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Indonesia’s Subsidies for Fossil Fuels Pose a Threat to its Energy Transition, According to The Diplomat

Indonesian Energy Transition

On November 15, 2022, Indonesian President Joko Widodo and a group of nations led by the United States announced a $20 billion climate finance deal to help Indonesia curb its power sector’s reliance on coal, and transition towards a carbon-free energy system. This deal is officially called the Just Energy Transition Partnership (JETP). A year later, Indonesia released implementation plans for the agreement, outlining numerous targets and policies to help Indonesia achieve carbon neutrality and grow its domestic renewable technology industry. However, none of the recommended policies address the most significant threat to Indonesia’s energy transition: fossil fuel subsidies. On November 21, 2023, the government of Indonesia released a draft implementation plan outlining its strategy to utilize the support provided by the JETP. The draft implementation plan, formally known as the Comprehensive Investment and Policy Plan (CIPP), outlines three primary targets for Indonesia’s electricity system: 1) to cap power sector emissions by 2030 at a level of 250 megatons of CO2; 2) to reach renewable energy generation of 44 percent by 2030; and 3) to achieve net zero emissions in the power sector by 2050. The CIPP estimates that to reach these targets, Indonesia must attract funding of at least $97.1 billion by 2030 and $500 billion from 2030 to 2050. The $20 billion in financing from the JETP is “expected to serve as a catalyst” to help attract further investment from other sources. The CIPP outlines five priority areas of investment to focus on through 2030: $19.7 billion covering new transmission lines and grid upgrades; $2.4 billion to retire or retrofit coal plants; $49.2 billion to build 16.1 GW of dispatchable renewable capacity (bioenergy, geothermal, and hydropower); $25.7 billion to build 40.4 GW of variable renewable capacity (solar and wind); and an unspecified amount to improve Indonesia’s renewable energy supply chain, particularly solar PV manufacturing. Indonesia’s continued use of fossil fuel and electricity subsidies threatens these goals. Indonesia’s government provides generous fuel and electricity subsidies to support poorer households and spur economic development by keeping prices low. These subsidies started under the Suharto regime (1966-1998) when Indonesia still had significant domestic oil reserves. However, since the 1990s, Indonesia’s domestic oil production has fallen while demand for oil and electricity has skyrocketed. As a result, energy subsidies have reached up to 2 percent of Indonesia’s total GDP. Furthermore, these subsidies primarily benefit wealthier Indonesians. The World Bank notes that Indonesia’s middle and upper class “consume between 42 and 73 percent of subsidized diesel.” Currently, the following subsidies and price caps are in place. This list does not outline all government market interventions but includes those that could negatively impact Indonesia’s energy transition. First, Indonesia maintains a subsidy for gasoline and diesel. In 2022, the Indonesian government raised the price of subsidized gasoline and diesel, but the cost of these goods is still below market rates for Indonesian consumers. Usually, these subsidies come as reimbursements to Pertamina, Indonesia’s state-owned oil and gas company. Pertamina owns most of the gas stations in Indonesia. Indonesia’s central government compensates Pertamina for the difference between the cost of purchasing oil and gas and the final price consumers pay. Second, a domestic sales mandate and coal price cap force Indonesian coal mining companies to sell 25 percent of their coal to PLN, Indonesia’s state electricity utility. Similar mandates exist for oil and natural gas, though those two fossil fuels comprise a much smaller portion of total energy generation than coal.


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