric-based LPG purchase transactions.

Although it requires significant initial effort, this system will facilitate the government in the future, while also providing a digital database on subsidy distribution. If India can implement it, Indonesia should be able to as well.

With a closed (targeted) LPG subsidy scheme, the 3 kg LPG price in the market can be adjusted to economic prices, not subsidised prices anymore. This will reduce the government’s subsidy burden. For diesel and Pertalite subsidies, data collection based on barcodes via the MyPertamina application needs to be revalidated. Pertamina must cross-check with vehicle ownership data (STNK) at the police.

Fuel subsidies should be prioritised for small fishing boats, small farmers’ agricultural equipment, and motorcycles of UMKM actors. Four-wheeled vehicles should be prohibited from using subsidised diesel and Pertalite, except for yellow-plated commercial vehicles used for goods distribution, especially food, to maintain inflation stability.

Electricity subsidies also need to be revalidated by PLN through integration of Susenas data. Households that have improved their welfare need to exit the recipient group, while those experiencing decline should be able to enter.

Along with that, PLN can develop an electric stove programme for poor households gradually. Thus, they have an alternative besides subsidised LPG. Meanwhile, the