Indonesia’s Energy Subsidy Policy

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1		Ruddy Kaharudin Gobel	--	1947	2024-01-15 10:21:45	\|
2	references update and layout	Fanny Huang	Meta information modification	1947	2024-01-18 06:59:37	\|

This entry is adapted from the peer-reviewed paper 10.3390/su16010407

Energy subsidies, play a crucial role in ensuring accessible and affordable energy for all, aligning with state obligations and legal mandates. These subsidies are not only instruments of social welfare; they are also integral to achieving energy security, characterized by supply security, competitive energy markets, and environmental protection. The Indonesian Government’s substantial investment in energy subsidies, designed to assist poor and vulnerable households, ironically favors the wealthy and exacerbates inequality.

energy subsidy policy reforms

1. Introduction

The provision of subsidies by governments worldwide serves as a pivotal mechanism to alleviate financial burdens on communities, covering essential sectors such as food, education, health, and energy. Energy subsidies, in particular, play a crucial role in ensuring accessible and affordable energy for all, aligning with state obligations and legal mandates. These subsidies are not only instruments of social welfare; they are also integral to achieving energy security, characterized by supply security, competitive energy markets, and environmental protection ^[1].

As part of energy policies in general, energy subsidies are consistently viewed as instruments to assist the population, especially the less affluent, in gaining access to energy ^[2]. However, the implementation of energy subsidy policies, especially in developing countries, often sparks debate due to their paradoxical effects. While intended to assist the less affluent in gaining energy access, they can inadvertently lead to fiscal strain, environmental harm, and economic imbalances ^[3].

In Indonesia, energy subsidies are regulated by law, and the state is obliged to provide them to facilitate access to energy for the poor and vulnerable groups ^[4]. Due to this obligation, the Government invests heavily in energy subsidies, making Indonesia one of the countries that subsidizes energy commodities the most. For example, regarding electricity subsidies, Indonesia is ranked fourth globally after Russia, Iran, and Saudi Arabia ^[5].

However, poorly implemented policies could lead to various negative consequences. These adverse impacts include burdening the government budget, environmental damage, and economic distortions in energy prices. Additionally, poor policy implementation causes wastage in energy use and reduced incentives for developing eco-friendly energy ^[2]. According to a study by the International Institute for Sustainable Development (IISD), fossil fuel subsidies represent an inefficient method for redistributing resource rents. In Indonesia, these subsidies have primarily favored high-income households rather than low-income ones and have promoted the wasteful consumption of energy ^[3].

Several studies have relevant findings. Energy subsidies are perceived to lead to deadweight loss and reduce the well-being of energy consumers ^[6]. Inchauste, Victor, and David ^[7] also express a similar view that energy subsidies, although often intended to benefit low-income groups, mainly accrue to those with higher levels of well-being. Studies by Schaffitzel et al. ^[8] and Timilsinaa and Pargalb ^[9] also echo this sentiment, emphasizing that energy subsidies tend to be regressive and primarily favor affluent groups.

Several negative impacts of poorly implemented energy subsidy policies include distorting energy prices, leading to excessive energy consumption, promoting demand for subsidized energy products, and reducing demand for energy products with prices that more accurately reflect actual market conditions ^[2]^[7]. Furthermore, these subsidies diminish incentives for energy efficiency and the development of renewable energy sources ^[2].

In Indonesia, household-based energy subsidies such as electricity and LPG face related problems. The budget allocation for these subsidies amounted to IDR 54.8 trillion and IDR 49.4 trillion in 2020, making them the most significant components of assistance in the state budget ^[10]. This amount exceeds even the budget of government assistance for education, health, farmers, fishermen, small businesses, and other forms of assistance.

However, this policy is unclear regarding its effectiveness in addressing inequality in gender, disabilities, and other social inclusion (GEDSI) contexts. Inequality and equality are critical because improving the welfare of the poor and vulnerable groups should be the goal of any policy, including energy subsidies. Therefore, evaluating whether this significant government investment is achieving its intended purpose is essential.

2. Indonesia’s Energy Subsidy Policy

On a macroeconomic scale, subsidies for energy products purchased by households and businesses disrupt long-term macroeconomic indicators. Additionally, they encourage excessive consumption of subsidized energy products. Furthermore, subsidies affects the relative prices of non-traded goods, causing them to decrease when the non-traded sector relies more on oil-intensive resources than the traded sector and vice versa ^[11].

Previous studies analyzing the impact of energy subsidy policies have primarily employed economic methodologies and analyses. These studies tend to limit their conceptual or theoretical approach to a financial perspective, focusing on the inefficiency of energy commodity markets or the concept of deadweight loss. This narrow focus restricts the scope of energy subsidy policies, typically limiting them to measures that raise the prices of energy commodities closer to production or market levels. Consequently, although increasing the prices of subsidized energy commodities benefits the economy, on the one hand, it also places a burden on poor and vulnerable households. From the previous studies, several conclusions can be drawn:

A targeted subsidy approach not only yields fiscal savings but also enhances the welfare of vulnerable communities ^[6].
Ensuring that subsidies reach those truly entitled is crucial, as this minimizes socioeconomic impacts while achieving fiscal goals ^[12].
Eliminating energy subsidies can benefit the economy and increase GDP, with the impact depending on how budget savings from subsidy removal are reallocated ^[9].
The compensation mechanisms implemented in Iran’s energy subsidies were initially successful. However, they raised questions about the feasibility and sustainability of such approaches ^[13]^[14].
Removing remaining electricity subsidies could lead to further improvements in electricity use efficiency and free up resources for other priorities, such as infrastructure spending ^[14].

While these studies clearly state the benefits of the policy, they lack a comprehensive discussion on alternative forms of policy other than increasing energy commodity prices. Some studies suggest direct compensation as an antidote to price increases. However, in cases like Iran, this approach had limited impact.

In addition, there are numerous studies and literature that discuss aspects of equality in energy policy, including gender equality and social inclusion. From these studies, researchers can infer the following:

Women have a crucial role in driving energy transformation to support energy justice and democracy ^[15].
Providing small-scale electrical energy is insufficient to support the development of micro-businesses. Energy access in remote areas must be aligned with increasing community needs ^[16].
The success of energy subsidies depends on available policies and adequate services. Subsidies that are sensitive to gender and poverty levels are extremely important ^[17].
Higher gender inclusion in the energy sector can improve development outcomes, though the current focus is more on energy technology ^[18].
Women’s access to stable employment and control over household expenditure decisions, especially related to the use of clean fuels, is significant ^[19].

These studies highlight the important role of gender inclusion in energy policy but do not thoroughly explain how this inclusion should be implemented or how energy policies, including subsidies, can encourage it. Additionally, discussions about the appropriate form of policy are not detailed enough to provide solutions for developing policies inclusive of marginalized societal groups. Thus, there are still several research gaps that need to be addressed through further study.

Many studies on energy, gender equality, and social inclusion have shown that equal access to energy and other essential services positively impacts welfare. For instance, Ding et al. ^[20] found that access to energy reduces energy poverty, improves efficiency, and promotes cultural change. This finding is consistent with Baltruszewicz et al. ^[21], who found that equal access to primary education, electricity, and sanitation is more important than ownership of goods or income. Sarkodie and Adams ^[22] also stated that access to electricity positively impacts economic growth. Therefore, access to electricity or LPG should be ensured to improve the welfare of the poor and vulnerable groups, including through energy subsidies.

These subsidies aim to make energy more affordable for the poor and vulnerable, enabling easy access. However, energy subsidies have the opposite effect in many countries ^[23]. According to Inchauste, Victor, and David ^[7], subsidies are primarily availed by affluent groups and not to assist the impoverished population. Schaffitzel et al. ^[12] and Timilsinaa and Pargalb ^[9] also found that energy subsidies are regressive and benefit the wealthy. However, reducing subsidies is also not an ideal choice, and it impacts the welfare of the poor and vulnerable groups. This finding is in line with Khalid and Salman ^[6], who argue that policy reforms through subsidy reduction make energy prices unaffordable for the less fortunate. Similarly, Acharya and Sadathb ^[24] stated that price hikes reduce actual income and could negatively affect overall welfare. Solaymania and Karib ^[25] also asserted that energy subsidy reforms through price hikes reduce household consumption and welfare.

One shortcoming in policymaking is the lack of consideration for gender. Schofield and Goodwin ^[12] stated that gender dynamics are not uniform across different situations, hindering the opportunity for change. Gender inclusiveness is also important, as women play a crucial role in promoting energy justice and democracy through driving energy transformation ^[26]. The role is also consistent with the theoretical perspective of feminism, as it suggests a new approach to replacing the patriarchal order with a system that prioritizes equal rights, equity, and justice ^[27].

Similar findings were also revealed by Setyowati’s research when looking at Indonesia’s context. The research shows that Indonesia’s energy justice efforts focus mainly on accessibility and affordability, overlooking procedural and recognition aspects. This approach favors large, on-grid solutions and limits funding for smaller renewable energy projects, leading to spatial inequality and excluding energy-poor communities ^[28]. Hence, the finding suggested developing policies that cover all aspects of energy justice and diversify financial support to combat energy poverty. Therefore, the study proposed a new method for gender-based public sector policymaking.

Lapniewska ^[29] found that gender equality is critical for providing electricity in Europe. However, the visibility of gender equality is often insufficient, and the participation of individuals in decision-making is limited to administrative tasks. This lack of involvement may be due to a deficiency in relevant educational backgrounds. In sub-Saharan Africa, Anditi et al. ^[30] found that the current analysis framework does not adequately address gender-specific needs and lacks specificity for informal urban settlement contexts. Furthermore, according to Ryan ^[31], when making decisions regarding the availability of energy sources, women and certain minority groups are often excluded. These groups also receive inadequate energy resources and are not protected by their right to access energy.

The need to pay more attention to social equality aspects in energy policy was also emphasized by Pueyo and DeMartino ^[16], Johnson et al. ^[32], Johnson, Gerber and Muhoza ^[18], Choudhuri and Desai ^[19], and Anditi et al. ^[30]. These studies showed the significant impacts of energy policy, including subsidies.

The policy dramatically impacts efforts to reduce poverty and inequality, promote gender equality, support identity and culture, develop small businesses, and strengthen the local economy, including informal urban settlements. Johnson, Gerber, and Muhoza ^[18] also highlighted the relationship between energy and gender. Therefore, a more precise policy is needed to incorporate gender considerations into energy policy. Besides measuring the potential reduction in poverty and inequality using the Gini ratio indicator, expanding access to energy could also reduce inequality ^[26]. Furthermore, a new measure of inequality based on electricity consumption could provide a comprehensive and balanced picture of overall welfare.

The need to have a tailored policy is also voiced by Zhang et al.’s study on the relationship between renewable energy use, financial development, and public health ^[33]. The study shows that renewable energy benefits health more in low-pollution and open-trade countries. However, financial growth can harm health in high-pollution, trade-limited areas. Hence, customizing energy and financial policies to local needs is necessary. One interesting suggestion for policy development is stated by Rahman et al.’s research findings ^[34]. The study argues that achieving energy equity requires continuous investment and effort from the Government through public-led market mechanisms. The involvement of a private sector approach to energy infrastructure that leads to an open market system would foster competition and eventually lead to more affordable energy prices.

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Ruddy Kaharudin Gobel

Bambang Shergi Laksmono

Martani Huseini

Mia Siscawati

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1. Introduction

2. Indonesia’s Energy Subsidy Policy

References