Indonesia: Energy Rich and Electricity Poor

Even though it enjoys sizeable coal and natural gas reserves, Indonesia struggles to provide electricity to its growing economy. Geography is its most obvious challenge. Others include evolving international markets and an energy sector that remains highly politicized.

A vast Southeast Asian archipelago of more than 17,500 islands that straddles the equator, Indonesia has become an established and crucial player in the world’s energy markets. It is endowed with some of the world’s largest reserves of fossil fuels, and in 2011, it was the world’s largest steam coal exporter and the eighth-largest natural gas exporter. Yet, today, energy security has become Indonesia’s paramount challenge. And it appears it will be the country’s preoccupation until at least 2020.

At the heart of the issue is that the economy of world’s fourth-most-populous country (after China, India, and the U.S.), with 243 million people, has been booming at an enviable annual rate of 6% since 2010. But so has its domestic energy consumption, which surged by more than 50% over the past decade on the back of an emerging consumer class. This consumption growth has forced the country to halt exports of oil, temper its natural gas exports, and redirect nearly a quarter of produced coal for domestic production of electricity.

On the other hand, compounded by its geographic complexity, without available electricity imports, and reluctant to rely on diminishing domestic oil supplies that fuel off-grid diesel generators on the nation’s 6,000 inhabited islands, the country has been stricken by a critical undersupply of power. Though it is one of Southeast Asia’s biggest economies, it has one of the lowest electrification rates in the region. This dilemma is underscored by forecasts suggesting that between 2009 and 2019, national electricity demand will increase by an average 9% per year and reach 328.3 TWh in 2020—more than double last year’s figure of 162.4 TWh.

The government’s solution is to seek massive power capacity increases, and it recently embarked on an ambitious plan to add at least 55.3 GW of new capacity and at least 49,299 kilometers of new transmission lines within the next decade. Can Indonesia bypass a number of hurdles and resolve its energy dilemma?

It is important to note that the country has been long-steeped in a festering electricity crisis characterized by rolling blackouts lasting, on a national average, about 3.8 hours per day, according to 2009 figures. As Dr. Mika M. Purra of the Center on Asia and Globalization at the National University of Singapore points out, power shortages have been routine since Indonesia’s independence from the Netherlands in 1949. Moreover, Purra asserts that while modernization of the power sector has been a specific goal of the government since 1998, a “historical narrative reveals repetitive attributes that have continuously stalled any serious efforts to reform the sector, thus causing significant harm to the state, its economy and the general public.” ±±One pervading issue is that the governance structure is based on the dominance of state-owned enterprises, and until recently the government functioned on a constitutional mandate as the sole provider of electricity for the nation. Under the authoritarian regimes of former Presidents Sukarno (1945–1967) and Suharto (1967–1998), the principles of bureaucratization were reinforced and did little to change the structure of state-owned power entity Persero-Perusahaan Listrik Negara (PLN), which held an iron-grip monopoly on the country’s generation, transmission, and distribution.

Only after the Asian financial crisis of 1997–98 and the fall of Suharto’s regime did fundamental changes in the power sector come, Purra says. The new era of democratization of political process achieved, among its most notable changes, passage of Energy Law No. 30 in 2009 (Figure 1). The landmark law allows independent power producers (IPPs) to generate and sell electricity to end users in the Indonesian market, ending PLN’s 60-year-long monopoly as the single electricity supplier in Indonesia.

1. Major players. In a power market regulatory upheaval, Indonesia’s Energy Law No. 30, passed in 2009, allowed independent power producers (IPPs) to begin generating and selling electricity. But state-owned power company Perusahaan Listrik Negara (PLN) generated about 75% of all power in 2012, remains heavily subsidized, holds a monopoly on transmission and distribution grids, and functions as the system operator. This chart shows the major players in Indonesia’s electricity system and how PLN generates revenues and receives subsidies. Source: Differ Group, “The Indonesian Electricity System—A Brief Overview,” differgroup.com/analysis, 2012

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