Plunging fossil fuel revenues should push Indonesia to accelerate its clean energy revolution

Professional Gas Drilling Rig Site Indonesia Photo Credit: Max Pixel

As Indonesian fossil fuel revenues tumble, government subsidies for the fossil fuel industry are becoming less sustainable. In the interests of economic stability, the government should cut off the fossil fuel industry and transition to cleaner energy sources.

Editorial

A report from the International Institute for Sustainable Development (IISD) stated that during the 2014-2016 fiscal years, revenue from upstream oil and gas sectors stood around US$16 billion, or 18% of the government’s total revenue. 14% of the revenue, however, was then channelled out for fossil fuel subsidies. The IISD recommends the government cut its various energy subsidies to support the development of clean energy. Reforms in energy subsidies could have a positive impact on the country’s budget and promote sustainable economic growth.  

Source: The Global Economy

Previous fuel subsidy cuts were a success

In 2014, the government cut fuel subsidies and saved around Rp.200 trillion (US$16 billion). The savings were re-allocated to infrastructure projects and other social programs. Today, the government could use savings from fuel subsidy cuts to fund the transition to green energy.

Subsidy cuts could also help diversify Indonesia’s economy. This could take the form of investing in infrastructure and support a transition to clean energy in the productive sectors, creating sustainable jobs and reducing the country’s dependence on fossil fuels.

Clean energy suits the country very well

Indonesia has an abundance of clean energy resources.  It is estimated that the country has a total of 442 Gigawatts (GW) of renewable energy capacity. However, only 9.4 GW (2%) has been installed.  Geothermal is one area ready for investment. Indonesia has around 29GW of geothermal capabilities, about 40% of the world’s total geothermal reserves. Currently, the country has installed just 1,925 MW of geothermal power capacity, leaving plenty of room for expansion.

Indonesia’s geothermal resources offer an opportunity to increase electricity supply to areas with rising demand, such as in Java and Sumatra, as well as alleviate poverty through rural electrification in the eastern part of the country.

Renewable energy currently makes up 13% of the total electricity produced in Indonesia. Whereas, coal-based sources accounted for more than 50% in 2018. Indonesia is far behind other neighboring countries when it comes to renewables capacity per capita with only 35 Watts per capita. Laos currently has 400, Malaysia more than 200, and Thailand more than 100. Even the Philippines generates more renewable energy per capita, with around 60 Watts per citizen.

Jokowi has flirted with renewable developments. In July, the government launched two wind power plants in South Sulawesi. But with the majority of Indonesia’s clean energy potential remaining untapped, the country is leaving opportunities to spearhead a green energy revolution unexplored.

There are significant challenges to developing the renewable energy sector

After the Paris Summit Agreement, Indonesia set a target of sourcing 23% of its energy from renewables by 2025. However, the country is struggling to meet its goal. Several big projects around the country have stalled and there are no new significant renewable energy projects on the horizon.

There are fundamental problems as to why this is the case. Firstly, businesses processes prevent projects from receiving adequate financing. Frequent changes in the regulatory framework and poor implementation have created a climate of confusion and uncertainty which has spooked developers and investors. This unfavorable business climate has left the clean energy sector woefully underfunded.

Additionally, the fossil fuel industry wields significant political power. It has played a dominant role in Indonesia’s economy for more than a decade and accumulated vast political capital. With the energy market dominated by the fossil fuel industry, it is no surprise that renewable energy is struggling to find its place.

Government action can help reduce obstacles such as funding and inconsistent regulations

Declining revenues has exposed vulnerabilities in Indonesia’s energy market. Depleted revenues, if left unchecked, could lead to economic disruption and political instability. The country needs to diversify its energy market and adapt to new challenges. Renewable energy is the future, and with the rich natural resources Indonesia possesses, the country is well-placed to embark on a green energy revolution.

Declining fossil fuel revenues offer an opportunity to reduce subsidies and re-allocate that money to renewables. As proposed by the Fiscal Policy Agency (BKF), subsidy reform, the introduction of a fossil fuel tax and streamlining business procedures to attract international investors would provide a solid financial platform to mount a green energy drive. 

Collecting taxes from the fossil fuel industry will be a challenge. Introducing regulation and implementation measures will require standing up to the fossil fuel lobby and curbing its political influence. But Indonesia has the opportunity to strengthen its economy and build a greener, more sustainable future.