Challenges and policies in Indonesia's energy sector

Abstract

Fossil fuels are central to Indonesia's energy policy, and its main source of export revenues. However, insufficient investment, the lack of transport infrastructure and an unwieldy regulatory environment are inhibiting the sector from reaching its full potential. Looking ahead, growing environmental concerns combined with sharp falls in coal prices and the on-going shale gas revolution call into question the sustainability of an energy strategy based almost exclusively on fossil fuels. This viewpoint challenges Indonesia's current energy policy and proposes ways to increase its energy efficiency and use of renewables. In particular, its gas sector should be further developed to plug the gap until sufficient renewable energy, especially geothermal, comes on line. Government control over the oil industry via state-owned Pertamina should be gradually reduced. Clarifying, streamlining and publicising simple regulations in energy, especially regarding land rights and on-shore processing, and removing foreign-ownership restrictions will help bring much needed investment. The pressure on the environment of natural resource exploitation should also be addressed by properly defining property rights and regulations regarding forest land, and implementing a positive implicit carbon price.