Indonesia’s Energy Woes

Updated On: Jul 31, 2008

Years of chronic underinvestment in energy infrastructure have left Indonesia struggling to keep its lights on. It has been forced to schedule a series of rolling blackouts across the capital city of Jakarta and the industrial zone of Tangerang over the next two weeks as one of the main gas suppliers for state-owned electricity company PLN shuts down for routine maintenance.
Many across Asia face similar problems but Indonesia may be worse off than most. Power stations are poorly maintained. Coupled with the soaring price of coal, oil and gas, it has left the country exposed and looking for a quick fix.
Last week the government announced a new rule forcing manufacturers in Java and Bali to shift two working days each month to a Saturday and Sunday. The move is designed to take the pressure off during peak electricity periods. Any company that doesn’t comply will have its power temporarily cut off.
Critics have described the latest policy announcements as “Band-aid” solutions to a very serious problem.
Indonesia ’s struggle to meet the electricity demands of an economy growing at more than 6 percent, faced with a quadrupling of coal prices and a doubling of oil prices in the past year.
Underinvestment in infrastructure, particularly electricity supply, is the biggest threat to economic growth. Japanese companies, backed by the embassy, earlier this month sent a letter to the government and PLN complaining about financial losses related to recent blackouts and demanding something be done.
The local business group for petrochemical companies said its members would delay about US$1.5 billion worth of investment slated for this year until the government could give them some certainty of power supply.
Indonesia has an ambitious program to add 10,000 megawatts of capacity by 2010, an increase of more than 40 percent. It’s the interim period that has people worried. For years companies operating in Indonesia and the 53 percent of households which actually have access to electricity have put up with regular brownouts and blackouts across the country, caused by a lack of new and well-maintained power stations. But the problem has been exacerbated in recent months by the rising cost of oil, coal and gas.
But PLN’s role may need to be questioned. Indonesia ’s government did try to break open PLN’s monopoly by introducing a new law in 2002. However, the constitutional court annulled it two years later. So the country is left with the 1985 electricity law, under which the government is responsible for providing electricity across the country, via PLN.
Low pricing and subsidies for diesel, gasoline and kerosene are another dimension of the energy woes in Indonesia. Prices remain low and subsidies have spiraled as market prices have surged.
Indonesia spends $20 billion this year on fuel subsidies, more than any country except China, and six times as much on energy subsidies as it does on agriculture.
Some spending on subsidies is simply wasted. There have been cases of Indonesian fishing boats take drums of subsidized diesel out to sea for resale to foreign fishing vessels. Economists estimate that fuel use in Indonesia would fall by as much as a fifth if the government were to eliminate subsidies entirely.
But political pressures and inflation concerns continue to prevent the country from ending subsidies and letting domestic prices bounce up and down. With electioneering in Indonesia beginning, and on going protests against an earlier hike in May, it seems unlikely the current administration will risk another hike in prices further.
Indonesia, with extensive oil fields that made it a top target for Japanese conquest during World War II, became a net oil importer in 2004. Output from its aging fields has fallen almost 40 percent since 1995, and the country plans to withdraw from OPEC at the end of this year.

Sources: International Herald Tribune, July 28, 2008, Fuel Subsidies Overseas Take a Toll on U.S.,http://www.heraldtribune.com/article/20080728/ZNYT01/807280381&title=Fue...
Straits Times, July 28, 2008 Creaking Indonesia power grid drags on business http://www.straitstimes.com/Latest%2BNews/S-E%2BAsia/STIStory_262086.htm...

Related Article