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Editorial: Pushing through energy reform

The government should be commended for quickly seizing the opportunity that has been provided by the plunge in global oil prices to get rid of the distorting and exorbitantly wasteful fuel subsidies

The Jakarta Post
Wed, January 21, 2015

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Editorial: Pushing through energy reform

T

he government should be commended for quickly seizing the opportunity that has been provided by the plunge in global oil prices to get rid of the distorting and exorbitantly wasteful fuel subsidies.

But the government should not be complacent, stopping at putting fuel prices on a managed floating market-price mechanism because the current oil-price trend is simply a matter of luck. No one is able to predict what the oil price will be next year, as fossil fuel prices have always been highly volatile.

The current period of low oil prices is a great opportunity for the government to push through comprehensive energy reform, based on the 2007 Energy Law, which governs energy diversification away from such conventional energy sources as oil, gas and coal toward renewable resources such as geothermal, biofuel, wind, solar and hydro power.

The law requires the government to build up strategic energy reserves to maintain energy security and stipulates a price mechanism to stimulate efficient energy use. Yet more important is that the law also stipulates elaborate provisions on energy conservation, offering fiscal incentives and facilities for the producers and users of energy-conserving technology.

The legislation also allows the central government and local administrations to provide fiscal incentives and facilities for companies or individuals who harness new energy resources or develop renewable energy such as biofuels that need large plantations.

The law obliges the central government and local administrations to give incentives to industrial companies that conduct in-house management of energy efficiency through maintenance and housekeeping measures and the replacement of selected equipment that may require additional investments.

The Energy Law has been well designed to facilitate the integration of energy diversification, efficiency and conservation into a comprehensive energy-development program, enforced with special regulations that stipulate compulsory conservation measures complete with fiscal and financial incentives for the development of renewable-energy sources.

The law sets the targets of primary energy diversification that will reduce the role of oil in the energy mix from about 50 percent in 2013, to about 24 percent in 2025 and less than 20 percent in 2050. The role of natural gas will be raised from 20 percent now to 22 percent in 2025 and 24 percent in 2050 and renewable energy from 6 percent to 23 percent in 2025 and 31 percent in 2050.

The cheapest and cleanest energy choice of all is not to waste it. Hence the importance of fiscal incentives for promoting energy efficiency and conservation. Imposing regional taxes of 5 to 10 percent on fossil fuels, on top of the 10 percent value added tax, is a good step. Such consumption taxes would encourage conservation.

But the government needs to provide additional fiscal incentives for stimulating the development of renewable energy and setting mandatory floor prices for fossil fuels to secure the commercial viability of renewable energy.

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