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Analysis: Indonesia needs clearer direction in energy policy
One of the most significant problems in Indonesia’s economy is the current account deficit, meaning the country imports more than it exports
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One of the most significant problems in Indonesia’s economy is the current account deficit, meaning the country imports more than it exports. Looking into the details, one of the main causes is the trade deficit in the oil and gas sector.
Statistics Indonesia (BPS) data shows that oil and gas trade suffered from a US$12.4 billion deficit in 2018, larger than the $8.6 billion seen in 2017. The nonoil and gas trade surplus in 2018 was only $3.8 billion, which implied a trade deficit of $8.6 billion last year.
Subsequently, the current account deficit requires external financing, which is expected to come from capital inflows. However, short term capital inflows are more dominant than foreign direct investment. This implies that the rupiah is always under pressure, more so when the United States’ interest rate increases. The fund rate of the Federal Reserve has been increasing since 2015.
We believe that a good energy policy is the key to design demand and supply in the future, considering the availability of primary energy resources in Indonesia and the latest technological developments. Clearly, the key is to move from using fossil fuels such as oil, coal and gas to renewable sources like hydro, geothermal, solar, wind power and bioenergy.
Indonesia is abundant in renewable sources of energy. Data from the Energy and Mineral Resources Ministry’s Renewable and Conservation Energy Directorate General shows that the potential reserves of renewable energy stands at 411.4 gigawatts.
Potential reserves consist of solar energy (207.8 GW), hydropower (75 GW), wind power (60.6 GW), geothermal energy (17.5 GW), bioenergy (32.6 GW) and tidal power (17.9 GW). However, such a large renewable energy reserve has not been exploited as its real exploitation is only 8.89 GW, equal to 2 percent.
Fossil fuels in Indonesia are limited, which should motivate the use of renewables in the future.
Indonesia’s oil reserves are 3.6 billion barrels, which may meet demand for only 12 years. Meanwhile, gas reserves stand at 98 trillion standard cubic feet, which may meet demand for 33 years. Coal reserves, however, stand at 32.4 billion tons, which may meet demand for 82 years.
The latest technological development that should be taken into account is the production of electric vehicle (EV) batteries. The push for EV battery production will determine the speed of transformation of fossil-based energy to renewables.
More advanced batteries are smaller in size, lighter in weight and require less time for charging. Of course, affordability is key to accelerating the conversion to renewable energy.
EV may not be far away as it will be common on the streets of many countries, replacing conventional cars. The use of electricity will also be accelerated by people’s awareness on the benefits of cleaner air. Air pollution, which is caused by fossil fuels, has become a serious issue.
On top of that, we see two constraints that may hamper the conversion of energy use from fossil fuels to renewables. First, more capital is required to develop renewable power plants like wind turbines, solar photovoltaic or geothermal, compared to fossil fuel plants. While the cost of renewable energy power plants can be lower than fossil fuel ones, larger investment in the first stage of construction is a high barrier to entry. Accordingly, the government should provide more incentives for renewable energy power plants to attract more investments in this sector.
Second, switching costs is another barrier converting from fossil fuel to renewable energy. For example, fossil fuel-based vehicles should be slowly replaced by electric-powered ones, but converting the cars might incur some costs.
Of course, the transition can be implemented gradually through providing incentives for the use of electric cars and disincentives for fossil-fueled ones. The government could charge a lower tax on electric cars and a higher tax on conventional ones.
Finally, we think that the government should design policies in harmony to accelerate the conversion from fossil fuel-based to renewable energy. Fiscal, trade and investment policies should provide a clear message that renewable energy development is promoted and fossil fuel energy is gradually declining.
We believe that these policies are not only important to tackle the current account deficit in the long term, but also exploit abundant primary energy sources in Indonesia and provide lower energy prices. Those are the fundamentals required for the sustainability of economic growth in the future.
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The writer is the head of industry and regional research at Bank Mandiri.
