Energy Subsidies in Indonesia

The GSI’s program of work in Indonesia undertakes research and policy engagement on subsidies for fuel consumers, fuel producers and renewable energy, with the intention of contributing to the following policy objectives:

  • Reduce overall fossil fuel subsidy expenditure
  • Improve the fair social distribution of subsidy expenditure
  • Increase clean energy access and use, particularly among poorer households

In carrying forward this work, the Global Subsidies Initiative has collaborated with a number of organizations, including the Asian Development Bank, the Faculty of Economics and Business (P2EB) with the University of Gadjah Mada, the Habibie Center, the National Team for the Acceleration of Poverty Reduction (TNP2K) and consumer organization Yayasan Lembaga Konsumen Indonesia (YLKI).

 

October 2016

Ten Things You Need to Know About Electricity Subsidies in Indonesia (PDF - 2 MB)

Subsidies for electricity cost Indonesia billions of dollars a year, much of that benefitting wealthy households. This infographic highlights what you need to know about Indonesia's subsidies for electricity, and plans for reform. Also available here in Bahasa (1.97 MB).
 

Indonesia's Financially Sustainable Electricity Sector (PDF - 4.34 MB)

The paper reviews the ability of Indonesia’s electricity sector to meet the country’s need for electricity in a financially sustainable way.

 

June 2016

Financing Development With Fossil Fuel Subsidies: The reallocation of Indonesia's gasoline and diesel subsidies in 2015 (PDF - 4.5 MB)

At the very end of December 2014, Indonesia introduced major reforms to its fossil fuel subsidies, removing subsidies to gasoline (except for distribution costs outside of the central islands of Java, Bali and Madura) and introducing a “fixed” subsidy of IDR 1,000 per litre for diesel. At the same time, world oil prices plummeted. Together, these changes led to massive fiscal savings, equal to IDR 211 trillion (USD 15.6 billion)—over 10 per cent of state expenditure. This study investigates two central questions: Where were these savings reallocated? and Is the new expenditure doing a better job for Indonesia’s development than subsidies? It concludes that fuel subsidy reform and reallocation in Indonesia have been a major step forward in improving public expenditure.

 

January 2016

International Experiences with LPG Subsidy Reform: Options for Indonesia - English (PDF - 2.2 MB)
Pengalaman Internasional dalam Reformasi Subsidi LPG: Pilihan bagi Indonesia - Bahasa Indonesia (forthcoming)

International Experiences with LPG Subsidy Reform: Options for Indonesia - Executive Summary - English  (PDF - 1.2 MB)
Pengalaman Internasional dalam Reformasi Subsidi LPG: Pilihan bagi Indonesia - Ringkasan Eksekutif - Bahasa Indonesia (PDF - 1.2 MB)

With diesel and gasoline reforms implemented in early 2015, the Government of Indonesia is now turning its focus toward liquefied petroleum gas (LPG) subsidies. This report investigates international experience and best practice on how to reform LPG subsidies, with a focus on countries’ efforts to ensure that energy access is not compromised by higher LPG prices.

 

November 2015

Fossil Fuel Subsidies in Indonesia Trends, Impacts and Reforms (PDF - 2.3 MB)

Subsidized energy is provided to all Indonesian citizens as a public service obligation. This study measures the size of fossil fuel subsidies such as underpricing of petroleum products and electricity, tax exemptions, and subsidized credit. It then uses economic and energy-system models to project the potential economic, energy, and environmental impacts of reducing subsidies. Finally, it discusses options for social safety nets to mitigate the impacts of the reforms. It shows that the short-term adverse impacts of subsidy reform turn positive in the long term as households and industry respond to changing market realities by adjusting energy demand, supply, and production capacity. Policy options for sustainable energy use are provided to aid policy makers in their current subsidy reform process.

G-20 Subsidies to Oil, Gas and Coal Production: Indonesia (PDF - 1.2 MB)
Excel data on production subsidies in Indonesia

As part of a project jointly prepared by the Global Subsidies Initiative (GSI), Oil Change International (OCI) and the Overseas Development Institute (ODI), this country study and accompanying data sheet compiles publicly available information on subsidies to oil, gas and coal production in Indonesia. It is one of the background papers to the report Empty Promises: G20 Subsidies to Oil, Gas and Coal Production.

 

March 2015

Indonesia Energy Subsidy Review Volume 2 Issue 1 (PDF - 655 KB)
Tinjauan Subsidi Bahan Bakar Di Indonesia Edisi 1 Volume 2 (PDF - 656 KB)

This is the second edition of the Indonesia Energy Subsidy Review. Part One outlines economic and policy developments affecting Indonesia's key subsidized energy products (gasoline, diesel, liquefied petroleum gas, kerosene and electricity), and analyzes the dynamics of each market. Part Two features analysis by guest authors on issues related to energy pricing policy. In this edition, two articles examine the politics of energy subsidy reforms, looking at the role played by parliament and public opinion. The paper concludes with a commentary by Dr. Mohamad Ikhsan, Special Advisor to the Vice President at the Office of the Vice  President of Indonesia, and Professor of Economics at the University of Indonesia.

An Input to Indonesian Fuel Price System Reforms: A review of international experiences with fuel pricing systems (PDF - 2.14 MB)
Executive Summary - English (PDF - 401 KB)
Executive Summary - Indonesian (PDF - 316 KB)

In January 2015, the Indonesian government introduced a new pricing system for gasoline and diesel fuel. The system is intended to end wasteful spending on fuel subsidies by passing through international oil price increases into domestic fuel prices. This will result in large fiscal savings―IDR 195 trillion (US$ 15.6 billion) alone was saved in State Budget Revision 2015, allowing for a major injection of funds into infrastructure. But it will also result in higher average prices for Indonesian consumers. Going forward, will the government be able to continue passing through price changes at the same time as safeguarding the interests of consumers, particularly if world oil prices return to past highs? This paper reviews international experience to compare how other countries have dealt with the economic and political challenge of fuel pricing, and to identify what lessons this might provide for strengthening and maintaining Indonesia’s new pricing mechanism and helping consumers cope with price volatility.

Impacts of Energy Subsidy Reform on Micro, Small And Medium-Sized Enterprises (MSMEs) and their Adjustment Strategies (PDF - 2.36 MB)

This study provides an analysis of the impacts of energy price increases caused by subsidy removal on MSMEs in Indonesia. It surveys 193 MSMEs in two groups of manufacturing industries (namely the food and beverages industry and textile and garment industry), and in several other sectors, namely retail, food and drink stalls and services. It finds that indirect impacts of energy price increases have the most serious effects on MSMEs: higher transportation costs (especially land transportation), higher prices of raw materials, and higher inflation. It recommends that the most effective way to safeguard MSMEs from the impacts of reform are to mitigate the indirect effects of any energy price increases, with a particular focus on controlling inflation. Should the government wish to provide compensation mechanisms to support SMEs, the interventions most favoured by SMEs are policies to help them improve their market access and credit access.

The Role of Information in Perception of Fossil-Fuel Subsidy Reform: Evidence from Indonesia (PDF - 3.57 MB)

This paper analyzes household perceptions—and the role that information can play in defining those perceptions—on fossil-fuel subsidy reforms in Indonesia. The data used in this study were collected by Lembaga Survei Indonesia (LSI), based on an August 2014 survey that involved 2,899 respondents in 34 Indonesian provinces. Logistic and multinomial logistic regressions of the data show that: (1) Those who live outside Java tend to be more receptive to the idea of subsidy reforms; (2) Those owning motorcycles and cars are more likely to oppose reform; (3) Providing information about the state budget and the personal impact of the subsidy was able to change a share of respondents’ opinions, from opposition to support of the reform.

The Constitutionality of Subsidies and Legal Issues Related to Fossil-Fuel Subsidy Reform in Indonesia (PDF - 2.4 MB)

This issue brief examines the relationship between fossil-fuel subsidies and the Undang-Undang Dasar Republik Indonesia 1945 (the 1945 Constitution of Indonesia). How does the 1945 Constitution of Indonesia define “subsidy”? What does it say about the use of subsidies, and what implications does this have for changes to Indonesia’s energy subsidies, especially subsidies for gasoline and diesel? The note outlines some of the key clauses against which subsidy reforms might be held and the key differences in interpretation of how those clauses should be interpreted.

Fossil-Fuel Subsidy Reform and Higher Fuel Prices in Indonesia: Impacts and expectations (PDF - 624 KB)
Reformasi Subsidi Bahan Bakar Fosil dan Kenaikan Harga Bahan Bakar di Indonesia: Dampak dan ekspektasi (PDF - 630 KB)

This issue brief discusses the impact and consequences of fossil-fuel subsidy reform in Indonesia, in particular in the light of recent policy changes in November 2014 and January 2015. It sets out a general framework for understanding the impacts that can be expected once world oil prices rise again. It concludes with key policy interventions that can help ensure that subsidies do not return and the benefits of reform are maximized.

 

March 2014

Indonesia Energy Subsidy Review Volume 1 Issue 1 (PDF - 3.07 MB)
Tinjauan Subsidi Bahan Bakar Di Indonesia Edisi 1 Volume 1 (PDF - 3.23 MB)

This is the first edition of the Indonesia Energy Subsidy Review, a new biannual publication of the GSI. Part One of each edition outlines economic and policy developments affecting Indonesia's key subsidized energy products (gasoline, diesel, liquefied petroleum gas, kerosene and electricity), and analyzes the dynamics of each market. Part Two features analysis by guest authors on issues related to energy pricing policy. In this edition, two articles examine the impact of energy subsidy reforms on Indonesia's small- and medium-sized enterprises (SMEs) and its social welfare system more generally. The paper concludes with a commentary by Dr Zamroni Salim of the Economic Research Centre of the Indonesian Institute of Sciences.

Briefing Note - The Future of Social Welfare Programs in Indonesia: From Fossil-Fuel Subsidies to Better Social Protection (PDF - 463 KB)
Briefing Note - Masa Depan Program Kesejahteraan Sosial di Indonesia: Dari Subsidi Bahan Bakar Fosil hingga Perlindungan Sosial yang Lebih Baik (PDF - 489 KB)

This briefing note examines the relationship between fossil-fuel subsidies and Indonesia’s broader policy interventions to promote social welfare. Traditionally, Indonesia has used fossil-fuel subsidies to help alleviate poverty and to control inflation. However, over time, this policy has grown increasingly expensive. It has also been criticized for being inefficient and regressive, given that the rich enjoy a greater proportion of the benefits than the poor. This paper reviews the evidence to explore two contrary beliefs: on the one hand, that fossil-fuel subsidies cannot be reduced because this would harm the poor; and, on the other hand, that reforming fuel subsidies is in fact fundamental to the improvement of social welfare policy in Indonesia. Who is right? What are Indonesia’s ambitions to improve social welfare and how do fossil-fuel subsidies fit in?

Briefing Note - Practical Implications of Fossil-Fuel Subsidy Reform for the Energy Supply Chain in Indonesia (PDF - 357 KB)
Briefing Note - Implikasi Praktis Reformasi Subsidi Bahan Bakar Fosil Bagi Rantai Pasokan Energi di Indonesia (PDF - 367 KB)

This briefing note examines the practical short-term implications for Indonesia’s energy supply chain of steps towards fossil-fuel subsidy reform. What impacts were witnessed following recent gasoline and diesel price hikes in June 2013? What might we expect in the future? What does this mean for the planning of more comprehensive, long-term fossil-fuel subsidy reform?

 

November 2013

Briefing Note - Fossil Fuel Subsidies and Small and Medium-Sized Enterprises (SMEs): The impacts and possible responses (PDF - 754 KB)
Briefing Note - Reformasi Subsidi Bahan Bakar Fosim dan Usaha Kecil Menengah (UKM): Dampak dan Alternatif Tanggapan (PDF - 791 KB)

This briefing note examines the relationship between fossil-fuel subsidy reform and Indonesia’s many small and medium-sized enterprises (SMEs). How might we expect SMEs to be affected by fossil-fuel subsidy reform? What do we know about the impacts of reforms in the recent past? The note concludes by identifying avenues for further research, and actions that could be taken by governments and SMEs to minimize the potential negative impacts of fossil-fuel subsidy reforms.

 

August 2013

Fossil-Fuel Subsidy Reform in Indonesia: A review of government communications in 2012 (PDF - 315 KB)

Indonesia has subsidized fuel for decades as a means to improve energy access and share the benefits of the country’s oil wealth. However, as Indonesia’s oil reserves have diminished, and millions of motor vehicles are added to the road each year, the costs of Indonesia’s fuel subsidies have soared. Today, Indonesia spends more on energy subsidies than it does on defence, healthcare, education and social security combined.

Communications represent an important response to the challenges associated with fossil-fuel subsidy reform. This report reviews the Government of Indonesia’s communications on fossil-fuel subsidy reform in 2012, a year in which it announced plans to both restrict the use of subsidized fuel and raise prices. The paper draws primarily on interviews with government officials responsible for communication-related activities on fossil-fuel subsidy policies to understand the communications-related plans to accompanied fuel-pricing policies in 2012. It ends with recommendations for strengthening strategic communications going forward.

 

April 2013

A Guidebook to Fossil-Fuel Subsidy Reform for Policy-Makers in Southeast Asia (PDF - 6.84 MB)
Guidebook Executive Summary (PDF - 774.83 KB)
Ringkasan Eksekutif - Bahasa Indonesia (PDF - 842.09 KB)

There is no one-size-fits-all strategy for fossil-fuel subsidy reform—but there are a set of planning stages that are generic, along with many common issues, challenges and potential solutions. The purpose of this guide is to advise countries on the process for formulating an effective reform strategy that will fit their individual objectives and circumstances. It is aimed at policy-makers in Southeast Asia. Parts of its guidance is drawn from Indonesia's experiences and consultations with Indonesian policy-makers.

 

March 2012

Indonesia's Fuel Subsidies: Action plan for reform (PDF - 102 KB)

The International Institute for Sustainable Development’s Global Subsidies Initiative (GSI), in collaboration with Jakarta-based research institutes the Indonesia Institute for Energy Economics (IIEE) and QEnergy, conducted a project to assist the Indonesian government in reforming fossil-fuel subsidies and creating a sustainable network to support it. The project mapped the positions of major stakeholder groups based on consultations and surveys conducted in 2011. It also provided new analysis of the practical challenges facing the government’s specific implementation plans to reduce gasoline subsidies, as announced in January 2012. This resulted in an action plan, drawing on both research and consultations to provide a set of recommended actions for progressing fuel subsidy reform.

 

October 2010

Fossil Fuels - At What Cost? Government Support for Upstream Oil and Gas Activities in Indonesia (PDF - 2.33 MB)
Executive Summary (Indonesian) (PDF - 466.49 KB)

The GSI's first report in the series Fossil Fuels - At What Cost? studies the subsidies provided to fossil-fuel producers in Indonesia. It identifies three subsidies totaling US$ 1.8 billion in 2008. This is a lower-bound figure for Indonesia, as at least seven other potential subsidies were identified but could not be assessed or quantified based on available information. Further work could usefully be undertaken to assess the economic, environmental and social impacts of these subsidies in order to determine whether they should be kept or considered for reform.

Lessons Learned From Indonesia's Attempts to Reform Fossil-Fuel Subsidies (PDF - 889.86 KB)

This report examines Indonesia's attempts to reform fossil-fuel subsidies. It reviews the history of fossil-fuel subsidies in the country and focuses on the performance of two policies that have been used to support reform. The first is the Bantuan Langsun Tunai, an unconditional cash transfer program used to help cushion low-income households from price increases in 2005 and 2008. The second program, begun in 2007, aims to make low-income households use liquefied petroleum gas (LPG) instead of kerosene, as it is cheaper to subsidize, cleaner and more efficient. The report concludes that both these policies appear to have achieved the Indonesian government's objectives.

 

Resources

In addition to its research products, the GSI brings out regular news briefings about the latest developments in subsidy policy in Indonesia.

For background information about Indonesia's energy subsidies in 2012, see:

A Citizens' Guide to Energy Subsidies in Indonesia: 2012 Update (PDF - 2.3 MB)
Panduan Masyarakat Tentang Subsidi Energi Di Indonesia: Perkembangan Terakhir 2012 (PDF - 2.28 MB)