Revisiting fuel-conservation
The market pricing mechanism and fiscal measures the government, state oil company Pertamina and State Electricity Company (PLN) have and will implement will help encourage fuel efficiency, cut fuel and electricity consumption and consequently government spending on the fuel subsidy.
The government announced last week all large industrial enterprises would be required to buy diesel oil and industrial fuel at market prices. Now only export-oriented businesses and shipping and big fishing companies will be subject to market prices. Small and micro firms and cooperatives still can get their fuel needs at subsidized prices.
The central government also is considering slapping higher luxury sales taxes on big-capacity passenger cars and local administrations will impose progressive car registration taxes on people owning more than one car.
These fiscal measures would dampen the demand for passenger cars and would consequently help reduce fuel consumption because our transportation still depends almost entirely on oil fuel.
Likewise, PLN is considering raising electricity charges for industrial users during peak hours and slapping penalties on industrial users for power usage in excess of their quotas.
Pricing policies obviously have an immediate bearing on the viability of fuel efficiency investments as large users are forced to use the most energy-efficient machinery. In countries, such as Indonesia in which oil fuel prices are subsidized, industrial enterprises often do not bother to invest in energy efficiency measures.
Markets are a powerful and fundamental force in massive implementation of energy efficiency. Subsidies, which depress fuel prices can provide a significant disincentive for fuel efficiency investments, and the removal of this barrier can become an important step toward creating an investment climate in which fuel and electricity efficiency can prosper.
However, the measures cited above would not by themselves help develop a more diversified base of energy and reduce the country's vulnerability due to being too heavily dependent on fossil-based fuels if the government does not implement a comprehensive energy conservation program.
To be effective, energy diversification and fuel efficiency programs should be integrated into a comprehensive energy conservation program based on a special law that stipulates compulsory and voluntary conservation measures complete with fiscal and financial incentives for the development of renewable energy sources.
Many countries have enacted and implemented energy conservation promotion acts, which stipulate not only compulsory conservation measures but also fiscal and financial incentives for factories and buildings making investment in energy conservation.
An energy conservation promotion act is more effective in improving efficiency in energy use and in developing energy diversification through integrated energy planning and increased use and contribution of renewable sources of energy in overall energy supply.
Legislation obliges industrial companies to conduct in-house management of energy efficiency through maintenance and housekeeping measures, replacement of selected equipment, which may require additional investment or modification of entire manufacturing processes which may require large scale investment.
Energy intensity tends to differ from one product to another. But fuel conservation and efficiency is especially crucial for industries with high energy intensity such as iron and steel, chemicals, petroleum refining, pulp and paper, and cement production.
All these measures will be possible only with the support of fiscal measures and financial incentives such as bank loans with easier terms. Governments have at their disposal a variety of instruments such as tax credits or subsidized or low-interest loans through which energy efficiency improvements can be promoted.
The severe fuel-supply problems the nation is currently facing and the huge fuel subsidies that threatens the state budget with an unmanageable deficit should provide a momentum for the government and the House of Representatives to design a comprehensive energy-conservation program and empower its implementation through a special law.