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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